Penguin Solutions, Inc. 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO FINANCIAL STATEMENTS Page Consolidated Balance Sheets 58 Consolidated Statements of Operations 59 Consolidated Statements of Comprehensive Income (Loss) 60 Consolidated Statements of Shareholders’ Equity 61 Consolidated Statements of Cash Flows 62 Notes to Consolidated Financial Statements 63 Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34 ) 92 57 SMART Global Holdings, Inc. Consolidated Balance Sheets (In thousands, except par value amount) As of August 26, 2022 August 27, 2021 Assets Cash and cash equivalents $ 363,065 $ 222,986 Accounts receivable, net (1) 410,323 313,393 Inventories 323,084 363,601 Other current assets 55,393 50,838 Total current assets 1,151,865 950,818 Property and equipment, net 153,935 156,266 Operating lease right-of-use assets 77,399 40,869 Intangible assets, net 77,812 101,073 Goodwill 74,009 74,255 Other noncurrent assets 37,044 21,517 Total assets $ 1,572,064 $ 1,344,798 Liabilities and Equity Accounts payable and accrued expenses $ 413,354 $ 484,107 Current debt 12,025 25,354 Other current liabilities 90,161 74,337 Total current liabilities 515,540 583,798 Long-term debt 591,389 340,484 Noncurrent operating lease liabilities 71,754 32,419 Acquisition-related contingent consideration — 60,500 Other noncurrent liabilities 14,835 8,673 Total liabilities 1,193,518 1,025,874 Commitments and contingencies SMART Global Holdings shareholders’ equity: Ordinary shares, $ 0.03 par value; authorized 200,000 shares; 52,880 shares issued and 48,604 outstanding as of August 26, 2022; 50,138 shares issued and 48,736 outstanding as of August 27, 2021 1,586 1,504 Additional paid-in-capital 448,112 396,120 Retained earnings 251,344 184,787 Treasury shares, 4,276 and 1,402 shares held as of August 26, 2022 and August 27, 2021, respectively ( 107,776 ) ( 50,545 ) Accumulated other comprehensive income (loss) ( 221,655 ) ( 221,615 ) Total SGH shareholders’ equity 371,611 310,251 Noncontrolling interest in subsidiary 6,935 8,673 Total equity 378,546 318,924 Total liabilities and equity $ 1,572,064 $ 1,344,798 (1) Receivables from related parties were de minimis and $ 14,057 as of August 26, 2022 and August 27, 2021, respectively. The accompanying notes are an integral part of these consolidated financial statements. 58 SMART Global Holdings, Inc. Consolidated Statements of Operations (In thousands, except per share amounts) Year ended August 26, 2022 August 27, 2021 August 28, 2020 Net sales (1) $ 1,819,352 $ 1,501,142 $ 1,122,377 Cost of sales 1,366,132 1,192,762 905,981 Gross profit 453,220 308,380 216,396 Operating expenses: Research and development 77,356 49,274 52,056 Selling, general and administrative 220,031 171,509 123,010 Change in fair value of contingent consideration 41,324 32,400 — Total operating expenses 338,711 253,183 175,066 Operating income 114,509 55,197 41,330 Non-operating (income) expense: Interest expense, net 21,169 17,600 15,000 Other non-operating (income) expense 4,837 ( 375 ) 16,970 Total non-operating (income) expense 26,006 17,225 31,970 Income before taxes 88,503 37,972 9,360 Income tax provision 19,911 15,466 10,503 Net income (loss) 68,592 22,506 ( 1,143 ) Net income attributable to noncontrolling interest 2,035 1,196 — Net income (loss) attributable to SGH $ 66,557 $ 21,310 $ ( 1,143 ) Earnings (loss) per share: Basic $ 1.35 $ 0.44 $ ( 0.02 ) Diluted $ 1.22 $ 0.41 $ ( 0.02 ) Shares used in per share calculations: Basic 49,467 48,558 47,988 Diluted 54,443 51,584 47,988 (1) Sales to related parties were de minimis, $ 76,488 and $ 75,837 in 2022, 2021 and 2020, respectively. The accompanying notes are an integral part of these consolidated financial statements. 59 SMART Global Holdings, Inc. Consolidated Statements of Comprehensive Income (Loss) (In thousands) Year ended August 26, 2022 August 27, 2021 August 28, 2020 Net income (loss) $ 68,592 $ 22,506 $ ( 1,143 ) Other comprehensive income (loss), net of tax: Foreign currency translation adjustments ( 40 ) 6,626 ( 50,375 ) Comprehensive income (loss) 68,552 29,132 ( 51,518 ) Comprehensive income attributable to noncontrolling interest 2,035 1,196 — Comprehensive income (loss) attributable to SGH $ 66,517 $ 27,936 $ ( 51,518 ) The accompanying notes are an integral part of these consolidated financial statements. 60 SMART Global Holdings, Inc. Consolidated Statements of Shareholders’ Equity (In thousands) Shares Issued Amount Additional Paid-in-capital Retained Earnings Treasury Shares Accumulated Other Comprehensive Income (Loss) Total SGH Shareholders’ Equity Non- controlling Interest in Subsidiary Total Equity As of August 30, 2019 47,355 $ 1,421 $ 286,568 $ 164,620 $ ( 1,283 ) $ ( 177,866 ) $ 273,460 $ — $ 273,460 Net income (loss) — — — ( 1,143 ) — — ( 1,143 ) — ( 1,143 ) Other comprehensive income (loss) — — — — — ( 50,375 ) ( 50,375 ) — ( 50,375 ) Shares issued under equity plans 1,525 45 5,434 — — — 5,479 — 5,479 Repurchase of ordinary shares ( 27 ) ( 1 ) 1 — ( 749 ) — ( 749 ) — ( 749 ) Shares issued in connection with acquisition of Inforce 135 4 ( 4 ) — — — — — — Share-based compensation expense — — 18,716 — — — 18,716 — 18,716 Reclassification of Capped Calls to equity — — ( 14,106 ) — — — ( 14,106 ) — ( 14,106 ) Issuance of convertible notes — — 50,822 — — — 50,822 — 50,822 As of August 28, 2020 48,988 1,469 347,431 163,477 ( 2,032 ) ( 228,241 ) 282,104 — 282,104 Net income — — — 21,310 — — 21,310 1,196 22,506 Other comprehensive income (loss) — — — — — 6,626 6,626 — 6,626 Shares issued under equity plans 2,403 72 14,851 — — — 14,923 — 14,923 Repurchase of ordinary shares ( 1,253 ) ( 37 ) 37 — ( 48,513 ) — ( 48,513 ) — ( 48,513 ) Share-based compensation expense — — 33,801 — — — 33,801 — 33,801 Acquisition of noncontrolling interest — — — — — — — 7,477 7,477 As of August 27, 2021 50,138 1,504 396,120 184,787 ( 50,545 ) ( 221,615 ) 310,251 8,673 318,924 Net income — — — 66,557 — — 66,557 2,035 68,592 Other comprehensive income (loss) — — — — — ( 40 ) ( 40 ) — ( 40 ) Shares issued under equity plans 2,797 84 12,056 — — — 12,140 — 12,140 Repurchase of ordinary shares ( 55 ) ( 2 ) 2 — ( 57,231 ) — ( 57,231 ) — ( 57,231 ) Share-based compensation expense — — 39,934 — — — 39,934 — 39,934 Distribution to noncontrolling interest — — — — — — — ( 3,773 ) ( 3,773 ) As of August 26, 2022 52,880 $ 1,586 $ 448,112 $ 251,344 $ ( 107,776 ) $ ( 221,655 ) $ 371,611 $ 6,935 $ 378,546 The accompanying notes are an integral part of these consolidated financial statements. 61 SMART Global Holdings, Inc. Consolidated Statements of Cash Flows (In thousands) Year Ended August 26, 2022 August 27, 2021 August 28, 2020 Cash flows from operating activities: Net income (loss) $ 68,592 $ 22,506 $ ( 1,143 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation expense and amortization of intangible assets 64,907 49,111 36,430 Amortization of debt discount and issuance costs 10,263 8,798 5,866 Share-based compensation expense 40,119 33,877 18,716 Change in fair value of contingent consideration 41,324 32,400 — Loss on remeasurement of Capped Calls — — 7,719 Loss on extinguishment of debt 653 — 6,822 Other 695 829 2,471 Changes in operating assets and liabilities: Accounts receivable ( 97,509 ) ( 51,440 ) ( 12,348 ) Inventories 39,667 ( 137,889 ) ( 51,840 ) Other assets ( 1,353 ) ( 9,943 ) 10,820 Accounts payable and accrued expenses and other liabilities ( 61,738 ) 208,108 65,807 Deferred income taxes, net ( 689 ) ( 3,007 ) ( 2,115 ) Net cash provided by operating activities 104,931 153,350 87,205 Cash flows from investing activities: Capital expenditures and deposits on equipment ( 38,153 ) ( 47,580 ) ( 32,445 ) Acquisition of business, net of cash acquired — ( 35,677 ) — Other ( 817 ) ( 921 ) 404 Net cash used for investing activities ( 38,970 ) ( 84,178 ) ( 32,041 ) Cash flows from financing activities: Proceeds from debt 278,657 11,439 243,125 Proceeds from borrowing under line of credit 84,000 172,500 103,000 Proceeds from issuance of ordinary shares 12,140 14,923 5,479 Repayments of debt ( 127,073 ) — ( 213,436 ) Repayments of borrowings under line of credit ( 109,000 ) ( 147,500 ) ( 103,000 ) Payments to acquire ordinary shares ( 57,231 ) ( 48,513 ) ( 749 ) Distribution to noncontrolling interest ( 3,773 ) — — Purchase of Capped Calls — — ( 21,825 ) Other ( 3,841 ) — — Net cash provided by financing activities 73,879 2,849 12,594 Effect of changes in currency exchange rates on cash and cash equivalents 239 154 ( 15,086 ) Net increase in cash and cash equivalents 140,079 72,175 52,672 Cash and cash equivalents at beginning of period 222,986 150,811 98,139 Cash and cash equivalents at end of period $ 363,065 $ 222,986 $ 150,811 Supplemental disclosures: Interest paid, net of amounts capitalized $ 12,798 $ 8,029 $ 12,983 Income taxes paid, net 13,811 6,702 9,151 The accompanying notes are an integral part of these consolidated financial statements. 62 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 the “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. Fiscal Year : Our fiscal year is the 52 or 53-week period ending on the last Friday in August. Fiscal 2022, 2021 and 2020 each contained 52 weeks. All period references are to our fiscal periods unless otherwise indicated. 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. 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. dollar. 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, which 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. U.S. 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; and • Level 3 – Valuations based on unobservable inputs for the asset or liability. Functional Currency Our primary functional currency is the U.S. dollar. Gains and losses from the remeasurement of non-functional currency balances are recorded in other non-operating (income) expense. The functional currency of our subsidiaries in Brazil is the 63 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). Goodwill 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 26, 2022. 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 or noncurrent assets. Cash received from government incentives related to operating expenses is included as an operating activity in the consolidated statement of cash flows. Income Taxes 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 and five to seven years for trademarks/trade names. 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 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. Leases 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 64 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 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. 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 assets. 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 65 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 Costs : 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. Subsequent Events Acquisition of Stratus Technologies On August 29, 2022, SGH completed its previously announced acquisition of all of the outstanding shares of Storm Private Holdings I Ltd., a Cayman Islands exempted company (“Stratus Holding Company” and together with its subsidiaries, “Stratus Technologies”), pursuant to a Share Purchase Agreement (the “Purchase Agreement”), dated as of June 28, 2022. At the closing of the transaction, SGH paid to the seller a cash purchase price of $ 225 million, subject to certain adjustments. In addition, the seller has the right to receive, and SGH will be obligated to pay, contingent consideration (if 66 any) of up to $ 50 million (the “Earnout”) based on the gross profit performance of the Stratus business during the first full 12 fiscal months of Stratus following the closing. The Earnout, if any, will be payable in cash, ordinary shares of SGH or a mix of cash and SGH Shares, at SGH’s election. Stratus is a global leader in simplified, protected, and autonomous computing platforms and services in the data center and at the Edge. For more than 40 years, Stratus has provided high-availability, fault-tolerant computing to Fortune 500 companies and small-to-medium sized businesses enabling them to securely and remotely run critical applications with minimal downtime. First Supplemental Indenture to Indenture Governing 2.25% Convertible Senior Notes Due 2026 On August 26, 2022, SGH entered into the First Supplemental Indenture (the “First Supplemental Indenture”) to the Indenture, dated February 11, 2020 (the “Indenture”), between SGH and U.S. Bank National Association, as trustee, governing SGH’s outstanding 2.25 % Convertible Senior Notes due 2026 (the “2026 Notes”). The First Supplemental Indenture became effective on August 27, 2022. Pursuant to the First Supplemental Indenture, SGH irrevocably elected (i) to eliminate SGH’s option to elect Physical Settlement (as defined in the Indenture) on any conversion of 2026 Notes that occurs on or after the date of the First Supplemental Indenture and (ii) that, with respect to any Combination Settlement (as defined in the Indenture) for a conversion of the 2026 Notes, the Specified Dollar Amount (as defined in the Indenture) that will be settled in cash per $ 1,000 principal amount of the 2026 Notes shall be no lower than $ 1,000 . As a result of our election, upon any conversion of our 2026 Notes, we will be required to pay cash in an amount at least equal to the principal portion while continuing to have the option to settle any amount in excess of the principal portion in cash and/or ordinary shares. Following the election, only the amounts expected to be settled in excess of the principal portion are considered dilutive in calculating earnings per share under the if-converted method. Amended Credit Facility On August 29, 2022, SGH and SMART Modular Technologies, Inc. entered into an incremental amendment to the Credit Agreement (the “Incremental Amendment,” and together with the Credit Agreement, the “Amended Credit Agreement”). The Incremental Amendment (i) provides for incremental term loans in an aggregate amount of $ 300 million (the “Incremental 2027 TLA”), which Incremental 2027 TLA is on the same terms as the 2027 TLA , (ii) increases the maximum First Lien Leverage Ratio (as defined in the Amended Credit Agreement) financial covenant from 3.00 :1.00 to 3.25 :1.00 and (iii) increases the aggregate amount of unrestricted cash and permitted investments netted from the definitions of Consolidated First Lien Debt and Consolidated Net Debt under the Amended Credit Agreement from $ 100 million to $ 125 million. The 2027 TLA, the Incremental 2027 TLA and the 2027 Revolver are referred to together as the “Amended Credit Facility.” The Amended Credit Facility matures on February 7, 2027. Prepayment of Earnout Note On August 29, 2022, substantially simultaneously with entering into the Incremental Amendment, we repaid in full the $ 101.8 million outstanding under the Earnout Note. See “Business Acquisition – LED Business – Contingent Consideration.” Share Dividend On January 3, 2022, our Board of Directors declared a share dividend of one ordinary share, $ 0.03 par value per share, for every one outstanding ordinary share owned to shareholders of record as of January 25, 2022. The dividend was paid on February 1, 2022. The accompanying consolidated financial statements and notes have been restated and adjusted for the impact of the share dividend. Recently Adopted Accounting Standards In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-08 – Business Combinations: Accounting for Contract Asset and Contract Liabilities from Contracts with Customers , to require that an acquirer recognize and measure contract assets and liabilities acquired in a business combination in accordance with ASC 606, Revenue from Contracts with Customers . We adopted ASU 2021-08 in the third quarter of 2022 and the adoption had no impact on our financial statements. 67 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. We adopted ASU 2019-12 in the first quarter of 2022 on a prospective basis. The adoption of this ASU did not have a significant impact on our financial statements. In June 2016, the FASB issued ASU 2016-13 – Financial Instruments – Credit Losses: 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 . 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: Accounting for Convertible Instruments and Contracts in an 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 and permits the use of either the modified retrospective or fully retrospective method of transition. We adopted ASU 2020-06 in the first quarter of 2023 under the modified retrospective method. Upon adoption of ASU 2020-06, the previously separated equity component and associated issuance costs for our outstanding 2026 Notes were reclassified from additional capital to long-term debt, thereby eliminating future amortization of the debt discount as interest expense. Amortization of the debt discount as interest expense was $ 8.1 million, $ 7.5 million and $ 3.9 million in 2022, 2021 and 2020, respectively. The following table summarizes the effects of adopting ASU 2020-06: Ending Balance as of Beginning Balance as of August 26, 2022 Adoption of ASU 2020-06 August 27, 2022 Long-term debt $ 591,389 $ 32,183 $ 623,572 Additional paid-in-capital 448,112 ( 50,822 ) 397,290 Retained earnings 251,344 18,639 269,983 On August 26, 2022, we made an irrevocable election, effective August 27, 2022, under the indenture to require the principal portion of our 2026 Notes to be settled in cash and any conversion consideration in excess of the principal portion in cash and/or ordinary shares at our option upon conversion. Following the irrevocable election, only the amounts expected to be settled in excess of the principal portion are considered dilutive in calculating earnings per share under the if-converted method. See “Subsequent Events – First Supplemental Indenture to Indenture Governing 2.25 % Convertible Senior Notes Due 2026.” Business Acquisition LED Business 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., a corporation now known as Wolfspeed, 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 68 (c) Cree’s 51.0 % 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. 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 operates as our LED Solutions segment. Purchase Price : The purchase price for the LED Business consisted of (i) a payment of $ 50.0 million in cash, subject to customary adjustments, (ii) an unsecured promissory note issued to Cree by the Company in the amount of $ 125.0 million(“LED Purchase Price Note”), (iii) an earn-out payment of up to $ 125.0 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 aggregate purchase price was as follows: Cash $ 50,000 Additional payment for net working capital adjustment (1) 22,398 Fair value of LED Purchase Price Note 125,000 Fair value of Earnout Note 28,100 $ 225,498 (1) 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 was 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 was revalued each quarter and changes in valuation were reflected in results of operations. In 2022 and in the second half of 2021, we recorded charges of $ 41.3 million and $ 32.4 million, respectively, to adjust the value of the Earnout Note to its fair value. The changes 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. Based on the revenue and gross profit performance of the LED Business in Cree’s first four full fiscal quarters following the closing, the final calculated value of the contingent consideration was $ 101.8 million and, in the fourth quarter of 2022, we issued the Earnout Note to Cree for this amount. On August 29, 2022, subsequent to the end of 2022, we repaid in full the amount outstanding under that Earnout Note. 69 Valuation : The purchase price was 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 $ 36,721 Accounts receivable 45,608 Inventories 60,423 Other current assets 5,204 Property and equipment 70,116 Operating lease right-of-use assets 7,494 Intangible assets 64,500 Other noncurrent assets 26 Accounts payable and accrued expenses ( 23,673 ) Other current liabilities ( 27,509 ) Noncurrent operating lease liabilities ( 4,019 ) Other noncurrent liabilities ( 1,916 ) Total net assets acquired 232,975 Noncontrolling interest in subsidiary ( 7,477 ) Consideration $ 225,498 The fair values and useful lives of the intangible asset acquired was as follows: Amount Estimated useful life (in years) Technology $ 49,800 7 - 8 Trademarks/trade names 6,100 5 Customer relationships 5,200 7 - 8 Order backlog 3,400 less than 1 $ 64,500 • 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/trade names 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 trade names/trademarks from a third party. Key assumptions included attributable revenue expected from the trade names/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 70 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 from 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. Year ended August 27, 2021 August 28, 2020 Net sales $ 1,705,366 $ 1,555,689 Net loss attributable to SGH ( 142,319 ) ( 95,926 ) Earnings (loss) per share: Basic $ ( 2.93 ) $ ( 2.00 ) Diluted $ ( 2.93 ) $ ( 2.00 ) 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. Inventories As of August 26, 2022 August 27, 2021 Raw materials $ 150,913 $ 163,610 Work in process 38,624 92,901 Finished goods 133,547 107,090 $ 323,084 $ 363,601 As of August 26, 2022 and August 27, 2021, 6 % and 11 %, respectively, of total inventories were inventories owned and held under our logistics services. 71 Property and Equipment As of August 26, 2022 August 27, 2021 Equipment $ 204,805 $ 182,493 Buildings and building improvements 59,047 53,502 Furniture, fixtures and software 38,715 32,114 Land 16,126 16,126 318,693 284,235 Accumulated depreciation ( 164,758 ) ( 127,969 ) $ 153,935 $ 156,266 Depreciation expense for property and equipment was $ 41.1 million, $ 28.9 million and $ 22.8 million in 2022, 2021 and 2020, respectively. Intangible Assets and Goodwill As of August 26, 2022 As of August 27, 2021 Gross Amount Accumulated Amortization Gross Amount Accumulated Amortization Intangible assets: Technology $ 61,594 $ ( 18,473 ) $ 61,307 $ ( 9,142 ) Customer relationships 57,500 ( 32,238 ) 57,500 ( 22,393 ) Trademarks/trade names 19,200 ( 9,771 ) 19,200 ( 6,628 ) Order backlog — — 3,800 ( 2,571 ) $ 138,294 $ ( 60,482 ) $ 141,807 $ ( 40,734 ) Goodwill by segment: Intelligent Platform Solutions $ 40,401 $ 40,401 Memory Solutions 33,608 33,854 $ 74,009 $ 74,255 In 2022, and 2021, we capitalized $ 1.4 million and $ 65.7 million, respectively, for intangible assets, with weighted-average useful lives of 17.8 years and 6.7 years, respectively. Amortization expense for intangible assets was $ 23.8 million, $ 20.3 million and $ 13.7 million in 2022, 2021 and 2020, respectively. Amortization expense is expected to be $ 21.8 million for 2023, $ 17.8 million for 2024, $ 15.3 million for 2025, $ 8.5 million for 2026, $ 7.7 million for 2027 and $ 6.6 million thereafter. Goodwill of our Memory Solutions segment decreased in 2022 by $ 0.2 million and increased in 2021 by $ 0.3 million from translation adjustments. Accounts Payable and Accrued Expenses As of August 26, 2022 August 27, 2021 Accounts payable (1) $ 345,063 $ 429,640 Salaries, wages and benefits 45,189 37,795 Income and other taxes 17,961 14,319 Other 5,141 2,353 $ 413,354 $ 484,107 72 (1) Includes accounts payable for property and equipment of $ 3.5 million and $ 3.1 million as of August 26, 2022 and August 27, 2021, respectively. Debt As of August 26, 2022 August 27, 2021 2027 TLA $ 269,304 $ — Convertible Senior Notes 213,023 203,992 LED Earnout Note 101,824 — LED Purchase Price Note — 125,000 ABL Credit Agreement — 25,000 Other 19,263 11,846 603,414 365,838 Less current debt ( 12,025 ) ( 25,354 ) Long-term debt $ 591,389 $ 340,484 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 SOFR as its preferred alternative to LIBOR in derivatives and other financial contracts. As of January 1, 2022, the Financial Conduct Authority ceased the publication of the one-week and two-month USD LIBOR settings. 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. Credit Facility On February 7, 2022, SGH and SMART Modular Technologies, Inc. entered into a credit agreement (the “Credit Agreement”) with a syndicate of banks that provides for (i) a term loan credit facility in an aggregate principal amount of $ 275.0 million (the “2027 TLA”) and (ii) a revolving credit facility in an aggregate principal amount of $ 250.0 million (the “2027 Revolver,” and together with the 2027 TLA, the “Credit Facility”), in each case, maturing on February 7, 2027 (subject to certain earlier “springing maturity” dates upon certain conditions specified in the Credit Agreement). The Credit Agreement provides that up to $ 35.0 million of the 2027 Revolver is available for issuances of letters of credit. Issuance costs incurred in connection with the Credit Facility were $ 9.1 million and were allocated to the 2027 TLA and 2027 Revolver on a pro rata basis. Unamortized issuances costs allocated to the 2027 TLA are amortized using the effective interest method and are included as a reduction of the principal amount of the 2027 TLA within debt. Unamortized issuances costs allocated to the 2027 Revolver are amortized using the straight-line method and are included in other current and noncurrent assets. Principal payments under the 2027 TLA are due quarterly equal to 2.5 % per annum of the initial aggregate principal amount for the first four quarters beginning in May 2022, with such per annum percentage equal to 5.0 %, 5.0 %, 5.0 % and 7.5 % per annum in years two through five, respectively, with the balance due at maturity. Interest and fees : Loans under the Credit Agreement bear interest at a rate per annum equal to either, at our option, a term SOFR or a base rate, in each case plus an applicable margin. 2027 TLA : The applicable margin for 2027 TLA is 2.00 % per annum with respect to term SOFR borrowings, and 1.00 % per annum with respect to base rate borrowings. As of August 26, 2022, the interest rate applicable to the principal amount outstanding under the 2027 TLA was 3.55 % per annum. As of August 26, 2022, there was $ 273.3 million of 2027 TLA 73 principal amount outstanding and unamortized issuance costs were $ 4.0 million and, as of August 26, 2022, the 2027 TLA had an effective interest rate of 3.99 %. 2027 Revolver : The applicable margin for revolving loans varies based on our Total Leverage Ratio (as defined in the Credit Agreement) and ranges from 1.25 % to 3.00 % per annum with respect to term SOFR borrowings and from 0.25 % to 2.00 % per annum with respect to base rate borrowings. In addition, we are required to pay a quarterly unused commitment fee at an initial rate of 0.25 %, which may increase up to a rate of 0.35 % based on certain Total Leverage Ratio levels specified in the Credit Agreement. As of August 26, 2022, there were no amounts outstanding under the 2027 Revolver and unamortized issuance costs were $ 4.1 million. Security : The Credit Agreement is jointly and severally guaranteed on a senior basis by certain subsidiaries of SGH organized in the United States and Cayman Islands. In addition, the Credit Agreement is secured by a pledge of the capital stock of, or equity interests in, certain subsidiaries of SGH organized in the United States and the Cayman Islands and by substantially all of the assets of certain subsidiaries of SGH organized in the United States and the Cayman Islands. Covenants : The Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability and the ability of our subsidiaries to: incur additional indebtedness; create liens on assets; engage in mergers or consolidations; sell assets; pay dividends; make distributions or repurchase capital stock; make investments, loans or advances; repay or repurchase certain subordinated debt (except as scheduled or at maturity); create restrictions on the payment of dividends or other amounts to us from our restricted subsidiaries; make certain acquisitions; engage in certain transactions with affiliates; amend material agreements governing our subordinated debt and fundamentally change our business. The Credit Agreement also includes the following financial maintenance covenants tested on the final day of each fiscal quarter: i. a First Lien Leverage Ratio (as defined in the Credit Agreement) of 3.00 to 1.00; ii. a Total Leverage Ratio of 5.00 to 1.00; provided, that commencing after the eighth full fiscal quarter after the Effective Date, such Total Leverage Ratio level will instead be 4.50 to 1.00; provided further, that commencing after the eighth full fiscal quarter after the Effective Date, in connection with any Material Acquisition (as defined in the Credit Agreement), at the election of the Borrowers, the maximum Total Leverage Ratio for the next four testing periods after such Material Acquisition has been consummated will be automatically increased by 0.50 to 1.00 above the otherwise permitted Total Leverage Ratio for the applicable fiscal quarter (not to exceed 5.00 to 1.00 in any event); provided further, that (x) no more than two such elections may be made during the term of the Credit Agreement and (y) following the first such election, no subsequent election may be made unless the Total Leverage Ratio has been less than or equal to 5.00 to 1.00 as of the last day of at least two consecutive Test Periods (as defined in the Credit Agreement) following the expiration of the first increase; and iii. an Interest Coverage Ratio (as defined in the Credit Agreement) of 3.00 to 1.00. For purposes of calculating the First Lien Leverage Ratio and the Total Leverage Ratio, the consolidated debt of the Company and its Restricted Subsidiaries (as defined in the Credit Agreement) is reduced by up to $ 100 million of the aggregate amount of unrestricted cash and Permitted Investments (as defined in the Credit Agreement) of the Company and its Restricted Subsidiaries. Other : Substantially simultaneously with entering into the Credit Agreement, we used a portion of the proceeds of the Credit Facility to pay in full all borrowings and terminated all commitments under (i) our ABL Credit Agreement, dated as of December 23, 2020, (ii) our Amended Credit Agreement, dated as of March 6, 2020 and (iii) the LED Purchase Price Note, dated as of March 1, 2021. In connection therewith, we used an aggregate of $ 160.4 million to pay principal and interest outstanding under these agreements and recorded charges of $ 0.7 million in other non-operating expense to write off certain unamortized issuance costs. 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, 74 redeemed or repurchased. The 2026 Notes are governed by an indenture (the “Indenture”) between us and U.S. Bank National Association, as trustee. After the effect of the share dividend paid in the second quarter of 2022, the conversion rate of the 2026 Notes is 49.2504 ordinary shares per $ 1,000 principal amount of notes, which represents a conversion price of approximately $ 20.30 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: i. 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; ii. 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; iii. on or after August 15, 2025 until the close of business on the second scheduled trading day immediately before the maturity date; iv. upon the occurrence of certain corporate events or distributions on our ordinary shares, as provided in the Indenture; or v. 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. Through 2022, it was 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 of the principal amounts upon conversion of the 2026 Notes are considered in diluted earnings per share under the treasury stock method. On August 26, 2022, we made an irrevocable election, effective August 27, 2022, under the indenture to require the principal portion of our 2026 Notes to be settled in cash and any conversion consideration in excess of the principal portion in cash and/or ordinary shares at our option upon conversion. Following the irrevocable election, only the amounts expected to be settled in excess of the principal portion are considered dilutive in calculating earnings per share under the if-converted method. See “Subsequent Events – First Supplemental Indenture to Indenture Governing 2.25 % Convertible Senior Notes Due 2026.” 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. Other : 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. 75 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. Unamortized debt discount and issuance costs are amortized over the term of the 2026 Notes using the effective interest rate method. As of August 26, 2022 and August 27, 2021, the effective interest rate was 7.06 %. Interest expense for the 2026 Notes consisted of 2.25 % contractual stated interest and amortization of discount and issuance costs and included of the following: Year ended August 26, 2022 August 27, 2021 August 28, 2020 Contractual stated interest $ 5,609 $ 5,609 $ 3,078 Amortization of discount and issuance costs 9,031 8,419 4,385 $ 14,640 $ 14,028 $ 7,463 As of both August 26, 2022 and August 27, 2021, the carrying amount of the equity components of the 2026 Notes, which are included in additional paid-in-capital, was $ 50.8 million. As of the beginning of the first quarter of 2023, we adopted ASU 2020-06. In connection therewith, we reclassified $ 50.8 million from additional paid-in-capital to long-term debt. See “Recently Issued Accounting Standards.” LED Earnout Note Part of our consideration for the acquisition of the LED Business in March 2021 was the possibility of 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, with a minimum payment of $ 2.5 million. In the third quarter of 2022, we issued an unsecured promissory note to Cree for this earnout in the amount of $ 101.8 million. The Earnout Note bore interest at LIBOR plus 3.0 %, payable quarterly, and was scheduled to mature on March 27, 2025. On August 29, 2022, subsequent to the end of our fiscal year 2022, we repaid in full the amount outstanding under that Earnout Note. 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 bore interest at LIBOR plus 3.0 %, payable quarterly, and was due on August 15, 2023. In the second quarter of 2022, we repaid in full the LED Purchase Price Note. Asset-Based Lending Credit Agreement In the second quarter of 2022, we used a portion of the proceeds of the Credit Facility to pay in full all borrowings and terminated all commitments under our ABL Credit Agreement, dated as of December 23, 2020. Other 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 $ 19.7 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 and July 19, 2022, we borrowed R$ 61.3 million (or $ 11.8 million) and R$ 40.9 million (or $ 7.9 million), respectively, under the agreement and, as of August 26, 2022, the outstanding balance was $ 19.3 million. 76 Maturities of Debt As of August 26, 2022, maturities of debt were as follows: 2023 $ 12,150 2024 20,744 2025 119,130 2026 265,588 2027 225,275 2028 and thereafter 1,482 Less unamortized discount and issuance costs ( 40,955 ) $ 603,414 Leases As of August 26, 2022 and August 27, 2021, 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 any period presented. The components of operating lease expense were as follows: Year ended August 26, 2022 August 27, 2021 August 28, 2020 Fixed lease cost $ 13,511 $ 9,377 $ 6,743 Variable lease cost 1,534 1,445 842 Short-term lease cost 466 288 295 $ 15,511 $ 11,110 $ 7,880 Cash flows used for operating activities in 2022, 2021 and 2020 included payments for operating leases of $ 10.0 million, $ 7.5 million and $ 5.1 million, respectively. Noncash acquisitions of right-of-use assets were $ 47.6 million, $ 24.5 million and $ 8.8 million in 2022, 2021 and 2020, respectively. As of August 26, 2022 and August 27, 2021, the weighted-average remaining lease term for our operating leases was 10.9 years and 6.1 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 26, 2022 and August 27, 2021, the weighted-average discount rate for our operating leases was 6.1 % and 6.7 %, respectively. Minimum payments of lease liabilities as of August 26, 2022 were as follows: 2023 $ 11,365 2024 11,772 2025 9,738 2026 8,620 2027 8,572 2028 and thereafter 65,868 115,935 Less imputed interest ( 35,567 ) Present value of total lease liabilities $ 80,368 77 Commitments and Contingencies Commitments As of August 26, 2022, we had commitments of $ 102.9 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. Equity SGH Shareholders’ Equity Share Dividend On January 3, 2022, our Board of Directors declared a share dividend of one ordinary share, $ 0.03 par value per share, for every one outstanding ordinary share owned to shareholders of record as of January 25, 2022. The dividend was paid on February 1, 2022. Share Repurchase Authorization On April 4, 2022, our Board of Directors approved a $ 75 million share repurchase authorization, under which we may repurchase our outstanding ordinary shares from time to time through open market purchases, privately-negotiated transactions or otherwise. The share repurchase authorization has no expiration date but may be suspended or terminated by the Board of Directors at any time. In 2022, we repurchased an aggregate of 2.6 million shares for $ 50.0 million under the repurchase authorization. As of August 26, 2022, these repurchased shares were held in treasury. Other Share Repurchases We repurchased 241 thousand, 153 thousand and 28 thousand ordinary shares as payment of withholding taxes for $ 7.2 million, $ 4.2 million and $ 0.7 million in 2022, 2021 and 2020, respectively. As of August 26, 2022, these repurchased shares were held in treasury. 78 In addition, in January 2021, we repurchased an aggregate of 1.1 million ordinary shares for $ 44.3 million 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. in a privately negotiated transaction. The transaction closed on January 15, 2021. As of August 26, 2022, these repurchased shares were held in treasury. Capped Calls 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 $ 20.30 per share, subject to certain adjustments, corresponding to the initial conversion price of the 2026 Notes, and initial cap prices of $ 27.07 per share, which are subject to certain adjustments. The Capped Calls cover, subject to anti-dilution adjustments, approximately 12.3 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 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. In the second quarter of 2022, the Cree Joint Venture distributed an aggregate of $ 7.7 million to its partners, including $ 3.9 million to SGH and $ 3.8 million to San’an. Noncontrolling interest increased by $ 2.0 million and $ 1.2 million in 2022 and 2021, respectively, for San’an’s share of net income from the Cree Joint Venture. Remaining 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 (also known as Informatics Law – Basic Productive Process Program) (“IT Law/PPB”) and 2) Programa de Apoio ao Desenvolvimento Tecnológico da Indústria de Semicondutores (also known as Program of Support of the Development of the Semiconductor Industry) (“PADIS”). In January 2022, the Brazilian government approved an extension to PADIS. The financial credits available through PADIS are set to expire in December 2026, while the financial credits through IT Law/PPB are set to expire in December 2029. The Brazil Incentive Programs provide for reduced import and other transaction-related taxes for certain 79 procurement, manufacturing and sales activities. In exchange, we must invest in certain research and development activities related to semiconductors and IT solutions in aggregate amounts that exceed a specified percentage of our gross revenues recognized in connection with sales in Brazil, excluding exports and sales to customers located at the Manaus Free Trade Zone. 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 $ 17.3 million, $ 30.0 million and $ 6.4 million in 2022, 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 26, 2022 and August 27, 2021, earned but unused financial credits were $ 18.7 million and $ 19.8 million, respectively. Financial credits earned but unused as of August 26, 2022 can be utilized through August 2026. Fair Value Measurements Cash and cash equivalents as of August 26, 2022 and August 27, 2021 included money market funds of $ 13.8 million and $ 2.7 million, respectively, 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 26, 2022 As of August 27, 2021 Fair Value Carrying Value Fair Value Carrying Value Assets: Derivative financial instrument assets $ — $ — $ 883 $ 883 Liabilities: Derivative financial instrument liabilities $ 605 $ 605 $ 50 $ 50 2027 TLA 273,281 269,304 — — Convertible Senior Notes 290,223 213,023 335,668 203,992 LED Earnout Note 96,412 101,824 — — LED Purchase Price Note — — 125,000 125,000 ABL Credit Agreement — — 25,000 25,000 Debt – other 17,855 19,263 10,702 11,846 Acquisition-related contingent consideration — — 60,500 60,500 The fair values of our derivative financial instruments, as measured on a recurring basis, were based on 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 2027 TLA, LED Earnout Note, 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 related to our acquisition of the LED Business and was included in noncurrent liabilities. The fair value as of August 27, 2021, measured on a recurring basis, was based on Level 3 measurements, which included 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. 80 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 from 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. In 2022 and 2021, we recognized net realized losses of $ 2.4 million and $ 3.4 million, respectively, and in 2020, we recognized net realized gains of $ 11.3 million from changes in the fair value of non-designated forward contracts. In 2022, we recognized net unrealized losses of $ 0.8 million, and in 2021 and 2020, we recognized net unrealized gains of $ 1.9 million and $ 0.1 million, respectively, from changes in the fair value of non-designated forward contracts. Equity Plans 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 26, 2022, 4.0 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 26, 2022, 2.0 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 26, 2022, 1.9 million of our ordinary shares were available for issuance under the ESPP. Options and RSUs generally vest over a period of four years , and options generally have a ten -year term. Restricted Share Awards and Restricted Share Units Awards (“Restricted Awards”) Shares Weighted Average Grant Date Fair Value Per Share Aggregate Intrinsic Value Outstanding as of August 27, 2021 5,637 $ 18.08 $ 134,425 Granted 1,642 $ 25.73 Vested ( 2,057 ) $ 18.10 Forfeited and cancelled ( 344 ) $ 20.54 Outstanding as of August 26, 2022 4,878 $ 20.47 $ 94,052 Year ended August 26, 2022 August 27, 2021 August 28, 2020 Awards granted 1,642 4,651 1,680 Weighted average grant-date fair value per share $ 25.73 $ 19.59 $ 12.21 Aggregate vesting-date fair value of shares vested $ 49,821 $ 21,381 $ 12,464 Restricted Awards include grants with service, performance and/or market conditions with restrictions that generally lapse after a three - to four-year service period. Awards with market conditions are based on either the Company’s share price or 81 the Company’s total shareholder return (“TSR”) relative to companies included in a market index. For awards with market conditions, the number of shares that will vest will vary between 0 % and 200 % of target amounts, depending upon the Company’s achievement level over the specified performance period. The fair value of awards with market conditions were fixed at the grant date using a Monte Carlo simulation analysis and were based on significant inputs not observable in the market. In May 2020, we granted a PSRA 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 26, 2022, total unrecognized compensation costs for unvested Restricted Awards was $ 88.6 million, which was expected to be recognized over a weighted average period of 2.55 years. Share Options As of August 26, 2022, there were 3.3 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 $ 6.3 million, $ 8.6 million and $ 3.0 million in 2022, 2021 and 2020, respectively. Shares Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value Outstanding as of August 27, 2021 3,778 $ 14.95 6.33 $ 33,602 Granted — $ — Exercised ( 443 ) $ 12.75 Forfeited and cancelled ( 61 ) $ 11.04 Outstanding as of August 26, 2022 3,274 $ 15.32 5.22 $ 14,429 Exercisable as of August 26, 2022 2,776 $ 15.97 4.77 $ 10,673 Year ended August 27, 2021 August 28, 2020 Share options granted 500 1,926 Weighted average grant-date fair value per share $ 6.65 $ 5.73 Average expected term in years 6.25 6.25 Weighted-average expected volatility 52.07 % 49.18 % Weighted-average risk-free interest rate 0.49 % 1.32 % 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 26, 2022, total aggregate unrecognized compensation costs for unvested options was $ 2.8 million, which was expected to be recognized over a weighted average period of 1.73 years. 82 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 simulation analysis with 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 a Monte Carlo simulation analysis 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 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 307 thousand ordinary shares for $ 6.5 million in 2022, 353 thousand shares for $ 3.6 million in 2021 and 314 thousand shares for $ 3.0 million in 2020. Share-Based Compensation Expense Year ended August 26, 2022 August 27, 2021 August 28, 2020 Share-based compensation expense by caption: Cost of sales $ 6,740 $ 4,593 $ 3,022 Research and development 6,377 4,429 3,069 Selling, general and administrative 27,002 24,855 12,625 $ 40,119 $ 33,877 $ 18,716 Income tax benefits related to the tax deductions for share-based awards are recognized only upon the settlement of the related share-based awards. Income tax benefits for share-based awards were $ 1.3 million in 2022 and were de minimis in 2021 and 2020. Employee Savings and Retirement Plan We have a 401(k) retirement plan under which U.S. employees may make contributions subject to Internal Revenue Service annual contribution limits, to various savings alternatives, none of which include direct investment in the Company’s ordinary shares. We may make matching contributions, which vest immediately, at our discretion. Contribution expense for our 401(k) plan was $ 4.4 million, $ 3.4 million and $ 2.3 million in 2022, 2021 and 2020, respectively. Revenue and Customer Contract Balances We disaggregate revenue by segment and geography and by product and service revenue. See “Segment and Other Information.” 83 Net Sales and Gross Billings Net sales by products and services and gross amounts billed for services, including logistics services in which we act as an agent for our customers, were as follows: Year ended August 26, 2022 August 27, 2021 August 28, 2020 Net sales: Products and professional services $ 1,755,883 $ 1,465,765 $ 1,090,173 Logistics services 63,469 35,377 32,204 $ 1,819,352 $ 1,501,142 $ 1,122,377 Gross billings in connection with logistics services: Logistics services $ 63,469 $ 35,377 $ 32,204 Cost of materials (1) 1,601,289 751,985 604,698 $ 1,664,758 $ 787,362 $ 636,902 (1) Included in gross billings are amounts billed to customers for the cost of materials procured in an agent capacity in connection with our logistics services business, which includes procurement, logistics, inventory management, temporary warehousing, kitting and/or 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 As of August 26, 2022 August 27, 2021 Contract assets (1) $ 1,322 $ 4,247 Contract liabilities: (2) Deferred revenue (3) $ 39,676 $ 19,271 Customer advances 24,125 15,835 $ 63,801 $ 35,106 (1) Contract assets are included in other current assets. (2) 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. (3) Deferred revenue includes $ 23.3 million and $ 0.4 million as of August 26, 2022 and August 27, 2021, respectively, related to contracts that contain termination rights. Contract assets represent amounts recognized as revenue for which we do not have the unconditional right to consideration. Contract assets as of August 26, 2022 related to amounts expected to be invoiced during the next 12 months. As of August 26,2022, there were no contract assets remaining to be invoiced from August 27, 2021. Deferred revenue related to amounts received from customers in advance of satisfying performance obligations. As of August 26, 2022 we expect to recognize revenue of $ 30.8 million of the balance of $ 39.7 million in the next 12 months, and the remaining amount thereafter. In 2022, we recognized revenue of $ 14.1 million from satisfying performance obligations related to amounts included in deferred revenue as of August 27, 2021. Customer advances represent amounts received from customers for advance payments to secure product and services. In 2022, we recognized revenue of $ 5.2 million from satisfying performance obligations related to amounts included in customer advances as of August 27, 2021. As of August 26, 2022 and August 27, 2021, other current liabilities included $ 15.4 million and $ 24.9 million, respectively, for estimates of consideration payable to customers, including estimates for pricing adjustments and returns. 84 Other Non-operating (Income) Expense Year ended August 26, 2022 August 27, 2021 August 28, 2020 Foreign currency losses $ 4,728 $ 719 $ 3,408 Loss on extinguishment of debt 653 — 6,822 Loss from remeasurement of Capped Calls — — 7,719 Other ( 544 ) ( 1,094 ) ( 979 ) $ 4,837 $ ( 375 ) $ 16,970 Foreign currency losses relate primarily to our Brazil operating subsidiaries. In the second quarter of 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, 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 a credit agreement and recognized debt extinguishment losses of $ 0.2 million. 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.” Income Taxes Our income tax provision (benefit) consisted of the following: Year ended August 26, 2022 August 27, 2021 August 28, 2020 Income (loss) before income taxes: U.S. $ 12,405 $ ( 28,326 ) $ ( 13,120 ) Foreign 76,098 66,298 22,480 $ 88,503 $ 37,972 $ 9,360 Income tax provision (benefit): Current: Federal $ 1,100 $ — $ — State 1,772 623 143 Foreign 18,588 18,022 12,164 21,460 18,645 12,307 Deferred: Federal 259 ( 13 ) 258 State 43 3 37 Foreign ( 1,851 ) ( 3,169 ) ( 2,099 ) ( 1,549 ) ( 3,179 ) ( 1,804 ) Income tax provision $ 19,911 $ 15,466 $ 10,503 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 tax rate: 85 Year ended August 26, 2022 August 27, 2021 August 28, 2020 Statutory tax rate 21.0 % 21.0 % 21.0 % Foreign income taxes at different rates 6.8 % 19.9 % 58.5 % State income tax, net of federal benefit 3.7 % 5.5 % 8.9 % Change in valuation allowance 3.5 % 26.9 % 23.5 % Non-deductible expenses (non-taxable income) ( 1.3 ) % ( 5.7 ) % 19.1 % Foreign tax incentives ( 11.1 ) % ( 26.9 ) % ( 14.0 ) % Foreign withholding tax 2.7 % 3.9 % 3.7 % Tax credits ( 3.3 ) % ( 5.4 ) % ( 7.3 ) % Other 0.5 % 1.5 % ( 1.2 ) % Effective tax rate 22.5 % 40.7 % 112.2 % 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: As of August 26, 2022 August 27, 2021 Deferred tax assets: Accruals and allowances $ 22,458 $ 22,629 Share-based compensation 6,073 8,581 Research and other tax credit carryforwards 9,686 8,971 Operating lease liabilities 13,405 7,721 Tax amortizable goodwill 17,561 7,086 Net operating loss carryforwards 23,723 29,834 Gross deferred tax assets 92,906 84,822 Valuation allowance ( 52,267 ) ( 49,154 ) Deferred tax assets, net of valuation allowance 40,639 35,668 Deferred tax liabilities: Right-of-use assets 12,693 7,280 Property and equipment 13,859 14,078 Intangible assets 8,348 9,643 Deferred tax liabilities 34,900 31,001 Net deferred tax assets $ 5,739 $ 4,667 As of August 26, 2022, we had U.S. federal and state net operating loss carryforwards of $ 86.9 million and $ 47.7 million, respectively. Federal net operating loss carryforwards of $ 71.2 million will expire in 2028 through 2038, if not utilized, and the remaining $ 15.7 million is indefinite lived. The state net operating loss carryforwards will expire in 2024 through 2040. In addition, as of August 26, 2022, we have U.S. federal and state research and development credit carryforwards of $ 7.4 million and $ 1.1 million, respectively, and $ 1.4 million of foreign tax credit carryforwards. 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 $ 20.0 million, of which $ 16.2 million will expire in 2024 through 2025 and the remaining $ 3.8 million is indefinite lived. 86 Activity related to our deferred tax valuation allowance was as follows: Balance at Beginning of Year Charged (Credited) to Operations Charged to Other Accounts Balance at End of Year Deferred tax valuation allowance: Year ended August 26, 2022 $ 49,154 $ 3,113 $ — $ 52,267 Year ended August 27, 2021 38,921 10,233 — 49,154 Year ended August 28, 2020 36,722 2,199 — 38,921 Our valuation allowance on deferred tax assets primarily relates to our U.S. net operating loss carryforwards and tax credit carryforwards and Netherlands tax loss carryforward. The increase in valuation allowance of $ 3.1 million in 2022 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 realization 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 2022, 2021 and 2020. The effect of the tax incentive arrangements noted above reduced our income tax provision by $ 15.6 million (benefiting our diluted earnings per share by $ 0.29 ) in 2022, $ 15.7 million ($ 0.30 per diluted share) in 2021 and $ 13.5 million ($ 0.28 per diluted share) in 2020. Below is a reconciliation of the beginning and ending amounts of our unrecognized tax benefits: Year ended August 26, 2022 August 27, 2021 August 28, 2020 Beginning unrecognized tax benefits $ 17,454 $ 16,514 $ 15,037 Increases related to prior year tax provisions — — 67 Decreases related to prior year tax provisions ( 212 ) ( 397 ) — Increases related to current year tax provisions 1,678 1,337 1,410 Ending unrecognized tax benefits $ 18,920 $ 17,454 $ 16,514 As of August 26, 2022 and August 27, 2021, the total amount of unrecognized tax benefits that would affect our effective tax rate, if recognized, was $ 1.9 million and $ 1.8 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. Our U.S. federal and state tax returns remain open to examination for 2006 through 2021. 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 87 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 Year ended August 26, 2022 August 27, 2021 August 28, 2020 Net income (loss) attributable to SGH – Basic and Diluted $ 66,557 $ 21,310 $ ( 1,143 ) Weighted-average shares outstanding – Basic 49,467 48,558 47,988 Dilutive effect of equity plans and convertible notes 4,976 3,026 — Weighted-average shares outstanding – Diluted 54,443 51,584 47,988 Earnings (loss) per share: Basic $ 1.35 $ 0.44 $ ( 0.02 ) Diluted $ 1.22 $ 0.41 $ ( 0.02 ) Below are unweighted potentially dilutive shares that were not included in the computation of diluted earnings per share because to do so would have been antidilutive: As of August 26, 2022 August 27, 2021 August 28, 2020 Equity plans 329 5,380 9,369 Convertible notes — — 12,313 329 5,380 21,682 We have the option to pay cash, issue shares or a combination thereof for the aggregate amount due upon any conversion of our 2026 Notes. Through 2022, it was 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 of the principal amounts upon conversion of the 2026 Notes are considered in diluted earnings per share under the treasury stock method. On August 26, 2022, we made an irrevocable election, effective August 27, 2022, under the indenture to require the principal portion of our 2026 Notes to be settled in cash and any conversion consideration in excess of the principal portion in cash and/or ordinary shares at our option upon conversion. Following the irrevocable election, only the amounts expected to be settled in excess of the principal portion are considered dilutive in calculating earnings per share under the if-converted method. See “Subsequent Events – First Supplemental Indenture to Indenture Governing 2.25 % Convertible Senior Notes Due 2026.” The 2026 Notes are 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 $ 20.30 per share. 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. We have the following three business units, which are our reportable segments: • Memory Solutions : Our Memory Solutions group, under our SMART Modular brand, 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 88 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, under our Penguin Solutions brand, consists of two major product lines – 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, hyperscale, energy, financial services and education markets. Penguin Edge 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, under our Cree LED brand, 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 general 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. Year ended August 26, 2022 August 27, 2021 August 28, 2020 Net sales: Memory Solutions $ 975,181 $ 931,818 $ 857,237 Intelligent Platform Solutions 440,986 344,757 265,140 LED Solutions 403,185 224,567 — Total net sales $ 1,819,352 $ 1,501,142 $ 1,122,377 Segment operating income: Memory Solutions $ 119,849 $ 91,737 $ 71,867 Intelligent Platform Solutions 54,019 32,931 12,362 LED Solutions 53,761 36,126 — Total segment operating income 227,629 160,794 84,229 Unallocated: Share-based compensation expense ( 40,119 ) ( 33,877 ) ( 18,716 ) Amortization of acquisition-related intangibles ( 23,729 ) ( 20,255 ) ( 13,654 ) Flow through of inventory step up — ( 7,090 ) — Out of period import tax expense (1) — ( 4,345 ) — Acquisition and integration expenses ( 7,090 ) ( 5,314 ) ( 5,532 ) Change in fair value of contingent consideration ( 41,324 ) ( 32,400 ) — Other ( 858 ) ( 2,316 ) ( 4,997 ) Total unallocated ( 113,120 ) ( 105,597 ) ( 42,899 ) Consolidated operating income $ 114,509 $ 55,197 $ 41,330 (1) 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, $ 0.7 million increase in interest expense and a $ 1.7 million benefit to 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. 89 Depreciation included in segment operating income was as follows: Year ended August 26, 2022 August 27, 2021 August 28, 2020 Memory Solutions $ 23,710 $ 19,547 $ 19,117 Intelligent Platform Solutions 4,664 3,275 3,659 LED Solutions 12,736 6,034 — $ 41,110 $ 28,856 $ 22,776 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. Sales to our ten largest customers in 2022, 2021 and 2020 were 65 %, 65 % and 66 %, respectively, of total net sales. As of August 26, 2022, two customers accounted for 22 % and 17 %, respectively, of accounts receivable. Net sales to a number of customers each exceeded 10% of our total net sales in the past three years. Net sales to a Memory Solutions customer were 11 %, 12 % and 17 % of total net sales in 2022, 2021 and 2020, respectively. Net sales to an IPS customer were 15 % and 10 % of total net sales in 2022 and 2021, respectively. Additionally, net sales to another Memory Solutions customer were 11 % of total net sales in 2020. No other customers accounted for more than 10% of our total net sales in 2022, 2021 and 2020. We rely on a limited number of suppliers for a significant portion of our raw materials. Purchases from our three largest suppliers in 2022, 2021 and 2020 were $ 1.5 billion, $ 1.1 billion and $ 0.9 billion, respectively. As of August 26, 2022 and August 27, 2021, accounts payable and accrued expenses included $ 170.1 million and $ 148.4 million, respectively, for amounts owed to our largest three suppliers for 2022 and 2021, respectively. Geographic Information Net sales by geographic area, based on customer ship-to location, were as follows: Year ended August 26, 2022 August 27, 2021 August 28, 2020 United States $ 705,540 $ 601,728 $ 477,975 Brazil 424,933 447,249 390,021 China 309,175 213,989 90,705 Europe 116,278 84,216 37,758 Other 263,426 153,960 125,918 $ 1,819,352 $ 1,501,142 $ 1,122,377 90 Long-lived assets by geographic area, including property and equipment and right-of-use assets, were as follows: As of August 26, 2022 August 27, 2021 Brazil $ 62,803 $ 63,858 China 52,201 61,405 United States 102,907 56,746 Malaysia 10,778 11,329 Other 2,645 3,797 $ 231,334 $ 197,135 91 REPORT 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 26, 2022 and August 27, 2021, 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 26, 2022, 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 26, 2022 and August 27, 2021, and the results of its operations and its cash flows for each of the three years in the period ended August 26, 2022, 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 26, 2022, 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 14, 2022, expressed an unqualified opinion on the Company’s internal control over financial reporting. 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. Revenue Recognition — Refer to the Significant Accounting Policies and Revenue and Customer Contract Balances notes to the financial statements Critical Audit Matter Description The Company had $1.8 billion of revenue for the year ended August 26, 2022 of which $441 million related to the Intelligent Platform Solutions segment (“IPS”). A portion of the Company’s revenue is derived from the sale of customized products. In certain cases, the Company recognizes revenue when control of the underlying assets pass 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 the Company has a present right to payment. Under the terms of these arrangements, the Company cannot repurpose products without the customer’s consent and accordingly, the Company recognizes revenue at the point in time when products are completed and made available to the customer. 92 A portion of the Company’s 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. The Company allocates the consideration to each performance obligation based on the relative selling price, determined as the best estimate of the price at which the Company would transact if it sold the deliverable regularly on a stand-alone basis. We identified both the evaluation of performance obligations and the determination of the timing of recognition as performance obligations are satisfied in certain contracts within the IPS segment to be a critical audit matter. This required a high degree of auditor judgment and an increased extent of audit effort. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the Company's identification of performance obligations and the recognition of revenue as performance obligations are satisfied for the IPS segment included the following, among others: – We tested the effectiveness of internal controls related to revenue for the IPS segment including those related to the identification of the performance obligations and the recognition of revenue as performance obligations were satisfied. – We evaluated management's significant accounting policies related to revenue recognition for compliance with generally accepted accounting principles. – We selected a sample of contract documents for customers in the IPS segment and performed the following procedures: • Obtained and read the arrangement with the customer for each selection, including the contract, amendments, purchase order, and other documents (together the “contractual documents”) that were part of the arrangement, each as applicable. • Held inquiries with management outside of accounting, as needed, to identify the performance obligations in the contract and assist in evaluating when performance obligations are satisfied. • Assessed the terms and conditions in the contractual documents and evaluated the appropriateness of management's application of their accounting policies in the evaluation of performance obligations and the recognition of revenue as performance obligations are satisfied. /s/ DELOITTE & TOUCHE LLP San Jose, California October 14, 2022 We have served as the Company’s auditor since 2014. 93 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.