Penguin Solutions, Inc. 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO FINANCIAL STATEMENTS Page Consolidated Balance Sheets 62 Consolidated Statements of Operations 63 Consolidated Statements of Comprehensive Income (Loss) 64 Consolidated Statements of Shareholders’ Equity 65 Consolidated Statements of Cash Flows 66 Notes to Consolidated Financial Statements 67 Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34 ) 99 61 SMART Global Holdings, Inc. Consolidated Balance Sheets (In thousands, except par value amount) As of August 25, 2023 August 26, 2022 Assets Cash and cash equivalents $ 365,563 $ 313,328 Short-term investments 25,251 — Accounts receivable, net 219,247 355,002 Inventories 174,977 263,768 Other current assets 51,790 33,486 Current assets of discontinued operations 70,574 186,281 Total current assets 907,402 1,151,865 Property and equipment, net 118,734 96,708 Operating lease right-of-use assets 68,444 71,823 Intangible assets, net 160,185 77,812 Goodwill 161,958 55,121 Deferred tax assets 74,085 4,576 Other noncurrent assets 15,150 15,014 Noncurrent assets of discontinued operations — 99,145 Total assets $ 1,505,958 $ 1,572,064 Liabilities and Equity Accounts payable and accrued expenses $ 182,035 $ 354,098 Current debt 35,618 8,469 Deferred revenue 48,096 30,780 Acquisition-related contingent consideration 50,000 — Other current liabilities 32,731 57,880 Current liabilities of discontinued operations 77,770 64,313 Total current liabilities 426,250 515,540 Long-term debt 754,820 575,682 Noncurrent operating lease liabilities 66,407 66,990 Other noncurrent liabilities 29,248 14,835 Noncurrent liabilities of discontinued operations — 20,471 Total liabilities 1,276,725 1,193,518 Commitments and contingencies SMART Global Holdings shareholders’ equity: Ordinary shares, $ 0.03 par value; authorized 200,000 shares; 57,542 shares issued and 51,901 shares outstanding as of August 25, 2023; 52,880 shares issued and 48,604 shares outstanding as of August 26, 2022 1,726 1,586 Additional paid-in capital 476,703 448,112 Retained earnings 82,457 251,344 Treasury shares, 5,641 shares and 4,276 shares held as of August 25, 2023 and August 26, 2022, respectively ( 132,447 ) ( 107,776 ) Accumulated other comprehensive income (loss) ( 205,964 ) ( 221,655 ) Total SGH shareholders’ equity 222,475 371,611 Noncontrolling interest in subsidiary 6,758 6,935 Total equity 229,233 378,546 Total liabilities and equity $ 1,505,958 $ 1,572,064 The accompanying notes are an integral part of these consolidated financial statements. 62 SMART Global Holdings, Inc. Consolidated Statements of Operations (In thousands, except per share amounts) Year ended August 25, 2023 August 26, 2022 August 27, 2021 Net sales: Products $ 1,192,890 $ 1,247,470 $ 959,289 Services 248,360 148,406 96,240 Total net sales 1,441,250 1,395,876 1,055,529 Cost of sales: Products 916,005 940,516 772,232 Services 110,074 64,315 45,324 Total cost of sales 1,026,079 1,004,831 817,556 Gross profit 415,171 391,045 237,973 Operating expenses: Research and development 90,565 77,472 59,933 Selling, general and administrative 260,722 204,839 158,174 Impairment of goodwill 19,092 — — Change in fair value of contingent consideration 29,000 41,324 32,400 Other operating (income) expense 7,047 234 3,172 Total operating expenses 406,426 323,869 253,679 Operating income (loss) 8,745 67,176 ( 15,706 ) Non-operating (income) expense: Interest expense, net 36,421 24,345 17,141 Other non-operating (income) expense 11,837 350 ( 582 ) Total non-operating (income) expense 48,258 24,695 16,559 Income (loss) before taxes ( 39,513 ) 42,481 ( 32,265 ) Income tax provision (benefit) ( 49,203 ) 18,074 9,689 Net income (loss) from continuing operations 9,690 24,407 ( 41,954 ) Net income (loss) from discontinued operations ( 195,384 ) 44,185 64,460 Net income (loss) ( 185,694 ) 68,592 22,506 Net income attributable to noncontrolling interest 1,832 2,035 1,196 Net income (loss) attributable to SGH $ ( 187,526 ) $ 66,557 $ 21,310 Basic earnings (loss) per share: Continuing operations $ 0.16 $ 0.45 $ ( 0.89 ) Discontinued operations ( 3.94 ) 0.90 1.33 $ ( 3.78 ) $ 1.35 $ 0.44 Diluted earnings (loss) per share: Continuing operations $ 0.15 $ 0.41 $ ( 0.89 ) Discontinued operations ( 3.80 ) 0.81 1.33 $ ( 3.65 ) $ 1.22 $ 0.44 Shares used in per share calculations: Basic 49,566 49,467 48,558 Diluted 51,322 54,443 48,558 The accompanying notes are an integral part of these consolidated financial statements. 63 SMART Global Holdings, Inc. Consolidated Statements of Comprehensive Income (Loss) (In thousands) Year ended August 25, 2023 August 26, 2022 August 27, 2021 Net income (loss) $ ( 185,694 ) $ 68,592 $ 22,506 Other comprehensive income (loss), net of tax: Cumulative translation adjustment 15,686 ( 40 ) 6,626 Gains (losses) on investments 5 — — Comprehensive income (loss) ( 170,003 ) 68,552 29,132 Comprehensive income attributable to noncontrolling interest 1,832 2,035 1,196 Comprehensive income (loss) attributable to SGH $ ( 171,835 ) $ 66,517 $ 27,936 The accompanying notes are an integral part of these consolidated financial statements. 64 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 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 Net income (loss) — — — ( 187,526 ) — — ( 187,526 ) 1,832 ( 185,694 ) Other comprehensive income (loss) — — — — — 15,691 15,691 — 15,691 Shares issued under equity plans 4,662 140 42,904 — — — 43,044 — 43,044 Repurchase of ordinary shares — — — — ( 24,671 ) — ( 24,671 ) — ( 24,671 ) Purchase of Capped Calls — — ( 15,090 ) — — — ( 15,090 ) — ( 15,090 ) Settlement of Capped Calls — — 10,786 — — — 10,786 — 10,786 Share-based compensation expense — — 40,813 — — — 40,813 — 40,813 Distribution to noncontrolling interest — — — — — — — ( 2,009 ) ( 2,009 ) Adoption of ASU 2020-06 — — ( 50,822 ) 18,639 — — ( 32,183 ) — ( 32,183 ) As of August 25, 2023 57,542 $ 1,726 $ 476,703 $ 82,457 $ ( 132,447 ) $ ( 205,964 ) $ 222,475 $ 6,758 $ 229,233 The accompanying notes are an integral part of these consolidated financial statements. 65 SMART Global Holdings, Inc. Consolidated Statements of Cash Flows (In thousands) Year Ended August 25, 2023 August 26, 2022 August 27, 2021 Cash flows from operating activities Net income (loss) $ ( 185,694 ) $ 68,592 $ 22,506 Net income (loss) from discontinued operations ( 195,384 ) 44,185 64,460 Net income (loss) from continuing operations 9,690 24,407 ( 41,954 ) Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities: Depreciation expense and amortization of intangible assets 71,632 46,665 34,937 Amortization of debt discount and issuance costs 4,064 10,263 8,798 Share-based compensation expense 39,228 37,284 30,961 Impairment of goodwill 19,092 — — Change in fair value of contingent consideration 29,000 41,324 32,400 Loss on extinguishment of debt 15,924 653 — Deferred income taxes, net ( 63,603 ) ( 20 ) ( 1,982 ) Other 4,008 582 ( 598 ) Changes in operating assets and liabilities: Accounts receivable 162,515 ( 97,801 ) ( 47,773 ) Inventories 95,217 30,733 ( 99,906 ) Other assets 6,767 ( 10,321 ) 15,415 Accounts payable and accrued expenses and other liabilities ( 256,133 ) ( 44,907 ) 192,542 Payment of acquisition-related contingent consideration ( 73,724 ) — — Net cash provided by operating activities from continuing operations 63,677 38,862 122,840 Net cash provided by operating activities from discontinued operations 40,710 66,069 30,510 Net cash provided by operating activities 104,387 104,931 153,350 Cash flows from investing activities Capital expenditures and deposits on equipment ( 39,421 ) ( 20,359 ) ( 16,669 ) Acquisition of business, net of cash acquired ( 213,073 ) — ( 35,677 ) Purchases of held-to-maturity investment securities ( 25,015 ) — — Other ( 3,675 ) ( 875 ) ( 1,121 ) Net cash used for investing activities from continuing operations ( 281,184 ) ( 21,234 ) ( 53,467 ) Net cash used for investing activities from discontinued operations ( 17,385 ) ( 17,736 ) ( 30,711 ) Net cash used for investing activities ( 298,569 ) ( 38,970 ) ( 84,178 ) Cash flows from financing activities Proceeds from debt 295,287 270,775 — Proceeds from issuance of ordinary shares 43,045 12,140 14,923 Proceeds from borrowing under line of credit — 84,000 172,500 Payment of acquisition-related contingent consideration ( 28,100 ) — — Payments to acquire ordinary shares ( 24,671 ) ( 57,231 ) ( 48,513 ) Repayments of debt ( 21,634 ) ( 126,719 ) — Payment of premium in connection with convertible note exchange ( 14,141 ) — — Net cash paid for settlement and purchase of Capped Calls ( 4,304 ) — — Distribution to noncontrolling interest ( 2,009 ) ( 3,773 ) — Repayments of borrowings under line of credit — ( 109,000 ) ( 147,500 ) Other ( 6,252 ) ( 9,547 ) ( 6,138 ) Net cash provided by (used for) financing activities from continuing operations 237,221 60,645 ( 14,728 ) Net cash provided by (used for) financing activities from discontinued operations ( 805 ) 13,234 17,577 Net cash provided by financing activities 236,416 73,879 2,849 Effect of changes in currency exchange rates 4,765 239 154 Net increase in cash and cash equivalents 46,999 140,079 72,175 Cash and cash equivalents at beginning of period 363,065 222,986 150,811 Cash and cash equivalents at end of period $ 410,064 $ 363,065 $ 222,986 Cash and cash equivalents at end of period: Continuing operations $ 365,563 $ 313,328 $ 182,842 Discontinued operations 44,501 49,737 40,144 $ 410,064 $ 363,065 $ 222,986 The accompanying notes are an integral part of these consolidated financial statements. 66 SMART Global Holdings, Inc. Notes to Consolidated Financial Statements (Tabular amounts in thousands, except per share amounts) Significant Accounting Policies Basis of Presentation 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. Presentation of SMART Brazil as Discontinued Operations : On June 13, 2023, we entered into an agreement to sell 81 % of our interest in SMART Modular Technologies do Brasil – Indústria e Comercio de Componentes Ltda. (“SMART Brazil”). As a result, we have presented the balance sheets, results of operations and cash flows of SMART Brazil as discontinued operations for all periods presented. SMART Brazil was previously included within our Memory Solutions segment. See “Divestiture of SMART Brazil.” Unless otherwise noted, amounts and discussion within these notes to the consolidated financial statements relate to our continuing operations. Prior period comparative information has been conformed to current period presentation for continuing operations. 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 years 2023, 2022 and 2021 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, Cash Equivalents and Investments Cash equivalents include highly liquid investments, readily convertible to known amounts of cash, with original maturities of three months or less. Investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Cash paid for interest, net of amounts capitalized, for 2023, 2022 and 2021 was $ 41.8 million, $ 12.8 million and $ 8.0 million, respectively. Income taxes paid, net of refunds, for 2023, 2022 and 2021 were $ 35.5 million, $ 13.8 million and $ 6.7 million, respectively. 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: 67 • 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 SMART Brazil subsidiaries is the Brazilian real. Assets and liabilities of our SMART 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. In 2023, we recorded aggregate goodwill impairment charges of $ 19.1 million. Other than this impairment charge in 2023, there has been no impairment of goodwill for any of our current reporting units. See “Goodwill and Intangible Assets – Impairment of Penguin Edge Goodwill.” 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 ten years for technology, four to eight years for customer relationships and five to eight 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. 68 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 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 eight 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 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. Noncancellable, nonrefundable customized product sales are recognized over time on a cost incurred basis. In connection with these arrangements, customers obtain control and benefit from products as they are completed. The terms for these 69 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 professional services and supply chain services. Professional services include solution design, system installation, software automation and managed support services related to high performance computing (“HPC”) and storage systems. Supply chain services includes procurement, logistics, inventory management, temporary warehousing, kitting and packaging. 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 and services on behalf of our customers and then resell such materials or services 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 and services 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 the cost of materials and services, which remain unpaid as of the end of a reporting period, are included in accounts receivable. Additionally, the 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 (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 70 business acquisitions and divestitures, 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. Divestiture of SMART Brazil Overview of Transaction On June 13, 2023, we entered into a Stock Purchase Agreement (the “Brazil Purchase Agreement”), by and among SMART Modular Technologies (LX) S.à.r.l., a société à responsabilité limitée governed by the laws of Grand Duchy of Luxembourg and our wholly owned subsidiary (the “Brazil Seller”), Lexar Europe B.V., a company organized under the laws of The Netherlands (the “Brazil Purchaser”), Shenzhen Longsys Electronics Co., Ltd., a company limited by shares governed by the laws of the People’s Republic of China (“Longsys”), solely with respect to certain provisions therein, Shanghai Intelligent Memory Semiconductor Co., Ltd., a limited liability company governed by the laws of the People’s Republic of China (“Parent Funding Entity”), and solely with respect to certain provisions therein, SGH, for the intended sale of our standards-based modules assembly and test business in Brazil. The transaction, which was approved by our Board of Directors and the Board of Directors of the Brazil Seller, is expected to close at the end of calendar 2023 or early 2024. Pursuant to the Brazil Purchase Agreement, among other matters, and subject to the satisfaction or waiver of the conditions set forth therein, the Brazil Seller will sell to the Brazil Purchaser, and the Brazil Purchaser will purchase from the Brazil Seller, 81 % of the Brazil Seller’s right, title and interest in and to the outstanding quotas of SMART Modular Technologies do Brasil – Indústria e Comercio de Componentes Ltda., a sociedade limitada governed by the laws of Brazil (“SMART Brazil”), with the Brazil Seller retaining a 19 % interest in SMART Brazil (the “Retained Interest”). Pursuant to the terms of, and subject to the conditions specified in, the Brazil Purchase Agreement, upon completion of the transaction, the Brazil Purchaser will pay to the Brazil Seller (based on a total enterprise value of $ 205.0 million for SMART Brazil) consideration consisting of (i) an up front cash purchase price of $ 137.7 million on a cash-free, debt-free basis and subject to certain customary adjustments as set forth in the Brazil Purchase Agreement, (ii) a deferred cash purchase price of $ 28.4 million eighteen months following the closing and (iii) subject to and at the time of exercise of the Put/Call Option (as defined below), an additional cash payment equal to 19 % of the amount of SMART Brazil’s cash at the closing (as calculated pursuant to the Brazil Purchase Agreement) minus the amount of SMART Brazil’s indebtedness at the closing (as calculated pursuant to the Brazil Purchase Agreement). Pursuant to the Brazil Purchase Agreement, at closing, SMART Brazil, the Brazil Seller, the Brazil Purchaser and Longsys will enter into a Quotaholders Agreement, which will provide the Brazil Seller with a put option to sell the Retained Interest in SMART Brazil (the “Put Option”) during three exercise windows following its fiscal years 2026, 2027 or 2028 (the “Exercise Windows”). A call option has also been granted to the Brazil Purchaser to require the Brazil Seller to sell the Retained Interest during the Exercise Windows (the “Call Option,” together with the Put Option, the “Put/Call Option”). The price for the Put/Call Option is based on a 100 % enterprise value of 7.5 x net income for SMART Brazil for the preceding fiscal year at the time of exercise. The Quotaholders Agreement also provides, among other things, for certain governance and approval rights among the parties thereto. The closing of the transaction is subject to customary conditions to closing, including, among others, (i) completion of filings for outbound direct investment with the Division of Development and Reform in the China (Shanghai) Pilot Free Trade Zone Lin-gang Special Area Administration and the Division of Finance and Trade Development in the China (Shanghai) Pilot Free Trade Zone Lin-gang Special Area Administration and completion of foreign exchange registration with a qualified bank authorized by the Municipal Administration of Foreign Exchange in Shanghai (the “China Outbound Approvals”) and (ii) approval of the transactions contemplated by the Brazil Purchase Agreement by Longsys’ shareholders (the “Longsys Shareholder Approval”). The Brazil Purchase Agreement contains customary termination rights, including the right for the Brazil Seller or the Brazil Purchaser to terminate the Brazil Purchase Agreement if the closing shall not have occurred by January 31, 2024. The Brazil Purchaser shall pay a $ 8.0 million termination fee to the Brazil Seller if the transaction is terminated due to a failure to obtain the China Outbound Approvals or the Longsys Shareholder Approval and other specified circumstances, which termination fee may be increased to $ 12.0 million over time. Presentation of SMART Brazil Operations In connection with the proposed sale of an 81 % interest in SMART Brazil, we concluded that the net assets of SMART Brazil met the criteria for classification as held for sale. In addition, the proposed sale represents a strategic shift that will have a 71 major effect on our operations and financial results. As a result, we have presented the results of operations, cash flows and financial position of SMART Brazil as discontinued operations in the accompanying consolidated financial statements and notes for all periods presented. As of August 25, 2023, we expect the proposed sale of an 81 % interest in SMART Brazil to close within one year and, as a result, we have classified the total assets and total liabilities associated with our SMART Brazil operations as current in the accompany consolidated balance sheets as of August 25, 2023. The following table presents the assets and liabilities of our SMART Brazil operations: As of August 25, 2023 August 26, 2022 Cash and cash equivalents $ 44,501 $ 49,737 Accounts receivable, net 17,055 55,321 Inventories 25,877 59,316 Other current assets 17,732 21,907 Total current assets 105,165 186,281 Property and equipment, net 58,321 57,227 Operating lease right-of-use assets 5,213 5,576 Goodwill 20,668 18,888 Other noncurrent assets 34,243 17,454 Total assets 223,610 285,426 Impairment charge related to proposed divestiture of SMART Brazil ( 153,036 ) — Total assets, net of impairment 70,574 285,426 Accounts payable and accrued expenses 25,867 59,256 Current debt 4,006 3,556 Other current liabilities 1,030 1,501 Total current liabilities 30,903 64,313 Long-term debt 13,689 15,707 Noncurrent operating lease liabilities 4,614 4,764 Deferred tax liabilities 28,564 — Total liabilities 77,770 84,784 Net assets of discontinued operations $ ( 7,196 ) $ 200,642 Reported as: Current assets of discontinued operations $ 70,574 $ 186,281 Noncurrent assets of discontinued operations — 99,145 Total assets of discontinued operations 70,574 285,426 Current liabilities of discontinued operations 77,770 64,313 Noncurrent liabilities of discontinued operations — 20,471 Total liabilities of discontinued operations 77,770 84,784 Net assets of discontinued operations $ ( 7,196 ) $ 200,642 A disposal group classified as held for sale shall be measured at the lower of its carrying amount or fair value less costs to sell. Accordingly, we evaluated the carrying value of the net assets of our SMART Brazil operations (including $ 206.3 million recognized within shareholder’s equity related to the cumulative translation adjustment from our SMART Brazil operations), estimated costs to sell and expected proceeds and concluded the net assets were impaired. As a result, we recognized an impairment charge of 153.0 million in 2023 to write down the carrying value of the net assets of our SMART Brazil operations. As of August 25, 2023, we concluded that the outside basis of our Brazil operations inclusive of any withholding taxes should be recognized upon the classification as held for sale. Accordingly, we recognized withholding taxes on the expected capital gain and deferred tax liabilities of $ 28.6 million in 2023. 72 The following table presents the results of our SMART Brazil operations, including the impairment charge recognized in 2023 related to the proposed divestiture of SMART Brazil: Year ended August 25, 2023 August 26, 2022 August 27, 2021 Net sales $ 185,377 $ 423,476 $ 445,613 Cost of sales 184,016 361,301 375,206 Gross profit 1,361 62,175 70,407 Operating expenses: Research and development 5,887 ( 116 ) ( 10,659 ) Selling, general and administrative 12,509 14,958 11,017 Other operating (income) expense 657 — ( 854 ) Total operating expenses 19,053 14,842 ( 496 ) Operating income (loss) ( 17,692 ) 47,333 70,903 Non-operating (income) expense: Impairment charge related to proposed divestiture of SMART Brazil 153,036 — — Interest (income) expense, net ( 4,174 ) ( 3,176 ) 459 Other non-operating (income) expense 996 4,487 207 Total non-operating (income) expense 149,858 1,311 666 Income (loss) before taxes ( 167,550 ) 46,022 70,237 Income tax provision (benefit) 27,834 1,837 5,777 Net income (loss) from discontinued operations $ ( 195,384 ) $ 44,185 $ 64,460 Recently Adopted Accounting Standards In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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, and requires an entity to use the if-converted method in the diluted earnings per share calculation for convertible instruments. This ASU was effective for us in the first quarter of 2023 and permitted 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, the previously separated equity component and associated issuance costs for our 2.25 % convertible senior notes due 2026 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 and $ 7.5 million in 2022 and 2021, respectively. The following table summarizes the effects of adopting ASU 2020-06: Ending Balance as of August 26, 2022 Adoption of ASU 2020-06 Beginning Balance as of August 27, 2022 Long-term debt $ 575,682 $ 32,183 $ 607,865 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 ”Debt – Convertible Senior Notes – 2026 Notes.” 73 In October 2021, the FASB issued 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. 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. Business Acquisitions Stratus Technologies On August 29, 2022 (the “Stratus Acquisition Date”), we completed the acquisition of Storm Private Holdings I Ltd., a Cayman Islands exempted company (“Stratus Holding Company” and together with its subsidiaries, “Stratus Technologies”), pursuant to the terms of that certain Share Purchase Agreement (the “Stratus Purchase Agreement”), dated as of June 28, 2022, by and among SGH, Stratus Holding Company and Storm Private Investments LP, a Cayman Islands exempted limited partnership (the “Stratus Seller”). Pursuant to the Stratus Purchase Agreement, among other matters, the Stratus Seller sold to SGH, and SGH purchased from the Stratus Seller, all of the Stratus Seller’s right, title and interest in and to the outstanding equity securities of Stratus Holding Company. Stratus Technologies 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 Technologies 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. Stratus operates as part of SGH’s Intelligent Platform Solutions (“IPS”) segment. The acquisition of Stratus Technologies further enhances SGH’s growth and diversification strategy and complements and expands SGH’s IPS business in data center and edge environments. Purchase Price : At the closing of the transaction, we paid the Stratus Seller a cash purchase price of $ 225 million, subject to certain adjustments. In addition, the Stratus Seller has the right to receive, and we are obligated to pay, contingent consideration of up to $ 50 million (the “Stratus Earnout”) based on the gross profit performance of Stratus Technologies during the first full 12 fiscal months following the closing of the acquisition. Pursuant to the terms of the Stratus Purchase Agreement, we had the option to settle the Stratus Earnout amount owed to the Stratus Seller in cash, ordinary shares of SGH, or a mix of cash and ordinary shares of SGH. On June 28, 2023, we provided notice to the Stratus Seller of our election to settle the Stratus Earnout in cash. Based on the gross profit achieved by Stratus Technologies during the 12 fiscal months following the closing of the acquisition, as of August 25, 2023, current liabilities in the accompanying balance included $ 50.0 million for the expected amount payable for the Stratus Earnout. Cash paid was utilized, in part, to settle the outstanding debt of Stratus Technologies as of the closing of the transaction and was recognized as a component of consideration transferred. As a result, the assets acquired and liabilities assumed do not include an assumed liability for the outstanding debt of Stratus Technologies. The purchase price for Stratus Technologies was as follows: Cash $ 225,000 Additional payment for net working capital adjustment (1) 17,246 Fair value of Stratus Earnout 20,800 $ 263,046 (1) Includes $ 14.4 million paid at closing and $ 2.8 million paid in the second quarter of 2023 upon completion of the review of the working capital assets acquired and liabilities assumed. Contingent Consideration : The Stratus Earnout was accounted for as contingent consideration. As of the Stratus Acquisition Date, the fair value of the Stratus Earnout was estimated to be $ 20.8 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, including forecasted 74 gross profit, comparable company volatility, discount rate and cost of debt. The fair value of the Stratus Earnout was estimated based on the Company’s evaluation of the probability and amount of the Stratus Earnout to be achieved based on the expected gross profit of Stratus Technologies, using an estimated gross profit volatility of 33.4 % and a discount rate of 7.3 % as of the Stratus Acquisition Date. Valuation : We estimated the fair value of the assets and liabilities of Stratus Technologies as of the Stratus Acquisition Date. The purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed as follows: Cash and cash equivalents $ 29,174 Accounts receivable 26,685 Inventories 10,890 Other current assets 6,536 Property and equipment 7,292 Operating lease right-of-use assets 9,216 Intangible assets 123,700 Goodwill 125,929 Other noncurrent assets 11,661 Accounts payable and accrued expenses ( 32,656 ) Other current liabilities ( 36,723 ) Noncurrent operating lease liabilities ( 7,067 ) Other noncurrent liabilities ( 11,591 ) Total net assets acquired $ 263,046 The goodwill arising from the acquisition of Stratus Technologies was assigned to our IPS segment. None of the goodwill recognized is deductible for income tax purposes. The fair values and useful lives of identifiable intangible assets were as follows: Amount Estimated useful life (in years) Technology $ 82,000 5 Customer relationships 27,800 8 Trademarks/trade names 10,000 9 In-process research and development 3,900 N/A $ 123,700 • Technology intangible assets were valued using the multi-period excess earnings method based on the discounted cash flow and technology obsolescence rate. Discounted cash flow requires the use of significant unobservable inputs, 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. • Customer relationship intangible assets were valued using the multi-period excess earnings method, which is the present value of the projected cash flows that are expected to be generated by the existing intangible assets 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. • Trademark/trade name 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 trademarks/trade names from a third party. Key assumptions included attributable revenue expected from the trademarks/trade names, royalty rates and assumed asset life. • In-process research and development (“IPR&D”) relates to next generation fault tolerant architecture. IPR&D is indefinite-lived and will be reviewed for impairment at least annually. Amortization will commence upon completion of research and development efforts. IPR&D was valued based on discounted cash flow, which requires the use of significant unobservable inputs, including projected revenue, expenses, capital expenditures and other costs. 75 Unaudited Pro Forma Financial Information : The following unaudited pro forma financial information presents SGH’s combined results of operations as if the acquisition of Stratus Technologies had occurred on August 28, 2021. The unaudited pro forma financial information is based on various adjustments and assumptions and is not necessarily indicative of what SGH’s results of operations actually would have been had the acquisition been completed as of August 28, 2021 or will be for any future periods. Furthermore, the pro forma financial information does not include adjustments to reflect any potential revenue, synergies or dis-synergies, or cost savings that may be achievable in connection with the acquisition or the associated costs that may be necessary to achieve such revenues, synergies or cost savings. The following unaudited pro forma financial information for the year ended August 26, 2022 combines the historical results of continuing operations of SGH for the year ended August 26, 2022 and the historical results of operations of Stratus Technologies for the year ended May 29, 2022: Year ended August 25, 2023 Net sales $ 1,563,252 Net income attributable to SGH 8,677 Earnings per share: Basic $ 0.18 Diluted $ 0.16 Acquisition-related transaction expenses are included within selling, general and administrative expenses and were $ 4.8 million and $ 4.6 million in 2023 and 2022, respectively. For 2023, net sales for Stratus Technologies were $ 172.7 million and net loss was $ 1.2 million, excluding any charges recognized to adjust the Stratus Earnout to its carrying amount as of August 25, 2023. LED Business On March 1, 2021, pursuant to the 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 (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 (the “LED Purchase Price Note”), (iii) an earnout 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 (the “LED Earnout Period”), with a minimum payment of $ 2.5 million, payable in the form of an unsecured promissory note to be issued by us (the “LED Earnout Note”) and (iv) the assumption of certain liabilities. 76 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 LED Earnout 28,100 $ 225,498 (1) Included $ 15.3 million paid at closing and $ 7.1 million paid in the fourth quarter of 2022 upon completion of the review of the net working capital assets acquired and liabilities assumed. Contingent Consideration : The LED Earnout Note was accounted for as contingent consideration. The fair value of the LED 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 LED Earnout Note was revalued each quarter and changes in valuation were reflected in results of operations. In 2022 and 2021, we recorded charges of $ 41.3 million and $ 32.4 million, respectively, to adjust the value of the LED 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 LED Earnout Note to Cree for this amount. In the first quarter of 2023, we repaid in full the amount outstanding under the LED Earnout Note. Valuation : The purchase price of the LED Business was based on these valuation analyses and was allocated to tangible and intangible assets acquired, liabilities assumed and noncontrolling interest 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 ) Total net assets acquired $ 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 77 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. Cash and Investments As of August 25, 2023, all of our debt securities, the fair values of which approximated their carrying values, were classified as held to maturity. Cash, cash equivalents and investments were as follows: As of August 25, 2023 As of August 26, 2022 Cash and Cash Equivalents Short-term Investments Cash and Cash Equivalents Cash and cash equivalents $ 321,937 $ — $ 299,509 Level 1: Money market funds 43,626 — 13,819 U.S. Treasury securities — 25,251 — $ 365,563 $ 25,251 $ 313,328 Inventories As of August 25, 2023 August 26, 2022 Raw materials $ 90,085 $ 128,802 Work in process 24,485 31,534 Finished goods 60,407 103,432 $ 174,977 $ 263,768 As of August 25, 2023 and August 26, 2022, 8 % of total inventories were inventories owned and held under our logistics services. Property and Equipment As of August 25, 2023 August 26, 2022 Equipment $ 86,429 $ 83,694 Buildings and building improvements 69,325 41,232 Furniture, fixtures and software 44,121 30,190 Land 16,126 16,126 216,001 171,242 Accumulated depreciation ( 97,267 ) ( 74,534 ) $ 118,734 $ 96,708 Depreciation expense for property and equipment was $ 26.5 million, $ 22.9 million and $ 14.7 million in 2023, 2022 and 2021, respectively. 78 Change in Accounting Estimate : During the first quarter of 2023, we completed an assessment of the estimated useful lives of our manufacturing equipment. Based on that assessment, we revised the estimated useful lives from five years to eight years as of the beginning of the first quarter of 2023. The change reduced our non-cash depreciation expense for 2023 by $ 3.7 million, which resulted in aggregate reductions of $ 3.5 million in cost of sales and research and development expense and a reduction of $ 0.2 million in the cost of our inventories as of the end of 2023. These reductions benefited net income for 2023 by $ 2.8 million, or $ 0.05 per share. Intangible Assets and Goodwill As of August 25, 2023 As of August 26, 2022 Gross Amount Accumulated Amortization Gross Amount Accumulated Amortization Intangible assets: Technology $ 141,201 $ ( 34,569 ) $ 61,594 $ ( 18,473 ) Customer relationships 72,500 ( 33,990 ) 57,500 ( 32,238 ) Trademarks/trade names 28,300 ( 13,257 ) 19,200 ( 9,771 ) $ 242,001 $ ( 81,816 ) $ 138,294 $ ( 60,482 ) Goodwill by segment: Intelligent Platform Solutions $ 147,238 $ 40,401 Memory Solutions 14,720 14,720 $ 161,958 $ 55,121 In 2023 and 2022, we capitalized $ 127.5 million and $ 1.4 million, respectively, for intangible assets, with weighted-average useful lives of 6.1 years and 17.8 years, respectively. Amortization expense for intangible assets was $ 45.1 million, $ 23.8 million and $ 20.3 million in 2023, 2022 and 2021, respectively. Amortization expense is expected to be $ 40.1 million for 2024, $ 35.6 million for 2025, $ 30.2 million for 2026, $ 29.5 million for 2027, $ 13.9 million for 2028 and $ 10.9 million thereafter. Goodwill of our Intelligent Platform Solutions segment increased in 2023, primarily due to the addition of $ 125.9 million in connection with our acquisition of Stratus Technologies. See “Business Acquisitions – Stratus Technologies.” During 2023, we assessed goodwill associated with our Penguin Edge business within our IPS segment and concluded it was partially impaired. As a result, we recognized aggregate impairment charges of $ 19.1 million in 2023 to impair the carrying value of goodwill. See “Impairment of Penguin Edge Goodwill.” Impairment of Penguin Edge Goodwill During the second quarter of 2023, we initiated a plan within our IPS segment pursuant to which we intend to wind down manufacturing and discontinue the sale of legacy products offered through our Penguin Edge business by approximately the end of calendar 2024. In connection therewith, we performed a quantitative assessment of the fair value of goodwill using an income approach with assumptions that are considered Level 3 measurements and concluded that the carrying value of the Penguin Edge reporting unit goodwill exceeded its fair value. The fair value of the Penguin Edge reporting unit was determined primarily by discounting estimated future cash flows, which were determined based on revenue and expense assumptions over the next two years, at a weighted-average cost of capital of 14.5 %. As a result, we recorded charges of $ 17.6 million and $ 1.5 million in the second and fourth quarters of 2023, respectively, to impair the carrying value of Penguin Edge goodwill. We concluded that long-lived assets other than goodwill, primarily consisting of customer relationship intangible assets, had fair values in excess of their carrying amounts, and accordingly, recorded no impairments of such assets. These assets will continue to be amortized over their remaining useful lives through the date of our anticipated completion of wind-down activities. At each reporting date through the end of the wind-down period, we will reassess the estimated remaining cash flows of the Penguin Edge business. We currently anticipate that the remaining goodwill of the Penguin Edge reporting unit of $ 16.1 million as of August 25, 2023 may become further impaired in future periods. 79 Accounts Payable and Accrued Expenses As of August 25, 2023 August 26, 2022 Accounts payable (1) $ 134,980 $ 293,165 Salaries, wages and benefits 27,665 42,773 Income and other taxes 13,370 14,979 Other 6,020 3,181 $ 182,035 $ 354,098 (1) Includes accounts payable for property and equipment of $ 5.2 million and $ 2.3 million as of August 25, 2023 and August 26, 2022, respectively. Debt As of August 25, 2023 August 26, 2022 Amended 2027 TLA $ 544,943 $ 269,304 2029 Notes 146,886 — 2026 Notes 98,609 213,023 LED Earnout Note — 101,824 790,438 584,151 Less current debt ( 35,618 ) ( 8,469 ) Long-term debt $ 754,820 $ 575,682 Credit Facility On February 7, 2022, SGH and SMART Modular Technologies, Inc. (collectively, the “Borrowers”) entered into a credit agreement (the “Original Credit Agreement”) with a syndicate of banks and Citizens Bank, N.A., as administrative agent (the “Administrative Agent”) that provided 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”), in each case, maturing on February 7, 2027 (subject to certain earlier “springing maturity” dates upon certain conditions specified in the Original Credit Agreement). The Original Credit Agreement provides that up to $ 35.0 million of the 2027 Revolver is available for issuances of letters of credit. Incremental Amendment : On August 29, 2022, the Borrowers entered into the First Amendment (the “Incremental Amendment”; the Original Credit Agreement as amended by the Incremental Amendment, the “Amended Credit Agreement”) with and among the lenders party thereto and the Administrative Agent. The Incremental Amendment amended the Original Credit Agreement and (i) provides for incremental term loans under the Amended Credit Agreement in an aggregate amount of $ 300.0 million (the “Incremental Term Loans” and together with the 2027 TLA, the “Amended 2027 TLA”) which Incremental Term Loans are on the same terms as the term loans incurred under the Original Credit Agreement, (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. Substantially simultaneously with entering into the Incremental Amendment, the Borrowers applied a portion of the proceeds of the Incremental Term Loans to (i) finance a portion of the purchase price for the acquisition of Stratus Technologies and (ii) prepay in full the $ 101.8 million outstanding under the LED Earnout Note. In connection with our prepayment of the LED Earnout Note, we recognized a gain of $ 0.8 million in the first quarter of 2023, which is included in other non-operating (income) expense in the accompanying consolidated statements of operations. Interest and fees : Loans under the Amended 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. The applicable margin for our 2027 Revolver varies based on our Total Leverage Ratio (as defined in the Amended 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 % 80 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 Amended Credit Agreement. Security : The Amended 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 Amended 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 Amended 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 Amended 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 Amended Credit Agreement) of 3.25 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 Amended 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 Amended 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 Amended Credit Agreement) following the expiration of the first increase; and iii. an Interest Coverage Ratio (as defined in the Amended 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 Amended Credit Agreement) is reduced by up to $ 125.0 million of the aggregate amount of unrestricted cash and Permitted Investments (as defined in the Amended Credit Agreement) of the Company and its Restricted Subsidiaries. Other : As of August 25, 2023, there was $ 551.6 million of principal amount outstanding under the Amended 2027 TLA, unamortized issuance costs were $ 6.7 million and the effective interest rate was 8.22 %. As of August 25, 2023, there were no amounts outstanding under the 2027 Revolver and unamortized issuance costs were $ 3.2 million. Convertible Senior Notes Convertible Senior Notes Exchange On January 18, 2023, SGH entered into separate, privately negotiated exchange agreements with a limited number of holders of its 2.25 % Convertible Senior Notes due 2026 (the “2026 Notes”) to exchange $ 150.0 million principal amount of the 2026 Notes for (i) $ 150.0 million in aggregate principal amount of new 2.00 % Convertible Senior Notes due 2029 (the “2029 Notes”) and (ii) an aggregate of $ 15.6 million in cash, with such cash payment representing $ 14.1 million of premium paid for the 2026 Notes in excess of par value and $ 1.5 million of accrued and unpaid interest on the 2026 Notes (collectively, the “Exchange Transactions”). The 2029 Notes were issued pursuant to, and are governed by, an indenture (the “2029 Indenture”), dated as of January 23, 2023, between the Company and U.S. Bank Trust Company, National Association, as trustee. 81 Transactions involving contemporaneous exchanges between the same debtor and creditor in connection with the issuance of a new debt obligation and satisfaction of an existing debt obligation are accounted for as debt extinguishments if the debt instruments have substantially different terms. An exchange is deemed to have substantially different terms if: • The present value of the remaining cash flows of the old instrument differs by more than 10% of the present value of the cash flows of the new instrument, or • The change in the fair value of the conversion option immediately before and after the exchange is greater than 10% of the carrying value of the debt instrument immediately prior to the exchange. We concluded that the exchanged 2026 Notes and the 2029 Notes had substantially different terms, and accordingly, we accounted for the Exchange Transactions as the extinguishment of the 2026 Notes and the issuance of the 2029 Notes. As a result, we recognized an extinguishment loss in the second quarter of 2023, included in other non-operating expense, of $ 16.7 million consisting of $ 14.1 million of premium paid to extinguish the 2026 Notes and $ 2.5 million for the write-off of unamortized issuance costs. 2029 Notes The 2029 Notes are senior, unsecured obligations of the Company and are equal in right of payment with our existing and future senior, unsecured indebtedness, senior in right of payment to our existing and future indebtedness that is expressly subordinated to the 2029 Notes and effectively subordinated to our existing and future senior, secured indebtedness, to the extent of the value of the collateral securing that indebtedness. Our 2026 Notes and 2029 Notes are structurally subordinated to all other existing and future indebtedness and other liabilities, including trade payables and (to the extent the Company is not a holder thereof) preferred equity, if any, of our subsidiaries. The 2029 Notes bear interest at a rate of 2.00 % per annum on the principal amount thereof, payable semi-annually in arrears on February 1 and August 1 of each year, beginning on August 1, 2023, to the noteholders of record of the 2029 Notes as of the close of business on the immediately preceding January 15 and July 15, respectively. The 2029 Notes will mature on February 1, 2029 (the “2029 Maturity Date”), unless earlier converted, redeemed or repurchased. The 2029 Notes are convertible into cash or a combination of cash and the Company’s ordinary shares, $ 0.03 par value per share, at our election. The initial conversion rate of the 2029 Notes is 47.1059 ordinary shares per $ 1,000 principal amount of the 2029 Notes, which represents an initial conversion price of approximately $ 21.23 per ordinary share. The conversion rate is subject to adjustment upon the occurrence of certain specified events as set forth in the 2029 Indenture. In connection with any conversion of the 2029 Notes, we are required to pay the principal amount in cash and have the option to settle any amount in excess of the principal portion in cash and/or ordinary shares. Conversion Rights : Holders of the 2029 Notes may convert them under the following circumstances: i. during any fiscal quarter commencing after the fiscal quarter ended on May 26, 2023 (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 “2029 Notes Measurement Period”) in which the trading price per $1,000 principal amount of notes for each trading day of the 2029 Notes 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. upon the occurrence of certain corporate events or distributions on our ordinary shares, as provided in the 2029 Indenture; iv. if we call the 2029 Notes for redemption; and v. on or after August 1, 2028 until the close of business on the second scheduled trading day immediately before the 2029 Maturity Date. Upon the occurrence of a “make-whole fundamental change” (as defined in the 2029 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 2029 Indenture), holders of the 2029 Notes may require us to repurchase their 2029 Notes at a cash repurchase price equal to the principal amount of the 2029 Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. The definition of fundamental change 82 includes certain business combination transactions involving the Company and certain de-listing events with respect to our ordinary shares. Cash Redemption at Our Option : We have the right to redeem the 2029 Notes, in whole or in part, at our option at any time, and from time to time, on or after February 6, 2026 and on or before the 40th scheduled trading day immediately before the 2029 Maturity Date, at a cash redemption price equal to the principal amount of the 2029 Notes to be redeemed, plus accrued and unpaid interest, if any, but only if the last reported per share sale price of our ordinary shares exceeds 130 % of the conversion price on (i) each of at least 20 trading days during the 30 consecutive trading days ending on, and including, the trading day immediately before the redemption notice date for such redemption and (ii) the trading day immediately before the date we send such notice. In addition, we have the right to redeem all, but not less than all, of the 2029 Notes if certain changes in tax law occur. Calling any 2029 Note for redemption will constitute a make-whole fundamental change with respect to such note, in which case the conversion rate applicable to the conversion of such note will be increased in certain circumstances if it is converted after it is called for redemption. 2026 Notes In February 2020, we issued $ 250.0 million in aggregate principal amount of 2026 Notes. The 2026 Notes are general unsecured obligations, bear interest at an annual rate of 2.25 % per year, payable semi-annually on February 15 and August 15, and mature on February 15, 2026, unless earlier converted, redeemed or repurchased. The 2026 Notes are governed by an indenture (the “2026 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 2026 Indenture. On January 18, 2023, we exchanged $ 150.0 million principal amount of 2026 Notes for $ 150.0 million principal amount of new 2029 Notes. As a result, as of August 25, 2023, $ 100.0 million in aggregate principal amount of 2026 Notes remain outstanding. See “Convertible Senior Notes Exchange.” First Supplemental Indenture to Indenture Governing the 2026 Notes : On August 26, 2022, SGH entered into the First Supplemental Indenture (the “2026 First Supplemental Indenture”) to the 2026 Indenture governing the 2026 Notes. The 2026 First Supplemental Indenture became effective on August 27, 2022. Pursuant to the 2026 First Supplemental Indenture, SGH irrevocably elected (i) to eliminate SGH’s option to elect Physical Settlement (as defined in the 2026 Indenture) on any conversion of the 2026 Notes that occurs on or after the date of the 2026 First Supplemental Indenture and (ii) with respect to any Combination Settlement (as defined in the 2026 Indenture) for a conversion of the 2026 Notes, the Specified Dollar Amount (as defined in the 2026 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 the 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 irrevocable election, only the amounts expected to be settled in excess of the principal portion are considered in calculating diluted earnings per share under the if-converted method. 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 “2026 Notes Measurement Period”) in which the trading price per $1,000 principal amount of notes for each trading day of the 2026 Notes 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. 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 83 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. Convertible Senior Note Interest Unamortized debt discount and issuance costs are amortized over the terms of our 2026 Notes and 2029 Notes using the effective interest method. As of August 25, 2023 and August 26, 2022, the effective interest rate for our 2026 Notes was 2.83 % and 7.06 %, respectively. As of August 25, 2023, the effective interest rate for our 2029 Notes was 2.40 %. Aggregate interest expense for our convertible notes consisted of contractual stated interest and amortization of discount and issuance costs and included the following: Year ended August 25, 2023 August 26, 2022 August 27, 2021 Contractual stated interest $ 5,397 $ 5,609 $ 5,609 Amortization of discount and issuance costs 1,160 9,031 8,419 $ 6,557 $ 14,640 $ 14,028 As of August 26, 2022, the carrying amount of the equity components of the 2026 Notes, which was included in additional paid-in-capital, was $ 50.8 million. As of the beginning of 2023, we adopted ASU 2020-06. In connection therewith, we reclassified $ 32.2 million from additional paid-in-capital to long-term debt and $ 18.6 million from additional paid-in-capital to retained earnings. See “Recently Adopted Accounting Standards.” LED Earnout Note Part of our consideration for the acquisition of the LED Business in March 2021 was the possibility of an earnout 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 LED Earnout Note bore interest at LIBOR plus 3.0 %, payable quarterly, and was scheduled to mature on March 27, 2025. In the first quarter of 2023, and substantially simultaneously with entering into the Incremental Amendment, we repaid in full the $ 101.8 million outstanding under the LED Earnout Note. In connection with our prepayment of the LED Earnout Note, we recognized a gain of $ 0.8 million in the first quarter of 2023, which is included in other non-operating income in the accompanying consolidated statements of operations. 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. Maturities of Debt As of August 25, 2023, maturities of debt were as follows: 2024 $ 36,056 2025 28,845 2026 128,845 2027 457,904 2028 — 2029 and thereafter 150,000 Less unamortized discount and issuance costs ( 11,212 ) $ 790,438 84 Leases As of August 25, 2023 and August 26, 2022, 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 25, 2023 August 26, 2022 August 27, 2021 Fixed lease cost $ 16,574 $ 12,116 $ 8,313 Variable lease cost 1,386 1,508 1,445 Short-term lease cost 2,266 466 288 $ 20,226 $ 14,090 $ 10,046 Cash flows used for operating activities in 2023, 2022 and 2021 included payments for operating leases of $ 7.7 million, $ 9.0 million and $ 6.5 million, respectively. Acquisitions of right-of-use assets were $ 10.8 million, $ 47.6 million and $ 22.3 million in 2023, 2022 and 2021, respectively. As of August 25, 2023 and August 26, 2022, the weighted-average remaining lease term for our operating leases was 10.5 years and 11.3 years, respectively, and the weighted-average discount rate was 6.0 % and 5.9 %, 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 25, 2023, minimum payments of lease liabilities were as follows: 2024 $ 13,537 2025 11,459 2026 9,878 2027 7,678 2028 7,901 2029 and thereafter 54,395 104,848 Less imputed interest ( 28,329 ) Present value of total lease liabilities $ 76,519 Commitments and Contingencies Commitments As of August 25, 2023, we had commitments of $ 54.1 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. 85 Contingencies From time to time, we may be 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. 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 $ 75.0 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 2023 and 2022, we repurchased 0.5 million and 2.6 million shares, respectively, for $ 8.4 million and $ 50.0 million, respectively, under the repurchase authorization. Other Share Repurchases Ordinary shares withheld as payment of withholding taxes and exercise prices in connection with the vesting or exercise of equity awards are treated as ordinary share repurchases. We repurchased 506 thousand, 240 thousand and 153 thousand ordinary shares as payment of withholding taxes for $ 10.9 million, $ 7.2 million and $ 4.2 million in 2023, 2022 and 2021, respectively. In connection with the Exchange Transactions in the second quarter of 2023, we repurchased 326 thousand ordinary shares for $ 5.4 million. 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. 2029 Capped Calls On January 18, 2023, in connection with the offering of the 2029 Notes, we entered into privately negotiated capped call transactions (the “2029 Capped Calls”). The 2029 Capped Calls cover, subject to anti-dilution adjustments substantially similar to those applicable to the 2029 Notes, the aggregate number of ordinary shares that initially underlie the 2029 Notes and are expected generally to reduce potential dilution to our ordinary shares upon any conversion of the 2029 Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted 2029 Notes, as the case may be, with such reduction and/or offset subject to a cap, based on the cap price. The cap price of the 2029 Capped Calls is initially $ 29.1375 per share, which represented a premium of 75 % over the last reported sale price of our ordinary shares on January 18, 2023. The cost of the 2029 Capped Calls, which are considered capital transactions, was $ 15.1 million and was recognized as a decrease to additional paid-in capital in the second quarter of 2023. The 2029 Capped Calls are separate transactions, each between the Company and the counterparties to the 2029 Capped Calls, and are not part of the terms of the 2029 Notes and do not affect any holder’s rights under the 2029 Notes or the 2029 Indenture. Holders of the 2029 Notes do not have any rights with respect to the 2029 Capped Calls. 86 2026 Capped Calls In February 2020, in connection with the offering of the our 2026 Notes, we entered into capped call transactions (“2026 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 2026 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 2026 Capped Calls expire February 15, 2026 (the maturity date of the 2026 Notes), subject to earlier exercise. The 2026 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 2026 Capped Calls are subject to certain specified additional disruption events that may give rise to a termination of the 2026 Capped Calls, including insolvency filings and hedging disruptions. As part of the Exchange Transactions, we entered into agreements with a number of counterparties to settle a portion of the 2026 Capped Calls in a notional amount corresponding to the amount of the 2026 Notes that were exchanged. The value received in connection with the settlement of a portion of the 2026 Capped Calls was $ 10.8 million and was recognized as an increase in additional paid-in capital in the second quarter of 2023. Accumulated Other Comprehensive Income (Loss) Changes in accumulated other comprehensive income (loss) by component for 2023 was as follows: Cumulative Translation Adjustment Gains (Losses) on Derivative Instruments Gains (Losses) on Investments Total As of August 26, 2022 $ ( 221,655 ) $ — $ — $ ( 221,655 ) Other comprehensive income (loss) before reclassifications 15,686 112 5 15,803 Reclassifications out of accumulated other comprehensive income — ( 112 ) — ( 112 ) Other comprehensive income (loss) 15,686 — 5 15,691 As of August 25, 2023 $ ( 205,969 ) $ — $ 5 $ ( 205,964 ) 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. Cash and other assets of the Cree Joint Venture are generally not available for use by us in our other operations. 87 Fair Value Measurements As of August 25, 2023 As of August 26, 2022 Fair Value Carrying Value Fair Value Carrying Value Liabilities: Amended 2027 TLA $ 551,648 $ 544,943 $ 273,281 $ 269,304 2029 Notes 195,426 146,886 — — 2026 Notes 131,864 98,609 290,223 213,023 LED Earnout Note — — 96,412 101,824 The fair values of the Amended 2027 TLA and LED Earnout Note, 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. The fair values of the 2029 Notes and the 2026 Notes, as measured on a non-recurring basis, was determined based on Level 2 measurements, including the trading prices of the 2029 Notes and the 2026 Notes. As of August 25, 2023, the carrying value of the Stratus Earnout of $ 50.0 million approximated its fair value. Equity Plans Our Amended and Restated 2017 Share Incentive Plan (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 25, 2023, 3.9 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 25, 2023, 1.8 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 25, 2023, 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. The disclosures related to our restricted awards, share options and employee share purchase plan include both our continuing and discontinued operations. 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 26, 2022 4,878 $ 20.47 $ 94,052 Granted 2,579 $ 17.77 Vested ( 1,854 ) $ 18.55 Forfeited and cancelled ( 698 ) $ 22.21 Outstanding as of August 25, 2023 4,905 $ 19.53 $ 117,327 88 Restricted Award activity was as follows: Year ended August 25, 2023 August 26, 2022 August 27, 2021 Awards granted 2,579 1,642 4,651 Weighted-average grant date fair value per share $ 17.77 $ 25.73 $ 19.59 Aggregate vesting date fair value of shares vested $ 31,686 $ 49,821 $ 21,381 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 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 25, 2023, total unrecognized compensation costs for unvested Restricted Awards was $ 83.3 million, which was expected to be recognized over a weighted-average period of 2.5 years. Share Options As of August 25, 2023, there were 1.0 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 $ 19.9 million, $ 6.3 million and $ 8.6 million in 2023, 2022 and 2021, respectively. Shares Weighted- Average Exercise Price Per Share Weighted- Average Remaining Contractual Term (in years) Aggregate Intrinsic Value Outstanding as of August 26, 2022 3,274 $ 15.32 5.22 $ 14,429 Granted — $ — Exercised ( 2,215 ) $ 16.43 Forfeited and cancelled ( 85 ) $ 18.23 Outstanding as of August 25, 2023 974 $ 12.55 5.27 $ 11,077 Exercisable as of August 25, 2023 773 $ 12.61 4.83 $ 8,741 Share option activity was as follows (no share options were granted in 2023 or 2022): Year ended August 27, 2021 Share options granted 500 Weighted-average grant-date fair value per share $ 6.65 Average expected term in years 6.25 Weighted-average expected volatility 52.07 % Weighted-average risk-free interest rate 0.49 % Expected dividend yield — % 89 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 25, 2023, total aggregate unrecognized compensation costs for unvested options was $ 1.2 million, which was expected to be recognized over a weighted-average period of 0.9 years. 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 602 thousand ordinary shares for $ 6.6 million in 2023, 307 thousand shares for $ 6.5 million in 2022 and 353 thousand shares for $ 3.6 million in 2021. Share-Based Compensation Expense Share-based compensation expense for our continuing operations was as follows: Year ended August 25, 2023 August 26, 2022 August 27, 2021 Share-based compensation expense by caption: Cost of sales $ 6,334 $ 6,296 $ 3,871 Research and development 6,016 5,868 3,860 Selling, general and administrative 26,878 25,120 23,230 $ 39,228 $ 37,284 $ 30,961 Income tax benefits for share-based awards were $ 6.7 million in 2023 and were de minimis in 2022 and 2021. The increase in tax benefit recognized in 2023 was due to the release of the U.S. federal and state valuation allowance on share-based compensation deferred tax assets. 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 $ 4.6 million, $ 4.4 million and $ 3.4 million in 2023, 2022 and 2021, respectively. Revenue and Customer Contract Balances We disaggregate revenue by segment and geography and by product and service revenue. See “Segment and Other Information.” Net Sales and Gross Billings We provide certain logistics services on an agent basis, whereby we procure materials and services on behalf of our customers and then resell such materials and services to our customers. Our materials logistics business 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. 90 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 and services 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. The cost of materials and services invoiced to our customers under these arrangements, but not recognized as revenue or cost of sales in our results of operations, were as follows: Year ended August 25, 2023 August 26, 2022 August 27, 2021 Cost of materials and services invoiced in connection with logistics services $ 765,796 $ 1,601,289 $ 751,985 Sales to related parties were de minimus in 2023 and 2022 and were $ 76.5 million in 2021 . Customer Contract Balances As of August 25, 2023 August 26, 2022 Contract assets (1) $ — $ 1,322 Contract liabilities: (2) Deferred revenue (3) $ 69,326 $ 39,676 Customer advances 5,565 24,125 $ 74,891 $ 63,801 (1) Contract assets are included in other current assets. (2) Contract liabilities are included in other current 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 $ 10.9 million and $ 23.3 million as of August 25, 2023 and August 26, 2022, 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. As of August 25, 2023, there were no contract assets remaining to be invoiced from August 26, 2022. Deferred revenue represents amounts received from customers in advance of satisfying performance obligations. As of August 25, 2023, we expect to recognize revenue of $ 48.1 million of the balance of $ 69.3 million in the next 12 months and the remaining amount thereafter. In 2023, we recognized revenue of $ 30.0 million from satisfying performance obligations related to amounts included in deferred revenue as of August 26, 2022. Customer advances represent amounts received from customers for advance payments to secure product. In 2023, we recognized revenue of $ 24.0 million from satisfying performance obligations related to amounts included in customer advances as of August 26, 2022. As of August 25, 2023 and August 26, 2022, other current liabilities included $ 12.5 million and $ 15.4 million, respectively, for estimates of consideration payable to customers, including estimates for pricing adjustments and returns. Other Operating (Income) Expense In 2023, we initiated plans that included workforce reductions and the elimination of certain projects across our businesses. In connection therewith, we recorded restructure charges of $ 7.0 million in 2023, primarily for employee severance costs and other benefits as well as lease impairment charges. We anticipate that these activities will continue into future quarters and anticipate recording additional restructure charges. As of August 25, 2023, $ 1.4 million remained unpaid, which is expected to be paid in 2024. 91 Other Non-operating (Income) Expense Year ended August 25, 2023 August 26, 2022 August 27, 2021 Loss (gain) on extinguishment of debt $ 15,924 $ 653 $ — Loss (gain) on disposition of assets ( 2,986 ) 213 17 Other ( 1,101 ) ( 516 ) ( 599 ) $ 11,837 $ 350 $ ( 582 ) In the second quarter of 2023, we recognized a loss in connection with the extinguishment of $ 150.0 million of our 2026 Notes. See “Debt – Convertible Senior Notes – Convertible Senior Notes Exchange.” Income Taxes Income (loss) before provision for income taxes consisted of the following: August 25, 2023 August 26, 2022 August 27, 2021 Income (loss) before income taxes: U.S. $ 20,118 $ 12,405 $ ( 28,326 ) Non-U.S. ( 59,631 ) 30,076 ( 3,939 ) $ ( 39,513 ) $ 42,481 $ ( 32,265 ) Income tax provision (benefit) consisted of the following: August 25, 2023 August 26, 2022 August 27, 2021 Income tax provision (benefit): Current: Federal $ 3,253 $ 1,100 $ — State 2,417 1,772 623 Foreign 8,418 15,213 11,020 14,088 18,085 11,643 Deferred: Federal ( 51,540 ) 259 ( 13 ) State ( 6,998 ) 43 3 Foreign ( 4,753 ) ( 313 ) ( 1,944 ) ( 63,291 ) ( 11 ) ( 1,954 ) Income tax provision (benefit) $ ( 49,203 ) $ 18,074 $ 9,689 92 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: Year ended August 25, 2023 August 26, 2022 August 27, 2021 Statutory tax rate $ ( 8,298 ) 21.0 % $ 8,921 21.0 % $ ( 6,776 ) 21.0 % Foreign income taxes at different rates 16,992 ( 43.0 ) % 3,887 9.1 % 8,016 ( 24.8 ) % State income tax, net of federal benefit 2,793 ( 7.1 ) % 1,693 4.0 % ( 353 ) 1.1 % Goodwill impairment 2,876 ( 7.3 ) % — — % — — % Tax on uncertain tax positions 5,679 ( 14.4 ) % 95 0.2 % 55 ( 0.2 ) % Share-based compensation ( 538 ) 1.4 % ( 2,681 ) ( 6.3 ) % ( 1,422 ) 4.4 % Change in valuation allowance ( 69,789 ) 176.6 % 3,113 7.3 % 10,233 ( 31.7 ) % Non-deductible expenses (non-taxable income) 2,151 ( 5.4 ) % 3,422 8.1 % ( 50 ) 0.2 % Foreign withholding tax 3,371 ( 8.5 ) % 2,368 5.6 % 1,493 ( 4.6 ) % Tax credits ( 4,339 ) 11.0 % ( 2,908 ) ( 6.8 ) % ( 2,068 ) 6.4 % Other ( 101 ) 0.2 % 164 0.3 % 561 ( 1.8 ) % Effective tax rate $ ( 49,203 ) 124.5 % $ 18,074 42.5 % $ 9,689 ( 30.0 ) % For 2023, the primary difference between the statutory tax rate and the effective tax rate was due to a release of the U.S. federal and state valuation allowance. The effective tax rate benefit from the valuation allowance release is offset with detriments associated with losses generated in jurisdictions with rates lower than the U.S. statutory tax rate, increases in reserves for uncertain tax provisions, foreign withholding taxes and book goodwill impairment with no tax basis. 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 consisted of the following: As of August 25, 2023 August 26, 2022 Deferred tax assets: Accruals and allowances $ 15,063 $ 18,442 Deferred revenue 1,913 2,179 Share-based compensation 3,159 6,073 Research and other tax credit carryforwards 5,759 9,686 Capitalized research and development (1) 12,588 — Operating lease liabilities 17,671 13,405 Tax amortizable goodwill 16,040 17,561 Interest carryforward 22,355 — Loss carryforwards 10,474 22,422 Gross deferred tax assets 105,022 89,768 Valuation allowance ( 2,663 ) ( 52,267 ) Net deferred tax assets 102,359 37,501 Deferred tax liabilities: Operating right-of-use assets 15,650 12,693 Property and equipment 11,846 15,357 Intangible assets 417 8,348 Other liabilities 1,152 — Gross deferred tax liabilities 29,065 36,398 Net deferred tax assets $ 73,294 $ 1,103 Reported as: Deferred tax assets $ 74,085 $ 4,576 Deferred tax liabilities (included in other noncurrent liabilities) 791 3,473 Net deferred tax assets $ 73,294 $ 1,103 93 (1) As required by the 2017 Tax Cuts and Jobs Act, effective for the period ended August 25, 2023, our research and development expenditures were capitalized and amortized, which resulted in substantially higher cash taxes for 2023 with an equal amount of deferred tax benefit. We regularly assess the recoverability of our deferred tax assets under ASC Topic 740. We assess available positive and negative evidence to estimate whether we will generate sufficient future taxable income to use our existing deferred tax assets. We have no carryback ability, and therefore we must rely on future taxable income, including tax planning strategies and future reversals of taxable temporary differences, to support their realizability. In our assessment for the period ended August 25, 2023, we concluded that it was more likely than not that all deferred tax assets related to U.S. federal ordinary income and states, with the exception of certain acquired state tax attributes, will be realizable. In reaching the conclusion that deferred tax assets related to U.S. federal and states will be realizable, we considered, among other things, three significant pieces of positive evidence occurring during the year ended August 25, 2023: (1) achieving three-year cumulative earnings, (2) recent use of deferred tax assets including available tax attribute carryforwards and (3) forecasted growth and profitability. Therefore, in the year ended August 25, 2023 we released $ 69.8 million of valuation allowance. We continue to maintain a valuation allowance against certain state tax attributes due to expected annual limitations on utilization which causes uncertainty regarding the realizability of these deferred tax assets. We will continue to monitor the need for a valuation allowance against our remaining deferred tax assets. As of August 25, 2023, we had U.S. federal and state net operating loss carryforwards of $ 32.1 million and $ 41.9 million, respectively. If not utilized, the federal net operating loss carryforwards will begin to expire in 2025 and the state net operating loss carryforwards will begin to expire in 2028. In addition, we had U.S. federal and state research and development credit carryforwards of $ 17.5 million and $ 5.4 million, respectively, and $ 2.1 million of foreign tax credit carryforwards. If not utilized, the federal research and foreign tax credits will begin to expire in 2032. If not utilized, $ 2.0 million of the state credits will begin to expire in 2029, while $ 3.4 million of state credits do not expire. In addition, we had Section 163(j) interest expense carryforwards of $ 101.0 million from the acquisition of Stratus, which do not expire. Lastly, we had net operating loss carryforwards in Hong Kong of $ 18.6 million which does not expire. Certain U.S. federal and state carryforwards are subject to an annual limitation under the provisions of Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Code”). Further, under Section 382 of the Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards to offset its post-change taxable income may be limited. In general, an “ownership change” will occur if there is a cumulative change in our ownership by certain “5-percent shareholders” (including groups of shareholders) that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. Our net operating loss, tax credit and section 163(j) interest expense carryforwards are subject to limitations per Sections 382 and 383 of the Code. We have experienced ownership changes in the past, and we may experience ownership changes in the future, as a result of future transactions in our ordinary shares, some changes of which may be outside our control. As a result, our ability to use our pre-change net operating loss, tax credit and section 163(j) interest expense carryforwards to offset post-change U.S. federal and state taxable income may be subject to additional limitations. Legislation enacted in 2017, informally titled the Tax Cuts and Jobs Act, (“Tax Act”), as modified in 2020 by the Coronavirus Aid, Relief, and the Economic Security Act (“CARES Act”) changed the federal rules governing net operating loss carryforwards. For net operating loss carryforwards arising in tax years beginning after December 31, 2017, the Tax Act limits a taxpayer’s ability to utilize such carryforwards to 80% of taxable income beginning after December 31, 2020. In addition, net operating loss carryforwards arising in tax years ending after December 31, 2017 can be carried forward indefinitely, but carryback is generally prohibited, with the exception of carrybacks reinstated by the CARES Act. Net operating loss carryforwards generated before January 1, 2018 will not be subject to the Tax Act’s taxable income limitation and will continue to have a twenty-year carryforward period. Nevertheless, our net operating loss carryforwards and other tax assets could expire before utilization and could be subject to limitations. 94 Activity related to our deferred tax valuation allowance was as follows: Balance at Beginning of Period Charged (Credited) to Operations Charged to Other Accounts (1) Business Acquisitions Balance at End of Period Year ended August 27, 2021 $ 38,921 $ 10,233 $ — $ — $ 49,154 Year ended August 26, 2022 49,154 3,113 — — 52,267 Year ended August 25, 2023 52,267 ( 69,789 ) ( 4,073 ) 24,258 2,663 (1) During the period ended August 25, 2023, SMART Embedded Computing B.V. entered liquidation, resulting in the existing Netherlands, NOL carryforwards being considered to have a remote likelihood of being utilized. Accordingly, a deferred tax asset of $ 4.1 million was written off and the related full valuation allowance was released. We choose to maintain flexibility to pull excess cash from all jurisdictions where needed, except the U.S. group, to manage debt balances. 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, which is primarily related to foreign withholding taxes which are not individually or cumulatively significant. We have operations in Malaysia, where we have tax incentive arrangements for our pioneer status activities and our global supply chain operations. The statutory 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 2023, 2022 and 2021. The effect of the tax incentive arrangements noted above reduced our income tax provision by $ 10.4 million (benefiting our diluted earnings per share by $ 0.20 ) in 2023, $ 10.0 million ($ 0.18 per diluted share) in 2022 and $ 4.6 million ($ 0.10 per diluted share) in 2021. Below is a reconciliation of the beginning and ending amounts of our unrecognized tax benefits: Year ended August 25, 2023 August 26, 2022 August 27, 2021 Beginning unrecognized tax benefits $ 18,920 $ 17,454 $ 16,514 Acquired balances 871 — — Increases related to prior year tax provisions 6,271 — — Increases related to current year tax provisions 4,248 1,678 1,337 Decreases related to prior year tax provisions ( 3,468 ) ( 212 ) ( 397 ) Lapse of statute of limitation ( 1,239 ) — — Ending unrecognized tax benefits $ 25,603 $ 18,920 $ 17,454 As of August 25, 2023 and August 26, 2022, the total amount of unrecognized tax benefits that would affect our effective tax rate, if recognized, was $ 23.0 million and $ 0.9 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 2022. In addition, tax returns that remain open to examination in non-U.S. subsidiaries, including Malaysia, Brazil, Luxembourg, Ireland, Japan, Hong Kong and China, vary by country. We believe that adequate amounts of taxes and related interest and penalties have been provided and any adjustments as a result of examinations are not expected to materially adversely affect our business, results of operations or financial condition. 95 Earnings Per Share Year ended August 25, 2023 August 26, 2022 August 27, 2021 Net income (loss) from continuing operations $ 7,858 $ 22,372 $ ( 43,150 ) Net income (loss) from discontinued operations ( 195,384 ) 44,185 64,460 Net income (loss) attributable to SGH – Basic and Diluted ( 187,526 ) 66,557 21,310 Weighted-average shares outstanding – Basic 49,566 49,467 48,558 Dilutive effect of equity plans and convertible notes 1,756 4,976 — Weighted-average shares outstanding – Diluted 51,322 54,443 48,558 Basic earnings (loss) per share: Continuing operations $ 0.16 $ 0.45 $ ( 0.89 ) Discontinued operations ( 3.94 ) 0.90 1.33 $ ( 3.78 ) $ 1.35 $ 0.44 Diluted earnings (loss) per share: Continuing operations $ 0.15 $ 0.41 $ ( 0.89 ) Discontinued operations ( 3.80 ) 0.81 1.33 $ ( 3.65 ) $ 1.22 $ 0.44 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 25, 2023 August 26, 2022 August 27, 2021 Equity plans 2,238 329 5,380 Upon any conversion of our 2026 Notes or 2029 Notes, we will be required to pay cash in an amount at least equal to the principal portion and have the option to settle any amount in excess of the principal portion in cash and/or ordinary shares. As a result, only the amounts settled in excess of the principal portion are considered in calculating diluted earnings 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 and computing, including server applications and other vertical markets. These products are marketed to OEMs and to commercial and government customers. The Memory Solutions group also offers SMART Supply Chain Services, which provides customized, integrated supply chain services to enable our customers to better manage supply chain planning and execution, reduce costs and increase productivity. • Intelligent Platform Solutions : Our IPS group, under our Penguin Solutions and newly acquired Stratus Technologies brands, offers specialized platform solutions and services for high-performance computing, artificial intelligence, machine learning, advanced modeling and the internet of things that span the continuum of edge, core and cloud. Our solutions are designed specifically for customers across multiple markets, including government, hyperscale, energy, financial services, health care, education and others. • LED Solutions : Our LED Solutions group, under our CreeLED brand, offers a broad portfolio of application-optimized LEDs focused on improving lumen density, intensity, efficacy, optical control and/or reliability. Backed by 96 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. 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 identify (other than goodwill) or report internally our assets nor allocate certain expenses and amortization, interest, other non-operating (income) expense or taxes to segments. Year ended August 25, 2023 August 26, 2022 August 27, 2021 Net sales: Memory Solutions $ 443,264 $ 551,705 $ 486,205 Intelligent Platform Solutions 749,708 440,986 344,757 LED Solutions 248,278 403,185 224,567 Total net sales $ 1,441,250 $ 1,395,876 $ 1,055,529 Segment operating income: Memory Solutions $ 73,639 $ 78,869 $ 19,530 Intelligent Platform Solutions 110,975 49,450 29,658 LED Solutions ( 4,820 ) 49,142 34,296 Total segment operating income 179,794 177,461 83,484 Unallocated: Share-based compensation expense ( 39,228 ) ( 37,284 ) ( 30,961 ) Amortization of acquisition-related intangibles ( 44,601 ) ( 23,729 ) ( 20,255 ) Flow through of inventory step up ( 2,599 ) — ( 7,090 ) Cost of sales-related restructure ( 6,813 ) — — Acquisition and integration expenses ( 20,869 ) ( 7,090 ) ( 5,314 ) Impairment of goodwill ( 19,092 ) — — Change in fair value of contingent consideration ( 29,000 ) ( 41,324 ) ( 32,400 ) Restructure charge ( 7,047 ) ( 234 ) ( 3,172 ) Other ( 1,800 ) ( 624 ) 2 Total unallocated ( 171,049 ) ( 110,285 ) ( 99,190 ) Consolidated operating income (loss) $ 8,745 $ 67,176 $ ( 15,706 ) Depreciation included in segment operating income was as follows: Year ended August 25, 2023 August 26, 2022 August 27, 2021 Memory Solutions $ 3,891 $ 5,468 $ 5,373 Intelligent Platform Solutions 9,196 4,664 3,275 LED Solutions 13,411 12,736 6,034 $ 26,498 $ 22,868 $ 14,682 Concentrations Our concentrations of credit risk consists principally of cash and cash equivalents, investments 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 2023, 2022 and 2021 were 60 %, 62 % and 59 %, respectively, of total net sales. As of August 25, 2023, there were no customers that accounted for more than 10% of accounts receivable. 97 Net sales to a number of customers each exceeded 10% of our total net sales in the past three years. Net sales to an IPS customer were 23 %, 20 % and 15 % of total net sales in 2023, 2022 and 2021, respectively. Additionally, net sales to another IPS customer were 11 % of total net sales in 2022. Net sales to a Memory Solutions customer were 11 % of total net sales in 2022. No other customers accounted for more than 10% of our total net sales in 2023, 2022 and 2021. We rely on a limited number of suppliers for a significant portion of our raw materials. Purchases from our three largest suppliers in 2023, 2022 and 2021 were $ 0.6 billion, $ 1.2 billion and $ 0.7 billion, respectively. As of August 25, 2023 and August 26, 2022, accounts payable and accrued expenses included $ 29.5 million and $ 131.7 million, respectively, for amounts owed to our largest three suppliers for 2023 and 2022, respectively. Geographic Information Net sales by geographic area, based on customer ship-to location, were as follows: Year ended August 25, 2023 August 26, 2022 August 27, 2021 United States $ 877,416 $ 705,404 $ 601,728 China 192,104 309,175 213,989 Europe 114,118 116,278 84,216 Other 257,612 265,019 155,596 $ 1,441,250 $ 1,395,876 $ 1,055,529 Long-lived assets, including property and equipment and right-of-use assets, by geographic area were as follows: As of August 25, 2023 August 26, 2022 United States $ 127,535 $ 102,907 China 42,331 52,201 Malaysia 10,324 10,778 Other 6,988 2,645 $ 187,178 $ 168,531 Quarterly Financial Data (Unaudited) The table below sets forth selected quarterly consolidated financial data from our continuing operations for 2023 and 2022: Q4 FY23 Q3 FY23 Q2 FY23 Q1 FY23 Q4 FY22 Q3 FY22 Q2 FY22 Q1 FY22 Net sales $ 316,658 $ 344,418 $ 388,377 $ 391,797 $ 362,459 $ 349,298 $ 327,827 $ 356,292 Gross profit 91,585 100,480 111,008 112,098 94,420 100,645 94,296 101,684 Operating income (loss) ( 1,639 ) ( 2,386 ) ( 2,077 ) 14,847 23,060 26,204 1,553 16,359 Net income (loss) attributable to SGH 64,841 ( 19,648 ) ( 33,396 ) ( 3,939 ) 8,862 13,924 ( 6,602 ) 6,188 Earnings (loss) per share: Basic $ 1.28 $ ( 0.40 ) $ ( 0.68 ) $ ( 0.08 ) $ 0.18 $ 0.28 $ ( 0.13 ) $ 0.13 Diluted $ 1.17 $ ( 0.40 ) $ ( 0.68 ) $ ( 0.08 ) $ 0.18 $ 0.25 $ ( 0.13 ) $ 0.11 Shares used in per share calculations: Basic 50,807 49,380 49,116 48,962 49,238 50,095 49,522 49,011 Diluted 55,523 49,380 49,116 48,962 50,504 54,998 49,522 54,635 98 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 25, 2023 and August 26, 2022, 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 25, 2023, 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 25, 2023 and August 26, 2022, and the results of its operations and its cash flows for each of the three years in the period ended August 25, 2023, 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 25, 2023, 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 20, 2023, 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 $1.44 billion of revenue for the year ended August 25, 2023 of which $750 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. 99 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. Divestiture of SMART Brazil – Classification of the Assets and Liabilities as Held-For-Sale and Measurement of Impairment Loss - Refer to the Divestiture of SMART Brazil note to the financial statements Critical Audit Matter Description On June 13, 2023 the Company entered into an agreement with Shenzhen Longsys Electronics Co., Ltd. (“Longsys”) for the sale of an 81% interest in SMART Brazil (the “disposal group”). As of August 25, 2023 the completion of the transaction remains subject to various regulatory approvals and satisfaction of closing conditions. In connection with the proposed sale, the net assets of the disposal group were classified as assets held-for-sale. An impairment charge of $153 million was recorded to reduce the carrying amount of the disposal group to its estimated fair value less costs to sell. We identified the assessment of whether the disposal group meets the criteria as an asset held-for-sale and the determination of the amount of the associated impairment charge as a critical audit matter, as these areas 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 classification of the Brazil disposal group as held-for-sale and the determination of the impairment charge included the following, among others: – We tested the effectiveness of internal controls the Company has in place for applying the appropriate technical accounting guidance to record the financial statement impacts of the proposed sale. – With respect to the Company’s conclusion that the disposal group meets the criteria to be considered held-for-sale: • We read the agreement entered into between the Company and Longsys on June 13, 2023 regarding the sale of an 81% interest in the disposal group. 100 • We reviewed management’s analysis of whether the criteria to classify the disposal group as held-for-sale were met as of August 25, 2023. • In order to assess management’s assertion that it is probable that the disposal will be completed within one year, we made inquiries of relevant personnel in the company’s finance, legal and executive functions regarding the status of the transaction as well as the regulatory and other conditions that need to be met. – With respect to the determination of the impairment charge: • With the assistance of professionals in our firm having expertise in accounting for divestitures, we evaluated the appropriateness of the technical accounting guidance used by the Company to record the financial statement impacts of the proposed sale. • We reviewed management’s determination of the impairment charge, and (i) agreed the carrying value of the disposal group, including amounts related to cumulative translation adjustments, used in such analysis to the underlying accounting records and (ii) assessed whether management’s determination of the estimated fair value of the disposal group was consistent with the terms of the June 13, 2023 agreement between the Company and Longsys. /s/ DELOITTE & TOUCHE LLP San Jose, California October 20, 2023 We have served as the Company’s auditor since 2014. 101 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.