What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2021-10-25 compared with 2020-10-22 · 1015 added, 2 removed, 1 unchanged (100% of the section changed)

Financial Statements and Supplementary Data

The financial statements and supplemental financial information required by this item are presented beginning on page F-1 in Part IV, Item 15 of this annual report on Form 10-K and are incorporated herein by reference, and the supplementary data required by this item is included in Note 15, Selected Quarterly Information, in our notes to consolidated financial statements.

Changes in and Disagreements with Accou ntants on Accounting and Financial Disclosure

INDEX TO FINANCIAL STATEMENTS

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statements of Comprehensive Income (Loss)

Consolidated Statements of Shareholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

SMART Global Holdings, Inc.

Consolidated Balance Sheets

(In thousands, except par value amount)

Cash and cash equivalents

Accounts receivable, net (1)

Other current assets

Total current assets

Property and equipment, net

Operating lease right-of-use assets

Intangible assets, net

Other noncurrent assets

Liabilities and Equity

Accounts payable and accrued expenses

Other current liabilities

Total current liabilities

Long-term debt

Acquisition-related contingent consideration

Noncurrent operating lease liabilities

Other noncurrent liabilities

Total liabilities

Commitments and contingencies

SMART Global Holdings shareholders’ equity:

Ordinary shares, $ 0.03 par value.

Authorized 200,000 shares;

25,770 issued and 24,368 outstanding as of August 27, 2021;

24,568 issued and 24,419 outstanding as of August 28, 2020

Additional paid-in-capital

Retained earnings

Treasury shares, 1,402 and 149 shares held as of August 27, 2021

and August 28, 2020, respectively

Accumulated other comprehensive income (loss)

Total SGH shareholders’ equity

Noncontrolling interest in subsidiary

Total liabilities and equity

Receivables from related parties were $ 14,057 and $ 6,546 as of August 27, 2021 and August 28, 2020, respectively.

The accompanying notes are an integral part of these consolidated financial statements.

SMART Global Holdings, Inc.

Consolidated Statements of Operations

(In thousands, except per share amounts)

Net sales (1)

Cost of sales

Operating expenses:

Research and development

Selling, general and administrative

Change in fair value of contingent consideration

Other operating (income) expense

Total operating expenses

Operating income

Non-operating (income) expense:

Interest expense, net

Other non-operating (income) expense

Total other non-operating expense

Income before taxes

Income tax provision

Net income (loss)

Net income attributable to noncontrolling interest

Net income (loss) attributable to SGH

Earnings (loss) per share:

Shares used in per share calculations:

Sales to related parties were $ 76,488 , $ 75,837 and $ 117,403 in 2021, 2020 and 2019, respectively.

The accompanying notes are an integral part of these consolidated financial statements.

SMART Global Holdings, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

Net income (loss)

Other comprehensive income (loss), net of tax:

Foreign currency translation adjustments

Comprehensive income (loss)

Comprehensive income attributable to noncontrolling interest

Comprehensive income (loss) attributable to SGH

The accompanying notes are an integral part of these consolidated financial statements.

SMART Global Holdings, Inc.

Consolidated Statements of Shareholders’ Equity

(In thousands)

Paid-in-capital

Comprehensive

Income (Loss)

Shareholders’

As of August 31, 2018

Other comprehensive loss

Shares issued under equity plans

Repurchase of ordinary shares

Shares issued or issuable in connection with acquisition of Inforce

Share-based compensation expense

Cumulative effect from adoption of ASC 606

As of August 30, 2019

Other comprehensive loss

Shares issued under equity plans

Repurchase of ordinary shares

Shares issued in connection with acquisition of Inforce

Share-based compensation expense

Reclassification of Capped Calls to equity

Issuance of convertible notes

As of August 28, 2020

Other comprehensive income

Shares issued under equity plans

Repurchase of ordinary shares

Share-based compensation expense

Acquisition of LED Business

As of August 27, 2021

The accompanying notes are an integral part of these consolidated financial statements.

SMART Global Holdings, Inc.

Consolidated Statements of Cash Flows

(In thousands)

Cash flows from operating activities:

Net income (loss)

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

Depreciation expense and amortization of intangible assets

Amortization of debt discounts and issuance costs

Share-based compensation expense

Loss (gain) from change in fair value of contingent consideration

Amortization of operating lease right-of-use assets

Loss on remeasurement of Capped Calls

Loss on extinguishment of debt

Changes in operating assets and liabilities:

Accounts receivable

Other current assets

Accounts payable and accrued expenses

Operating lease liabilities

Deferred income taxes, net

Net cash provided by operating activities

Cash flows from investing activities:

Capital expenditures and deposits on equipment

Acquisitions of businesses, net of cash acquired

Net cash used for investing activities

Cash flows from financing activities:

Proceeds from borrowing under line of credit

Proceeds from issuance of ordinary shares

Proceeds from issuance of debt

Repayments of borrowings under line of credit

Payments to acquire ordinary shares

Repayments of debt

Purchase of capped calls

Net cash provided by financing activities

Effect of changes in currency exchange rates on cash and cash equivalents

Net increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Supplement disclosures:

Interest paid, net of amounts capitalized

Income taxes paid, net

The accompanying notes are an integral part of these consolidated financial statements.

SMART Global Holdings, Inc.

Notes to Consolidated Financial Statements

(Tabular amounts in thousands, except per share amounts)

Significant Accounting Policies

Basis of Presentation

Since our inception over 30 years ago, SMART Global Holdings, Inc.

(“SGH” or “Company”) has grown into a diversified group of businesses focused on the design and manufacture of specialty solutions for the computing, memory and LED markets.

Our success is based on a customer-focused approach characterized by a commitment to quality, advanced technical expertise, quick time-to-market, build-to-order flexibility and excellence in customer service.

The accompanying consolidated financial statements include SGH and its consolidated subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America.

Intercompany balances and transactions have been eliminated in consolidation.

Reclassifications :

Certain reclassifications have been made to prior period amounts to conform to current period presentation, including, among others, presenting:

(i) treasury shares separate from additional paid-in-capital in the consolidated balance sheets and consolidated statements of shareholders’ equity;

(ii) components of accounts payable and accrued expenses in the consolidated balance sheet and footnotes;

(iii) components of property and equipment in the footnotes;

and (iv) the operating cash flow impacts of reclassifications in consolidated statements of cash flows.

Fiscal Year :

Our fiscal year is the 52 or 53-week period ending on the last Friday in August.

Fiscal 2021, 2020 and 2019 each contained 52 weeks.

All period references are to our fiscal periods unless otherwise indicated.

All financial information for our subsidiaries in Brazil is included in our consolidated financial statements on a one-month lag because their fiscal years end on July 31 of each year.

Out-of-Period Adjustment :

During the second quarter of 2021, we recorded an out-of-period adjustment to correct errors originating in previous periods related to understated import tax costs, which resulted in a $ 4.3 million increase in cost of sales, $ 0.8 million increase in interest expense and $ 1.7 million benefit for income taxes.

The adjustment was not considered material to the interim or annual consolidated financial statements for the year ended August 27, 2021 nor to any previously issued interim or annual consolidated financial statements.

Cash and Cash Equivalents

Cash equivalents include highly liquid short-term investments, readily convertible to known amounts of cash, with original maturities of three months or less.

Derivative Instruments

We use derivative instruments to manage our exposure to changes in currency exchange rates from certain monetary assets and liabilities denominated in currencies other than the U.S.

Derivative instruments are measured at their fair values and recognized as either assets or liabilities.

The accounting for changes in the fair value of derivative instruments is based on the intended use of the derivative and the resulting designation.

For derivative instruments that are not designated for hedge accounting, gains or losses from changes in fair values are recognized in other non-operating (income) expense.

We do not use foreign currency contracts for speculative or trading purposes.

Fair Value Measurements

We measure and report certain financial assets and liabilities at fair value on a recurring basis.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date.

GAAP has established a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.

Observable inputs are those that can be obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party might use in pricing an asset or liability.

The fair value hierarchy is categorized into three levels, based on the reliability of inputs, as follows:

Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities;

Level 2 – Valuations based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly;

Level 3 – Valuations based on unobservable inputs for the asset or liability.

Functional Currency

Our primary functional currency is the U.S.

Gains and losses from the remeasurement of non-functional currency balances are recorded in non-operating (income) expense.

The functional currency of our subsidiaries in Brazil is the Brazilian real.

Assets and liabilities of our Brazil subsidiaries are translated into U.S.

dollars each period at the current exchange rate, while revenues and expenses are translated at the average exchange rate prevailing during the period.

Cumulative translation gains and losses are included in accumulated other comprehensive income (loss).

We test goodwill for impairment in the fourth quarter of each year, or more frequently if indicators of an impairment exist, to determine whether it is more likely than not that the fair value of the reporting unit with goodwill is less than its carrying value.

Qualitative factors considered in this assessment include industry and market considerations, overall financial performance and other relevant events and factors affecting the fair value of the reporting unit.

No impairment of goodwill was recognized through August 27, 2021.

Government Incentives

We receive incentives from governmental entities related to certain expenses and other activities.

These government incentives may require that we meet or maintain specified spending levels and other operational metrics and are recorded in the financial statements in accordance with their purpose.

Incentives related to specific operating activities are recorded against the related expense in the period the expense is incurred.

Government incentives received prior to being earned are included in other current liabilities, whereas government incentives earned prior to being received are included in other current assets.

Cash received from government incentives related to operating expenses is included as an operating activity in the consolidated statement of cash flows.

We recognize current and deferred income taxes based on reported income before income taxes.

Deferred income taxes reflect the effect of temporary differences and carryforwards recognized for financial reporting and income tax purposes.

Deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases, utilizing tax rates that are expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled.

We recognize valuation allowances to reduce deferred tax assets to the amount that we estimate, based on available evidence and management judgment, will more likely than not be realized.

We record a valuation allowance in the period the determination is made that all or part of the net deferred tax assets will not be realized.

We record interest and penalties related to unrecognized tax benefits in tax expense.

Intangible Assets

Intangible assets are stated at cost and amortized on a straight-line basis over their estimated useful lives of generally four to eight years for technology, four to eight years for customer relationships, five to seven years for trademarks/tradenames and less than one year for order backlog.

Intangible assets are retired in the period they become fully amortized.

We review the carrying value of identified intangible assets for impairment when events and circumstances indicate that their carrying value may not be recoverable from the estimated future cash flows expected to result from their use and/or disposition.

In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to the amount by which the carrying value exceeds the estimated fair value of the identifiable intangible assets.

Inventories are stated at the lower of cost or net realizable value.

In our LED segment, cost is determined on a first-in, first-out method or average cost method.

For all other segments, inventory value is determined on a specific identification basis for material and an allocation of labor and manufacturing overhead.

At each balance sheet date, we evaluate ending inventories for excess quantities and obsolescence, including analyses of sales levels by product family, historical demand and forecasted demand in relation to inventory on hand, competitiveness of product offerings, market conditions and product life cycles.

We have operating leases through which we acquire or utilize facilities, offices and equipment in our manufacturing operations, research and development activities and selling, general and administrative functions.

In determining the lease term, we assess whether it is reasonably certain we will exercise options to renew or terminate a lease, and when or whether we would exercise an option to purchase the right-of-use asset.

Measuring the present value of the initial lease liability requires exercising judgment to determine the discount rate, which we base on interest rates for similar borrowings issued by entities with credit ratings similar to ours.

We recognize right-of use assets and corresponding lease liabilities for leases with an initial term of more than 12 months and do not separate lease and non-lease components.

Recognized leases are included in operating lease right-of-use assets and corresponding lease liabilities are included in other current liabilities or noncurrent operating lease liabilities.

For operating leases of buildings, we account for non-lease components, such as common area maintenance, as a component of the lease and include the components in the initial measurement of our right-of-use assets and corresponding liabilities.

Operating lease assets are amortized on a straight-line basis in operating expenses over the lease term.

Property and Equipment

Property and equipment is stated at cost and depreciated using the straight-line method over estimated useful lives of generally two to five years for equipment, five to forty years for buildings and building improvements and two to five years for furniture, fixtures and software.

Land leases are amortized using the straight-line method over their lease terms, which expire from 2057 to 2082 .

We review the carrying value of property and equipment for impairment when events and circumstances indicate that the carrying value of an asset or group of assets may not be recoverable from the estimated future cash flows expected to result from its use and/or disposition.

Research and Development

Research and development expenditures are expensed in the period incurred.

Revenue Recognition

We recognize revenue based on the transfer of control of goods and services and apply the following five-step approach:

(1) identification of a contract with a customer, (2) identification of the performance obligations in the contract, (3) determination of the transaction price, (4) allocation of the transaction price to the performance obligations in the contract and (5) recognition of revenue as performance obligations are satisfied.

Product Revenue :

Product revenue is generally recognized at a point in time when control of the promised goods is transferred to customers.

Contracts with customers are generally short-term in duration at fixed, negotiated prices with payment generally due shortly after delivery.

We estimate a liability for returns using the expected value method based on historical rates of return.

In addition, we generally offer price protection to our distributors, which is a form of variable consideration that decreases the transaction price.

We use the expected value method, based on historical price adjustments and current pricing trends, to estimate the amount of revenue recognized from sales to distributors.

Differences between the estimated and actual amounts are recognized as adjustments to revenue.

Non-cancellable, nonrefundable customized product sales are recognized over time on a cost incurred basis.

In connection with these arrangements, customers obtain control and benefit from the services as they are performed.

The terms for these arrangements provide us with a legally enforceable right to receive payment, including a reasonable profit margin upon customer cancellation, for performance completed to date.

Accordingly, we recognize revenue over time as we complete the manufacture of these products.

A portion of our revenue is derived from the sale of customized products.

In certain cases, we recognize revenue when control of the underlying assets passes to the customer when the customer is able to direct the use of, and obtain substantially all of the remaining benefit from, the assets;

the customer has the significant risks and rewards associated with ownership of the assets;

and we have a present right to payment.

Under the terms of these arrangements, we cannot repurpose products without the customer’s consent and accordingly, we recognize revenue at the point in time when products are completed and made available to the customer.

Service Revenue :

Our service revenue is derived from supply chain services as well as professional services.

Supply chain services includes procurement, logistics, inventory management, temporary warehousing, kitting and packaging.

Professional services include solution design, system installation, software automation and managed support services related to high performance computing (“HPC”) and storage systems.

A portion of our product sales include extended warranty and on-site services, subscriptions to our HPC environment, professional services, software and related support.

Agent Services :

We provide certain supply chain services on an agent basis, whereby we procure materials on behalf of our customers and then resell such materials to our customers.

Gross amounts invoiced to customers in connection with these agent services include amounts related to the services performed by us in addition to the cost of the materials procured.

However, only the amount related to the agent component is recognized as revenue in our results of operations.

We generally recognize revenue for these procurement, logistics and inventory management services upon the completion of such services, which typically occurs at the time of shipment of product to the customer.

Amounts we invoice to customers for cost of materials related to services performed, which remain unpaid as of the end of a reporting period, are included in accounts receivable.

Additionally, cost of materials procured for customers under these agent services, but which remain on hand as of the end of a reporting period, are included in inventories.

Amounts in accounts receivable and inventories impact the determination of net cash provided by (or used in) operations.

Transaction Price :

The transaction price is determined based on the consideration to which we will be entitled in exchange for transferring goods or services to the customer.

We allocate the transaction price to each distinct product and service based on its relative standalone selling price.

The standalone selling price for products primarily involves the cost to produce the deliverable plus the anticipated margin and for services is estimated based on our approved list price.

A portion of our service revenue is from professional consulting services, including installation and other services and hardware and software related support.

Each contract may contain multiple performance obligations, which requires the transaction price to be allocated to each performance obligation.

We allocate the consideration to each performance obligation based on the relative selling price, determined as the best estimate of the price at which we would transact if it sold the deliverable regularly on a stand-alone basis.

Contract C osts :

As a practical expedient, we recognize the incremental costs of obtaining a contract, specifically commission expenses that have an amortization period of less than twelve months , as an expense when incurred.

Additionally, we account for shipping and handling costs , if any, that occur after control transfers to the customer as a fulfillment activity.

We record shipping and handling costs related to revenue transactions within cost of sales as a period cost.

Share-Based Compensation

Share-based compensation is measured at the grant date, based on the fair value of the award, and recognized as expense under the straight-line attribution method over the requisite service period.

We account for forfeitures as they occur.

Treasury Shares

Treasury shares are carried at cost.

When treasury shares are retired, any excess of the repurchase price paid over par value is allocated between additional capital and retained earnings.

Use of Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures.

Estimates and judgments are based on historical experience, forecasted events and various other assumptions.

Significant items subject to such estimates and assumptions include business acquisitions, income taxes, inventories, goodwill and intangible assets, property and equipment, revenue recognition and share-based compensation.

Actual results could differ from the estimates made by management.

Recently Adopted Accounting Standards

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13 – Measurement of Credit Losses on Financial Instruments , which requires a financial asset (or a group of financial assets) measured on the basis of amortized cost to be presented at the net amount expected to be collected.

This ASU requires that the income statement reflect the measurement of credit losses for newly recognized financial assets as well as the increases or decreases of expected credit losses that have taken place during the period.

This ASU requires that credit losses of debt securities designated as available-for-sale be recorded through an allowance for credit losses and limits the credit loss to the amount by which fair value is below amortized cost.

We adopted ASU 2016-13 in the first quarter of 2021 under the modified retrospective adoption method.

The adoption of this ASU did not have a significant impact on our financial statements.

In February 2016, the Financial Accounting Standards Board issued ASU 2016-02 – Leases (“ASC 842”), which amends a number of aspects of lease accounting, including requiring lessees to recognize operating leases with a term greater than one year on their balance sheet as a right-of-use asset and corresponding lease liability, measured at the present value of lease payments.

We adopted this ASU in the first quarter of 2020 under the modified retrospective method and elected to not recast prior periods.

We elected the practical expedients available under the transition guidance, including but not limited to, not reassessing past lease accounting or using hindsight to evaluate lease term.

In addition, we elected to not separate lease and non-lease components for leases.

In connection with our adoption of ASC 842, we recognized $ 24.3 million for operating lease right-of-use assets and $ 25.0 million for operating lease liabilities.

The difference between the operating lease right-of-use assets and operating lease liabilities primarily related to deferred rent.

Recently Issued Accounting Standards

In August 2020, the FASB issued ASU 2020-06 – Debt – Debt with Conversion and Other Options and Derivatives and Hedging – Contracts in Entity’s Own Equity , which simplifies the accounting for convertible debt instruments by reducing the number of accounting models and the number of embedded conversion features that could be recognized separately from the primary contract.

This ASU requires a convertible debt instrument to be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives.

This ASU requires an entity to use the if-converted method in the diluted earnings per share calculation for convertible instruments.

This ASU is effective for us in the first quarter of 2023, with early adoption permitted beginning in the first quarter of 2022, and permits the use of either the modified retrospective or fully retrospective method of transition.

We are evaluating the timing and effects of adoption of this ASU on our financial statements.

In December 2019, the FASB issued ASU 2019-12 – Income Taxes – Simplifying the Accounting for Income Taxes , which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740.

The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance.

ASU 2019-12 is effective for us in the first quarter of 2022.

We expect to adopt this ASU on a prospective basis and do not expect the adoption to have a significant impact on our financial statements.

Business Acquisitions

On March 1, 2021, pursuant to the previously announced Asset Purchase Agreement dated October 18, 2020 , as amended by the Amendment to Asset Purchase Agreement dated March 1, 2021 (as amended, the “CreeLED Purchase Agreement”), (i) we acquired the LED business of Cree, Inc.

(“Cree”), including (a) certain equipment, inventory, intellectual property rights, contracts and real estate comprising Cree’s LED products segment, (b) all of the issued and outstanding equity interests of Cree Huizhou Solid State Lighting Company Limited, a limited liability company organized under the laws of the People’s Republic of China and an indirect wholly owned subsidiary of Cree and (c) Cree’s 51 % ownership interest in Cree Venture LED Company Limited (“Cree Joint Venture”), Cree’s joint venture with San’an Optoelectronics Co., Ltd.

(“San’an”) and (ii) we assumed certain liabilities related to the LED business (collectively, (i) and (ii), the “LED Business”).

In connection with the transaction, Cree retained certain assets used in and pre-closing liabilities associated with its LED products segment.

In connection with this transaction, Cree and the Company also entered into certain ancillary and related agreements, including (i) an Intellectual Property Assignment and License Agreement, (ii) a Transition Services Agreement, (iii) a Wafer Supply and Fabrication Services Agreement and (iv) a Real Estate License Agreement.

Under the acquisition method of accounting, the assets acquired and liabilities assumed of the LED Business were recorded as of the acquisition date at their respective fair values.

The LED Business’s results of operations are included in the consolidated financial statements from the date of acquisition.

The acquisition of the LED Business, a global industry leader, further enhances our growth and diversification strategy and fits well with our other specialty businesses in computing and memory.

The LED Business comprises a broad portfolio of highly efficient LED chips and high-performance LED components within the industry, including general lighting, specialty lighting, large-format video screens and outdoor and architectural lighting.

The LED Business will operate as our LED Solutions segment.

Purchase Price :

The purchase price for the LED Business consisted of (i) a payment of $ 50 million in cash, subject to customary adjustments, (ii) an unsecured promissory note issued to Cree by the Company in the amount of $ 125 million (“LED Purchase Price Note”), (iii) an earn-out payment of up to $ 125 million based on the revenue and gross profit performance of the LED Business in Cree’s first four full fiscal quarters following the closing (“Earnout Period”), with a minimum payment of $ 2.5 million, payable in the form of an unsecured promissory note to be issued by us (“Earnout Note”) and (iv) the assumption of certain liabilities.

The LED Purchase Price Note bears interest at LIBOR plus 3.0 % and is due on August 15, 2023 .

The Earnout Note will begin to bear interest upon completion of the Earnout Period at LIBOR plus 3.0 % and is due on March 27, 2025 .

The purchase price was as follows:

Additional payment for net working capital adjustment (1)

Fair value of LED Purchase Price Note

Fair value of Earnout Note

Includes $ 15.3 million paid at closing and $ 7.1 million paid in the fourth quarter of 2021 upon completion of the review of the net working capital assets acquired and liabilities assumed.

Contingent Consideration :

The Earnout Note is accounted for as contingent consideration.

The fair value of the Earnout Note was estimated as of the date of acquisition to be $ 28.1 million and was valued using a Monte Carlo simulation analysis in a risk-neutral framework with assumptions for volatility, market price of risk adjustment, risk-free rate and cost of debt.

The fair value measurement was based on significant inputs not observable in the market.

The Earnout Note is revalued each quarter and changes in valuation are reflected in results of operations.

In the second half of 2021, we recorded charges of $ 32.4 million to adjust the value of the Earnout Note to the fair value as of August 27, 2021.

The change in fair value reflected new information about the probability and timing of meeting the conditions of the revenue and gross profit targets of the LED Business.

As of August 27, 2021, the fair value of the Earnout Note was $ 60.5 million.

We estimated the fair value of the assets and liabilities of the LED Business as of March 1, 2021 , the acquisition date.

The purchase price has been allocated to the tangible and intangible assets acquired and liabilities assumed based on these valuation analyses.

The valuation of the LED Business assets acquired and liabilities assumed, noncontrolling interest in subsidiary and consideration was as follows:

Cash and cash equivalents

Accounts receivable

Other current assets

Property and equipment

Operating lease right-of-use assets

Intangible assets

Other noncurrent assets

Accounts payable and accrued expenses

Other current liabilities

Noncurrent operating lease liabilities

Other noncurrent liabilities

Total net assets acquired

Noncontrolling interest in subsidiary

Consideration

The fair values and useful lives of the intangible asset acquired was as follows:

Trademarks/tradenames

Customer relationships

Order backlog

Technology intangible assets were valued using the multi-period excess earnings method based on the discounted cash flow and technology obsolescence rate.

The discounted cash flow requires the use of significant assumptions, including projected revenue, expenses, capital expenditures and other costs and discount rates calculated based on the cost of equity adjusted for various risks, including the size of the acquiree, industry risk and other risk factors.

Trademarks/tradenames intangible assets were valued using the relief from royalty method, which is the discounted cash flow savings accruing to the owner by virtue of the fact that the owner is not required to license the tradenames/trademarks from a third party.

Key assumptions included attributable revenue expected from the tradenames/trademarks, royalty rates and assumed asset life.

Customer relationships intangible assets were valued using the multi-period excess earnings method, which is the present value of the projected cash flows expected to be generated by the existing intangible asset after reduction by an estimated fair rate of return on contributory assets required to generate the customer relationship revenues.

Key assumptions included discounted cash flow, estimated life cycle and customer attrition rates.

Order backlog intangible assets represent the value of existing firm purchase orders in place at the time of acquisition and were valued using the discounted cash flow method, which accounts for the expected profit related to the purchase orders.

Unaudited Pro Forma Financial Information :

The following unaudited pro forma financial information presents our combined results of operations as if the acquisition of the LED Business had occurred on August 31, 2019.

The unaudited pro forma financial information is based on various adjustments and assumptions and is not necessarily indicative of what our results of operations actually would have been had the acquisition been completed as of August 31, 2019 or will be for any future periods.

Furthermore, the pro forma financial information does not include adjustments to reflect any potential revenue, synergies or dis-synergies or cost savings that may be achievable in connection with the acquisition, or the associated costs that may be necessary to achieve such revenues, synergies or cost savings.

The unaudited pro forma financial information for the year ended August 27, 2021 combines our results of operations for the year ended August 27, 2021 (which include the results of the LED Business beginning on the March 1, 2021 acquisition date) and the results of operations of the LED Business for the six months ended December 27, 2020.

The unaudited pro forma financial information for the year ended August 28, 2020 combines our results of operations for the year ended August 28, 2020 and the results of operations of the LED Business for the year ended June 28, 2020.

Net loss attributable to SGH

Earnings (loss) per share:

The unaudited pro forma financial information above reflects the following adjustments:

Incremental cost of sales related to the estimated fair value of inventories.

Incremental depreciation expense related to the estimated fair value of property and equipment.

Incremental amortization expense related to the estimated fair value of identifiable intangible assets.

Incremental interest expense related to the LED Purchase Price Note and the Earnout Note.

The impacts to income tax expense as a result of the pro forma adjustments.

In 2021 and 2020, we incurred costs related to the acquisition of $ 5.3 million and $ 1.1 million, respectively, which were included in selling, general and administrative expense.

From March 1, 2021, the acquisition date, to August 27, 2021, revenues for the LED Business were $ 224.6 million and, for the same period, net income for the LED Business was $ 16.3 million, which excludes any expenses recognized to adjust the Earnout Note to its fair value.

In July 2019, we acquired Artesyn Embedded Computing, Inc.

(“Artesyn”), which we subsequently renamed SMART Embedded Computing, Inc.

(“SMART EC”), for $ 77.4 million.

The purchase price consisted of (i) cash paid at closing, subject to customary adjustments and (ii) an earn-out payment of up to $ 10 million based on Artesyn’s achievement of specific gross revenue levels through December 31, 2019 plus additional earn-out payments of $ 0.10 for each dollar of gross revenue through December 31, 2019 over an agreed upon achievement level.

The earn-out was payable, at our option in either cash or ordinary shares of SGH.

No earn-out was achieved by Artesyn.

The operations of SMART EC are part of our Intelligent Platforms Solutions segment.

The purchase price was as follows:

Fair value of contingent consideration

The initial fair value of the contingent consideration was estimated using a real options technique which incorporated various estimates, including projected gross revenue for the period, a volatility factor applied to gross revenue based on year-on-year growth in gross revenue of comparable companies, discount rates and the estimated amount of time until final payment was due.

Under the acquisition method of accounting, the assets acquired and liabilities assumed were recorded as of the acquisition date at their respective fair values.

Assets acquired and liabilities assumed were as follows:

Tangible assets acquired

Intangible assets

Liabilities assumed

Total net assets acquired

The excess of purchase price over the fair value amounts assigned to the assets acquired and liabilities assumed represents goodwill resulting from the acquisition.

The goodwill is not deductible for tax purposes.

The estimated fair values and useful lives of the intangible assets acquired included customer relationship assets with a fair value of $ 31.8 million and estimated useful lives of 4 - 6 years and technology assets with a fair value of $ 10.1 million and estimated useful lives of 4 years.

In 2020 and 2019, we incurred costs related to the acquisition of $ 0.6 million and $ 1.0 million, respectively, which were are included in selling, general and administrative expense.

SMART EC’s results of operations are included in the condensed consolidated financial statements from the date of acquisition.

SMART Wireless

In July 2019, we acquired Inforce Computing, Inc.

(“Inforce”), which we subsequently renamed SMART Wireless Computing, Inc.

(“SMART Wireless”), for $ 14.6 million.

The purchase price consisted of (i) a payment of $ 3.2 million in cash paid at closing, subject to customary adjustments, (ii) 382,788 ordinary shares of SGH valued at $ 9.2 million and (iii) amounts retained by us as security for the sellers’ indemnification obligations as well as any post-closing adjustments to the purchase price consisting of $ 0.7 million in cash and 67,550 ordinary shares of SGH valued at $ 1.6 million.

In 2020, we paid $ 0.4 million of the retained cash and issued all the retained shares.

The operations of SMART Wireless are part of our Intelligent Platforms Solutions segment.

The purchase price was as follows:

Fair value of shares issued at closing

Cash initially retained and paid in 2020

Fair value of shares initially retained and issued in 2020

Cash paid for post-closing adjustments

Under the acquisition method of accounting, the assets acquired and liabilities assumed were recorded as of the acquisition date at their respective fair values.

Assets acquired and liabilities assumed were as follows:

Tangible assets acquired

Intangible assets

Liabilities assumed

Total net assets acquired

The excess of purchase price over the fair value amounts assigned to the assets acquired and liabilities assumed represents goodwill resulting from the acquisition.

The goodwill is not deductible for tax purposes.

The estimated fair values and useful lives of the intangible assets acquired included customer relationship assets with a fair value of $ 5.8 million and estimated useful lives of 5 years and technology assets with a fair value of $ 0.9 million and estimated useful lives of 5 years.

In 2020 and 2019, we incurred costs related to the acquisition of $ 0.2 million and $ 0.5 million, respectively, which were are included in selling, general and administrative expense.

SMART Wireless’ results of operations are included in the consolidated financial statements from the date of acquisition.

At the time of the acquisition, Inforce’s selling shareholders included our CEO and two members of our Board of Directors.

In connection with the acquisition, these individuals received an aggregate of 397,407 ordinary shares of SGH valued at $ 9.5 million, consisting of 337,692 shares issued upon closing and the balance issuable upon satisfaction of certain post-closing criteria.

The remaining shares were issued in the fourth quarter of 2020.

Raw materials

Work in process

Finished goods

As of August 27, 2021 and August 28, 2020, 11 % and 17 %, respectively, of total inventories were inventories owned and held under our supply chain services.

Property and Equipment

Buildings and building improvements

Furniture, fixtures and software

Accumulated depreciation

Depreciation expense for property and equipment was $ 28.9 million, $ 22.8 million and $ 23.6 million in 2021, 2020 and 2019, respectively.

Intangible Assets and Goodwill

As of August 27, 2021

As of August 28, 2020

Intangible assets:

Customer relationships

Trademarks/tradenames

Order backlog

Goodwill by segment:

Intelligent Platform Solutions

Memory Solutions

In 2021 and 2019, we capitalized $ 65.7 million and $ 48.6 million, respectively, for intangible assets, primarily acquired in connection with business acquisitions, with weighted-average useful lives of 6.7 years and 4.8 years, respectively.

Amortization expense for intangible assets was $ 20.3 million, $ 13.7 million and $ 5.6 million in 2021, 2020 and 2019, respectively.

Amortization expense is expected to be $ 23.9 million for 2022, $ 21.9 million for 2023, $ 18.1 million for 2024, $ 15.3 million for 2025 and $ 8.3 million for 2026 and $ 13.6 million thereafter.

Goodwill of our Memory Solutions segment increased in 2021 by $ 0.3 million from translation adjustments.

Goodwill of our Memory Solutions segment decreased in 2020 by $ 7.2 million from translation adjustments and, for our Intelligent Platforms Solutions, by $ 0.3 million from adjustments to the purchase price allocation of business acquisitions.

Accounts Payable and Accrued Expenses

Accounts payable (1)

Salaries, wages and benefits

Income and other taxes

Includes accounts payable for property and equipment of $ 3.1 million and $ 1.8 million as of August 27, 2021 and August 28, 2020, respectively.

Convertible Senior Notes

LED Purchase Price Note

ABL Credit Agreement

Less current debt

Long-term debt

Reference Rate Reform

In July 2017, the Financial Conduct Authority (which regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021.

As a result, the Federal Reserve Board and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee, which identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative to LIBOR in derivatives and other financial contracts.

On March 5, 2021, the Financial Conduct Authority confirmed a partial extension of this deadline announcing that it will cease the publication of the one-week and two-month USD LIBOR settings immediately following December 31, 2021.

The remaining U.S.

dollar LIBOR settings will continue to be published until June 30, 2023.

For each of our debt instruments that provide for interest based on LIBOR, the SOFR, as published by the Federal Reserve Bank of New York, is listed as the alternative index to replace LIBOR if a different alternative index is not agreed to prior such cessation of the LIBOR rate.

Convertible Senior Notes

In February 2020, we issued $ 250.0 million in aggregate principal amount of 2.25 % convertible senior notes due 2026 (the “2026 Notes”).

The 2026 Notes are general unsecured obligations, bear interest at an annual rate of 2.25 % per year, payable semi-annually on February 15 and August 15, and mature on February 15, 2026 , unless earlier converted, redeemed or repurchased.

The 2026 Notes are governed by an indenture (the “Indenture”) between us and U.S.

Bank National Association, as trustee.

The initial conversion rate of the 2026 Notes is 24.6252 ordinary shares per $ 1,000 principal amount of notes, which represents an initial conversion price of approximately $ 40.61 per ordinary share.

The conversion rate is subject to adjustment upon the occurrence of certain specified events as set forth in the Indenture.

Conversion Rights :

Holders of the 2026 Notes may convert them under the following circumstances:

during any fiscal quarter commencing after the fiscal quarter ended on May 28, 2020 (and only during such fiscal quarter) if the last reported sale price per ordinary share exceeds 130 % of the conversion price for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter;

during the five consecutive business days immediately after any 10 consecutive trading day period (such 10 consecutive trading day period, the “Measurement Period”) in which the trading price per $1,000 principal amount of notes for each trading day of the Measurement Period was less than 98 % of the product of the last reported sale price per ordinary share on such trading day and the conversion rate on such trading day;

on or after August 15, 2025 until the close of business on the second scheduled trading day immediately before the maturity date;

upon the occurrence of certain corporate events or distributions on our ordinary shares, as provided in the Indenture;

the 2026 Notes are called for redemption.

Upon conversion, we will pay or deliver, as applicable, cash, ordinary shares or a combination of cash and ordinary shares at our election.

Our intent is to settle in cash the principal amount of our convertible notes upon conversion and may, at our option, settle any excess of the conversion value over the principal amount in cash, ordinary shares or any combination thereof.

Upon the occurrence of a “make-whole fundamental change” (as defined in the Indenture), we will in certain circumstances increase the conversion rate for a specified period of time.

In addition, upon the occurrence of a “fundamental change” (as defined in the Indenture), holders of the 2026 Notes may require us to repurchase their notes at a cash repurchase price equal to the principal amount of the 2026 Notes to be repurchased, plus accrued and unpaid interest.

If any taxes imposed or levied by or on behalf of the Cayman Islands (or certain other jurisdictions described in the Indenture) are required to be withheld or deducted from any payments or deliveries made under or with respect to the 2026 Notes, then, subject to certain exceptions, we will pay or deliver to the holder of each note such additional amounts as may be necessary to ensure that the net amount received by the beneficial owner of such note after such withholding or deduction (and after withholding or deducting any taxes on the additional amounts) will equal the amounts that would have been received by such beneficial owner had no such withholding or deduction been required.

Cash Redemption at Our Option :

We have the right to redeem the 2026 Notes, in whole or in part, at our option at any time, and from time to time, from February 21, 2023 through the 40th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the 2026 Notes to be redeemed, plus accrued and unpaid interest.

However, the repurchase right is only applicable if the last reported per share sale price of our ordinary shares exceeds 130 % of the conversion price on each of at least twenty trading days during the thirty consecutive trading days ending on, and including, the trading day immediately before the redemption notice date for such redemption.

In connection with the issuance of the 2026 Notes, we separated the par value of the 2026 Notes into liability and equity components.

The liability component of $ 197.5 million was calculated by using a discount rate of 6.53 %, which was our borrowing rate on the date of the issuance of the 2026 Notes for a similar debt instrument without the conversion feature.

The equity component of $ 52.5 million, representing the conversion option, was determined by deducting the liability component from the par value of the 2026 Notes.

The equity component of the 2026 Notes is included in additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification, which we reassess every reporting period.

The difference between the debt recorded at issuance and its principal amount is accreted using the effective interest method through interest expense over the term of the 2026 Notes.

Debt issuance costs for the 2026 Notes were $ 8.0 million, consisting of initial purchasers' discount and other issuance costs, and were allocated to the liability and equity components using the same proportions as the allocation of the proceeds from the 2026 Notes.

Transaction costs attributable to the liability component were $ 6.3 million and are netted with the debt balance and amortized to interest expense over the term of the 2026 Notes.

Transaction costs attributable to the equity component were $ 1.7 million and are netted with the equity component in additional paid-in-capital.

Interest expense for the 2026 Notes consisted of 2.25% contractual stated interest of $ 5.6 million and $ 3.1 million in 2021 and 2020, respectively, and amortization of discount and issuance costs of $ 8.4 million and $ 4.4 million in 2021 and 2020, respectively, resulting in an effective interest rate of 7.06 %.

As of both August 27, 2021 and August 28, 2020, the carrying amount of the equity components of the 2026 Notes, which are included in additional paid-in-capital, was $ 50.8 million.

LED Purchase Price Note

In connection with the acquisition of the LED Business in March 2021, we issued an unsecured promissory note to Cree in the amount of $ 125 million.

The LED Purchase Price Note bears interest at LIBOR plus 3.0 %, payable quarterly, and is due on August 15, 2023.

The LED Purchase Price Note requires that we maintain a secured leverage ratio not in excess of 3.50 :1.00 as of the end of each fiscal quarter.

See “Business Acquisitions – LED Business.”

Asset-Based Lending Credit Agreement

In December 2020, our subsidiaries, SMART Modular, SMART EC and Penguin Computing, Inc.

(collectively the “ABL Borrowers”), and certain other U.S.

subsidiaries of the Company party thereto as guarantors (such other U.S.

subsidiaries, together with the ABL Borrowers, collectively the “ABL Loan Parties”) entered into a Loan, Guaranty and Security Agreement (the “ABL Credit Agreement”), which provides for a senior secured asset-based revolving credit facility in an aggregate principal amount of up to $ 100 million.

Under the ABL Credit Agreement, we have the option to increase the total amount available to $ 150 million, subject to certain conditions, including obtaining commitments from one or more lenders.

The ABL Credit Agreement, which expires on December 23, 2023 , provides that up to $ 30 million of revolving credit facility is available for issuances of letters of credit, and allows for swingline loans in an amount not to exceed $ 15 million.

There are no requirements to make any scheduled amortization payments of drawn amounts.

Borrowings under the ABL Credit Agreement are available based upon monthly (or, in certain cases, weekly) borrowing base certifications valuing eligible inventory and eligible accounts receivable, as reduced by certain reserves in effect from time to time.

Interest and Fees :

The ABL Credit Agreement bears interest at a rate per annum equal to either, at the ABL Borrowers’ option, a LIBOR rate or a base rate, in each case plus an applicable margin.

The applicable margin is (i) 1.75 % per annum with respect to LIBOR borrowings, and 0.75 % per annum with respect to base rate borrowings when average daily Availability, as defined in the ABL Credit Agreement, is equal to or greater than $ 50 million, (ii) 2.00 % per annum with respect to LIBOR borrowings, and 1.00 % per annum with respect to base rate borrowings when average daily Availability is less than $ 50 million and greater than or equal to $ 35 million and (iii) 2.25 % per annum with respect to LIBOR borrowings, and 1.25 % per annum with respect to base rate borrowings when average daily Availability is less than $ 35 million.

We are subject to a monthly unused facility fee (i) 0.35 %, if average daily Revolver Usage (as defined in the ABL Credit Agreement) was less than 50 % of the Commitments (as defined in the ABL Credit Agreement) during the preceding calendar month, or (ii) 0.25 %, if average daily Revolver Usage was equal to or greater than 50 % of the Commitments during such month.

The ABL Credit Agreement contains customary affirmative and negative covenants and restrictions typical for a financing of this nature that, among other things, restrict the ABL Loan Parties’ ability to incur additional debt, pay dividends and make distributions, make certain investments and acquisitions, enter into certain transactions, repurchase its stock and prepay certain indebtedness, create liens, enter into agreements with affiliates and transfer and sell material assets and merge or consolidate.

In the event that certain minimum availability thresholds are not met on the last day of any period of four fiscal quarters, the ABL Borrowers will be required to maintain (i) a minimum Borrower Fixed Charge Coverage Ratio (as defined in the ABL Credit Agreement) of not less than 1.0 to 1.0 and (ii) a minimum Global Fixed Charge Coverage Ratio (as defined in the ABL Credit Agreement) of not less than 1.0 to 1.0, in each case, as of such last day of any period of four fiscal quarters.

Subject to the Intercreditor Agreement (as defined below), non-compliance with one or more of the covenants and restrictions could result in the full or partial principal balance of the ABL Credit Agreement becoming immediately due and payable and termination of the commitments available thereunder.

The ABL Credit Agreement is jointly and severally guaranteed on a senior basis by the ABL Loan Parties.

In addition, the ABL Credit Agreement is secured by a pledge of the capital stock of, or equity interests in, the ABL Loan Parties and by substantially all of the assets of the ABL Loan Parties subject to customary exceptions.

In connection with the ABL Credit Agreement, the ABL Loan Parties entered into a customary intercreditor agreement (the “Intercreditor Agreement”) which governs how the collateral securing the respective obligations under the ABL Credit Agreement and the Amended Credit Agreement will be treated among the secured parties.

Pursuant to the ABL Credit Agreement and Intercreditor Agreement, the obligations under the ABL Credit Agreement are secured by ( i ) a first-priority security interest, subject to certain customary exceptions, in assets held by the ABL Loan Parties consisting of accounts receivable, inventory and intangible assets to the extent attached to the foregoing, books and records related to the foregoing and the proceeds thereof and ( ii ) a second-priority security interest, subject to certain customary exceptions, in substantially all other present and future tangible and intangible assets held by the ABL Loan Parties and proceeds of the foregoing;

and the obligations under the Amended Credit Agreement are secured by ( i ) a second-priority security interest, subject to certain customary exceptions, in assets held by the ABL Loan Parties consisting of accounts receivable, inventory and intangible assets to the extent attached to the foregoing, books and records related to the foregoing and the proceeds thereof and ( ii ) a first-priority security interest in, subject to certain customary exceptions, substantially all other present and future tangible and intangible assets held by the Loan Parties and proceeds of the foregoing.

Amended Credit Agreement

In March 2020, three of our subsidiaries, SMART Worldwide Holdings, Inc.

(“SMART Worldwide”);

SMART Modular Technologies (Global), Inc.

(“SMART Global”);

and SMART Modular Technologies, Inc.

(“SMART Modular”) (collectively, “Borrowers”) entered into a third amended and restated credit agreement (“Amended Credit Agreement”), which provides for $ 50 million of revolving loans with a maturity date of March 6, 2025 .

Amounts outstanding under the Amended Credit Agreement bear interest at a rate of:

When the First Lien Leverage Ratio, as defined in the Amended Credit Agreement, is greater than 2.25 to 1.00:

3.75 % per annum with respect to LIBOR borrowings and

2.75 % per annum with respect to base rate borrowings

When the First Lien Leverage Ratio is less than or equal to 2.25 to 1.00:

3.50 % per annum with respect to LIBOR borrowings and

2.50 % per annum with respect to base rate borrowings.

The Amended Credit Agreement contains various representations and warranties and affirmative and negative covenants that are usual and customary for loans of this nature including, among other things, limitations on the Credit Group’s ability to incur debt and liens, issue preferred equity, engage in certain transactions, make investments, dispose of assets, pay dividends and engage in certain transactions with affiliates.

The Amended Credit Agreement also requires the financial maintenance covenant included therein to be set at a First Lien Leverage Ratio of 3.50 to 1.00 and to be applicable only if drawn revolving loans (plus issued letters of credit in excess of $ 10 million) outstanding as of the last day of any quarter exceed 30 % of the aggregate revolving commitments available under the Amended Credit Agreement.

The Amended Credit Agreement is jointly and severally guaranteed on a senior basis by certain subsidiaries of Global (excluding, among other subsidiaries, SMART Modular Technologies Sdn.

(“SMART Malaysia”)).

In addition, the Amended Credit Agreement is secured by a pledge of the capital stock of, or equity interests in, most of the subsidiaries of SMART Worldwide (including, without limitation, SMART Malaysia, Penguin Computing;

SMART EC and SMART Wireless) and by substantially all of the assets of the subsidiaries of SMART Worldwide, excluding the assets of SMART Malaysia and certain other subsidiaries.

Through one of our Brazil subsidiaries, we are party to a credit facility with the Funding Authority for Studies and Projects (“FINEP”), an organization of the Brazilian federal government under the Ministry of Science, Technology and Innovation devoted to funding science and technology in Brazil.

The facility provides for borrowings of up to R$ 102.2 million (or $ 20.0 million) for investments in technology innovation projects used in infrastructure and research and development conducted in Brazil as well as for the acquisition of equipment.

The facility bears interest bears interest at 2.8 % per annum and provides for unused commitment fees of 0.1 % per month.

The agreement also provides for initial administration fees of 1.09 %, deducted from each advance of funds.

Amounts outstanding and available under the facility are guaranteed by two unrelated parties, subject to a guarantee fee of 1.5 % per annum.

The facility includes customary conditions and can be terminated in the event of a change of effective control.

Amounts borrowed under the agreement are due in monthly installments of principal and interest beginning in June 2022 , with the final payment due in December 2027 .

On December 30, 2020, we borrowed R$ 60.7 million (or $ 11.9 million) under the agreement and, as of August 27, 2021, the outstanding balance was $ 11.8 million.

Maturities of Debt

As of August 27, 2021, maturities of debt were as follows:

Less unamortized discount and issuance costs

Maturities in the table above exclude amounts drawn under our ABL Credit Agreement, which expires in December 2023.

As of August 27, 2021, there was $ 25.0 million included in current debt for amounts drawn under this facility.

As of August 27, 2021 and August 28, 2020, we had operating leases through which we utilize facilities, offices and equipment in our manufacturing operations, research and development activities and selling, general and administrative functions.

Sublease income was not significant in 2021 or 2020.

Operating lease expense in 2019, prior to our adoption of ASC 842, was $ 5.0 million.

The components of operating lease expense were as follows:

Fixed lease cost

Variable lease cost

Short-term lease cost

Cash flows used for operating activities in 2021 and 2020 included payments for operating leases of $ 7.5 million and $ 5.1 million, respectively.

Noncash acquisitions of right-of-use assets were $ 24.5 million and $ 8.8 million in 2021 and 2020, respectively.

As of August 27, 2021 and August 28, 2020, the weighted-average remaining lease term for our operating leases was 6.1 years and 7.6 years, respectively.

Certain of our operating leases include one or more options to extend the lease term for periods from two to five years .

In determining the present value of our operating lease liabilities, we have assumed we will not extend any lease terms.

As of August 27, 2021 and August 28, 2020, the weighted-average discount rate for our operating leases was 6.7 % and 8.0 %, respectively.

Minimum payments of lease liabilities as of August 27, 2021 were as follows:

2027 and thereafter

Less imputed interest

Present value of total lease liabilities

The table above excludes lease liabilities for leases that have been executed but not yet commenced.

As of August 27, 2021, we had such lease commitments relating to operating lease payment obligations of $ 51.8 million for a building lease with a term of 16 years.

We will recognize a right-of-use asset and an associated lease liability at the time such asset becomes available for our use .

Such lease is currently expected to commence in the second half of calendar 2022.

Commitments and Contingencies

As of August 27, 2021, we had commitments of $ 170.0 million for purchase obligations, a substantial majority of which will be due within one year .

Purchase obligations include payments for the acquisition of inventories, property and equipment and other goods or services of either a fixed or minimum quantity.

Product Warranty and Indemnities

We generally provide a limited warranty that our products are in compliance with applicable specifications existing at the time of delivery.

Under our standard terms and conditions of sale, liability for certain failures of product during a stated warranty period is usually limited to repair or replacement of defective items or return of amounts paid for such items.

Our warranty obligations are not material.

We are party to a number of agreements in which we have agreed to defend, indemnify and hold harmless our customers and suppliers from damages and costs, which may arise from product defects as well as from any alleged infringement by our products of third-party patents, trademarks or other proprietary rights.

We believe our internal development processes and other policies and practices limit our exposure related to such indemnities.

Maximum potential future payments cannot be estimated because many of these agreements do not have a maximum stated liability.

However, to date, we have not had to reimburse any of our customers or suppliers for any losses related to these indemnities.

We have not recorded any liability for such indemnities.

Contingencies

From time to time, we are involved in legal matters that arise in the normal course of business.

Litigation in general, and intellectual property, employment and shareholder litigation in particular, can be expensive and disruptive to normal business operations.

Moreover, the results of complex legal proceedings are difficult to predict.

Additionally, from time to time, we are a party in the normal course of business to a variety of agreements pursuant to which we may be obligated to indemnify another party.

It is not possible to predict the maximum potential amount of future payments under these types of agreements due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement.

Historically, our payments under these types of agreements have not had a material adverse effect on our business, results of operations or financial condition.

We regularly review contingencies to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or range of loss can be made.

SGH Shareholders’ Equity

Ordinary Share Repurchases

In January 2021, we repurchased an aggregate of 1.1 million of our ordinary shares from Silver Lake Partners III Cayman (AIV III), L.P., Silver Lake Technology Investors III Cayman, L.P., Silver Lake Sumeru Fund Cayman, L.P.

and Silver Lake Technology Investors Sumeru Cayman, L.P.

at a purchase price of $ 40.30 per share for an aggregate amount of $ 44.3 million in a privately negotiated transaction.

The repurchased shares were recorded as treasury shares.

Ordinary shares withheld as payment of withholding taxes and exercise prices in connection with the vesting or exercise of equity awards are also treated as ordinary share repurchases.

An aggregate of 153 thousand, 28 thousand and 18 thousand shares were acquired for $ 4.2 million, $ 0.7 million and $ 0.5 million in 2021, 2020 and 2019, respectively.

In connection with the offering of the our 2026 Notes in February 2020, we entered into capped call transactions (“Capped Calls”), at arms-length, which have initial strike prices of approximately $ 40.61 per share, subject to certain adjustments, corresponding to the initial conversion price of the 2026 Notes, and initial cap prices of $ 54.145 per share, which are subject to certain adjustments.

The Capped Calls cover, subject to anti-dilution adjustments, approximately 6.2 million ordinary shares of the Company and are generally intended to reduce the potential economic dilution upon any conversion of 2026 Notes and/or offset any potential cash payments we may be required to make in excess of the principal amount of converted 2026 Notes, as the case may be, with such reduction and/or offset subject to a cap based on the cap price.

The Capped Calls expire February 15, 2026 (the maturity date of the 2026 Notes), subject to earlier exercise.

The Capped Calls are subject to either adjustment or termination upon the occurrence of specified extraordinary events affecting the Company, including mergers, tender offers and delistings involving the Company.

In addition, the Capped Calls are subject to certain specified additional disruption events that may give rise to a termination of the Capped Calls, including insolvency filings and hedging disruptions.

The Capped Calls were originally classified as noncurrent derivative assets because they could be settled only in cash.

In March 2020, our shareholders approved a proposal to amend our memorandum and articles of association to permit us to purchase or otherwise acquire our ordinary shares.

The amendment also enabled us to utilize shares or cash, or any combination thereof, to settle the capped call transactions, which resulted in the reclassification of the noncurrent derivative assets to additional paid in capital in an amount equal to the $ 14.1 million fair value of the Capped Calls as of March 30, 2020.

In connection therewith, we recognized a loss of $ 7.7 million in 2020 in other non-operating expense from the revaluation of the Capped Calls.

Noncontrolling Interest in Subsidiary

In connection with our acquisition of the LED Business, we have a 51 % ownership interest in the Cree Joint Venture.

The remaining 49% ownership interest is held by San’an.

The Cree Joint Venture has a five -member board of directors, three of which are designated by us and two of which are designated by San’an.

As a result of our majority voting interest, we consolidate the operations of the Cree Joint Venture and report its results of operations within our LED Solutions segment.

The Cree Joint Venture has a manufacturing agreement pursuant to which San’an supplies it with mid-power LED products and we and the Cree Joint Venture have a sales agent agreement pursuant to which we are the independent sales representative of the Cree Joint Venture.

The Cree Joint Venture produces and delivers to market high performing, mid-power lighting class LEDs in an exclusive arrangement serving the expanding markets of North and South America, Europe and Japan, and serves China markets and the rest of the world on a non-exclusive basis.

The 49 % ownership interest held by San’an is classified as noncontrolling interest.

Subsequent to the acquisition of the LED Business, noncontrolling interest increased by an aggregate of $ 1.2 million in 2021 for San’an’s share of net income from the Cree Joint Venture.

Cash and other assets of the Cree Joint Venture are generally not available for use by us in our other operations.

Government Incentives

Brazil Financial Credits

Through our Brazil subsidiaries, we participate in two programs (“Brazil Incentive Programs”), pursuant to which the Brazilian government incentivizes the manufacture and sale of certain information technology and consumer electronics products within Brazil.

The programs include 1) Lei da Informática – Processo Produtivo Básico Program (aka Informatics Law – Basic Productive Process Program) (“PPB/IT”) and 2) Programa de Incentivo ao Setor de Semicondutores (aka Program of Incentives for the Semiconductor Sector) (“PADIS”).

The financial credits available through PADIS are currently set to expire in January 2022.

The Brazil Incentive Programs provide for reduced import and other transaction-related taxes for certain procurement, manufacturing and sales activities.

In exchange, we must invest in certain research and development activities related to semiconductors and displays in aggregate amounts that exceed a specified percentage of our gross revenues recognized in connection with sales in Brazil.

Accordingly, financial credits earned in connection with the Brazil Incentive Programs are reflected as a reduction of research and development expense.

Financial credits available under the Brazil Incentive Programs are subject to limitations, which range from approximately 11 % to 14 % of gross revenues recognized for sales in Brazil.

Pursuant to the Brazil Incentive Programs, we recognized aggregate financial credits, reflected as a reduction of research and development expense, of $ 30.0 million and $ 6.4 million in 2021 and 2020, respectively.

Financial credits earned under the Brazil Incentive Programs may be refunded in cash or used to offset liabilities for Brazil federal taxes.

As of August 27, 2021 and August 28, 2020, earned but unused financial credits of $ 19.8 million and $ 6.4 million, respectively, were included in other current assets.

Financial credits earned but unused as of August 27, 2021 can be utilized through August 2026.

Fair Value Measurements

Cash and cash equivalents as of August 27, 2021 included money market funds of $ 2.7 million which were valued based on Level 1 measurements using quoted prices in active markets for identical assets.

Fair value measurements of other assets and liabilities were as follows:

As of August 27, 2021

As of August 28, 2020

Derivative financial instrument assets

Derivative financial instrument liabilities

Convertible Senior Notes

LED Purchase Price Note

ABL Credit Agreement

Acquisition-related contingent consideration

The fair values of our derivative financial instruments, as measured on a recurring basis, were based Level 2 measurements, including market-based observable inputs of currency exchange spot and forward rates, interest rates and credit-risk spreads.

The fair value of our Convertible Senior Notes (excluding the value of the equity component of our convertible notes), as measured on a non-recurring basis, was determined based on Level 2 measurements, including the trading price of the convertible notes.

The fair values of our LED Purchase Price Note, ABL Credit Agreement and other debt, as measured on a non-recurring basis, were estimated based on Level 2 measurements, including discounted cash flows and interest rates based on similar debt issued by parties with credit ratings similar to ours.

Acquisition-related contingent consideration relates to our acquisition of the LED Business and is included in other noncurrent liabilities.

The fair value, as measured on a recurring basis, was based on Level 3 measurements, which includes significant inputs not observable in the market.

The fair value was estimated using a Monte Carlo simulation analysis in a risk-neutral framework with assumptions for volatility, market price of risk adjustment, risk-free rate and cost of debt.

Assumptions used in the determination of fair value also included estimates of future revenue and gross profit of the LED Business in Cree’s first four full fiscal quarters following the closing of the acquisition.

Generally, changes in the assumptions for projected future revenue, gross profit and volatility would be accompanied by a directionally similar change in the fair value measurement.

Conversely, changes in the discount rate would be accompanied by a directionally opposite change in the related fair value measurement.

However, due to the contingent consideration having a maximum payout amount, changes in these assumptions would not affect the fair value of the contingent consideration if they increase (decrease) beyond certain amounts.

Subsequent to the acquisition date, at each reporting date, the contingent consideration liability is remeasured to fair value with changes recorded in our results of operations.

See “Business Acquisition – LED Business.”

Derivative Instruments

We use currency forward contracts to mitigate our exposure of certain monetary assets and liabilities from changes in currency exchange rates.

Realized and unrealized gains and losses on derivative instruments without hedge accounting designation as well as the changes in the underlying monetary assets and liabilities from changes in currency exchange rates are included in other non-operating (income) expense.

For derivative instruments without hedge accounting designation, in 2021, we recognized net realized losses of $ 2.3 million and net unrealized gains on the change in the fair value of the non-designated forward contracts of $ 2.1 million.

In 2020, we recognized realized gains of $ 11.1 million and net unrealized gains on the change in the fair value of the non-designated forward contracts of $ 0.3 million.

In 2019, we recognized net realized losses in the amount of $ 2.6 million and net unrealized losses on the change in the fair value of the non-designated forward contracts in the amount of $ 0.1 million.

Our Amended and Restated 2017 Share Incentive Plan (as amended, the “2017 Plan”) provides for the issuance of equity awards to our employees, directors and consultants.

Such awards include both incentive and non-qualified options, share appreciation rights, restricted share awards (“RSAs”), restricted share units (“RSUs”) and performance-based awards such as performance-based restricted stock awards (“PRSAs”) and performance-based restricted share units (“PSUs”).

As of August 27, 2021, 2.0 million of our ordinary shares were available for issuance under the 2017 Plan.

Our 2021 Share Inducement Plan (the “Inducement Plan” and together with the 2017 Plan, our “SGH Plans”) provides for the issuance of equity awards to provide inducements for certain individuals to enter into employment with us within the meaning of Rule 5635(c)(4) of the Nasdaq Marketplace Rules, and to motivate such persons to contribute to, and to enable them to share in any long-term growth and financial success we may experience.

Such awards include options, share appreciation rights, RSAs, RSUs and performance-based awards such as PRSAs and PSUs.

As of August 27, 2021, 0.9 million of our ordinary shares were available for issuance under the Inducement Plan.

Our employee share purchase plan (“ESPP”) has been offered to substantially all employees since April 2018 and generally permits eligible employees to purchase our ordinary shares through payroll deductions of up to 15 % of their eligible compensation, subject to certain limitations.

As of August 27, 2021, 0.8 million of our ordinary shares were available for issuance under the ESPP.

Options granted under the SGH Plans have an exercise price not less than the fair market value of a share of our common stock on the date of grant.

Options and RSUs generally vest over a period of four years , and options generally have a ten-year term, though options granted after August 26, 2011 and before Sept.

23, 2014 have an eight-year term.

Restricted Share Awards and Restricted Share Units Awards (“Restricted Awards”)

Outstanding as of August 28, 2020

Forfeited and cancelled

Outstanding as of August 27, 2021

Aggregate Restricted Award activity and assumptions were as follows:

Awards granted

Weighted average grant-date fair value per share

Aggregate vesting-date fair value of shares vested

In May 2020, we granted a PRSA that had both service and performance conditions.

As of August 28, 2020, we deemed it was probable that the service condition would be met, and the attainment of the performance condition for this award was probable.

On October 20, 2020, we modified this award, as well as another time-based award, each for our former CEO, to accelerate the remaining service-based vesting requirements such that they became fully vested as of the acceleration date.

These modifications resulted in additional share-based compensation expense in the first quarter of 2021 of $ 5.8 million.

As of August 27, 2021, total aggregate unrecognized compensation costs for unvested Restricted Awards was $ 87.6 million, which was expected to be recognized over a weighted average period of 3.02 years.

Share Options

As of August 27, 2021, there were 1.9 million share options outstanding, which are generally exercisable in increments of either one-fourth or one-third per year beginning one year from the date of grant.

Share options generally expire seven to ten years from the date of grant.

The total intrinsic value for options exercised was $ 8.6 million, $ 3.0 million and $ 7.4 million in 2021, 2020 and 2019, respectively.

Exercise Price

Remaining Contractual

Term (in years)

Outstanding as of August 28, 2020

Forfeited and cancelled

Outstanding as of August 27, 2021

Exercisable as of August 27, 2021

S hare option activity and assumptions were as follows:

Share options granted

Weighted average grant-date fair value per share

Average expected term in years

Weighted-average expected volatility

Weighted-average risk-free interest rate

Expected dividend yield

The fair value of share options is estimated on the date of grant using the Black-Scholes option pricing model.

The expected volatility is based on the historical volatilities of the common stock of comparable publicly traded companies.

The expected term of options granted represents the weighted average period of time that options granted are expected to be outstanding.

We apply the simplified approach in which the expected term is the mid-point between the vesting date and the expiration date.

The risk-free interest rate is based on the average U.S.

Treasury yield curve at the end of the quarter in which the option was granted.

As of August 27, 2021, total aggregate unrecognized compensation costs for unvested options was $ 6.4 million, which was expected to be recognized over a weighted average period of 1.6 years.

In March 2018, we granted two performance-based options that contained a stock market index as a benchmark for performance (“Market-Based Options”).

Share-based compensation expense for these options is recognized over the requisite service period by tranche.

The exercisability of Market-Based Options will depend upon the 30 -trading day rolling average closing price of our ordinary shares.

If the target price is not achieved by the end of 4th or 7th anniversary of the respective grant date, the options will expire.

The fair value of Market-Based Options was determined by using a Monte Carlo valuation model, using the following assumptions:

expected term of 1.10-4.00 years, expected volatility of 46.29 %, risk-free interest rate of 2.75 % and no expected dividends.

One of the Market-Based Options was cancelled in November 2019, resulting in an additional $ 2.0 million share-based compensation expense recorded in the first quarter of 2020.

In August 2020, we modified the terms of the remaining Market-Based Option to remove one of the service conditions to allow the continuation of vesting of the unvested options subject to the remaining service condition.

The modification resulted in an updated fair value using the Monte Carlo valuation model, with the following assumptions:

expected volatility of 56.07 % and risk-free interest rate of 0.34 %.

The modification of this Market-Based Option, as well as a time-based option also granted in March 2018, resulted in the reversal of $ 2.3 million share-based compensation expense in the fourth quarter of 2020.

Employee Share Purchase Plan

The SMART Global Holdings, Inc.

Employee Share Purchase Plan has been offered to substantially all employees since April 2018 and generally permits eligible employees to purchase our ordinary shares through payroll deductions of up to 15 % of their eligible compensation, subject to certain limitations.

The purchase price of the shares under the ESPP equals 85 % of the lower of the fair market value of our ordinary shares on either the first or last day of each offering period, which is generally six months.

Compensation expense is calculated as of the beginning of the offering period as the fair value of the employees’ purchase rights utilizing the Black-Scholes option valuation model and is recognized over the offering period.

Under the ESPP, employees purchased 0.2 million ordinary shares for $ 3.6 million in 2021, 0.2 million shares for $ 3.0 million in 2020 and 0.1 million shares for $ 2.3 million in 2019.

Share- B ased Compensation Expense

Share-based compensation expense by caption:

Cost of sales

Research and development

Selling, general and administrative

Income tax benefits related to the tax deductions for share-based awards are recognized only upon the settlement of the related share-based awards.

Share-based compensation expense in 2021, 2020 and 2019 reflects de minimis income tax benefits, which is consistent with our treatment of income or loss from our U.S.

Employee Savings and Retirement Plan

We have a 401(k) retirement plan under which U.S.

employees may contribute up to 60 % of their eligible pay, subject to Internal Revenue Service annual contribution limits, to various savings alternatives, none of which include direct investment in the Company’s shares.

We may make matching contributions, which vest immediately, at our discretion.

Contribution expense for the 401(k) plan was $ 3.4 million, $ 2.3 million and $ 2.0 million in 2021, 2020 and 2019, respectively.

Revenue and Customer Contract Balances

We disaggregate revenue by segment and geography and by product and service revenue.

See “Segment and Other Information.”

Net Sales and Gross Billings

Net sales by products and services and gross amounts billed for services, including those services in which we act as an agent for our customers, were as follows:

Gross billings in connection with services:

Cost of materials (1)

Included in gross billings in connection with services are amounts billed to customers for the cost of materials procured in an agent capacity in connection with our procurement, logistics, inventory management, temporary warehousing, kitting and packaging services.

While we take title to inventory under such arrangements, control of such inventory does not transfer to us as we do not, at any point, have the ability to direct the use, and thereby obtain the benefits of, the inventory.

Customer Contract Balances

Contract assets

Contract liabilities:

Deferred revenue

Customer advances

Contract assets are included in other current assets.

Contract liabilities are included in other current liabilities and noncurrent liabilities based on the timing of when our customer is expected to take control of the asset or receive the benefit of the service.

Contract assets represent amounts recognized as revenue for which we do not have the unconditional right to consideration.

Contract assets as of August 27, 2021 related to amounts expected to be invoiced during the next 12 months.

Contract assets of $ 5.1 million as of August 28, 2020 were invoiced during 2021.

Deferred revenue related to amounts received from customers in advance of satisfying performance obligations.

As of August 27, 2021, we expect to recognize revenue of $ 14.1 million of the balance of $ 19.3 million in the next 12 months, and the remaining amount thereafter.

In 2021, we recognized revenue of $ 17.3 million from satisfying performance obligations related to amounts included in deferred revenue as of August 28, 2020.

Customer advances represent amounts received from customers for advance payments to secure product and services within the next 12 months.

As of August 27, 2021, other current liabilities included $ 24.9 million for estimates of consideration payable to customers, including estimates for pricing adjustments and returns.

Other Operating (Income) Expense

In the fourth quarter of 2021, we initiated plans that included workforce reductions and the elimination of certain projects in our Intelligent Platforms Solutions segment.

In connection therewith, we recorded restructure charges of $ 2.1 million, primarily for employee severance costs and other benefits.

We do not expect additional costs to be incurred in connection with these restructure actions and, as of August 27, 2021, $ 0.5 million remained unpaid.

In the fourth quarter of 2020, we initiated plans to cease manufacturing and selling our battery product line.

In connection therewith, we recorded restructure charges in our Memory Solutions segment of $ 3.5 million, including $ 2.7 million of asset impairment, $ 0.4 million of receivables for value-added taxes and $ 0.4 million for contract termination costs.

We do not expect additional costs to be incurred in connection with these restructure actions and, as of August 27, 2021, no amounts remained outstanding or unpaid.

Other Non-operating (Income) Expense

Foreign currency (gains) losses

Loss from remeasurement of Capped Calls

Loss on extinguishment of debt

Foreign currency (gains) and losses relate primarily to our Brazil operating subsidiaries.

The loss from remeasurement of our Capped Calls resulted from the reclassification of the Capped Calls from a noncurrent derivative asset to additional paid in capital in an amount equal to their fair value as of March 30, 2020.

See “Equity.”

In February 2020, we used $ 208.7 million from the net proceeds from the offering of the 2026 Notes to repay in full our then-outstanding term loans under our Amended Credit Agreement, including the payment of accrued interest, premiums, related fees and expenses.

Related unamortized debt discounts and issuance costs of $ 4.6 million were charged to operations in connection with the extinguishment.

As a result, we recognized a loss on the extinguishment of debt of $ 6.6 million.

In the third quarter of 2020, we restructured our Amendment Credit Agreement and recognized debt extinguishment losses of $ 0.2 million.

Our income tax provision (benefit) consisted of the following:

Income (loss) before income taxes:

Income tax provision (benefit):

In applying the statutory tax rate in the effective income tax rate reconciliation, we used the U.S.

statutory tax rate, rather than the Cayman Islands zero percent tax rate.

The table below reconciles our tax provision (benefit) based on the U.S.

federal statutory rate to our effective rate:

Statutory tax rate

Foreign income taxes at different rates

State income tax, net of federal benefit

Tax on uncertain tax positions

Change in valuation allowance

Non-deductible expenses (non-taxable income)

Brazil financial credit incentive

Effective income tax rate

Deferred income taxes reflect the net tax effects of temporary differences between the bases of assets and liabilities for financial reporting and income tax purposes as well as carryforwards.

Net deferred tax assets are included in other noncurrent assets and consisted of the following:

Deferred tax assets:

Accruals and allowances

Share-based compensation

Research and other tax credit carryforwards

Property and equipment

Operating lease liability

Tax amortizable goodwill

Net operating loss carryforwards

Gross deferred tax assets

Less valuation allowance

Deferred tax assets, net of valuation allowance

Deferred tax liabilities:

Right-of-use assets

Property and equipment

Intangible assets

Deferred tax liabilities

Net deferred tax assets

As of August 27, 2021, we had U.S.

federal and state net operating loss carryforwards of $ 120.1 million and $ 55.0 million, respectively.

Federal net operating loss carryforwards of $ 107.9 million will expire in 2026 through 2038 , if not utilized, and the remaining $ 12.2 million is indefinite lived.

The state net operating loss carryforwards will expire in 2023 through 2039 , both in varying amounts.

In addition, we have U.S.

federal and state tax credit carryforwards of $ 7.3 million and $ 0.9 million, respectively.

Federal and state carryforwards prior to 2018 are subject to an annual limitation, under the provisions of Section 382 of the Internal Revenue Code of 1986.

Section 382 provides an annual limitation on net operating loss and credit carryforwards following an ownership change.

Any unused annual limitation is carried forward and added to the limitation in the subsequent year.

We have foreign net operating loss carryforwards of $ 16.2 million which will expire in 2022 through 2025 .

Activity related to our deferred tax valuation allowance was as follows:

Balance at Beginning

Charged (Credited)

to Operations

Charged to Other Accounts

End of Period

Deferred tax valuation allowance:

Year ended August 27, 2021

Year ended August 28, 2020

Year ended August 30, 2019

In connection with our acquisition of SMART EC in 2019, we recognized a deferred tax asset valuation allowance of $ 7.6 million.

See “Business Acquisitions – SMART EC.”

Our valuation allowance on deferred tax assets primarily relates to our U.S.

net operating loss carryforwards and tax credit carryforwards and Netherlands net operating loss carryforwards.

The increase in valuation allowance of $ 10.2 million is primarily attributable to the valuation allowance on deferred tax assets related to the LED Business subsequent to the date of acquisition.

We intend to maintain a valuation allowance until sufficient positive evidence exists to support the realizations of such deferred tax assets.

Provisions have been made for deferred income taxes on undistributed earnings of foreign subsidiaries to the extent that dividend payments by such foreign subsidiaries are expected to result in additional tax liability.

The undistributed foreign earnings would not be included in U.S.

taxable income because the U.S.

subsidiaries are not direct or indirect shareholders of these foreign subsidiaries.

SGH, a Cayman Islands entity, is the indirect holding company for which the Cayman Islands do not assess income taxes.

The foreign country withholding taxes on undistributed foreign earnings would have an insignificant impact on our consolidated results if it were to be distributed to SGH due to foreign tax laws and rulings.

Effective February 1, 2011, SMART Brazil began to participate in PADIS.

This program is specifically designed to promote the development of the local semiconductor industry.

The Brazilian government has approved multiple applications for different products by SMART Brazil for certain beneficial tax treatment under the PADIS incentive.

This beneficial tax treatment includes a reduction in the Brazil statutory income tax rate from 34 % to 9 % on taxable income for the Brazilian semiconductor operations of SMART Brazil.

We have operations in Malaysia, where we have tax incentive arrangements for our pioneer status activities and our global supply chain business.

The statutory tax rate for Malaysia is 24 %.

These arrangements are scheduled to expire in August 2028 and are subject to certain conditions, for which we have complied in 2021, 2020 and 2019.

The effect of these tax incentive arrangements reduced our income tax provision, as compared to the statutory rates of Malaysia and Brazil, by $ 15.6 million (benefiting our diluted earnings per share by $ 0.65 ) in 2021, $ 13.5 million ($ 0.56 per diluted share) in 2020 and $ 16.3 million ($ 0.70 per diluted share) in 2019.

Below is a reconciliation of the beginning and ending amount of our unrecognized tax benefits:

Beginning unrecognized tax benefits

Increases related to prior year tax provisions

Decreases related to prior year tax provisions

Increases related to current year tax provisions

Ending unrecognized tax benefits

As of August 27, 2021 and August 28, 2020, the total amount of unrecognized tax benefits that would affect our effective tax rate, if recognized, was $ 1.8 million and $ 1.7 million, respectively.

Amounts accrued for interest and penalties related to uncertain tax positions were not material for any period presented.

The resolution of tax audits or expiration of statute of limitations could also reduce our unrecognized tax benefits.

Although the timing of final resolution is uncertain, the estimated potential reduction in our unrecognized tax benefits in the next 12 months would not be material.

We and our subsidiaries file income tax returns with the U.S.

federal government, various U.S.

states and various foreign jurisdictions throughout the world.

We regularly engage in discussions and negotiations with tax authorities regarding tax matters, including transfer pricing, and we continue to defend any and all such claims presented.

federal and state tax returns remain open to examination for 2005 through 2020 .

In addition, tax returns that remain open to examination in non-U.S.

subsidiaries, including Malaysia, Brazil, Luxembourg, United Kingdom, Hong Kong and China vary by country.

We believe that adequate amounts of taxes and related interest and penalties have been provided, and any adjustments as a result of examinations are not expected to materially adversely affect our business, results of operations or financial condition.

Earnings Per Share

Net income (loss) attributable to SGH – Basic and Diluted

Weighted-average shares outstanding – Basic

Dilutive effect of equity plans and convertible notes

Weighted-average shares outstanding – Diluted

Earnings (loss) per share:

Below are potentially dilutive shares, as of the end of the periods shown, that were not included in the computation of diluted earnings per share because to do so would have been antidilutive:

Convertible notes

We have the option to pay cash, issue shares, or any combination thereof for the aggregate amount due upon any conversion of our 2026 Notes.

It is our intent to settle the principal amount of the 2026 Notes in cash upon any conversion.

As a result, only the amounts payable in excess if the principal amounts upon conversion of the 2026 Notes are considered in diluted earnings per share under the treasury stock method.

As a result, the 2026 Notes would be dilutive when the average share price of the Company’s ordinary shares for a reporting period exceeds the conversion price of the 2026 Notes of $ 40.61 per share.

See “Debt – Convertible Senior Notes.”

Segment and Other Information

Segment information presented below is consistent with how our chief operating decision maker evaluates operating results to make decisions about allocating resources and assessing performance.

In the fourth quarter of 2021, we reorganized SGH into three business units:

Memory Solutions, Intelligent Platforms Solutions and LED Solutions.

Two of our previous segments, specialty memory products and Brazil products, have been combined to become Memory Solutions.

Intelligent Platform Solutions was formerly referred to as specialty compute and storage solutions.

All prior year information in the tables below has been revised to reflect the change to our three reportable segments.

Memory Solutions :

Our Memory Solutions group provides high performance and reliable memory solutions through the design, development and advanced packaging of leading-edge to extended lifecycle products.

These specialty products are tailored to meet customer-specific requirements across networking and communications, enterprise storage, computing, including desktop, notebook and server applications, smartphones and other vertical markets.

These products are marketed to OEMs and to commercial and government customers.

The Memory Solutions group also offers SMART Supply Chain Services, which provides customized, integrated supply chain services to enable our customers to better manage supply chain planning and execution, reduce costs and increase productivity.

Intelligent Platform Solutions (“IPS”) :

Our IPS group consists of Penguin Computing and Penguin Edge.

Penguin Computing offers specialized platform solutions for high-performance computing, artificial intelligence, machine learning and advanced modeling for technology research.

We provide these leading-edge solutions to customers in the government, hyper-scale, energy, financial services and education markets.

Penguin Edge encompasses the operations of SMART EC and SMART Wireless and offers solutions for embedded and wireless applications, specializing in high-reliability products for a wide range of customers in government, telecommunications, health care, smart city, network edge and industrial applications.

LED Solutions :

Our LED Solutions group offers a broad portfolio of application-optimized LEDs focused on improving on lumen density, intensity, efficacy, optical control and reliability.

Backed by expert design assistance and superior sales support, our LED products enable our customers to develop and market LED-based products for lighting, video screens and specialty lighting applications.

Our LED Solutions is comprised of the LED business we acquired from Cree, Inc.

on March 1, 2021.

Segments are determined based on sources of revenue, types of customers and operating performance.

There are no differences between the accounting policies for our segment reporting and our consolidated results of operations.

Operating expenses directly associated with the activities of a specific segment are charged to that segment.

Certain other indirect operating income and expenses are generally allocated to segments based on their respective percentage of net sales.

We do not allocate interest, other non-operating (income) expense or taxes to segments.

Memory Solutions

Intelligent Platform Solutions

LED Solutions

Segment operating income:

Memory Solutions

Intelligent Platform Solutions

LED Solutions

Total segment operating income

Share-based compensation

Change in fair value of contingent consideration

Amortization of intangible assets

Flow through of inventory step up

Restructure and integration expense

Consolidated operating income

Depreciation included in segment operating income was as follows:

Memory Solutions

Intelligent Platform Solutions

LED Solutions

Concentrations

Our concentrations of credit risk consists principally of cash and cash equivalents and accounts receivable.

Our revenues and related accounts receivable reflect a concentration of activity with certain customers.

We generally do not require collateral or other security to support accounts receivable.

We perform periodic credit evaluations of our customers to minimize collection risk on accounts receivable and maintain allowances for potentially uncollectible accounts.

A significant portion of our net sales is concentrated with a select number of customers.

In 2021, 2020 and 2019, sales to our ten largest customers were 65 %, 66 % and 73 %, respectively, of total net sales.

As of August 27, 2021, three customers accounted for 16 %, 10 % and 10 %, respectively, of accounts receivable.

Net sales to a number of customers exceed 10% of our total net sales in the past three years.

Net sales to a Memory Solutions customer were 12 %, 17 % and 18 % of total net sales in 2021, 2020 and 2019, respectively.

Net sales to an IPS customer were 10 % of total net sales in 2021.

Additionally, net sales to another Memory Solutions customer were 11 % of total net sales in 2020;

and net sales to two additional Memory Solutions customers were 13 % and 11 % of total net sales in 2019.

No other customers accounted for more than 10% of our total net sales in 2021, 2020 or 2019.

We rely on four suppliers for a significant portion of our raw materials.

Purchases from these suppliers in 2021, 2020 and 2019 were $ 1.3 billion, $ 1.0 billion and $ 1.2 billion, respectively.

At August 27, 2021 and August 28, 2020, accounts payable and accrued expenses included $ 190.2 million and $ 139.5 million, respectively, for amounts owed to these suppliers.

Geographic Information

Net sales by geographic area, based on customer ship-to location, were as follows:

United States

Long-lived assets by geographic area, including property and equipment and right-of-use assets, were as follows:

United States

RE PORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of SMART Global Holdings, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of SMART Global Holdings, Inc.

and subsidiaries (the “Company”) as of August 27, 2021 and August 28, 2020, the related consolidated statements of operations, comprehensive income (loss), shareholders' equity, and cash flows for each of the three years in the period ended August 27, 2021, and the related notes, (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of August 27, 2021 and August 28, 2020, and the results of its operations and its cash flows for each of the three years in the period ended August 27, 2021, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of August 27, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated October 25, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.

Change in Accounting Principle

As discussed in the notes to the financial statements, the Company has changed its method of accounting for leases in the year ended August 28, 2020 due to the adoption of Accounting Standards Update No.

2016-02, Leases (Topic 842) , using the modified retrospective approach.

Basis for Opinion

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Business Acquisitions — Refer to the notes to the financial statements

Critical Audit Matter Description

On March 1, 2021, the Company acquired certain net assets of the LED business of Cree, Inc.

(“Cree”) for $225.5 million, which includes an earn-out payment of up to $125 million based on the revenue and gross profit performance of the LED business.

The Company allocated the fair value of the purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values.

The Company estimated the fair value of identifiable intangible assets to be $64.5 million, including $49.8 million related to developed technology.

The estimated fair value of the contingent consideration liability on the date of the acquisition was $28.1 million.

The contingent consideration liability is revalued each quarter to fair value.

During the year ended August 27, 2021, the Company adjusted the fair value of the contingent consideration liability to the fair value as of year end of $60.5 million.

There was a high degree of auditor judgment and subjectivity in applying audit procedures relating to the fair value measurement of intangible assets acquired, specifically the developed technology, and the fair value measurement of contingent consideration liability due to the significant amount of judgment by management when developing its estimates.

Significant audit effort was required in performing procedures and evaluating the significant assumptions relating to the estimates and the audit effort involved the use of professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained from these procedures.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to management’s estimates of the fair value of the developed technology intangible assets and the contingent consideration liability included the following, among others:

We tested the effectiveness of internal controls over business combinations including (i) the controls over the valuation of the acquired intangible assets and contingent consideration liability and (ii) controls over the forecasted financial information including assumptions of projected revenue and gross margin and discount rates selected by management.

With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodologies and (2) discount rates, including testing the underlying source information, testing the mathematical accuracy of the calculations, and developing a range of independent estimates and comparing those to the discount rates selected by management;

We evaluated the reasonableness of management’s forecasts of revenue growth rates and gross margin by comparing to:

Historical net sales for the LED business.

Underlying inputs to the estimates including but not limited to backlog, customer purchase order information, and contractual terms with customers.

Analyst reports for the Company and the LED business, as well as industry reports, and comparison of historical rates to companies in the peer group.

Inquiries with appropriate individuals within the Company’s operations, engineering and finance departments regarding the forecasts of revenue growth rates and gross margin.

We evaluated whether the audit evidence obtained through these procedures was consistent with evidence obtained in other areas of the audit.

/s/ DELOITTE & TOUCHE LLP

San Jose, California

October 25, 2021

We have served as the Company's auditor since 2014.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data