SMT Smart Technologies Inc. (MM)

 

 

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 February 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AND TO BE A PART THEREOF FROM THE DATE ON WHICH THIS REPORT IS FURNISHED TO THE COMMISSION, TO THE EXTENT NOT SUPERSEDED BY DOCUMENTS OR REPORTS THE REGISTRANT SUBSEQUENTLY FURNISHES TO OR FILES WITH THE COMMISSION.

 

 

 

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DOCUMENTS FURNISHED AS PART OF THIS FORM 6-K

In connection with its announcement of financial results of its fiscal year 2016, for the quarter ended December 31, 2015, SMART Technologies Inc. is filing the following documents:

Management’s discussion and analysis;

Interim consolidated financial statements; and

Certificates of the principal executive and financial officers.

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.

 

Date: February 11, 2016

Exhibit Index

 

99.1		Management’s Discussion and Analysis for the three and nine months ended December 31, 2015.
99.2		Interim consolidated financial statements of SMART Technologies Inc. for the three and nine months ended December 31, 2015.
99.3		Rule 13a-14(a)/15d-14(a) Certification of principal executive officer of SMART Technologies Inc.
99.4		Rule 13a-14(a)/15d-14(a) Certification of principal financial officer of SMART Technologies Inc.

 

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Forward-Looking Statements

This MD&A includes forward-looking statements that reflect our current views with respect to future events and financial performance. These statements include forward-looking statements both with respect to us specifically and the technology product industry and business, demographic and other matters in general. Statements that include the words “expanding”, “expect”, “continuing”, “intend”, “plan”, “believe”, “project”, “estimate”, “anticipate”, “may”, “will”, “continue”, “further”, “seek” 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. In particular and without limitation, this MD&A contains forward-looking statements pertaining to management’s ability to address the Company’s financial challenges, general market conditions, our strategy and prospects, including expectations of the education and enterprise markets for our products, our plans and objectives for future operations, productivity enhancements and cost savings, our future financial performance and financial condition, the addition of new products to our portfolio and enhancements to current products, our industry, opportunities in the education and enterprise markets and licensing opportunities, working capital requirements, regulation, exchange rates and income tax considerations.

All forward-looking statements address matters that involve risks, uncertainties and assumptions. Accordingly, there are or will be important factors and assumptions that could cause our actual results and other circumstances and events to differ materially from those indicated in these statements. These risk factors and assumptions include, but are not limited to, the following:

 

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our ability to maintain sales to the education market that is in decline;

 

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sales of our new products may not be sufficient to offset the decline in the education market;

 

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our ability to implement meaningful changes to address the Company’s business and financial challenges;

 

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our ability to identify, execute and consummate any strategic opportunities that may be identified as a part of our strategic review;

 

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our ability to successfully manufacture, distribute and market kapp;

 

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competition in our industry;

 

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our ability to successfully execute our strategy to grow in the enterprise market;

 

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our ability to successfully execute our strategy to monetize software;

 

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possible changes in the demand for our products;

 

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shifts in product mix from interactive whiteboards to interactive flat panels;

 

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difficulty in predicting our sales and operating results;

 

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our substantial debt could adversely affect our financial condition;

 

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our ability to raise additional funds, manage cash flow, foreign exchange risk and working capital;

 

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changes to our business model;

 

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our ability to enhance current products and develop and introduce new products;

 

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the potential negative effect of product defects;

 

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reduced spending by our customers due to changes in the spending policies or budget priorities for government funding;

 

•

our ability to establish new relationships and to build on our existing relationships with our resellers and distributors;

 

•

the potential negative effect of disruptions of certain business functions provided by third parties;

 

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•

the potential negative effects of system failures or cybersecurity attacks;

 

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our ability to attract, retain and motivate qualified personnel;

 

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the continued service and availability of a limited number of key personnel;

 

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the reliability of component supply and product assembly and logistical services provided by third parties;

 

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the development of the market for interactive learning and collaboration products;

 

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our ability to grow our sales in foreign markets;

 

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our ability to manage risks inherent in foreign operations;

 

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our ability to manage our systems, procedures and controls;

 

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the potential of increased costs related to future restructuring and related charges;

 

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our ability to protect our brand;

 

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our ability to achieve the benefits of strategic partnerships;

 

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our reliance upon a strategic partnership with Microsoft;

 

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our ability to successfully obtain patents or registration for other intellectual property rights or protect, maintain and enforce such rights;

 

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third-party claims of infringement or violation of, or other conflicts with, intellectual property rights by us; and

 

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our ability to manage, defend and settle litigation.

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 world’s first interactive whiteboard in 1991, and we remain one of the global leaders in the interactive display market with over 3.1 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 over 2.8 million classrooms worldwide, reaching over 69 million students and teachers based on an assumed average classroom size of 24 students. 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, the kapp iQ multi-way whiteboards, and the LightRaise interactive projectors. 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

 

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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.

Reportable Segments

Effective April 1, 2015, the Company completed a reorganization which merged the existing Education and Enterprise sales and customer service teams into the new Solutions business unit, and established separate sales and customer service teams dedicated to the Company’s new line of products in the kapp business unit. Certain functions that were previously distinct to the individual Education and Enterprise segments were centralized at the corporate level. As a result of only the sales and customer service teams being dedicated to a specific business unit, no discrete financial information is available on a business unit basis. The existing NextWindow segment no longer earns revenue or incurs expenses as it enters the final stage of its wind down. The Company no longer has individual business units that meet the criteria of an operating segment, and is now organized and managed as a single reportable operating segment. For more information about changes in our segment reporting, please see “Note 12—Segment Disclosure” in our interim financial statements. In October 2015, as a part of cost reduction initiatives, the Company merged the kapp sales and customer service teams into the Solutions business unit. This had no impact on the Company’s assessment of reportable operating segments.

Highlights

 

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Revenue decreased by $113 million from $393 million in the first nine months of fiscal 2015 to $280 million in the first nine months of fiscal 2016. Adjusted Revenue decreased by $65 million from $346 million in the first nine months of fiscal 2015 to $280 million in the first nine months of fiscal 2016. Gross margin percentage was 46% in the first nine months of fiscal 2015 compared to 28% in the first nine months of fiscal 2016. Adjusted Gross Margin percentage was 39% in the first nine months of fiscal 2015 compared to 35% in the first nine months of fiscal 2016. Adjusted EBITDA decreased by $22 million from $33 million in the first nine months of fiscal 2015 to $11 million in the first nine months of fiscal 2016.

 

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In the third quarter of fiscal 2016, we updated our financial outlook and subsequently implemented cost reduction initiatives primarily relating to kapp sales and marketing activities and related R&D spend. As a result, we are no longer organized with a separate kapp sales and customer service team. We incurred employee termination costs of $4 million related to the fiscal 2016 October restructuring plan in the third quarter of fiscal 2016.

 

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As a result of slower than anticipated kapp sales, during the third quarter of fiscal 2016, we assessed and revised our future demand assumptions for finished goods and raw materials. Based on these revised demand assumptions, we recorded a primarily non-cash, pre-tax charge against inventory and purchase commitments of $21 million, in the third quarter of fiscal 2016 (“kapp Inventory Charge”). We also reclassified $5 million of inventory as non-current as it is not reasonably expected to be realized in cash during the next 12 months. The kapp Inventory Charge is excluded from the calculation of Adjusted Net Income and Adjusted EBITDA. Significant judgment was required in calculating the kapp Inventory Charge, which involved forecasting future demand and the associated pricing at which we can realize the carrying value of our inventory. Further, our expectations with respect to our inventory and asset risk (including our ability to sell our existing inventory of kapp boards and manage our purchase obligations with our manufacturing suppliers) and the potential for additional charges related to inventory are forward-looking statements that are subject to the inherent risk of forecasting our financial results and performance for future periods, particularly over longer periods. See “Forward-Looking Statements” and the “Risk Factors” section of the Annual Report on Form 20-F, including the risk factors titled “We may not be able to manufacture, market, distribute and sell our kapp products successfully”, “Our sales and operating results are difficult to predict” and

 

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“Sales of our new products may not be sufficient to offset the decline in our education sales, and if sales of new products are not sufficiently robust, our liquidity may be materially and adversely affected”.

Results of Operations

Revenue

 

		Three months ended December 31,												Nine months ended December 31,
		2015				2014				Change				2015				2014				Change
Revenue		$	77.7			$	126.6				(38.6	)%		$	280.1			$	393.3				(28.8	)%
Adjusted Revenue(1)		$	77.7			$	111.3				(30.1	)%		$	280.1			$	345.5				(18.9	)%
Revenue by geographic location
North America		$	48.8			$	73.9				(34.0	)%		$	181.4			$	239.8				(24.4	)%
Europe, Middle East and Africa (EMEA)			23.6				43.0				(45.2	)%			83.5				111.7				(25.2	)%
Rest of World			5.4				9.7				(44.4	)%			15.1				41.8				(63.8	)%
		$	77.7			$	126.6				(38.6	)%		$	280.1			$	393.3				(28.8	)%
Adjusted Revenue(1) by geographic location
North America		$	48.8			$	65.0				(24.9	)%		$	181.4			$	210.7				(13.9	)%
Europe, Middle East and Africa			23.6				37.8				(37.6	)%			83.5				98.2				(14.9	)%
Rest of World			5.4				8.5				(36.7	)%			15.1				36.7				(58.9	)%
		$	77.7			$	111.3				(30.1	)%		$	280.1			$	345.5				(18.9	)%

 

(1)	This is a non-GAAP measure. See “Non-GAAP measures” section for additional information.

Revenue decreased by $49 million in the third quarter of fiscal 2016 and $113 million in the first nine months of fiscal 2016 compared to the same periods in fiscal 2015. When we introduced SMART Notebook Advantage in the third quarter of fiscal 2014, we reduced the support period, and effectively, the revenue deferral period, for previously sold software to end at March 31, 2015. The accelerated revenue recognition due to this change in accounting estimate resulted in a revenue increase of $15 million in the third quarter of fiscal 2015 and $48 million in the first nine months of fiscal 2015. Adjusted Revenue decreased by $34 million in the third quarter of fiscal 2016 and $65 million in the first nine months of fiscal 2016 compared to the same periods in fiscal 2015, primarily due to lower revenue from interactive whiteboards, interactive projectors and attachment products, partly offset by modest period-over-period increases in revenue from interactive flat panels.

Adjusted Revenue in North America, EMEA and Rest of World were negatively impacted by declines in our education and enterprise solutions in the third quarter and first nine months of fiscal 2016. The decrease in Adjusted Revenue in Rest of World was also impacted by prior-period sales from our NextWindow operations in the first nine months of fiscal 2015.

Revenue and Adjusted Revenue were negatively impacted by foreign exchange movements of approximately $3 million in the third quarter of fiscal 2016 and $10 million in the first nine months of fiscal 2016 compared to the same periods in fiscal 2015, primarily as a result of the strengthening of the U.S. dollar against the Canadian dollar, the Euro and British pound sterling.

 

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Gross Margin

 

		Three months ended December 31,												Nine months ended December 31,
		2015				2014				Change				2015				2014				Change
Gross margin		$	3.9			$	57.1				(93.2	)%		$	77.6			$	182.5				(57.5	)%
Gross margin percentage			5.0	%			45.1	%			(40.1	)pt			27.7	%			46.4	%			(18.7	)pt
Adjusted Gross Margin(1)		$	24.4			$	41.8				(41.6	)%		$	98.2			$	134.8				(27.2	)%
Adjusted Gross Margin percentage(1)			31.4	%			37.6	%			(6.2	)pt			35.1	%			39.0	%			(3.9	)pt

 

(1)	These are non-GAAP measures. See “Non-GAAP measures” section for additional information.

Gross margin decreased by $53 million in the third quarter of fiscal 2016 and $105 million in the first nine months of fiscal 2016 compared to the same periods in fiscal 2015. Gross margin was negatively impacted by the $21 million kapp Inventory Charge recorded in the third quarter of fiscal 2016. The change in deferred revenue resulted in an increase in revenue of $15 million in the third quarter of fiscal 2015 and $48 million in the first nine months of fiscal 2015, due to the change in accounting estimate as discussed previously.

Adjusted Gross Margin decreased by $17 million in the third quarter of fiscal 2016 and $37 million in the first nine months of fiscal 2016 compared to the same periods in fiscal 2015. The decrease was due to lower Adjusted Revenue as discussed previously. The decrease in period-over-period Adjusted 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.

Gross margin and Adjusted Gross Margin were negatively impacted by foreign exchange movements of approximately $2 million in the third quarter of fiscal 2016 and $7 million in the first nine months of fiscal 2016 compared to the same periods in fiscal 2015, primarily as a result of the strengthening of the U.S. dollar against the Canadian dollar which negatively impacted our revenue and positively impacted our cost of sales.

Operating Expenses

Selling, Marketing and Administration Expenses

 

		Three months ended December 31,												Nine months ended December 31,
		2015				2014(1)				Change				2015				2014(1)				Change
Selling, marketing and administration		$	16.0			$	23.2				(31.4	)%		$	63.3			$	76.6				(17.3	)%
As a percent of revenue			20.5	%			18.4	%			2.1	pt			22.6	%			19.5	%			3.1	pt
As a percent of Adjusted Revenue(2)			20.5	%			20.9	%			(0.4	)pt			22.6	%			22.2	%			0.4	pt

 

(1)	Certain reclassifications have been made to prior periods’ figures to conform to the current period’s presentation.

(2)	This is a non-GAAP measure. See “Non-GAAP measures” section for additional information.

As the majority of our selling, marketing and administration expenses were incurred in Canadian dollars, these expenses were positively impacted by changes in foreign exchange rates of approximately $2 million in the third quarter of fiscal 2016 and $8 million in the first nine months of fiscal 2016 compared to the same periods in fiscal 2015, primarily as a result of the strengthening of the U.S. dollar relative to the Canadian dollar. Removing the foreign exchange impact, selling, marketing and administration expenses decreased by $5 million in both the third quarter and first nine months of fiscal 2016 compared to the same periods in fiscal 2015, primarily due to the impact of the fiscal 2016 October restructuring plan.

 

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Research and Development Expenses

 

		Three months ended December 31,												Nine months ended December 31,
		2015				2014(1)				Change				2015				2014(1)				Change
Research and development		$	8.5			$	9.8				(13.4	)%		$	28.8			$	32.4				(11.2	)%
As a percent of revenue			10.9	%			7.7	%			3.2	pt			10.3	%			8.2	%			2.1	pt
As a percent of Adjusted Revenue(2)			10.9	%			8.8	%			2.1	pt			10.3	%			9.4	%			0.9	pt

 

(1)	Certain reclassifications have been made to prior periods’ figures to conform to the current period’s presentation.

(2)	This is a non-GAAP measure. See “Non-GAAP measures” section for additional information.

Research and development expenses were positively impacted by foreign exchange movements of approximately $1 million in the third quarter of fiscal 2016 and $3 million in the first nine months of fiscal 2016 compared to the same periods in fiscal 2015, primarily as a result of the strengthening of the U.S. dollar relative to the Canadian dollar. Removing the foreign exchange impact, research and development expenses remained flat in both the third quarter and first nine months of fiscal 2016 compared to the same periods in fiscal 2015.

Depreciation and Amortization

 

		Three months ended December 31,												Nine months ended December 31,
		2015				2014				Change				2015				2014				Change
Depreciation and amortization		$	1.7			$	2.8				(37.9	)%		$	6.5			$	8.8				(25.9	)%

The decrease in depreciation and amortization of property and equipment in the third quarter and first nine months of fiscal 2016 compared to the same periods in fiscal 2015 was due to decreases in the net book value of these assets as a result of declining period-over-period capital expenditures.

Restructuring Costs

 

		Three months ended December 31,												Nine months ended December 31,
		2015				2014				Change				2015				2014				Change
Restructuring costs		$	3.8			$	(0.0	)			*			$	4.7			$	2.3				107.0	%

 

*	Not Meaningful

In the third quarter and first nine months of fiscal 2016, we incurred $4 million in employee termination costs related to the fiscal 2016 October restructuring plan. We also incurred $0.7 million in additional restructuring costs related to the cancellation of an office lease in the first nine months of fiscal 2016.

In the first nine months of fiscal 2015, we incurred $2 million in employee termination and other restructuring costs related to the fiscal 2015 restructuring plan.

Non-Operating Expenses (Income)

 

		Three months ended December 31,												Nine months ended December 31,
		2015				2014				Change				2015				2014				Change
Interest expense		$	4.6			$	5.0				(8.7	)%		$	13.9			$	15.2				(8.4	)%
Foreign exchange loss		$	2.7			$	3.9				(32.1	)%		$	7.8			$	3.9				98.4	%
Other (income) expense		$	(0.5	)		$	0.1				*			$	(0.7	)		$	(0.5	)			24.2	%
		$	6.7			$	9.0				(25.5	)%		$	21.1			$	18.6				13.4	%

 

*	Not Meaningful

 

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Interest Expense

In the third quarter and first nine months of fiscal 2016 and fiscal 2015, our interest expense primarily related to our long-term debt and capital lease.

Foreign Exchange loss

In the third quarter and first nine months of fiscal 2016, the change in foreign exchange loss was primarily related to the conversion of our U.S. dollar-denominated debt into our functional currency of Canadian dollars. From October 1, 2015 to December 31, 2015, the U.S dollar strengthened by 3.4% against the Canadian dollar compared to 4.0% for the same period last year. From March 31, 2015 to December 31, 2015, the U.S dollar strengthened by 9.5% against the Canadian dollar compared to 5.0% for the same period last year.

Income Tax Expense

 

		Three months ended December 31,												Nine months ended December 31,
		2015				2014				Change				2015				2014				Change
Income tax expense		$	16.8			$	3.1				*			$	13.9			$	10.1				37.3	%
Effective tax rate			*				24.7	%			*				*				23.1	%			*

 

*	Not Meaningful

The increase in income tax expense in the third quarter and first nine months of fiscal 2016 compared to the same periods in fiscal 2015 was due primarily to an increased valuation allowance resulting from the derecognition of previously recognized tax assets. For more information about changes in our valuation allowance, please see “Note 9—Income taxes” in our unaudited interim financial statements for the three and nine months ended December 31, 2015.

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 capital item for income tax purposes. We have not provided for deferred income taxes on the differences between the carrying value of substantially all of our foreign subsidiaries and their corresponding tax basis as the earnings of those subsidiaries are intended to be permanently reinvested in their operations. As such these investments are not anticipated to give rise to income taxes in the foreseeable future. If such earnings are remitted, in the form of dividends or otherwise, we may be subject to income taxes and foreign withholding taxes.

Non-GAAP Measures

As used in this MD&A, “GAAP” means generally accepted accounting principles in the United States, which 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) income or any other measure of financial performance calculated and presented in accordance with GAAP. Adjusted Revenue, Adjusted Gross Margin, Adjusted Net (Loss) Income, Adjusted EBITDA and other non-GAAP measures have inherent limitations, and the reader should therefore not place undue reliance on them.

In the second quarter of fiscal 2016, we changed our definition of Adjusted Revenue from revenue adjusted for the change in deferred revenue balances during the period, to revenue adjusted for the accelerated deferred revenue recognized as a result of the change in accounting estimate as discussed below. All Adjusted Revenue amounts with respect to prior periods presented herein have been restated to reflect this change.

 

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In the third quarter of fiscal 2016, we recognized the kapp Inventory Charge of $21 million and elected to remove this expense from our non-GAAP financial measures, including Adjusted Gross Margin, Adjusted Gross Margin percentage, Adjusted Net (Loss) Income, Adjusted Net (Loss) Income per share, and Adjusted EBITDA. We removed the kapp Inventory Charge as we believe it is unusual and material, and enables us and our shareholders to better assess our operating performance in prior and future periods by improving the comparability of the financial information presented.

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, costs of restructuring, 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 Income before interest expense, income taxes, depreciation and other income.

Due to the change in accounting estimate as a result of the reduction in the support period for previously sold products as discussed in Note 1(a) in the unaudited interim consolidated financial statements, and the kapp Inventory Charge as discussed in Note 3 in the unaudited interim consolidated financial statements, we chose to use the non-GAAP measures of Adjusted Revenue and Adjusted Gross Margin. Although the significant impact related to the change in accounting estimate for previously sold products ended in the fourth quarter of fiscal 2015, we will continue adjusting for this change for comparative purposes. We use Adjusted Revenue and Adjusted Gross Margin as key measures to provide additional insights into the operational performance of the Company and to help clarify trends affecting the Company’s business.

We use Adjusted Net (Loss) Income to assess the performance of the business after removing the after-tax impact of stock-based compensation, costs of restructuring, foreign exchange gains and losses, accelerated deferred revenue recognized, amortization of intangible assets, 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 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 management’s 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 Net (Loss) Income, 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 Net (Loss) Income, and Adjusted EBITDA to the most directly comparable GAAP measures: revenue, gross margin and net (loss) income.

 

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The following table sets forth the reconciliation of revenue to Adjusted Revenue and gross margin to Adjusted Gross Margin.

 

		Three months ended December 31,								Nine months ended December 31,
		2015				2014				2015				2014
Adjusted Revenue
Revenue		$	77.7			$	126.6			$	280.1			$	393.3
Deferred revenue recognized—accelerated amortization			—				(15.3	)			—				(47.7	)
Adjusted Revenue		$	77.7			$	111.3			$	280.1			$	345.5
Adjusted Gross Margin
Gross margin		$	3.9			$	57.1			$	77.6			$	182.5
Deferred revenue recognized—accelerated amortization			—				(15.3	)			—				(47.7	)
kapp Inventory Charge			20.6				—				20.6				—
Adjusted Gross Margin		$	24.4			$	41.8			$	98.2			$	134.8

 

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The following table shows the reconciliations of net income to Adjusted Net (Loss) Income and Adjusted EBITDA and basic and diluted earnings per share to Adjusted Net (Loss) Income per share.

 

		Three months ended December 31,								Nine months ended December 31,
		2015				2014				2015				2014
Net (loss) income		$	(49.5	)		$	9.3			$	(60.7	)		$	33.7
Adjustments to net (loss) income
Amortization of intangible assets			0.0				0.0				0.0				0.1
Foreign exchange loss			2.7				3.9				7.8				3.9
Accelerated deferred revenue recognized			—				(15.3	)			—				(47.7	)
Stock-based compensation			(0.1	)			0.9				1.2				2.7
Restructuring costs			3.8				(0.0	)			4.7				2.3
Gain on liquidation of foreign subsidiary(1)			—				—				—				(0.4	)
Gain on sale of long-lived assets			—				0.0				—				(0.1	)
kapp Inventory Charge			20.6				—				20.6				—
			26.9				(10.5	)			34.4				(39.2	)
Tax impact on adjustments(2)			0.5				(3.3	)			1.0				(10.9	)
Adjustments to net (loss) income, net of tax			26.4				(7.2	)			33.4				(28.3	)
Adjusted Net (Loss) Income		$	(23.1	)		$	2.2			$	(27.3	)		$	5.4
Additional adjustments to Adjusted Net (Loss) Income
Income tax expense (recovery)(3)			17.3				(0.3	)			14.9				(0.8	)
Depreciation in cost of sales			1.7				1.3				3.7				4.0
Depreciation of property and equipment			1.7				2.8				6.5				8.8
Interest expense			4.6				5.0				13.9				15.2
Other (income) expense(1)			(0.5	)			0.1				(0.7	)			(0.1	)
Adjusted EBITDA		$	1.7			$	10.9			$	10.9			$	32.5
As a percent of revenue(4)			2.2	%			9.8	%			3.9	%			9.4	%
Adjusted Net (Loss) Income per share
(Loss) earnings per share—basic		$	(0.41	)		$	0.08			$	(0.50	)		$	0.28
Adjustments to net (loss) income, net of tax, per share			0.22				(0.06	)			0.28				(0.24	)
Adjusted Net (Loss) Income per share—basic		$	(0.19	)		$	0.02			$	(0.22	)		$	0.04
(Loss) earnings per share—diluted		$	(0.41	)		$	0.07			$	(0.50	)		$	0.27
Adjustments to net (loss) income, net of tax, per share			0.22				(0.05	)			0.28				(0.23	)
Adjusted Net (Loss) Income per—diluted		$	(0.19	)		$	0.02			$	(0.22	)		$	0.04

 

(1)	Included in Other (income) expense in the consolidated statements of operations.

(2)

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 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.

(3)

Income tax expense of $16.8 million and $13.9 million for the three and nine months ended December 31, 2015 (2014 – $3.1 million and $10.1 million) per consolidated statement of operations, net of tax impact on adjustments to Adjusted Net Income of $0.5 million and $1.0 million for the three and nine months ended December 31, 2015 (2014 – $3.3 million and $10.9 million).

(4)	Adjusted EBITDA as a percent of revenue is calculated by dividing Adjusted EBITDA by Adjusted Revenue.

 

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Selected Quarterly Financial Data

The following tables set forth the Company’s unaudited quarterly financial information and non-GAAP measures for each of the eight most recent quarters, including the quarter ended December 31, 2015. 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. Data for the periods are indicated in millions of dollars, except for per share amounts.

 

		2016												2015																2014
		Third Quarter				Second Quarter				First Quarter				Fourth Quarter				Third Quarter				Second Quarter				First Quarter				Fourth Quarter
Revenue		$	77.7			$	103.6			$	98.7			$	99.6			$	126.6			$	129.2			$	137.5			$	124.2
Gross margin			3.9				37.5				36.3				49.4				57.1				62.5				62.9				52.2
Net (loss) income			(49.5	)			(9.0	)			(2.2	)			(9.6	)			9.3				12.3				12.1				(3.6	)
(Loss) earnings per share
Basic		$	(0.41	)		$	(0.07	)		$	(0.02	)		$	(0.08	)		$	0.08			$	0.10			$	0.10			$	(0.03	)
Diluted		$	(0.41	)		$	(0.07	)		$	(0.02	)		$	(0.08	)		$	0.07			$	0.10			$	0.10			$	(0.03	)
Non-GAAP measures:
Adjusted Revenue		$	77.7			$	103.6			$	98.7			$	85.8			$	111.3			$	113.1			$	121.2			$	107.9
Adjusted Gross Margin			24.4				37.5				36.3				35.5				41.8				46.4				46.6				35.9
Adjusted EBITDA			1.7				6.8				2.5				1.8				10.9				12.9				8.7				2.4
Adjusted Net (Loss) Income			(23.1	)			(1.3	)			(2.9	)			(5.2	)			2.2				4.8				(1.5	)			(6.3	)
Adjusted Net (Loss) Income per share
Basic		$	(0.19	)		$	(0.01	)		$	(0.02	)		$	(0.04	)		$	0.02			$	0.04			$	(0.01	)		$	(0.05	)
Diluted		$	(0.19	)		$	(0.01	)		$	(0.02	)		$	(0.04	)		$	0.02			$	0.04			$	(0.01	)		$	(0.05	)

 

Certain reclassifications have been made to prior periods’ figures to conform to the current period’s presentation.

Liquidity and Capital Resources

As of December 31, 2015, we held cash and cash equivalents of $19.6 million, in addition to the liquidity that is available through our asset-based loan (the “ABL”). Our primary source of cash flow is generated from sales of our hardware and software products. We believe that ongoing operations and associated cash flow, in addition to our cash resources and ABL, will provide sufficient liquidity to support our business operations for at least the next 12 months.

Given that we have experienced a significant decline in revenue as well as the market value of our stock, our financial position has deteriorated. For the nine months ended December 31, 2015, we reported a net loss of $60.7 million and used $34.7 million of cash in operating activities, as a result of slower than anticipated SMART kapp sales and significant declines in our education sales during the period. If our education sales continue to decline, and the sales of our new products, particularly kapp and interactive flat panels, continue to be unable to sufficiently offset that decline, our liquidity may continue to be materially and adversely affected. See the “Risk Factors” section of the Annual Report on Form 20-F, including the risk factor titled “Sales of our new products may not be sufficient to offset the decline in our education sales, and if sales of new products are not sufficiently robust, our liquidity may be materially and adversely affected.”

As of December 31, 2015, our outstanding debt balances were as follows:

 

Issue Date

Maturity Date

Interest Rate

Amount Outstanding

Term loan, net of unamortized debt discount of $3.2 million

July 31, 2013

Jan 31, 2018

LIBOR + 9.25%

$

100.7 million

Asset-based loan credit facility

July 31, 2013

July 31, 2017

LIBOR + 2.50%

$

10.0 million

 

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All debt and credit facilities are denominated in U.S. dollars. Our debt and credit facilities contain standard borrowing conditions, and could be recalled by the lenders if certain conditions are not met.

We currently hold a four-and-a-half year, $125 million senior secured term loan (the “Term loan”) and a four-year, $50 million asset-based loan credit facility. The Term loan bears interest at LIBOR plus 9.25% with a LIBOR floor of 1.25% and will be repaid at 7.5% per annum during the first two-and-a-half years and 10% in the last two years on a quarterly basis. The ABL currently bears interest at LIBOR plus 2.5% and $10 million was drawn as of December 31, 2015. 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 December 31, 2015 (March 31, 2015—$1 million). We had $23.5 million of availability from the ABL facility as at December 31, 2015.

The following table shows a summary of our cash flows (used in) provided by operating activities, investing activities and financing activities for the periods indicated.

 

		Nine months ended December 31,
		2015				2014
Net cash (used in) provided by operating activities		$	(34.7	)		$	30.5
Net cash used in investing activities		$	(2.5	)		$	(4.4	)
Net cash provided by (used in) financing activities		$	2.2			$	(7.7	)

Net Cash (Used in) Provided by Operating Activities

The increase in net cash used in operating activities was primarily due to a net increase in period-over-period working capital and operating loss in the first nine months of fiscal 2016 compared to operating income in the first nine months of fiscal 2015. The increase in working capital in the first nine months of fiscal 2016 was primarily related to increasing inventory.

Net Cash Used in Investing Activities

The decrease in net cash used in investing activities was due to lower capital expenditures in the first nine months of fiscal 2016 compared to the same period in fiscal 2015.

Net Cash Used in Financing Activities

In the first nine months of fiscal 2016, we drew $10 million on our ABL and repaid $8 million of our Term loan and capital lease obligation. In the first nine months of fiscal 2015, we repaid $8 million of our Term loan and capital lease obligation.

 

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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 as of December 31, 2015.

 

		12 months ended December 31,
		2016				2017				2018				2019				2020 and thereafter				Total
Operating leases		$	2.0			$	1.6			$	1.6			$	1.5			$	0.3			$	6.9
Capital lease			4.3				4.3				4.5				4.6				67.4				85.1
Long-term debt			12.5				22.5				78.9				—				—				113.9
Interest obligations on long-term debt			10.9				9.4				0.7				—				—				21.0
Purchase commitments			23.1				2.6				0.6				—				—				26.4
Total		$	52.8			$	40.4			$	86.3			$	6.1			$	67.7			$	253.3

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) under the lease agreement and management fees.

Long-term debt commitments represent the minimum principal repayments and interest payments required under our long-term debt and credit facilities.

Our purchase commitments are for finished goods from contract manufacturers, certain information systems management and licensing costs.

Commitments have been calculated using foreign exchange rates and interest rates in effect at December 31, 2015. Fluctuations in these rates may result in actual payments differing from those in the above table.

Guarantees and Contingencies

Legal Proceedings

We are involved in various claims and litigation from time to time arising in the normal course of business. While the outcome of these matters is uncertain and there can be no assurance that such matters will be resolved in our favor, 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 currently believe that the outcome of any such claims and litigation, or the amounts which 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 expected that no material loss would result.

Off-Balance Sheet Arrangements

As of December 31, 2015, there were 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.

 

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Changes in Internal Control over Financial Reporting

During the nine months ended December 31, 2015, no changes were made to the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s 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 results from operations. We are exposed to foreign exchange risk primarily between the Canadian dollar and both 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 current 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 gain or loss on the 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 current practice is to use interest rate derivatives without hedge accounting designation. We currently have not entered into any interest rate derivatives. Changes in the fair value of these interest rate derivatives are included in interest expense in the consolidated statements of operations.

 

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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. We continually monitor our actual and projected cash flows and believe that our internally generated cash flows, combined with our revolving credit facilities, will provide us with sufficient funding to meet all working capital and financing needs for at least the next 12 months. See “—Liquidity and Capital Resources”.

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 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 company’s 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, 2015 audited consolidated financial statements, except as disclosed in “Note 1-Basis of presentation and significant accounting policies” in the unaudited interim consolidated financial statements for the three and nine months ended December 31, 2015.

Recently Adopted Accounting Pronouncements

In July 2015, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard update on the topic of inventory. The amendments in this update changed the guidance on the subsequent measurement of inventory from the lower of cost or market to the lower of cost and net realizable value for entities using the first-in, first-out or the average cost method. The amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We early adopted this standard in the third quarter of fiscal 2016 and applied the new guidance prospectively, as permitted. The early adoption did not impact our results of operations, financial condition or disclosures.

 

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In November 2015, the FASB issued a new accounting standard update to change the balance sheet classification of deferred taxes. The amendments in this update eliminate the requirement for companies to separate deferred income tax liabilities and assets into current and non-current amounts in a classified balance sheet. Instead, companies will be required to classify all deferred tax liabilities and assets as non-current. The guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We early adopted this standard in the third quarter of fiscal 2016 and applied the new guidance retrospectively, as permitted. Previously reported current deferred income taxes and non-current deferred income taxes, classified under current assets and non-current assets, respectively, have been revised to reflect the retrospective application as follows as at March 31, 2015:

 

		March 31, 2015
Current deferred income taxes, as reported		$	8,052
Reclassification of deferred income taxes			(8,052	)
Current deferred income taxes, as reclassified		$	—
		March 31, 2015
Non-current deferred income taxes, as reported		$	8,304
Reclassification of deferred income taxes			8,052
Non-current deferred income taxes, as reclassified		$	16,356

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued a comprehensive new revenue recognition standard 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 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. The amendments are effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Early adoption is permitted for financial statements that have not been previously issued. This new guidance will be effective for us beginning April 1, 2016. The adoption of this standard is not expected to have a material impact on our consolidated financial statements.

 

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SMART Technologies Inc.

Interim Consolidated Financial Statements (unaudited)

Three and nine months ended December 31, 2015 and 2014

 

 

 

 

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SMART Technologies Inc.

Consolidated Statements of Operations (unaudited)

(thousands of U.S. dollars, except per share amounts)

 

		Three months ended December 31,								Nine months ended December 31,
		2015				2014				2015				2014
Revenue		$	77,748			$	126,577			$	280,062			$	393,271
Cost of sales			73,854				69,457				202,447				210,762
Gross margin			3,894				57,120				77,615				182,509
Operating expenses
Selling, marketing and administration			15,951				23,237				63,344				76,582
Research and development			8,466				9,773				28,779				32,411
Depreciation and amortization			1,722				2,774				6,505				8,780
Restructuring costs			3,763				(26	)			4,696				2,269
			29,902				35,758				103,324				120,042
Operating (loss) income			(26,008	)			21,362				(25,709	)			62,467
Non-operating expenses (income)
Interest expense			4,553				4,989				13,897				15,168
Foreign exchange loss			2,663				3,924				7,827				3,946
Other (income) expense			(522	)			68				(652	)			(525	)
			6,694				8,981				21,072				18,589
(Loss) income before income taxes			(32,702	)			12,381				(46,781	)			43,878
Income tax (recovery) expense
Current			1,670				(630	)			2,730				(1,550	)
Deferred			15,080				3,691				11,192				11,688
			16,750				3,061				13,922				10,138
Net (loss) income		$	(49,452	)		$	9,320			$	(60,703	)		$	33,740
(Loss) earnings per share
Basic		$	(0.41	)		$	0.08			$	(0.50	)		$	0.28
Diluted		$	(0.41	)		$	0.07			$	(0.50	)		$	0.27

 

See accompanying notes to consolidated financial statements

 

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SMART Technologies Inc.

Consolidated Statements of Comprehensive (Loss) Income (unaudited)

(thousands of U.S. dollars)

 

		Three months ended December 31,								Nine months ended December 31,
		2015				2014				2015				2014
Net (loss) income		$	(49,452	)		$	9,320			$	(60,703	)		$	33,740
Other comprehensive income (loss)
Unrealized gains (losses) on translation of consolidated financial statements to U.S. dollar reporting currency			1,204				(180	)			1,377				(671	)
Unrealized gains on translation of foreign subsidiaries to Canadian dollar functional currency, net of income taxes of $219 and $357 for the three and nine months ended December 31, 2015 ($(135) and $222 for the three and nine months ended December 31, 2014)			318				1,438				1,475				2,254
Reclassification of cumulative currency translation adjustments relating to liquidated subsidiary to Other income, net of income taxes of $0 for the nine months ended December 31, 2014			—				—				—				(422	)
			1,522				1,258				2,852				1,161
Total comprehensive (loss) income		$	(47,930	)		$	10,578			$	(57,851	)		$	34,901

 

 

See accompanying notes to consolidated financial statements

 

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SMART Technologies Inc.

Consolidated Balance Sheets (unaudited)

(thousands of U.S. dollars, except number of shares)

 

		December 31, 2015				March 31, 2015
ASSETS
Current assets
Cash and cash equivalents		$	19,575			$	54,465
Trade receivables, net of allowance of $3,225 and $4,392			55,200				61,584
Income taxes recoverable			5,268				7,432
Inventory			53,840				51,638
Other current assets			6,248				6,466
			140,131				181,585
Inventory			4,855				—
Property and equipment			42,784				54,745
Deferred income taxes			3,957				16,356
Deferred financing fees			1,623				2,462
Other long-term assets			508				603
		$	193,858			$	255,751
LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY
Current liabilities
Accounts payable		$	14,573			$	18,678
Accrued and other current liabilities			41,091				44,340
Deferred revenue			15,164				13,134
Current portion of capital lease obligation			1,059				1,103
Current portion of long-term debt			12,500				10,156
			84,387				87,411
Long-term debt			98,159				96,342
Capital lease obligation			48,356				53,818
Deferred revenue			13,033				11,787
Deferred income taxes			398				—
Other long-term liabilities			652				938
			244,985				250,296
Commitments and contingencies
Shareholders’ (deficit) equity
Share capital
Common shares—no par value; unlimited shares authorized; outstanding 122,429,920 and 122,190,913			696,491				696,151
Treasury shares—410,502			(840	)			(840	)
Accumulated other comprehensive income			5,524				2,672
Additional paid-in capital			49,559				48,630
Accumulated deficit			(801,861	)			(741,158	)
			(51,127	)			5,455
		$	193,858			$	255,751

 

See accompanying notes to consolidated financial statements

 

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SMART Technologies Inc.

Consolidated Statements of Shareholders’ (Deficit) Equity (unaudited)

(thousands of U.S. dollars)

 

		Nine months ended December 31,
		2015				2014
Share capital
Balance at beginning of period		$	695,311			$	694,041
Participant Equity Loan Plan			28				181
Shares issued under stock incentive plans			312				1,021
Balance at end of period			695,651				695,243
Accumulated other comprehensive income (loss)
Balance at beginning of period			2,672				(1,464	)
Other comprehensive income			2,852				1,161
Balance at end of period			5,524				(303	)
Additional paid-in capital
Balance at beginning of period			48,630				43,738
Stock-based compensation expense			1,241				2,739
Shares issued under stock incentive plans			(312	)			(1,002	)
Balance at end of period			49,559				45,475
Accumulated deficit
Balance at beginning of period			(741,158	)			(765,286	)
Net (loss) income			(60,703	)			33,740
Balance at end of period			(801,861	)			(731,546	)
Total shareholders’ (deficit) equity		$	(51,127	)		$	8,869

 

 

See accompanying notes to consolidated financial statements

 

Page 5

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SMART Technologies Inc.

Consolidated Statements of Cash Flows (unaudited)

(thousands of U.S. dollars)

 

		Nine months ended December 31,
		2015				2014
Cash (used in) provided by
Operations
Net (loss) income		($	60,703	)		$	33,740
Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities
Depreciation and amortization			10,162				12,963
Amortization of deferred financing fees			674				790
Amortization of long-term debt discount			1,200				935
Stock-based compensation expense			1,241				2,739
Unrealized loss on foreign exchange			5,516				3,714
Deferred income tax expense			11,192				11,688
Gain on liquidation of foreign subsidiary			—				(422	)
Other			(22	)			(108	)
Changes in operating assets and liabilities:
Trade receivables			6,156				15,437
Inventory			(15,007	)			26,220
Other current assets			(828	)			2,702
Income taxes recoverable			1,388				(7,087	)
Accounts payable, accrued and other current liabilities			(1,562	)			(33,434	)
Deferred revenue			5,853				(39,389	)
Cash (used in) provided by operating activities			(34,740	)			30,488
Investing
Capital expenditures			(2,505	)			(4,561	)
Proceeds from sale of long-lived assets			—				116
Cash used in investing activities			(2,505	)			(4,445	)
Financing
Proceeds from long-term debt			10,000				5,000
Repayment of long-term debt			(7,031	)			(12,031	)
Repayment of capital lease obligation			(807	)			(882	)
Participant Equity Loan Plan			25				179
Other			—				7
Cash provided by (used in) financing activities			2,187				(7,727	)
Effect of exchange rate changes on cash and cash equivalents			168				(2,052	)
Net (decrease) increase in cash and cash equivalents			(34,890	)			16,264
Cash and cash equivalents, beginning of period			54,465				58,146
Cash and cash equivalents, end of period		$	19,575			$	74,410
Cash and cash equivalents are comprised as follows
Cash		$	15,981			$	29,915
Cash equivalents			3,594				44,495
		$	19,575			$	74,410
Supplemental cash flow disclosures
Interest paid		$	10,710			$	11,475
Income taxes paid		$	1,736			$	7,892
Amount of non-cash capital expenditures in current liabilities		$	65			$	586

See accompanying notes to consolidated financial statements

 

Page 6

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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 and nine months ended December 31, 2015 and 2014

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 Company’s 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 Company’s audited consolidated financial statements for the year ended March 31, 2015, which have been prepared in accordance with GAAP. All normal recurring adjustments considered necessary for fair presentation have been included in these financial statements.

(a) Revenue recognition for arrangements with multiple deliverables

In the year ended March 31, 2014, the Company decreased the period over which deferred revenue for technical support services and unspecified software upgrades is amortized. The Company determined that this adjustment was a change in accounting estimate and accounted for the change prospectively commencing from September 24, 2013. The Company concluded that the support period for these sales ended on March 31, 2015. Therefore, there is no continuing impact on operating income and net income subsequent to March 31, 2015. For the three months ended December 31, 2014, the effect of this change on operating income and net income was an increase of $9,456 and $7,092, respectively and the impact on earnings per share was an increase of $0.06 on a basic and diluted basis. For the nine months ended December 31, 2014, the effect of this change on operating income and net income was an increase of $29,173 and $21,880, respectively and the impact on earnings per share was an increase of $0.18 and $0.17 on a basic and diluted basis, respectively.

(b) Recent accounting guidance adopted

In July 2015, the FASB issued a new accounting standard update on the topic of inventory. The amendments in this update changed the guidance on the subsequent measurement of inventory from the lower of cost or market to the lower of cost and net realizable value for entities using the first-in, first-out or the average cost method. The amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company early adopted this standard in the third quarter of fiscal 2016 and applied the new guidance prospectively, as permitted. The early adoption did not impact the Company’s results of operations, financial condition or disclosures.

In November 2015, the FASB issued a new accounting standard update to change the balance sheet classification of deferred taxes. The amendments in this update eliminate the requirement for companies to separate deferred income tax liabilities and assets into current and non-current amounts in a classified balance sheet. Instead, companies will be required to classify all deferred tax liabilities and assets as non-current. The guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company early adopted this standard in the third quarter of fiscal 2016 and applied the new guidance retrospectively, as permitted. Previously reported current deferred income taxes and non-current deferred income taxes, classified under current assets and non-current assets, respectively, have been revised to reflect the retrospective application as follows as at March 31, 2015:

 

		March 31, 2015
Current deferred income taxes, as reported		$	8,052
Reclassification of deferred income taxes			(8,052	)
Current deferred income taxes, as reclassified		$	—

 

Page 7

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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 and nine months ended December 31, 2015 and 2014

 

		March 31, 2015
Non-current deferred income taxes, as reported		$	8,304
Reclassification of deferred income taxes			8,052
Non-current deferred income taxes, as reclassified		$	16,356

(c) Recent accounting guidance not yet adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued a comprehensive new revenue recognition standard 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 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. The amendments are effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Early adoption is permitted for financial statements that have not been previously issued. This new guidance will be effective for the Company beginning April 1, 2016. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

2. Restructuring costs

(a) Fiscal 2016 October restructuring

In the third quarter of fiscal 2016, the Company updated its financial outlook and subsequently implemented cost reduction initiatives primarily relating to kapp sales and marketing activities and related R&D spend. The restructuring plan was substantially completed as at December 31, 2015.

 

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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 and nine months ended December 31, 2015 and 2014

 

Changes in the accrued restructuring obligation associated with the fiscal 2016 October restructuring activities were as follows:

 

		Nine months ended December 31, 2015
		Employee Termination Costs
Restructuring costs incurred		$	3,870
Restructuring costs paid			(3,581	)
Currency translation adjustment			(13	)
Balance at end of period		$	276

At December 31, 2015, the accrued fiscal 2016 October restructuring obligation of $276 was included in accrued and other current liabilities.

(b) Fiscal 2015 March restructuring

At the end of fiscal 2015, the Company completed a reorganization which merged the existing Education and Enterprise segments, effective April 1, 2015. Certain functions that were previously distinct to the Education and Enterprise segments were centralized at the corporate level. The restructuring plan included outsourcing of the Company’s information technology function. The restructuring plan was substantially completed as at September 30, 2015.

Changes in the accrued restructuring obligation associated with the fiscal 2015 March restructuring activities were as follows:

 

		Nine months ended December 31, 2015
		Employee Termination Costs				Other Restructuring Costs				Total
Balance at beginning of period		$	4,066			$	31			$	4,097
Restructuring costs paid			(3,896	)			(31	)			(3,927	)
Adjustments			272				—				272
Currency translation adjustment			(59	)			—				(59	)
Balance at end of period		$	383			$	—			$	383

At December 31, 2015, the accrued fiscal 2015 March restructuring obligation of $383 (March 31, 2015—$4,097) was included in accrued and other current liabilities.

(c) Other restructuring

Other restructuring activities undertaken from fiscal 2012 to 2015 included 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.

 

Page 9

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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 and nine months ended December 31, 2015 and 2014

 

Changes in the accrued restructuring obligation associated with the other restructuring activities were as follows:

 

		Nine months ended December 31, 2015
		Employee Termination Costs				Facilities Costs				Total
Balance at beginning of period		$	1,053			$	217			$	1,270
Restructuring costs paid			(300	)			(1,094	)			(1,394	)
Adjustments			(405	)			959				554
Currency translation adjustment			(54	)			(82	)			(136	)
Balance at end of period		$	294			$	—			$	294

 

		Nine months ended December 31, 2014
		Employee Termination Costs				Facilities Costs				Other Restructuring Costs				Total
Balance at beginning of period		$	5,191			$	4,129			$	—			$	9,320
Restructuring costs incurred			1,985				—				781				2,766
Restructuring costs paid			(4,498	)			(4,046	)			(333	)			(8,877	)
Adjustments			(389	)			24				(140	)			(505	)
Accretion expense			—				8				—				8
Currency translation adjustment			(99	)			69				(18	)			(48	)
Balance at end of period		$	2,190			$	184			$	290			$	2,664

In the first nine months of fiscal 2016, the Company recorded additional restructuring costs related to the cancellation of an office lease.

At December 31, 2015, the Company has incurred total restructuring costs of $42,300 since the commencement of the other restructuring activities discussed above, comprised of employee termination benefits of $27,137, facilities costs of $12,651, and other restructuring costs of $2,512. At December 31, 2015, the accrued other restructuring obligation of $294 (March 31, 2015 – $1,113) was included in accrued and other current liabilities.

3. Inventory

The components of inventory were as follows:

 

		December 31, 2015				March 31, 2015
Finished goods		$	58,202			$	51,113
Raw materials			493				525
Non-current inventory			(4,855	)			—
Current inventory		$	53,840			$	51,638

As a result of slower than anticipated kapp sales, during the third quarter of fiscal 2016, the Company assessed and revised its future demand assumptions for finished goods and raw materials. Based on

 

Page 10

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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 and nine months ended December 31, 2015 and 2014

 

these revised demand assumptions, the Company recorded an inventory adjustment of $20,555 in the third quarter of fiscal 2016 within cost of sales, of which $13,226 related to finished goods and raw materials and $7,329 related to purchase commitments. The Company also classified the portion of inventory that is not reasonably expected to be realized in cash during the next 12 months as non-current.

4. Property and equipment

The components of property and equipment were as follows:

 

		December 31, 2015				March 31, 2015
Cost
Asset under capital lease, net of deferred gain		$	42,460			$	46,030
Information systems, hardware and software			51,598				56,054
Assembly equipment, furniture, fixtures and other			22,574				28,780
Assets under development			280				1,082
		$	116,912			$	131,946
Accumulated depreciation and amortization
Asset under capital lease, net of deferred gain		$	6,909			$	5,424
Information systems, hardware and software			47,499				48,741
Assembly equipment, furniture, fixtures and other			19,720				23,036
		$	74,128			$	77,201
Net book value
Asset under capital lease, net of deferred gain		$	35,551			$	40,606
Information systems, hardware and software			4,099				7,313
Assembly equipment, furniture, fixtures and other			2,854				5,744
Assets under development			280				1,082
		$	42,784			$	54,745

5. Accrued and other current liabilities

The components of accrued and other current liabilities were as follows:

 

		December 31, 2015				March 31, 2015
Product warranty		$	10,967			$	11,448
Accrued compensation and employee benefits			4,496				8,418
Accrued restructuring liabilities			953				5,210
Accrued purchase commitments			8,092				485
Other current liabilities			16,583				18,779
		$	41,091			$	44,340

 

Page 11

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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 and nine months ended December 31, 2015 and 2014

 

6. Product warranty

Changes in the product warranty obligation, which is included in accrued and other current liabilities, were as follows:

 

		Three months ended December 31,								Nine months ended December 31,
		2015				2014				2015				2014
Balance at beginning of period		$	11,184			$	17,825			$	11,448			$	17,775
Actual warranty costs incurred			(2,508	)			(3,394	)			(6,075	)			(7,412	)
Warranty expense			2,667				2,263				6,597				6,493
Currency translation adjustment			(376	)			(639	)			(1,003	)			(801	)
Balance at end of period		$	10,967			$	16,055			$	10,967			$	16,055

7. Long-term debt

The components of long-term debt were as follows:

 

		December 31, 2015				March 31, 2015
Term loan		$	103,906			$	110,938
Unamortized debt discount			(3,247	)			(4,440	)
Current portion of long-term debt			(12,500	)			(10,156	)
Asset-based loan			10,000				—
		$	98,159			$	96,342

All debt and credit facilities are U.S. dollar facilities. The Company’s debt and credit facilities contain standard borrowing conditions, and could be recalled by the lenders if certain conditions are not met.

The Term loan matures on January 31, 2018 and currently bears interest at LIBOR plus 9.25% with a LIBOR floor of 1.25%. The Term loan requires mandatory annual repayments of 7.5% per annum during the first two-and-a-half years and 10.0% in the last two years on a quarterly basis. 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 Company’s 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%. The ABL matures on July 31, 2017 and $10,000 was drawn as of December 31, 2015. 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 as at December 31, 2015 (March 31, 2015—$1,000). The Company had $23,483 of availability from the ABL facility as at December 31, 2015.

8. Share capital

The Company’s authorized share capital consists of an unlimited number of Common Shares and an unlimited number of Preferred Shares issuable in series.

 

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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 and nine months ended December 31, 2015 and 2014

 

The share capital activity was as follows:

 

		Amount				Shares outstanding
Common Shares
Balance at March 31, 2015		$	696,151				122,190,913
Participant Equity Loan Plan			28				—
Shares issued under stock plan			312				239,007
Balance at December 31, 2015		$	696,491				122,429,920
Treasury Shares
Balance at March 31, 2015		$	(840	)			(410,502	)
Balance at December 31, 2015		$	(840	)			(410,502	)
Total share capital		$	695,651				122,019,418

9. 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 (loss) income before income taxes.

The reasons for these differences are as follows:

 

		Nine months ended December 31,
		2015				2014
(Loss) income before income taxes		$	(46,781	)		$	43,878
Combined tax rate			26.50	%			25.00	%
Expected income tax (recovery) expense		$	(12,397	)		$	10,970
Adjustments
Non-deductible, non-taxable items			(12	)			1,519
Tax rate variance			(1,122	)			1,383
Change in valuation allowance			26,406				(893	)
Investment tax credits			693				(2,208	)
Other			354				(633	)
Income tax expense		$	13,922			$	10,138

 

Page 13

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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 and nine months ended December 31, 2015 and 2014

 

The components of deferred income tax assets and liabilities were as follows:

 

		December 31, 2015				March 31, 2015
Deferred income tax assets
Inventory		$	—			$	146
Non-capital losses			9,521				1,953
Foreign non-capital losses			5,608				5,691
Property, plant and equipment			1,966				1,399
Allowance for bad debts			172				135
Deferred revenue			6,143				6,765
Capital lease obligation			1,131				818
Accrued restructuring			142				269
Warranty			6,954				4,933
Deferred financing fees			428				256
Long-term debt			3,734				2,090
Intangible assets			108				88
Other			449				503
Total deferred income tax assets			36,356				25,046
Deferred income tax liabilities
Inventory			25				—
Investment tax credits			384				651
Total deferred income tax liabilities			409				651
Net deferred income tax assets before valuation allowance			35,947				24,395
Valuation allowance			32,388				8,039
Net deferred income tax assets after valuation allowance		$	3,559			$	16,356
Deferred income tax asset		$	3,957			$	16,356
Deferred income tax liability			398				—
		$	3,559			$	16,356

The Company had consolidated non-capital losses of $55,246 (Canada—$35,184, New Zealand—$19,939, Other—$123) at December 31, 2015 (March 31, 2015—$28,182 (Canada—$7,873, New Zealand—$20,168, Other—$141)).

The Company regularly assesses the need for a valuation allowance against its deferred tax assets. In making that assessment, the Company considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more-likely-than-not that some or all of the deferred tax assets will be realized. In evaluating the need for a valuation allowance, the Company assessed the impact of the fiscal 2016 financial performance together with the uncertainty surrounding the timing of a return in generating taxable income in Canada. As a result, the Company recorded a $23,230 valuation allowance in the third quarter of fiscal 2016 against its Canadian deferred tax assets to the extent that they are not expected to be realized through the reversal of taxable temporary differences and loss carrybacks. This accounting treatment has no effect on the Company’s actual ability to utilize the deferred tax assets to reduce future cash tax payments. The Company will continue to assess the likelihood that the deferred tax assets will be realizable at each reporting period and the valuation allowance will be adjusted accordingly.

 

Page 14

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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 and nine months ended December 31, 2015 and 2014

 

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, 2007. Tax authorities in various jurisdictions are conducting examinations of local tax returns for various taxation years ending after March 31, 2007. Notwithstanding management’s belief in the merit of the Company’s tax filing position, it is possible that the final outcome of any audits by taxation authorities may differ from estimates and assumptions used in determining the Company’s consolidated tax provision and accruals, which could result in a material effect on the consolidated income tax provision and the net income for the period in which such determinations are made.

The Company does not recognize tax benefits associated with uncertain tax positions unless the position is more likely than not to be sustained upon examination.

10. (Loss) earnings per share amounts

Basic (loss) earnings per share is computed based on the weighted average number of Common shares outstanding during the period. Diluted (loss) earnings 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 earnings per share were as follows:

 

		Three months ended December 31,								Nine months ended December 31,
		2015				2014				2015				2014
Net (loss) income available for common shareholders		$	(49,452	)		$	9,320			$	(60,703	)		$	33,740
Weighted-average shares outstanding			122,019,418				121,664,950				121,955,873				121,517,441
Effect of dilutive securities			—				4,661,774				—				5,114,515
Weighted-average diluted shares			122,019,418				126,326,724				121,955,873				126,631,956
Basic (loss) earnings per share		$	(0.41	)		$	0.08			$	(0.50	)		$	0.28
Diluted (loss) earnings per share		$	(0.41	)		$	0.07			$	(0.50	)		$	0.27

No dilutive securities were included in the diluted earnings per share calculation for the three and nine months ended December 31, 2015 due to net losses reported. Anti-dilutive securities excluded from the calculations of diluted earnings per share were 187,261 and 700,737 for the three and nine months ended December 31, 2014.

 

Page 15

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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 and nine months ended December 31, 2015 and 2014

 

11. 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 that it is required to honor these guarantees.

12. Segment disclosure

Effective April 1, 2015, the Company completed a reorganization which merged the existing Education and Enterprise sales and customer service teams into the new Solutions business unit, and established separate sales and customer service teams dedicated to the Company’s new line of products in the kapp business unit. Certain functions that were previously distinct to the individual Education and Enterprise segments were centralized at the corporate level. As a result of only the sales and customer service teams being dedicated to a specific business unit, no discrete financial information is available on a business unit basis. The existing NextWindow segment no longer earns revenue or incurs expenses as it enters the final stage of its wind down. Therefore, the Company no longer has individual business units that meet the criteria of an operating segment, and is now organized and managed as a single reportable operating segment.

Revenue information relating to the geographic locations in which the Company sells products, classified by the billing addresses of our customers, was as follows:

 

		Three months ended December 31,								Nine months ended December 31,
		2015				2014				2015				2014
Revenue
United States		$	40,139			$	65,976			$	161,282			$	210,798
Canada			8,657				7,938				20,129				29,007
Europe, Middle East and Africa			23,566				42,974				83,537				111,663
Rest of World			5,386				9,689				15,114				41,803
		$	77,748			$	126,577			$	280,062			$	393,271

For the three months ended December 31, 2015, one distributor accounted for 25% of revenue. For the nine months ended December 31, 2015, the same distributor accounted for 18% of revenue. For the three and nine months ended December 31, 2014, no individual distributor accounted for more than 10% of revenue.

13. Financial instruments

The Company’s 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, the capital lease obligation and long-term debt.

The Company periodically 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 counterparty’s relative credit standing. The Company does not use derivative financial instruments for trading or speculative purposes.

 

Page 16

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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 and nine months ended December 31, 2015 and 2014

 

(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.

These programs reduce but do not entirely eliminate the impact of currency exchange movements. The Company currently 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 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 Company’s 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 currently 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 as described in Note 1(e) to the audited consolidated financial statements for the year ended March 31, 2015. The geographic diversity of the customer base, combined with the Company’s established credit approval practices and ongoing monitoring of customer receivables balances, partially mitigates this counterparty risk.

Fair value measurements

Accounting Standards Codification (“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 fair value hierarchy, which prioritizes the inputs in the valuation methodologies in measuring fair value:

Level 1—Unadjusted quoted prices at the measurement date for identical assets or liabilities in active markets.

 

Page 17

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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 and nine months ended December 31, 2015 and 2014

 

Level 2—Observable 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 3—Significant unobservable inputs which are supported by little or no market activity and typically reflect management’s 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.

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis:

 

December 31, 2015
		Level 1				Level 2				Level 3				Total
Assets
Money market funds		$	3,594			$	—			$	—			$	3,594
Derivative instruments			—				56				—				56
Total assets		$	3,594			$	56			$	—			$	3,650
Liabilities
Derivative instruments		$	—			$	1,276			$	—			$	1,276
Total liabilities		$	—			$	1,276			$	—			$	1,276

 

March 31, 2015
		Level 1				Level 2				Level 3				Total
Assets
Money market funds		$	27,873			$	—			$	—			$	27,873
Derivative instruments			—				639				—				639
Total assets		$	27,873			$	639			$	—			$	28,512
Liabilities
Derivative instruments		$	—			$	927			$	—			$	927
Total liabilities		$	—			$	927			$	—			$	927

(a) Derivative contracts

 

December 31, 2015

Fair value

Contract term

Rates

Notional amounts of quantity

Buy/Sell

Foreign exchange forward derivative contracts

$

(708

)

Jan 2016 to Jun 2016

1.2492 – 1.2949

USD 9,000

Sell

(261

)

Jan 2016 to Jun 2016

1.3762 – 1.5215

EUR 11,000

Sell

(251

)

Jan 2016 to Sep 2016

1.8670 – 2.0201

GBP 6,000

Sell

$

(1,220

)

 

Page 18

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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 and nine months ended December 31, 2015 and 2014

 

March 31, 2015

Fair value

Contract term

Rates

Notional amounts of quantity

Buy/Sell

Foreign exchange forward derivative contracts

$

(607

)

Apr 2015 to Nov 2015

1.1294 – 1.2152

USD 7,000

Sell

639

Apr 2015 to Dec 2015

1.4010 – 1.4938

EUR 20,000

Sell

(320

)

Apr 2015 to Nov 2015

1.7906 – 1.8354

GBP 5,500

Sell

$

(288

)

The Company enters into foreign exchange forward derivative contracts to economically hedge its risks in the movement of foreign currencies against the Company’s functional currency of the Canadian dollar. The fair value of foreign exchange derivative contracts of $56 is included in other current assets at December 31, 2015 (March 31, 2015—$639). The fair value of foreign exchange derivative contracts of $1,276 is included in accrued and other current liabilities at December 31, 2015 (March 31, 2015—$927). Changes in the fair value of these contracts are included in foreign exchange loss. The Company recorded losses of $310 and $917 for the three months ended December 31, 2015 and 2014, respectively, and a loss of $2,781 and a gain of $1,113 for the nine months ended December 31, 2015 and 2014, 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 Company’s 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 debt 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 our 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 Company’s term loan are as follows:

 

		December 31, 2015								March 31, 2015
		Carrying value				Fair value				Carrying value				Fair value
Variable-rate term loan, excluding debt discount		$	103,906			$	101,967			$	110,938			$	111,424

 

Page 19

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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 and nine months ended December 31, 2015 and 2014

 

(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.

14. Comparative figures

Certain reclassifications have been made to prior periods’ figures to conform to the current period’s presentation.

 

Page 20

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14 (a)

of the Securities Exchange Act of 1934

CERTIFICATION

I, Neil Gaydon, certify that:

 

1)	I have reviewed the interim financial statements and interim MD&A (together, the “quarterly report”) of SMART Technologies Inc. for the third quarter ending December 31, 2015;

 

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 issuer as of, and for, the period presented in this report;

 

4)

The issuer’s other certifying officer(s) 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 the Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the issuer 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 issuer, 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 issuer’s 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 issuer’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and

 

5)	The issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of issuer’s 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 issuer’s 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 issuer’s internal control over financial reporting.

Dated this 11^th day of February, 2016.

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14 (a)

of the Securities Exchange Act of 1934

CERTIFICATION

I, Steve Winkelmann, certify that:

 

1)	I have reviewed the interim financial statements and interim MD&A (together, the “quarterly report”) of SMART Technologies Inc. for the third quarter ending December 31, 2015;

 

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 issuer as of, and for, the period presented in this report;

 

4)

The issuer’s other certifying officer(s) 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 the Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the issuer 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 issuer, 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 issuer’s 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 issuer’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and

 

5)	The issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of issuer’s 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 issuer’s 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 issuer’s internal control over financial reporting.

Dated this 11^th day of February, 2016.