UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February ~~25, 2022~~24, 2023

o☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File ~~Number~~Number 001-38102

SMART GLOBAL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)


Cayman Islands			98-1013909
(State or ~~Other Jurisdiction~~other jurisdiction of ~~Incorporation~~incorporation or ~~Organization)~~organization)			(I.R.S. Employer Identification No.)


c/o Walkers Corporate Limited
190 Elgin Avenue
George Town, Grand Cayman
Cayman Islands			KY1-9008
(Address of Principal Executive Offices)			(Zip Code)

Registrant’s ~~Telephone Number,~~telephone number, including ~~Area Code:~~area code: (510) 623-1231

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Ordinary shares, $0.03 par value per share	SGH	Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

☒

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

As of March ~~28, 2022,~~27, 2023, the registrant had ~~49,764,649~~49,071,741 ordinary shares outstanding.

~~Table of Contents~~


2

~~Table of Contents~~

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (“Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the ~~documents incorporated herein by reference contain “forward-looking statements” that are not historical in nature, that are predictive or that depend upon or refer to future events or conditions.~~Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, statements ~~regarding~~concerning future events and our future financial or operating ~~performance,~~performance; statements regarding the extent and timing of and expectations regarding our future revenues and expenses and customer ~~demand,~~demand; statements regarding our business strategies, investments and growth drivers in our industries and markets; statements regarding the deployment of our products and services and our ability to meet customer commitments; statements regarding the effects of the ongoing COVID-19 pandemic and macroeconomic events, including supply chain challenges, foreign currency fluctuations and interest rate changes, upon our and our customers’ respective businesses; statements regarding the anticipated benefits to be realized from the acquisition of Stratus Technologies; statements regarding the estimations of future payouts under our equity plans and in connection with the acquisition of Stratus Technologies; statements regarding our expected capital expenditures and our estimates regarding our capital requirements; statements regarding restructuring activities and charges; statements regarding the impairment of goodwill; and statements regarding our reliance on third ~~parties, and~~parties. These statements ~~using~~can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often use words such as “anticipate,” ~~“believe,” “could,” “estimate,~~“target,” “expect,” ~~“forecast,~~“estimate,” “intend,” “plan,” ~~“potential,~~“goal,” ~~“should”~~“believe,” “could” and other words of similar ~~words and the negatives thereof constitute forward-looking statements.~~meaning. Forward-looking statements ~~are based on~~provide our current expectations or forecasts of future events, circumstances, results or aspirations and ~~preliminary assumptions that~~ are subject to a number of significant risks, uncertainties and other factors, ~~risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Such factors, risks and uncertainties include,~~many of which are outside of our control, including but ~~are~~ not limited to, ~~those identified~~issues, delays or complications in integrating the operations of Stratus Technologies; global business and economic conditions and growth trends in technology industries, our customer markets and various geographic regions; uncertainties in the geopolitical environment; the rapidly evolving nature of the COVID-19 pandemic; disruptions in our operations or supply chain as a result of the COVID-19 pandemic or otherwise; the ability to manage our cost structure, including our success in implementing restructuring or other plans intended to improve our operating efficiency; workforce reductions; uncertainties in the global macro-economic environment; changes in demand for our segments; changes in trade regulations or adverse developments in international trade relations and agreements; changes in currency exchange rates; overall information technology spending; appropriations for government spending; the success of our strategic initiatives including additional investments in new products and additional capacity; acquisitions of companies or technologies, the failure to successfully integrate and operate them or customers’ negative reactions to them; limitations on, or changes in the availability of, supply of materials and components; fluctuations in material costs; the temporary or volatile nature of pricing trends in memory or elsewhere; deterioration in customer relationships; production or manufacturing difficulties; competitive factors; technological changes; future cash flows of the Penguin Edge business; difficulties with, or delays in, the introduction of new products; slowing or contraction of growth in the memory market in Brazil or in the LED market; reduction in, or termination of, incentives for local manufacturing in Brazil; changes to applicable tax regimes or rates; prices for the end products of our customers; strikes or labor disputes; deterioration in or loss of relations with any of our limited number of key vendors; the inability to maintain or expand government business; and the continuing availability of borrowings under term loans and revolving lines of credit and our ability to raise capital through debt or equity financings. These and other risks, uncertainties and factors are described in greater detail under the sections titled “Risk Factors,” “Critical Accounting Estimates,” “Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk” and “Liquidity and Capital Resources” contained in our Annual Report on Form 10-K for the fiscal year ended August 26, 2022, this Quarterly Report on Form 10-Q and ~~the risks discussed in~~ our other filings with the U.S. Securities and Exchange Commission (“SEC”) ~~filings.~~. In addition, such risks, uncertainties and factors as outlined above and in such filings do not constitute all risks, uncertainties and factors that could cause actual results of our company to be materially different from such forward-looking statements. Accordingly, you are cautioned not to place undue reliance on any forward-looking statements.

~~We urge you to consider these factors, risks and uncertainties carefully in evaluating the~~Any forward-looking statements contained in this Quarterly Report. All subsequent written or oral forward-looking statements attributable to our Company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements includedthat we make in this Quarterly Report ~~are made~~speak only as of the date of this Quarterly Report. WeExcept as required by law, we do not ~~intend, and~~ undertake ~~no obligation,~~ to update ~~or revise any~~the forward-looking statements contained in ~~order~~this Quarterly Report to reflect ~~events~~the impact of circumstances or ~~circumstances~~events that may arise after the date ~~of this Quarterly Report, except as required by law.~~that the forward-looking statements were made.

About This Quarterly Report

As used herein, “SGH,” “Company,” “Registrant,” “we,” “our,” “us” or similar terms refer to SMART Global Holdings, Inc. and our consolidated subsidiaries, unless the context indicates otherwise. Our fiscal year is the ~~52-~~52 or 53-week period ending on the last Friday in August. Fiscal ~~2022~~2023 and ~~2021~~2022 each contain 52 weeks. All period references are to our fiscal periods unless otherwise indicated.


3

~~Table of Contents~~

PART I. Financial Information

Item 1. Financial Statements

INDEX TO FINANCIAL STATEMENTS


			Page

Consolidated Balance Sheets			5
Consolidated Statements of Operations			6
Consolidated Statements of Comprehensive Income (Loss)			7
Consolidated Statements of Shareholders’ Equity			8
Consolidated Statements of Cash Flows			910
Notes to Consolidated Financial Statements			1011


4

~~Table of Contents~~

SMART Global Holdings, Inc.

Consolidated Balance Sheets

(In thousands, except par value amount)

(Unaudited)

As of February 25,
2022 August 27,
2021
Assets
Cash and cash equivalents $ 365,768 $ 222,986
Accounts receivable, net (1)
385,925 313,393
Inventories 334,148 363,601
Other current assets 45,876 50,838
Total current assets 1,131,717 950,818
Property and equipment, net 149,059 156,266
Operating lease right-of-use assets 35,816 40,869
Intangible assets, net 88,887 101,073
Goodwill 73,413 74,255
Other noncurrent assets 29,621 21,517
Total assets $ 1,508,513 $ 1,344,798
Liabilities and Equity
Accounts payable and accrued expenses $ 440,983 $ 484,107
Current debt 6,425 25,354
Other current liabilities 86,396 74,337
Total current liabilities 533,804 583,798
Long-term debt 483,911 340,484
Acquisition-related contingent consideration 101,700 60,500
Noncurrent operating lease liabilities 27,047 32,419
Other noncurrent liabilities 7,139 8,673
Total liabilities 1,153,601 1,025,874
Commitments and contingencies 0 0
SMART Global Holdings shareholders’ equity:
Ordinary shares, $0.03 par value; authorized 200,000 shares; 51,189 shares issued and 49,733 outstanding as of February 25, 2022; 50,138 shares issued and 48,736 outstanding as of August 27, 2021 1,535 1,504
Additional paid-in-capital 423,136 396,120
Retained earnings 207,272 184,787
Treasury shares, 1,456 and 1,402 shares held as of February 25, 2022 and August 27, 2021, respectively (53,440) (50,545)
Accumulated other comprehensive income (loss) (229,676) (221,615)
Total SGH shareholders’ equity 348,827 310,251
Noncontrolling interest in subsidiary 6,085 8,673
Total equity 354,912 318,924
Total liabilities and equity $ 1,508,513 $ 1,344,798


~~(1)~~			~~Receivables from related parties were de minimis and $14,057 as of February 25, 2022 and August 27, 2021, respectively.~~


As of	February 24, 2023		August 26, 2022
Assets
Cash and cash equivalents	$	375,854	$	363,065
Accounts receivable, net	229,474		410,323
Inventories	294,367		323,084
Other current assets	78,475		55,393
Total current assets	978,170		1,151,865
Property and equipment, net	171,798		153,935
Operating lease right-of-use assets	80,468		77,399
Intangible assets, net	182,894		77,812
Goodwill	182,710		74,009
Other noncurrent assets	44,043		37,044
Total assets	$	1,640,083	$	1,572,064

Liabilities and Equity
Accounts payable and accrued expenses	$	226,289	$	413,354
Current debt	32,141		12,025
Acquisition-related contingent consideration	30,900		—
Other current liabilities	131,117		90,161
Total current liabilities	420,447		515,540
Long-term debt	789,364		591,389
Noncurrent operating lease liabilities	76,092		71,754
Other noncurrent liabilities	22,660		14,835
Total liabilities	1,308,563		1,193,518

Commitments and contingencies

SMART Global Holdings shareholders’ equity:
Ordinary shares, $0.03 par value; authorized 200,000 shares; 54,383 shares issued and 49,072 outstanding as of February 24, 2023; 52,880 shares issued and 48,604 outstanding as of August 26, 2022	1,631		1,586
Additional paid-in capital	417,998		448,112
Retained earnings	247,756		251,344
Treasury shares, 5,311 and 4,276 shares held as of February 24, 2023 and August 26, 2022, respectively	(123,999)		(107,776)
Accumulated other comprehensive income (loss)	(217,557)		(221,655)
Total SGH shareholders’ equity	325,829		371,611
Noncontrolling interest in subsidiary	5,691		6,935
Total equity	331,520		378,546
Total liabilities and equity	$	1,640,083	$	1,572,064

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


5

~~Table of Contents~~

SMART Global Holdings, Inc.

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

Three Months Ended Six Months Ended
February 25,
2022 February 26,
2021 February 25,
2022 February 26,
2021
Net sales (1)
$ 449,171 $ 304,009 $ 919,115 $ 595,705
Cost of sales 336,458 250,553 684,201 489,606
Gross profit 112,713 53,456 234,914 106,099
Operating expenses:
Research and development 18,794 8,852 36,451 15,816
Selling, general and administrative 53,114 31,664 105,664 69,720
Change in fair value of contingent consideration 24,000 — 41,200 —
Total operating expenses 95,908 40,516 183,315 85,536
Operating income 16,805 12,940 51,599 20,563
Non-operating (income) expense:
Interest expense, net 4,462 4,365 9,568 7,518
Other non-operating (income) expense 1,785 1,531 3,020 699
Total non-operating (income) expense 6,247 5,896 12,588 8,217
Income before taxes 10,558 7,044 39,011 12,346
Income tax provision 7,586 1,200 15,341 4,475
Net income 2,972 5,844 23,670 7,871
Net income attributable to noncontrolling interest 514 — 1,185 —
Net income attributable to SGH $ 2,458 $ 5,844 $ 22,485 $ 7,871
Earnings per share:
Basic $ 0.05 $ 0.12 $ 0.46 $ 0.16
Diluted $ 0.04 $ 0.12 $ 0.40 $ 0.16
Shares used in per share calculations:
Basic 49,522 48,435 49,267 48,778
Diluted 57,636 50,407 56,135 50,307

~~(1)~~


	Three Months Ended				Six Months Ended
	February 24, 2023		February 25, 2022		February 24, 2023		February 25, 2022
Net sales:
Products	$	373,849	$	413,534	$	764,038	$	850,218
Services	55,325		35,637		130,614		68,897
Total net sales	429,174		449,171		894,652		919,115

Cost of sales:
Products	297,134		320,827		615,794		656,251
Services	21,659		15,631		50,067		27,950
Total cost of sales	318,793		336,458		665,861		684,201
Gross profit	110,381		112,713		228,791		234,914

Operating expenses:
Research and development	26,665		18,794		50,721		36,451
Selling, general and administrative	62,771		53,114		133,793		105,664
Impairment of goodwill	17,558		—		17,558		—
Change in fair value of contingent consideration	6,400		24,000		10,100		41,200
Other operating (income) expense	4,154		—		6,195		—
Total operating expenses	117,548		95,908		218,367		183,315
Operating income (loss)	(7,167)		16,805		10,424		51,599

Non-operating (income) expense:
Interest expense, net	8,006		4,462		16,043		9,568
Other non-operating (income) expense	13,329		1,785		12,669		3,020
Total non-operating (income) expense	21,335		6,247		28,712		12,588
Income (loss) before taxes	(28,502)		10,558		(18,288)		39,011

Income tax provision (benefit)	(1,716)		7,586		3,174		15,341
Net income (loss)	(26,786)		2,972		(21,462)		23,670
Net income attributable to noncontrolling interest	433		514		765		1,185
Net income (loss) attributable to SGH	$	(27,219)	$	2,458	$	(22,227)	$	22,485

Earnings (loss) per share
Basic	$	(0.55)	$	0.05	$	(0.45)	$	0.46
Diluted	$	(0.55)	$	0.04	$	(0.45)	$	0.40

Shares used in per share calculations:
Basic	49,116		49,522		49,039		49,267
Diluted	49,116		57,636		49,039		56,135

~~Sales to related parties were de minimis in 2022 and were $18,173 and $33,148 in the three and six months ended February 26, 2021, respectively.~~

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


6

~~Table of Contents~~

SMART Global Holdings, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

Three Months Ended Six Months Ended
February 25,
2022 February 26,
2021 February 25,
2022 February 26,
2021
Net income $ 2,972 $ 5,844 $ 23,670 $ 7,871
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 11,379 10,934 (8,061) (5,591)
Comprehensive income (loss) 14,351 16,778 15,609 2,280
Comprehensive income attributable to noncontrolling interest 514 — 1,185 —
Comprehensive income (loss) attributable to SGH $ 13,837 $ 16,778 $ 14,424 $ 2,280


	Three Months Ended				Six Months Ended
	February 24, 2023		February 25, 2022		February 24, 2023		February 25, 2022
Net income (loss)	$	(26,786)	$	2,972	$	(21,462)	$	23,670
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment	6,121		11,379		4,113		(8,061)
Gains (losses) on derivative instruments	(24)		—		(4)		—
Gains (losses) on investments	(4)		—		(11)		—
Comprehensive income (loss)	(20,693)		14,351		(17,364)		15,609
Comprehensive income attributable to noncontrolling interest	433		514		765		1,185
Comprehensive income (loss) attributable to SGH	$	(21,126)	$	13,837	$	(18,129)	$	14,424

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


7

~~Table~~

SMART Global Holdings, Inc.

Consolidated Statements of ~~Contents~~Shareholders’ Equity

(In thousands)

(Unaudited)


	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 26, 2022	52,880	$	1,586	$	448,112	$	251,344	$	(107,776)	$	(221,655)	$	371,611	$	6,935	$	378,546
Net income	—	—		—		4,992		—		—		4,992		332		5,324
Other comprehensive income (loss)	—	—		—		—		—		(1,995)		(1,995)		—		(1,995)
Shares issued under equity plans	1,060	32		3,910		—		—		—		3,942		—		3,942
Repurchase of ordinary shares	—	—		—		—		(4,659)		—		(4,659)		—		(4,659)
Share-based compensation expense	—	—		10,412		—		—		—		10,412		—		10,412
Adoption of ASU 2020-06	—	—		(50,822)		18,639		—		—		(32,183)		—		(32,183)
As of November 25, 2022	53,940	1,618		411,612		274,975		(112,435)		(223,650)		352,120		7,267		359,387
Net income (loss)	—	—		—		(27,219)		—		—		(27,219)		433		(26,786)
Other comprehensive income (loss)	—	—		—		—		—		6,093		6,093		—		6,093
Shares issued under equity plans	443	13		295		—		—		—		308		—		308
Repurchase of ordinary shares	—	—		—		—		(11,564)		—		(11,564)		—		(11,564)
Share-based compensation expense	—	—		10,395		—		—		—		10,395		—		10,395
Purchase of Capped Calls	—	—		(15,090)		—		—		—		(15,090)		—		(15,090)
Settlement of Capped Calls	—	—		10,786		—		—		—		10,786		—		10,786
Distribution to noncontrolling interest	—	—		—		—		—		—		—		(2,009)		(2,009)
As of February 24, 2023	54,383	$	1,631	$	417,998	$	247,756	$	(123,999)	$	(217,557)	$	325,829	$	5,691	$	331,520

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


8

SMART Global Holdings, Inc.

Consolidated Statements of Shareholders’ Equity

(In thousands)

(Unaudited)

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 27, 2021 50,138 $ 1,504 $ 396,120 $ 184,787 $ (50,545) $ (221,615) $ 310,251 $ 8,673 $ 318,924
Net income — — — 20,027 — — 20,027 671 20,698
Other comprehensive income (loss) — — — — — (19,440) (19,440) — (19,440)
Shares issued under equity plans 734 22 5,007 — — — 5,029 — 5,029
Repurchase of ordinary shares (51) (2) 2 — (2,666) — (2,666) — (2,666)
Share-based compensation expense — — 9,739 — — — 9,739 — 9,739
As of November 26, 2021 50,821 1,524 410,868 204,814 (53,211) (241,055) 322,940 9,344 332,284
Net income — — — 2,458 — — 2,458 514 2,972
Other comprehensive income (loss) — — — — — 11,379 11,379 — 11,379
Shares issued under equity plans 372 11 2,420 — — — 2,431 — 2,431
Repurchase of ordinary shares (4) — — — (229) — (229) — (229)
Share-based compensation expense — — 9,848 — — — 9,848 — 9,848
Distribution to noncontrolling interest — — — — — — — (3,773) (3,773)
As of February 25, 2022 51,189 $ 1,535 $ 423,136 $ 207,272 $ (53,440) $ (229,676) $ 348,827 $ 6,085 $ 354,912
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 $ 163,475 $ (2,032) $ (228,241) $ 282,102 $ — $ 282,102
Net income — — — 2,027 — — 2,027 — 2,027
Other comprehensive income (loss) — — — — — (16,525) (16,525) — (16,525)
Shares issued under equity plans 956 29 3,077 — — — 3,106 — 3,106
Repurchase of ordinary shares (139) (4) 4 — (3,483) — (3,483) — (3,483)
Share-based compensation expense — — 11,088 — — — 11,088 — 11,088
As of November 27, 2020 49,805 1,494 361,600 165,502 (5,515) (244,766) 278,315 — 278,315
Net income — — — 5,844 — — 5,844 — 5,844
Other comprehensive income (loss) — — — — — 10,934 10,934 — 10,934
Shares issued under equity plans 371 11 2,534 — — — 2,545 — 2,545
Repurchase of ordinary shares (1,104) (33) 33 — (44,481) — (44,481) — (44,481)
Share-based compensation expense — — 5,398 — — — 5,398 — 5,398
As of February 26, 2021 49,072 $ 1,472 $ 369,565 $ 171,346 $ (49,996) $ (233,832) $ 258,555 $ — $ 258,555


	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 27, 2021	50,138	$	1,504	$	396,120	$	184,787	$	(50,545)	$	(221,615)	$	310,251	$	8,673	$	318,924
Net income	—	—		—		20,027		—		—		20,027		671		20,698
Other comprehensive income (loss)	—	—		—		—		—		(19,440)		(19,440)		—		(19,440)
Shares issued under equity plans	734	22		5,007		—		—		—		5,029		—		5,029
Repurchase of ordinary shares	(51)	(2)		2		—		(2,666)		—		(2,666)		—		(2,666)
Share-based compensation expense	—	—		9,739		—		—		—		9,739		—		9,739
As of November 26, 2021	50,821	1,524		410,868		204,814		(53,211)		(241,055)		322,940		9,344		332,284
Net income	—	—		—		2,458		—		—		2,458		514		2,972
Other comprehensive income (loss)	—	—		—		—		—		11,379		11,379		—		11,379
Shares issued under equity plans	372	11		2,420		—		—		—		2,431		—		2,431
Repurchase of ordinary shares	(4)	—		—		—		(229)		—		(229)		—		(229)
Share-based compensation expense	—	—		9,848		—		—		—		9,848		—		9,848
Distribution to noncontrolling interest	—	—		—		—		—		—		—		(3,773)		(3,773)
As of February 25, 2022	51,189	$	1,535	$	423,136	$	207,272	$	(53,440)	$	(229,676)	$	348,827	$	6,085	$	354,912

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


9

SMART Global Holdings, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


Six months ended	February 24, 2023		February 25, 2022
Cash flows from operating activities:
Net income (loss)	$	(21,462)	$	23,670
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation expense and amortization of intangible assets	39,720		31,890
Amortization of debt discount and issuance costs	2,117		4,770
Share-based compensation expense	20,807		19,748
Impairment of goodwill	17,558		—
Change in fair value of contingent consideration	10,100		41,200
(Gain) loss on extinguishment of debt	15,924		653
Other	4,024		688
Changes in operating assets and liabilities:
Accounts receivable	208,224		(75,579)
Inventories	36,609		26,415
Other assets	(6,724)		10,445
Accounts payable and accrued expenses and other liabilities	(228,981)		(36,142)
Payment of acquisition-related contingent consideration	(73,724)		—
Deferred income taxes, net	2,358		(447)
Net cash provided by operating activities	26,550		47,311

Cash flows from investing activities:
Capital expenditures and deposits on equipment	(24,262)		(20,142)
Acquisition of business, net of cash acquired	(213,073)		—
Other	339		(692)
Net cash used for investing activities	(236,996)		(20,834)

Cash flows from financing activities:
Proceeds from debt	295,287		270,775
Proceeds from issuance of ordinary shares	4,250		7,460
Proceeds from borrowing under line of credit	—		84,000
Payment of acquisition-related contingent consideration	(28,100)		—
Payments to acquire ordinary shares	(16,223)		(2,895)
Payment of premium in connection with convertible note exchange	(14,141)		—
Repayments of debt	(8,996)		(125,000)
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)
Other	(3,416)		(3,841)
Net cash provided by financing activities	222,348		117,726

Effect of changes in currency exchange rates on cash, cash equivalents and restricted cash	1,917		(1,421)
Net increase in cash, cash equivalents and restricted cash	13,819		142,782
Cash, cash equivalents and restricted cash at beginning of period	363,065		222,986
Cash, cash equivalents and restricted cash at end of period	$	376,884	$	365,768

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


810

~~Table of Contents~~

~~SMART Global Holdings, Inc.~~

~~Consolidated Statements of Cash Flows~~

~~(In thousands)~~

~~(Unaudited)~~

Six Months Ended February 25,
2022 February 26,
2021
Cash flows from operating activities:
Net income $ 23,670 $ 7,871
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense and amortization of intangible assets 31,890 17,160
Amortization of debt discount and issuance costs 4,770 4,307
Share-based compensation expense 19,748 16,486
Change in fair value of contingent consideration 41,200 —
Amortization of operating lease right-of-use assets 5,245 2,913
Other 1,341 981
Changes in operating assets and liabilities:
Accounts receivable (75,579) 10,082
Inventories 26,415 (28,134)
Other current assets 5,200 (19,126)
Accounts payable and accrued expenses (31,646) 45,921
Operating lease liabilities (4,496) (2,742)
Deferred income taxes, net (447) 271
Net cash provided by operating activities 47,311 55,990
Cash flows from investing activities:
Capital expenditures and deposits on equipment (20,142) (34,795)
Other (692) 167
Net cash used for investing activities (20,834) (34,628)
Cash flows from financing activities:
Proceeds from debt 270,775 11,439
Proceeds from borrowing under line of credit 84,000 42,500
Proceeds from issuance of shares 7,460 5,651
Repayments of debt (125,000) —
Repayments of borrowings under line of credit (109,000) (42,500)
Distribution to noncontrolling interest (3,773) —
Payments to acquire ordinary shares (2,895) (47,964)
Other (3,841) —
Net cash provided by (used for) financing activities 117,726 (30,874)
Effect of changes in currency exchange rates on cash and cash equivalents (1,421) (1,496)
Net increase (decrease) in cash and cash equivalents 142,782 (11,008)
Cash and cash equivalents at beginning of period 222,986 150,811
Cash and cash equivalents at end of period $ 365,768 $ 139,803

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


9

~~Table of Contents~~

SMART Global Holdings, Inc.

Notes to Consolidated Financial Statements

(Tabular amounts in thousands, except per share amounts)

(Unaudited)

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 (“GAAP”) consistent in all material respects with those applied in our Annual Report on Form 10-K for the fiscal year ended August ~~27, 2021.~~26, 2022 and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial information. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of our management, the accompanying unaudited consolidated financial statements contain all necessary adjustments, consisting of a normal recurring nature, to fairly state the financial information set forth herein. These consolidated interim financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended August ~~27, 2021.~~26, 2022. Certain reclassifications have been made to prior period amounts to conform to current period presentation.

Fiscal Year: Our fiscal year is the 52 or 53-week period ending on the last Friday in August. Fiscal ~~2022~~2023 and ~~2021~~2022 each contain 52 weeks. All period references are to our fiscal periods unless otherwise indicated. ~~All financial~~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.

~~Subsequent Event~~

~~Share Repurchase Authorization~~

On April 4, 2022, our Board of Directors approved a $75 million share repurchase authorization, under which the Company may repurchase its 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.

~~Share Dividend~~

On January 3, 2022, our Board of Directors declared a share dividend of 1 ordinary share, $0.03 par value per share, for every one outstanding ordinary share owned to shareholders of record as of January 25, 2022. The dividend was paid on February 1, 2022. The accompanying consolidated financial statements and notes have been restated and adjusted for the impact of the share dividend.

Recently Adopted Accounting Standards

In ~~December 2019,~~August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ~~2019-12 –~~ ~~Income Taxes: Simplifying the Accounting for Income Taxes~~, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. We adopted ASU 2019-12 in the first quarter of 2022 on a prospective basis. The adoption of this ASU did not have a significant impact on our financial statements.

~~In June 2016, the FASB issued ASU 2016-13 –~~ ~~Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments~~, which requires a financial asset (or a group of financial assets) measured on the basis of amortized cost to be presented at the net amount expected to be collected. This ASU requires that the income statement reflect the measurement of credit losses for newly recognized financial assets as well as the increases or decreases of expected credit losses that have taken place during the period. This ASU requires that credit losses of debt securities designated as available-for-sale be recorded through an allowance for credit losses and limits the credit loss to the amount by which fair value is below amortized cost. We adopted ASU 2016-13 in the first quarter of 2021 under the modified retrospective adoption method. The adoption of this ASU did not have a significant impact on our financial statements.


10

~~Table of Contents~~

~~Recently Issued Accounting Standards~~

~~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~~. This ASU is effective for us in the first quarter of 2023 and, if adopted early, requires the retrospective method of transition applied to transactions occurring on or after the beginning of the fiscal year of adoption. We are evaluating the timing and effects of adoption of this ASU on our financial statements.

~~In August 2020, the FASB issued ASU~~ 2020-06 – Debt – Debt with Conversion and Other Options and Derivatives and Hedging – Contracts in Entity’s Own Equity: Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible debt instruments by reducing the number of accounting models and the number of embedded conversion features that could be recognized separately from the primary contract. This ASU requires a convertible debt instrument to be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. This ASU requires an entity to use the if-converted method in the diluted earnings per share calculation for convertible instruments. This ASU iswas effective for us in the first quarter of 2023 and permits the use of either the modified retrospective or fully retrospective method of transition.

We ~~are evaluating~~adopted ASU 2020-06 in the first quarter of 2023 under the modified retrospective method. Upon adoption of ASU 2020-06, the previously separated equity component and associated issuance costs of our 2.25% convertible senior notes due 2026 were reclassified from additional paid-in capital to long-term debt, thereby eliminating future amortization of the debt discount as interest expense. The following table summarizes the effects of ~~adoption~~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	$	591,389	$	32,183	$	623,572
Additional paid-in capital	448,112		(50,822)		397,290
Retained earnings	251,344		18,639		269,983

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 ~~this ASU on~~2022 for any acquisitions occurring after our ~~financial statements.~~adoption.


11

Business Acquisition

~~LED Business~~Stratus Technologies

On ~~March 1, 2021,~~August 29, 2022 (the “Acquisition Date”), we completed our previously announced 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 ~~previously announced Asset~~terms of that certain Share Purchase Agreement (the “Purchase Agreement”), dated ~~October 18, 2020,~~ as ~~amended~~of June 28, 2022, by ~~the Amendment~~and among SGH, Stratus Holding Company and Storm Private Investments LP, a Cayman Islands exempted limited partnership (“Seller”). Pursuant to ~~Asset~~the 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, contractsamong other matters, Seller sold to SGH, and ~~real estate comprising Cree’s LED products segment, (b)~~SGH purchased from Seller, all of Seller’s right, title and interest in and to the ~~issued and~~ outstanding equity ~~interests~~securities of ~~Cree Huizhou Solid State Lighting~~Stratus Holding Company ~~Limited,~~(the “Share Purchase”). Stratus will operate as part of SGH’s Intelligent Platform Solutions (“IPS”) segment.

Stratus Technologies is a ~~limited liability company organized under~~global leader in simplified, protected, and autonomous computing platforms and services in the ~~laws~~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. The acquisition of ~~the People’s Republic of China~~Stratus Technologies further enhances SGH’s growth and ~~an indirect wholly owned subsidiary of Cree~~diversification strategy and ~~(c) Cree’s 51% ownership interest~~complements and expands SGH’s IPS business in ~~Cree Venture LED Company Limited (“Cree Joint Venture”), Cree’s joint venture with San’an Optoelectronics Co., Ltd. (“San’an”)~~data center 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.edge environments.

Purchase Price: ~~The~~At the closing of the transaction, we paid the seller a cash purchase price ~~for the LED Business consisted~~ of ~~(i) a payment of $50~~$225 million, ~~in cash,~~ subject to ~~customary adjustments, (ii) an unsecured promissory note issued~~certain adjustments. In addition, the Seller has the right to ~~Cree by the Company in the amount of $125 million (“LED Purchase Price Note”), (iii) an earn-out payment~~receive, and we will be obligated to pay, contingent consideration (if any) of up to ~~$125~~$50 million (the “Earnout”) based on the ~~revenue and~~ gross profit performance of Stratus Technologies during the ~~LED Business in Cree’s~~ first ~~four~~ full 12 fiscal ~~quarters~~months following the ~~closing (“~~closing. The Earnout, ~~Period”), with a minimum payment of $2.5 million,~~if any, will be payable in cash, ordinary shares of SGH or a mix of cash and SGH Shares, at our election. See “Equity – SGH Shareholders’ Equity – Stratus Technologies Earnout.”

Cash paid was utilized, in part, to settle the ~~form~~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 ~~unsecured promissory note to be issued by us (“Earnout Note”)~~assumed liability for the outstanding debt of Stratus Technologies. The provisional purchase price was as follows:


Cash	$	225,000
Additional payment for net working capital adjustment (1)	17,246
Fair value of Earnout	20,800
	$	263,046

(1)Includes $14.4 million paid at closing and ~~(iv)~~$2.8 million paid in the ~~assumption~~second quarter of ~~certain liabilities. The LED Purchase Price Note bears interest at LIBOR plus 3.0% and is due on August 15, 2023. The Earnout Note will begin to bear interest~~2023 upon completion of the ~~Earnout Period at LIBOR plus 3.0%~~review of the working capital assets acquired and ~~is due on March 27, 2025. In the second quarter of 2022, we repaid the LED Purchase Price Note. See “Debt.”~~liabilities assumed.

Contingent Consideration: The Earnout ~~Note is~~was accounted for as contingent consideration. ~~The~~As of the Acquisition Date, the fair value of the Earnout ~~Note~~ was estimated ~~as of the date of acquisition~~ to be ~~$28.1~~$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 gross profit, comparable company volatility, discount rate and cost of debt. The fair value of the Earnout was estimated based on the Company’s evaluation of the probability and amount of Earnout to be achieved based on the expected gross profit of Stratus Technologies. A Monte Carlo simulation model was used to estimate the Earnout payment, which was discounted to its present value based on the expected payment date of the Earnout. The model used an estimated gross profit volatility of 33.4% and a discount rate of 7.3% as of the Acquisition Date.

The Earnout ~~Note~~ is revalued each quarter and ~~changes~~any change in valuation ~~are~~is reflected in our results of operations. In the ~~second half~~first six months of ~~2021,~~2023, we ~~recorded charges of $32.4 million to adjust~~adjusted the fair value of the Earnout ~~Note~~ to its current fair value ~~as of August 27, 2021, and~~with such change recognized in ~~the first six months of 2022, we recorded additional aggregate charges of $41.2 million to adjust the value of the Earnout Note to its fair value as of February 25, 2022.~~income from operations. The ~~changes~~change in fair value reflected new information about the ~~probability and timing of meeting the conditions~~estimate of the ~~revenue and~~ gross profit ~~targets~~ of Stratus Technologies during the ~~LED Business.~~

first full 12 fiscal months following the closing. As of February ~~25, 2022,~~24, 2023, the fair value of the Earnout ~~Note~~ was ~~$101.7~~$30.9 million. ~~Upon completion of the Earnout Period, the Earnout Note will be reclassified as debt.~~


1112

~~Table~~

Valuation: We estimated the fair value of ~~Contents~~the assets and liabilities of Stratus Technologies as of the Acquisition Date. The purchase price has been allocated to the tangible and intangible assets acquired and liabilities assumed based on these valuation analyses and were 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 expected to be 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.

Unaudited Pro Forma Financial Information: The following unaudited pro forma financial information presents ~~our~~SGH’s combined results of operations as if the acquisition of ~~the LED Business~~Stratus Technologies had occurred on August ~~31, 2019.~~27, 2021. The


13

unaudited pro forma financial information is based on various adjustments and assumptions and is not necessarily indicative of what ~~our~~SGH’s results of operations actually would have been had the acquisition been completed as of August ~~31, 2019~~27, 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 second quarter and first six months of 2021 combines our results of operations~~ for the three and six months ended February ~~26, 2021 and~~25, 2022 combines the historical results of operations of ~~the LED Business~~SGH for the three and six months ended ~~December 26, 2021.~~

Three Months Ended Six Months Ended
February 26,
2021 February 26,
2021
Net sales $ 409,166 $ 799,899
Net loss attributable to SGH (27,680) (155,758)
Earnings (loss) per share:
Basic $ (0.57) $ (3.19)
Diluted $ (0.57) $ (3.19)

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

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

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

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

•~~Incremental interest expense related to the LED Purchase Price Note~~February 25, 2022 and the historical results of operations of Stratus Technologies for the three and six months ended November 28, 2021:


	Three Months Ended		Six Months Ended
	February 25, 2022		February 25, 2022
Net sales	$	489,336	$	997,166
Net income attributable to SGH	1,299		6,479

Earnings per share:
Basic	$	0.03	$	0.13
Diluted	$	0.02	$	0.12

Acquisition-related transaction expenses are included within selling, general and administrative expenses and were $4.8 million in the first six months of 2023. For the first six months of 2023, net sales for Stratus Technologies were $85.9 million and net loss was $5.3 million, excluding any charges recognized to adjust the Earnout ~~Note.~~

•~~The impacts~~ to ~~income tax expense as a result of the pro forma adjustments.~~its fair value.

Inventories


As of	As of	February 25, 2022		August 27, 2021		As of	February 24, 2023		August 26, 2022
Raw materials	Raw materials	$	168,956	$	163,610	Raw materials	$	120,665	$	150,913
Work in process	Work in process	67,990		92,901		Work in process	51,642		38,624
Finished goods	Finished goods	97,202		107,090		Finished goods	122,060		133,547
		$	334,148	$	363,601		$	294,367	$	323,084

As of February ~~25, 2022~~24, 2023 and August ~~27, 2021, 7%~~26, 2022, 5% and ~~11%~~6%, respectively, of total inventories were inventories owned and held under our logistics services.


12

~~Table of Contents~~

Property and Equipment


As of	As of	February 25, 2022		August 27, 2021		As of	February 24, 2023		August 26, 2022
Equipment	Equipment	$	185,514	$	182,493	Equipment	$	229,908	$	204,805
Buildings and building improvements	Buildings and building improvements	55,306		53,502		Buildings and building improvements	65,736		59,047
Furniture, fixtures and software	Furniture, fixtures and software	35,356		32,114		Furniture, fixtures and software	41,742		38,715
Land	Land	16,126		16,126		Land	16,126		16,126
		292,302		284,235			353,512		318,693
Accumulated depreciation	Accumulated depreciation	(143,243)		(127,969)		Accumulated depreciation	(181,714)		(164,758)
		$	149,059	$	156,266		$	171,798	$	153,935

Depreciation expense for property and equipment was $9.0 million and $17.8 million in the second quarter and first six months of 2023, respectively, and $10.2 million and $19.7 million in the ~~three~~second quarter and ~~six months ended February 25, 2022, respectively, and $5.4 million and $10.3 million in the three and six months ended February 26, 2021, respectively.~~

~~Intangible Assets and Goodwill~~

February 25, 2022 August 27, 2021
Gross
Amount
Accumulated
Amortization
Gross
Amount
Accumulated
Amortization
Intangible assets:
Technology $ 61,336 $ (13,934) $ 61,307 $ (9,142)
Customer relationships 57,500 (27,315) 57,500 (22,393)
Trademarks/trade names 19,200 (8,199) 19,200 (6,628)
Order backlog 3,400 (3,101) 3,800 (2,571)
$ 141,436 $ (52,549) $ 141,807 $ (40,734)
Goodwill by segment:
Intelligent Platform Solutions $ 40,401 $ 40,401
Memory Solutions 33,012 33,854
$ 73,413 $ 74,255

~~In the~~ first six months of 2022, we capitalized $0.8 million for intangible assets with weighted average useful lives of 13.6 years. Amortization expense for intangible assets was $5.9 million and $12.2 million in the three and six months ended February 25, 2022, respectively, and $3.4 million and $6.8 million in the three and six months ended February 26, 2021, respectively. ~~Amortization expense is expected to be $11.7 million for the remainder of 2022, $21.8 million in 2023, $18.1 million in 2024, $15.4 million in 2025, $8.4 million in 2026 and $13.6 million thereafter.~~

~~Goodwill of our Memory Solutions segment decreased by $0.8 million in the first six months of 2022 and increased in all of 2021 by $0.3 million from translation adjustments.~~


1314

~~Table of Contents~~

~~Accounts Payable~~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 the first six months of 2023 by approximately $5.3 million, which resulted in aggregate reductions of $5.1 million in cost of sales and ~~Accrued Expenses~~research and development expense and $0.2 million in the cost of our inventories as of the end of the second quarter of 2023. The reduction benefited net income by $4.2 million, or $0.09 per share.

As of February 25,
2022 August 27,
2021
Accounts payable (1)
$ 380,088 $ 429,640
Salaries, wages and benefits 38,514 37,795
Income and other taxes 21,041 14,319
Other 1,340 2,353
$ 440,983 $ 484,107

Intangible Assets and Goodwill


	As of February 24, 2023				As of August 26, 2022
	Gross Amount		Accumulated Amortization		Gross Amount		Accumulated Amortization
Intangible assets:
Technology	$	150,757	$	(31,578)	$	61,594	$	(18,473)
Customer relationships	85,300		(38,890)		57,500		(32,238)
Trademarks/trade names	29,200		(11,895)		19,200		(9,771)
	$	265,257	$	(82,363)	$	138,294	$	(60,482)

Goodwill by segment:
Intelligent Platform Solutions	$	148,771			$	40,401
Memory Solutions	33,939				33,608
	$	182,710			$	74,009

In the first six months of 2023 and 2022, we capitalized $127.0 million, primarily in connection with our acquisition of Stratus Technologies, and $0.8 million, respectively, for intangible assets with weighted-average useful lives of 6.1 years and 13.6 years, respectively. Amortization expense for intangible assets was $11.0 million and $21.9 million in the second quarter and first six months of 2023, respectively, and $5.9 million and $12.2 million in the second quarter and first six months of 2022, respectively. Amortization expense is expected to be $22.0 million for the remainder of 2023, $41.9 million for 2024, $35.6 million for 2025, $30.4 million for 2026, $29.5 million for 2027 and $23.5 million for 2028 and thereafter.

Goodwill of our IPS segment increased in the first six months of 2023, primarily due to the addition of $125.9 million in connection with our acquisition of Stratus Technologies. See “Business Acquisition – Stratus Technologies.” In connection with the preparation of the financial statements included in this quarterly report, we assessed goodwill associated with our Penguin Edge business within our IPS segment and concluded it was partially impaired. As a result, we recognized a charge of $17.6 million to impair the carrying value of goodwill. See “Impairment of Penguin Edge Goodwill.”

Goodwill of our Memory Solutions segment increased by $0.3 million in the first six months of 2023 and decreased in all of 2022 by $0.2 million from translation adjustments.

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 certain legacy products offered through our Penguin Edge business by approximately the end of calendar 2024. In connection therewith and with the preparation of the financial statements included in this quarterly report, 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. As a result, we recorded a charge of $17.6 million in the second quarter of 2023 to impair the carrying value of IPS goodwill. 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%. 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 estimate the then-future cash flows of the Penguin Edge business. As future cash flows are generally expected to decline over time, we currently anticipate that the


~~(1)~~15			~~Includes accounts payable for property and equipment of $2.1 million and $3.1 million as of February 25, 2022 and August 27, 2021, respectively.~~

remaining goodwill of the Penguin Edge reporting unit of $17.6 million as of the end of the second quarter of 2023 may become further impaired in future periods.

Accounts Payable and Accrued Expenses


As of	February 24, 2023		August 26, 2022
Accounts payable (1)	$	167,769	$	345,063
Salaries, wages and benefits	34,046		45,189
Income and other taxes	16,068		17,961
Other	8,406		5,141
	$	226,289	$	413,354

(1)Includes accounts payable for property and equipment of $6.3 million and $3.5 million as of February 24, 2023 and August 26, 2022, respectively.

Debt


As of	As of	February 25, 2022		August 27, 2021		As of	February 24, 2023		August 26, 2022
Credit Facility Term Loan		$	270,560	$	—
Convertible Senior Notes		208,452		203,992
LED Purchase Price Note		—		125,000
ABL Credit Agreement		—		25,000
Amended 2027 TLA						Amended 2027 TLA	$	558,383	$	269,304
2029 Notes						2029 Notes	146,635		—
2026 Notes						2026 Notes	98,353		213,023
LED Earnout Note						LED Earnout Note	—		101,824
Other	Other	11,324		11,846		Other	18,134		19,263
		490,336		365,838			821,505		603,414
Less current debt	Less current debt	(6,425)		(25,354)		Less current debt	(32,141)		(12,025)
Long-term debt	Long-term debt	$	483,911	$	340,484	Long-term debt	$	789,364	$	591,389

Credit Facility

On February 7, 2022, weSGH and SMART Modular Technologies, Inc. (collectively, the “Borrowers”) entered into a credit agreement (the ~~"Credit Agreement"~~“Original Credit Agreement”) with a syndicate of banks that provides for (i) a term loan credit facility in an aggregate principal amount of $275.0 million (the ~~"2027 TLA"~~“2027 TLA”) and (ii) a revolving credit facility in an aggregate principal amount of $250.0 million (the ~~"2027 Revolver,"~~“2027 Revolver” and together with the 2027 TLA, the ~~"Credit Facility"~~“Original Credit Facility”), 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.

~~Issuance~~Incremental Amendment: On August 29, 2022, the Borrowers entered into the First Amendment (the “Amended Credit Agreement”) with and among the lenders party thereto and Citizens Bank, N.A., as Administrative Agent (the “Incremental Amendment”). The Incremental Amendment amends 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, which is included in other non-operating (income) expense in the accompanying statement of operations.


16

Other: As of February 24, 2023, there was $566.1 million of principal amount outstanding under the Amended 2027 TLA, unamortized issuance costs ~~incurred~~were $7.7 million and the effective interest rate was 7.45%. As of February 24, 2023, there were no amounts outstanding under the 2027 Revolver.

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 (“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 (“2029 Notes”) and (ii) an aggregate of approximately $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 (“2029 Indenture”), dated as of January 23, 2023, between the Company and U.S. Bank Trust Company, National Association, as trustee.

Transactions involving contemporaneous exchanges between the same debtor and creditor in connection with the ~~Credit Facility were $9.1 million~~issuance of a new debt obligation and ~~were allocated~~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 ~~2027 TLA~~exchange.

We concluded that the exchanged 2026 Notes and ~~2027 Revolver on a pro rata basis. Unamortized issuances costs allocated to~~ the ~~2027 TLA are amortized using~~2029 Notes had substantially different terms, and accordingly, we accounted for the ~~effective interest method and are included~~Exchange Transactions as ~~a reduction~~the extinguishment of the ~~principal amount~~2026 Notes and the issuance of the ~~2027 TLA within debt. Unamortized issuances costs allocated to the 2027 Revolver are amortized using the straight-line method and are~~2029 Notes. As a result, we recognized an extinguishment loss, included in other ~~current~~non-operating expense, of $16.7 million, consisting of $14.1 million of premium paid to extinguish the 2026 Notes and ~~noncurrent assets.~~$2.5 million for the write-off of unamortized issuance costs.

~~Principal payments under the 2027 TLA~~2029 Notes

The 2029 Notes are ~~due quarterly, beginning in May 2022, equal to 2.5% per annum~~senior, unsecured obligations of the ~~initial aggregate principal amount,~~Company and are equal in right of payment with ~~such per annum percentage equal~~our existing and future senior, unsecured indebtedness, senior in right of payment to ~~5.0%, 5.0%, 5.0%~~our existing and ~~7.5% per annum in years two through five, respectively, with~~future indebtedness that is expressly subordinated to the ~~balance due at maturity.~~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.

~~Interest and fees~~: ~~Loans under the Credit Agreement~~The 2029 Notes bear interest at a rate ~~per annum equal to either, at our option, a term secured overnight financing rate ("SOFR") rate or a base rate, in each case plus an applicable margin.~~

~~2027 TLA: The applicable margin for 2027 TLA is~~of 2.00% per annum ~~with respect to term SOFR borrowings, and 1.00% per annum with respect to base rate borrowings. As of February 25, 2022, the interest rate applicable to~~on the principal amount ~~outstanding~~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 (the “ordinary shares”), 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 ~~2027 TLA was 2.37%~~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 ~~annum. As~~ordinary share exceeds 130% of ~~February 25, 2022, there was $275.0 million of 2027 TLA~~the conversion price for at least 20


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trading days in the 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter;

ii.during the five consecutive business days immediately after any 10 consecutive trading day period (such 10 consecutive trading day period, the “measurement period”) in which the trading price per $1,000 principal amount ~~outstanding~~of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per ordinary share on such trading day and ~~unamortized issuance costs were $4.4 million and, as~~the conversion rate on such trading day;

iii.upon the occurrence of ~~February 25, 2022, the 2027 TLA had an effective interest rate of 2.76%.~~

~~2027 Revolver: The applicable margin for revolving loans varies based~~certain corporate events or distributions on our ~~Total Leverage Ratio~~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 maturity date.

Upon the occurrence of a “make-whole fundamental change” (as defined in the ~~Credit Agreement) and ranges from 1.25% to 3.00% per annum with respect to term SOFR borrowings and from 0.25% to 2.00% per annum with respect to base~~2029 Indenture), we will in certain circumstances increase the conversion rate ~~borrowings.~~for a specified period of time. In addition, ~~we are required to pay~~upon the occurrence of a quarterly unused commitment fee at an initial rate of 0.25%, which may increase up to a rate of 0.35% based on certain Total Leverage Ratio levels specified in the Credit Agreement. As of February 25, 2022, there were no amounts outstanding under the 2027 Revolver and unamortized issuance costs were $4.6 million.

~~Security~~: The Credit Agreement is jointly and severally guaranteed on a senior basis by certain subsidiaries of SGH organized in the United States and Cayman Islands. In addition, the Credit Agreement is secured by a pledge of the capital stock of, or equity interests in, certain subsidiaries of SGH organized in the United States and the Cayman Islands and by substantially all of the assets of certain subsidiaries of SGH organized in the United States and the Cayman Islands.

~~Covenants~~: The Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability and the ability of our subsidiaries to: incur additional indebtedness; create liens on assets; engage in mergers or consolidations; sell assets; pay dividends; make distributions or repurchase capital stock; make investments, loans or advances; repay or repurchase certain subordinated debt (except as scheduled or at maturity); create restrictions on the payment of dividends or other amounts to us from our restricted subsidiaries; make certain acquisitions; engage in certain transactions with affiliates; amend material agreements governing our subordinated debt and fundamentally change our business.

~~The Credit Agreement also includes the following financial maintenance covenants tested on the final day of each fiscal quarter:~~


			i.			~~a First Lien Leverage Ratio (as defined in the Credit Agreement) of 3.00 to 1.00;~~


			~~ii.~~			a Total Leverage Ratio of 5.00 to 1.00; provided, that commencing after the eighth full fiscal quarter after the Effective Date, such Total Leverage Ratio level will instead be 4.50 to 1.00; provided further, that commencing after the eighth full fiscal quarter after the Effective Date, in connection with any Material Acquisition (as defined in the Credit Agreement), at the election of the Borrowers, the maximum Total Leverage Ratio for the next four testing periods after such Material Acquisition has been consummated will be automatically increased by 0.50 to 1.00 above the otherwise permitted Total Leverage Ratio for the applicable fiscal quarter (not to exceed 5.00 to 1.00 in any event); provided further, that (x) no more than two such elections may be made during the term of the Credit Agreement and (y) following the first such election, no subsequent election may be made unless the Total Leverage Ratio has been less than or equal to 5.00 to 1.00 as of the last day of at least two consecutive Test Periods (as defined in the Credit Agreement) following the expiration of the first increase; and


			~~iii.~~			~~an Interest Coverage Ratio (as defined in the Credit Agreement) of 3.00 to 1.00.~~

~~For purposes of calculating the First Lien Leverage Ratio and the Total Leverage Ratio, the consolidated debt of the Company and its Restricted Subsidiaries~~“fundamental change” (as defined in the ~~Credit Agreement) is reduced by up to $100 million~~2029 Indenture), holders of the ~~aggregate~~2029 Notes may require us to repurchase their 2029 Notes at a cash repurchase price equal to the principal amount of ~~unrestricted cash~~the 2029 Notes to be repurchased, plus accrued and ~~Permitted Investments (as defined in~~unpaid interest, if any, to, but excluding, the ~~Credit Agreement)~~fundamental change repurchase date. The definition of fundamental change includes certain business combination transactions involving the Company and ~~its Restricted Subsidiaries.~~certain de-listing events with respect to our ordinary shares.

~~Other~~Cash Redemption at Our Option: ~~Substantially simultaneously with entering into~~We have the ~~Credit Agreement, we used~~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 ~~portion~~cash redemption price equal to the principal amount of the ~~proceeds~~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 ~~Credit Facility~~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 ~~pay~~redeem all, but not less than all, of the 2029 Notes if certain changes in ~~full all borrowings and terminated all commitments under (i) our ABL Credit Agreement, dated as~~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 December 23, 2020, (ii) our Amended Credit Agreement, dated as of of March 6, 2020 and (iii) the LED Purchase Price Note, dated as of March 1, 2021. In connection therewith, we used an aggregate of $160.4 million to pay principal and interest outstanding under these agreements and recorded charges of $0.7 millionsuch note will be increased in ~~other non-operating expense to write off~~ certain ~~unamortized issuance costs.~~circumstances if it is converted after it is called for redemption.

~~Convertible Senior~~2026 Notes

In February 2020, we issued $250.0 million in aggregate principal amount of 2.25% convertible senior notes due 2026 (the “2026 Notes”). The 2026 Notes are general unsecured obligations, bear interest at an annual rate of 2.25% per year, payable semi-annually on February 15 and August 15, and mature on February 15, 2026, unless earlier converted, redeemed or repurchased. The 2026 Notes are governed by an indenture (the ~~“Indenture”~~“2026 Indenture”) between us and U.S. Bank


15

~~Table of Contents~~

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 February 24, 2023, $100.0 million in aggregate principal amount of 2026 Notes remain outstanding. See “Convertible Senior Notes – Convertible Senior Notes Exchange.”

~~Conversion Rights~~First Supplemental Indenture to Indenture Governing the 2026 Notes: ~~Holders~~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 ~~may convert them~~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 ~~following circumstances:~~if-converted method.


18			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 5 consecutive business days immediately after any 10 consecutive trading day period (such 10 consecutive trading day period, the “Measurement Period”) in which the trading price per $1,000 principal amount of notes for each trading day of the Measurement Period was less than 98% of the product of the last reported sale price per ordinary share on such trading day and the conversion rate on such trading day;


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

Convertible Senior Note Interest


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


			v.			~~the 2026 Notes are called for redemption.~~

Upon conversion, we will pay or deliver, as applicable, cash, ordinary shares or a combination of cash and ordinary shares at our election. Our intent is to settle in cash the principal amount of our convertible notes upon conversion and may, at our option, settle any excess of the conversion value over the principal amount in cash, ordinary shares or any combination thereof.

The closing price of our ordinary shares exceeded 130% of the conversion price for our 2026 Notes for at least 20 trading days in the 30 consecutive trading days ended on February 25, 2022. As a result, the 2026 Notes are convertible by holders through May 27, 2022.

If we receive a notice of conversion for our 2026 Notes, and we elect to settle in cash any portion of the conversion obligation, the cash settlement obligation becomes a derivative debt liability subject to mark-to-market accounting treatment based on the volume-weighted-average price of our ordinary shares over a period of 40 consecutive trading days, beginning two business days after the holder gives notice to convert. Accordingly, as of the date of our election to settle any part of a conversion in cash, we would reclassify all or a portion of the fair value of the equity component of the converted 2026 Notes from additional capital to derivative debt liability within current debt in our consolidated balance sheet.

~~Other~~:Unamortized debt discount and issuance costs are amortized over the ~~term~~terms of ~~the~~our 2026 Notes and 2029 Notes using the effective interest ~~rate~~ method. As of February ~~25, 2022~~24, 2023 and August 26, ~~2021,~~2022, the effective interest rate for our 2026 Notes was 2.83% and 7.06%, respectively. As of February 24, 2023, the effective interest rate for our 2029 Notes was 2.40%. ~~Interest~~Aggregate interest expense for ~~the 2026 Notes~~our convertible notes consisted of ~~2.25%~~ contractual stated interest and amortization of discount and issuance costs and included of the following:


		Three Months Ended				Six Months Ended					Three Months Ended				Six Months Ended
		February 25, 2022		February 26, 2021		February 25, 2022		February 26, 2021			February 24, 2023		February 25, 2022		February 24, 2023		February 25, 2022
Contractual stated interest	Contractual stated interest	$	1,390	$	1,391	$	2,781	$	2,781	Contractual stated interest	$	1,366	$	1,390	$	2,757	$	2,781
Amortization of discount and issuance costs	Amortization of discount and issuance costs	2,250		2,098		4,460		4,159		Amortization of discount and issuance costs	317		2,250		654		4,460
		$	3,640	$	3,489	$	7,241	$	6,940		$	1,683	$	3,640	$	3,411	$	7,241

As of ~~both February 25,~~August 26, 2022, ~~and August 27, 2021,~~ the carrying amount of the equity components of the 2026 Notes, which iswas included in additional paid-in-capital, was $50.8 million. As of the beginning of the first quarter of 2023, we adopted ASU 2020-06. In connection therewith, we reclassified $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.”


16

~~Table~~Maturities of ~~Contents~~

~~Leases~~Debt

As of February ~~25, 2022~~24, 2023, maturities of debt were as follows:


Remainder of 2023	$	16,266
2024	39,743
2025	32,532
2026	132,532
2027	461,592
2028 and thereafter	151,537
Less unamortized discount and issuance costs	(12,697)
	$	821,505

Leases

As of February 24, 2023 and August ~~27, 2021,~~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 ~~the first six months of 2022 or 2021.~~any period presented. The components of operating lease expense were as follows:


		Three Months Ended				Six Months Ended					Three Months Ended				Six Months Ended
		February 25, 2022		February 26, 2021		February 25, 2022		February 26, 2021			February 24, 2023		February 25, 2022		February 24, 2023		February 25, 2022
Fixed lease cost	Fixed lease cost	$	3,213	$	1,915	$	6,516	$	3,454	Fixed lease cost	$	5,223	$	3,213	$	10,319	$	6,516
Variable lease cost	Variable lease cost	453		288		821		560		Variable lease cost	299		453		683		821
Short-term lease cost	Short-term lease cost	182		57		258		115		Short-term lease cost	558		182		1,057		258
		$	3,848	$	2,260	$	7,595	$	4,129		$	6,080	$	3,848	$	12,059	$	7,595

Cash flows used for operating activities ~~for~~in the first six months of ~~2022~~2023 and ~~2021~~2022 included payments for operating leases of $5.2 million and $5.1 million, ~~and $3.1 million,~~ respectively. ~~Noncash acquisitions~~Acquisitions of right-of-use assets were ~~$0.6~~$10.5 million ~~and $3.3 million for~~in the first six months of ~~2022~~2023, primarily due to the acquisition of Stratus Technologies, and ~~2021, respectively.~~$0.6 million in the first six months of 2022.

As of February ~~25, 2022~~24, 2023 and August ~~27, 2021,~~26, 2022, the weighted-average remaining lease term for our operating leases was ~~5.8~~10.3 years and ~~6.1~~10.9 years, respectively. Certain of our operating leases include one or more options to extend the lease term for


19

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 February ~~25, 2022~~24, 2023 and August ~~27, 2021,~~26, 2022, the weighted-average discount rate for our operating leases was ~~6.8%~~6.2% and ~~6.7%~~6.1%, respectively.

Minimum payments of operating lease liabilities as of February ~~25, 2022~~24, 2023 were as follows:

Remainder of 2022 $ 6,820
2023 10,805
2024 7,272
2025 4,664
2026 3,581
2027 and thereafter 15,652
48,794
Less imputed interest (10,618)
Present value of total lease liabilities $ 38,176

The table above excludes lease liabilities for leases that have been executed but not yet commenced. As of February 25, 2022, we had such lease commitments relating to operating lease payment obligations of $51.8 million for a building lease with a term of 16 years. We will recognize a right-of-use asset and an associated lease liability at the time such asset becomes available for our use. Such lease is currently expected to commence in the second half of fiscal 2022.


Remainder of 2023	$	6,008
2024	14,746
2025	12,633
2026	11,047
2027	8,629
2028 and thereafter	65,972
	119,035
Less imputed interest	(33,370)
Present value of total lease liabilities	$	85,665

Commitments and Contingencies

Contingencies

From time to time, we are involved in legal matters that arise in the normal course of business. Litigation in general, and intellectual property, employment and shareholder litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. Additionally, from time to time, we are a party in the normal course of business to a variety of agreements pursuant to which we may be obligated to indemnify another party. It is not possible to predict the maximum potential amount of future payments under these types of agreements due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. Historically, our payments under these types of agreements have not had a material adverse effect


17

~~Table of Contents~~

on our business, results of operations or financial condition. We regularly review contingencies to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or range of loss can be made.

Equity

SGH Shareholders’ Equity

~~Ordinary~~Share Dividend

On January 3, 2022, our Board of Directors declared a share dividend of one ordinary share, $0.03 par value per share, for every one outstanding ordinary share owned to shareholders of record as of January 25, 2022. The dividend was paid on February 1, 2022. The accompanying consolidated financial statements and notes have been restated and adjusted for the impact of the share dividend.

Share Repurchase Authorization

On April 4, 2022, our Board of Directors approved a $75 million share repurchase authorization, under which we may repurchase our outstanding ordinary shares from time to time through open market purchases, privately-negotiated transactions or otherwise. The share repurchase authorization has no expiration date but may be suspended or terminated by the Board of Directors at any time. In the first six months of 2023 and in 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

In January 2021, we agreed to repurchase an aggregate of 1.1 million ordinary shares from Silver Lake Partners III Cayman (AIV III), L.P., Silver Lake Technology Investors III Cayman, L.P., Silver Lake Sumeru Fund Cayman, L.P. and Silver Lake Technology Investors Sumeru Cayman, L.P. at a purchase price of $40.30 per share in a privately negotiated transaction. The transaction closed on January 15, 2021. In addition, ordinaryOrdinary 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 433 thousand and 55177 thousand ordinary shares as payment of withholding taxes for $0.6 million and $2.4 million, respectively, in the second quarter and first six months of ~~2022, respectively,~~2023, and ~~1.1~~4 thousand and 55 thousand ordinary shares for $0.2 million and ~~1.2~~$2.9 million, ~~ordinary shares~~respectively, in the second quarter and first six months of ~~2021, respectively. As~~2022.


20

In connection with the Exchange Transactions in the second quarter of ~~February 25, 2022, these~~2023, we repurchased 326 thousand ordinary shares ~~are held in treasury.~~for $5.4 million.

~~Noncontrolling Interest in Subsidiary~~Stratus Technologies Earnout

In connection with our acquisition of Status Technologies, the ~~LED Business, we have~~Seller has the right to receive an Earnout of up to $50.0 million based on the gross profit performance of Stratus Technologies during the first full 12 fiscal months following the closing. The Earnout, if any, will be payable in cash, ordinary shares of SGH or a ~~51% ownership interest~~mix of cash and SGH shares, at SGH’s election.

At the time of settlement of the Earnout, SGH may elect to pay any portion in SGH shares and, if so, the number of SGH shares issued will be determined based on the volume weighted-average price per SGH share for the 30 consecutive trading days ending on and including the trading day immediately preceding the date of payment of the Earnout (subject to equitable adjustment in the ~~Cree Joint Venture.~~event of certain changes to SGH shares occurring during such 30 consecutive trading days). Shares issuable pursuant to the Earnout are contingently issuable shares and are considered in the computation of diluted earnings per share if dilutive. The ~~remaining 49% ownership interest~~number of contingently issuable shares included in diluted earnings per share is ~~held by San’an.~~the number of shares, if any, that would be issuable at the time of settlement based on the assumption that the current fair value of the Earnout remains unchanged until the end of the earnout period. As of February 24, 2023, based on the fair value of the Earnout, the contingently issuable shares were anti-dilutive.

2029 Capped Calls

On January 18, 2023, in connection with the pricing of the 2029 Notes, we entered into privately negotiated capped call transactions (the “2029 Capped Calls”). The ~~Cree Joint Venture has~~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 ~~5-member board~~cap, based on the cap price of ~~directors, three~~the 2029 Capped Calls. 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 ~~designated by us~~considered capital transactions, was $15.1 million and ~~two of which~~was recognized as a decrease to additional paid-in capital.

The 2029 Capped Calls are ~~designated by San’an. As a result of our majority voting interest, we consolidate~~separate transactions, each between the ~~operations~~Company and the counterparties to the 2029 Capped Calls, and are not part 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 representativeterms of the ~~Cree Joint Venture. The Cree Joint Venture produces~~2029 Notes and ~~delivers to market high performing, mid-power lighting class LEDs in an exclusive arrangement serving~~do not affect any holder’s rights under the ~~expanding markets of North and South America, Europe and Japan, and serves China markets and~~2029 Notes or the ~~rest~~2029 Indenture. Holders of the ~~world on~~2029 Notes do not have any rights with respect to the 2029 Capped Calls.

2026 Capped Calls

In connection with our issuance of the 2026 Notes in February 2020, we entered into capped call transactions (the “2026 Capped Calls”). As part of the Exchange Transactions, we entered into agreements with a ~~non-exclusive basis.~~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.

~~The 49% ownership~~


21

Accumulated Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income (loss) by component for the six months ended February 24, 2023 were 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	4,113		124		(11)		4,226
Reclassifications out of accumulated other comprehensive income	—		(128)		—		(128)
Other comprehensive income (loss)	4,113		(4)		(11)		4,098

As of February 24, 2023	$	(217,542)	$	(4)	$	(11)	$	(217,557)

Noncontrolling Interest in Subsidiary

Noncontrolling interest ~~held~~increased by ~~San’an is classified as noncontrolling interest. In~~$0.4 million and $0.8 million in the second quarter and first six months of ~~2022, the Cree Joint Venture distributed an aggregate of $7.7 million to its partners, including $3.9 million to SGH~~2023 and ~~$3.8 million to San’an. Noncontrolling interest increased by~~ $0.5 million and $1.2 million in the second quarter and first six months of 2022, respectively, for San’an’s 49% share of net income from the Cree Joint Venture. ~~Remaining cash~~In the second quarters of 2023 and 2022, the Cree Joint Venture distributed an aggregate of $4.1 million and $7.7 million to its partners, including $2.1 million and $3.9 million to SGH and $2.0 million and $3.8 million to San’an, respectively. Cash and other assets of the Cree Joint Venture are generally not available for use by us in our other operations.

Government Incentives

Brazil Financial Credits

Through one of our ~~Brazil~~Brazilian subsidiaries, we participate in 2 programs (“Brazil Incentive Programs”), pursuant to which the Brazilian government incentivizes the manufacture and sale of certain information technology and consumer electronics products within Brazil. The programs include 1) Lei da Informática – Processo Produtivo Básico Program (alsoan incentive program, known as ~~Informatics Law – Basic Productive Process Program) (“IT Law/PPB”) and 2)~~ Programa de Apoio ao Desenvolvimento Tecnológico da Indústria de Semicondutores (also known as ~~Program of~~Technology Development Support of the ~~Development~~Semiconductor Industry Program) (“PADIS”), pursuant to which the Brazilian government incentivizes the manufacture and sale of ~~the Semiconductor Industry) (“PADIS”).~~ semiconductor components within Brazil.

In January 2022, the Brazilian government approved an extension to PADIS. The financial credits available through ~~PADIS~~the program are set to expire in December ~~2026, while the financial credits through IT Law/PPB are set to expire in December 2029. The Brazil Incentive Programs provide~~2026. PADIS provides for reduced import and other transaction-related taxes for certain procurement, manufacturing and sales activities. In exchange, we must invest in certain research and development activities related to ~~semiconductors and IT~~semiconductor-based solutions in ~~aggregate amounts that exceed a specified percentage~~an amount equivalent to 5% of ~~our~~the gross revenues of such Brazilian subsidiary recognized in connection with incentivized sales of semiconductor components in Brazil, excluding exports and sales to customers located at the Manaus Free Trade Zone. Accordingly, financial credits earned in connection with the Brazil Incentive Programs are reflected as a reduction of research and development expense. Financial credits available under the Brazil Incentive Programs areZone, subject to the limitations ~~which range from approximately 11%~~of 13.1% (through December 31, 2024) and 12.3% (from January 1, 2025 through December 31, 2026) of the subsidiary’s gross revenues.

Pursuant to ~~14% of gross revenues recognized for sales in Brazil.~~

~~Under~~ PADIS, we recognized aggregate financial credits, reflected as a reduction of research and development expense, of $1.4 million and $4.0 million in the second quarter and first six months of 2023, respectively, and $6.0 million and $11.9 million in the second quarter and first six months of 2022, ~~respectively, and $6.2 million and $14.0~~


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~~Table of Contents~~

~~million in the second quarter and first six months of 2021,~~ respectively. Financial credits earned under ~~the Brazil Incentive Programs~~PADIS may be refunded in cash or used to offset liabilities for Brazil federal taxes. As of February ~~25, 2022~~24, 2023 and August ~~27, 2021,~~26, 2022, receivables for earned ~~under PADIS~~ but unused financial credits ~~of $17.5~~were $19.6 million and ~~$19.8~~$18.7 million, ~~respectively, were included in other current assets.~~respectively. Financial credits earned ~~under PADIS~~ but unused as of February ~~25, 2022~~24, 2023 can be utilized through ~~November 2026.~~December 2027.

Fair Value Measurements

Cash and cash equivalents as of ~~both~~ February ~~25, 2022~~24, 2023 and August ~~27, 2021~~26, 2022 included money market funds of ~~$2.7~~$15.6 million and $13.8 million, respectively, which were valued based on Level 1 measurements using quoted prices in active markets for identical assets. Restricted cash was $1.0 million as of February 24, 2023.


22

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


		February 25, 2022				August 27, 2021					As of February 24, 2023				As of August 26, 2022
		Fair Value		Carrying Value		Fair Value		Carrying Value			Fair Value		Carrying Value		Fair Value		Carrying Value
Assets:	Assets:									Assets:
Derivative financial instrument assets	Derivative financial instrument assets	$	—	$	—	$	883	$	883	Derivative financial instrument assets	$	146	$	146	$	—	$	—

Liabilities:	Liabilities:									Liabilities:
Derivative financial instrument liabilities	Derivative financial instrument liabilities	$	2,895	$	2,895	$	50	$	50	Derivative financial instrument liabilities	$	509	$	509	$	605	$	605
Credit Facility Term Loan		275,000		270,560		—		—
Convertible Senior Notes		382,903		208,452		335,668		203,992
LED Purchase Price Note		—		—		125,000		125,000
ABL Credit Agreement		—		—		25,000		25,000
Acquisition-related contingent consideration										Acquisition-related contingent consideration	30,900		30,900		—		—
Amended 2027 TLA										Amended 2027 TLA	566,070		558,383		273,281		269,304
2029 Notes										2029 Notes	155,220		146,635		—		—
2026 Notes										2026 Notes	108,857		98,353		290,223		213,023
LED Earnout Note										LED Earnout Note	—		—		96,412		101,824
Debt – other	Debt – other	10,375		11,324		10,702		11,846		Debt – other	17,101		18,134		17,855		19,263
Acquisition-related contingent consideration		101,700		101,700		60,500		60,500

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

The fair value of our Convertible Senior Notes (excluding the value of the equity component of our convertible notes), as measured on a non-recurring basis, was determined based on Level 2 measurements, including the trading price of the convertible notes. The fair values of our LED Purchase Price Note, ABL Credit Agreement and other debt, as measured on a non-recurring basis, were estimated based on Level 2 measurements, including discounted cash flows and interest rates based on similar debt issued by parties with credit ratings similar to ours.

Acquisition-related contingent consideration ~~relates~~is related to our acquisition of ~~the LED Business~~Stratus Technologies and is included in ~~noncurrent liabilities.~~current liabilities as of February 24, 2023. The fair value as of February 24, 2023, measured on a recurring basis, was based on Level 3 measurements, which ~~includes~~included significant inputs not observable in the market. The fair value was estimated using a Monte Carlo simulation analysis in a risk-neutral framework with assumptions for volatility, market price of risk adjustment, risk-free rate and cost of debt. Assumptions used in the determination of fair value also included estimates of future revenue and gross profit of the LED Business in Cree’s first four full fiscal quarters following the closing of the acquisition. Generally, changes in the assumptions for projected future revenue, gross profit and volatility would be accompanied by a directionally similar change in the fair value measurement. Conversely, changes in the discount rate would be accompanied by a directionally opposite change in the related fair value measurement. However, due to the contingent consideration having a maximum payout amount, changes in these assumptions would not affect theThe fair value of the ~~contingent consideration if they increase (decrease) beyond certain amounts. Subsequent~~Earnout was estimated based on the Company’s evaluation of the probability and amount of Earnout to be achieved based on the ~~acquisition~~expected gross profit of Stratus Technologies. The Monte Carlo simulation model was used to estimate the Earnout payment, which was discounted to its present value based on the expected payment date ~~at each reporting date,~~of the ~~contingent consideration liability is remeasured~~Earnout. The model used an estimated gross profit volatility of 33.2% and a discount rate of 8.8% as of February 24, 2023.

The fair values of our Amended 2027 TLA, LED Earnout Note and other debt, as measured on a non-recurring basis, were estimated based on Level 2 measurements, including discounted cash flows and interest rates based on similar debt issued by parties with credit ratings similar to ours. The fair ~~value with changes recorded in our results~~values of ~~operations. See “Business Acquisition – LED Business.”~~the 2029 Notes and 2026 Notes, as measured on a non-recurring basis, was determined based on Level 2 measurements, including the trading prices of the notes.


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Derivative Instruments

We use currency forward contracts to mitigate our exposure of certain monetary assets and liabilities from changes in currency exchange rates. Realized and unrealized gains and losses from derivative instruments without hedge accounting designation as well as the changes in the underlying monetary assets and liabilities from changes in currency exchange rates are included in other non-operating (income) expense.

In the three and six months ended February 25, 2022, we recognized net realized gains of $1.2 million and $4.5 million in the three and six months ended February 25, 2022, respectively, and net unrealized losses of $4.3 million and $3.5 million, respectively, from changes in the fair value of the non-designated forward contracts. In the three and six months ended February 26, 2021, we recognized net realized losses of $2.9 million and $0.7 million, respectively, and net unrealized gains of $0.1 million and $3.1 million, respectively, from changes in the fair value of the non-designated forward contracts.


	Three Months Ended				Six Months Ended
	February 24, 2023		February 25, 2022		February 24, 2023		February 25, 2022
Realized (gains) losses on currency forward contracts	$	276	$	(1,236)	$	1,283	$	(5,146)
Unrealized (gains) losses on currency forward contracts	325		4,336		(105)		3,583

Equity Plans

As of February ~~25, 2022, 8.6~~24, 2023, 8.8 million shares of our ordinary shares were available for future awards under our equity plans.


23

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

Aggregate Restricted Award activity was as follows:

Three Months Ended Six Months Ended
February 25,
2022 February 26,
2021 February 25,
2022 February 26,
2021
Awards granted 113 337 646 1,434
Weighted average grant-date fair value per share $ 30.28 $ 20.02 $ 28.42 $ 12.67
Aggregate vesting-date fair value of shares vested $ 6,272 $ 3,038 $ 18,228 $ 11,408

~~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 performance-based restricted share award to our former CEO 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 previously granted to 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.


	Three Months Ended				Six Months Ended
	February 24, 2023		February 25, 2022		February 24, 2023		February 25, 2022
Awards granted	82		113		1,222		646
Weighted-average grant date fair value per share	$	17.15	$	30.28	$	19.05	$	28.42
Aggregate vesting date fair value of shares vested	$	6,665	$	6,272	$	15,614	$	18,228

As of February ~~25, 2022,~~24, 2023, total unrecognized compensation costs for unvested Restricted Awards was ~~$87.4~~$84.9 million, which was expected to be recognized over a ~~weighted average~~weighted-average period of ~~2.76~~2.5 years.


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~~Table of Contents~~

Share Options

~~Share option activity and assumptions were as follows:~~


~~Six Months Ended~~	February 26, 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~~	—

As of February ~~25, 2022,~~24, 2023, total aggregate unrecognized compensation costs for unvested options was ~~$4.4~~$1.8 million, which was expected to be recognized over a ~~weighted average~~weighted-average period of ~~1.77~~1.4 years.

Employee Share Purchase Plan (“ESPP”)

Under our ~~employee share purchase plan (“ESPP”),~~ESPP, employees purchased 265 thousand ordinary shares for $2.9 million in the first six months of 2023 and 133 thousand ~~ordinary~~ shares for $3.0 million in the first six months of ~~2022 and 173 thousand ordinary shares for $1.8 million in the first six months of 2021.~~2022.

Share-Based Compensation Expense


		Three Months Ended				Six Months Ended					Three Months Ended				Six Months Ended
		February 25, 2022		February 26, 2021		February 25, 2022		February 26, 2021			February 24, 2023		February 25, 2022		February 24, 2023		February 25, 2022
Share-based compensation expense by caption:	Share-based compensation expense by caption:									Share-based compensation expense by caption:
Cost of sales	Cost of sales	$	1,648	$	804	$	3,379	$	1,641	Cost of sales	$	1,369	$	1,648	$	3,077	$	3,379
Research and development	Research and development	1,559		810		3,099		1,588		Research and development	1,441		1,559		3,075		3,099
Selling, general and administrative	Selling, general and administrative	6,766		3,784		13,270		13,257		Selling, general and administrative	7,585		6,766		14,655		13,270
		$	9,973	$	5,398	$	19,748	$	16,486		$	10,395	$	9,973	$	20,807	$	19,748

Income tax benefits related to the tax deductions for share-based awards are recognized only upon the settlement of the related share-based awards. ~~Consistent with our treatment of income or loss from our U.S. operations, our income tax provision in 2022 and 2021 reflects de minimis income~~Income tax benefits for share-based ~~compensation expense.~~awards were $1.8 million and $4.0 million in the second quarter and first six months of 2023, respectively, and $1.8 million and $4.9 million in the second quarter and first six months of 2022, respectively.

Revenue and Customer Contract Balances

Net Sales and Gross Billings

We ~~disaggregate~~provide certain logistics services on an agent basis, whereby we procure materials on behalf of our customers and then resell such materials to our customers. Our logistics services 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.

Gross amounts invoiced to customers in connection with these agent services include amounts related to the services performed by us in addition to the cost of the materials procured. However, only the amount related to the agent component is recognized as revenue ~~by segment~~in our results of operations. We generally recognize revenue for these procurement, logistics and ~~geography and by product and service revenue. See “Segment and Other Information.”~~inventory management services upon the completion of such services, which typically occurs at the time of


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~~Net Sales and Gross Billings~~

~~Net~~shipment of product to the customer. The cost of materials billed to our customers under these arrangements, but not recognized as revenue or cost of sales ~~by products and services and gross amounts billed for services, including logistics services~~ in ~~which we act as an agent for~~ our ~~customers,~~results of operations, were as follows:

Three Months Ended Six Months Ended
February 25,
2022 February 26,
2021 February 25,
2022 February 26,
2021
Net sales:
Products and professional services $ 434,036 $ 296,996 $ 890,461 $ 582,197
Logistics services 15,135 7,013 28,654 13,508
$ 449,171 $ 304,009 $ 919,115 $ 595,705

Gross billings in connection with logistics services:
Logistics services $ 15,135 $ 7,013 $ 28,654 $ 13,508
Cost of materials (1)
339,715 144,109 675,990 275,633
$ 354,850 $ 151,122 $ 704,644 $ 289,141


~~(1)~~			Included in gross billings in connection with services are amounts billed to customers for the cost of materials procured in an agent capacity in connection with our logistics services business, which includes procurement, logistics, inventory management, temporary warehousing, kitting and/or packaging services. While we take title to inventory under such arrangements, control of such inventory does not transfer to us as we do not, at any point, have the ability to direct the use, and thereby obtain the benefits of, the inventory.


	Three Months ended				Six Months Ended
	February 24, 2023		February 25, 2022		February 24, 2023		February 25, 2022
Cost of materials billed in connection with logistics services	$	143,984	$	339,715	$	521,735	$	675,990

Customer Contract Balances


As of	As of	February 25, 2022		August 27, 2021		As of	February 24, 2023		August 26, 2022
Contract assets (1)	Contract assets (1)	$	102	$	4,247	Contract assets (1)	$	1,296	$	1,322

Contract liabilities: (2)	Contract liabilities: (2)					Contract liabilities: (2)
Deferred revenue(3)	Deferred revenue(3)	$	23,544	$	19,271	Deferred revenue(3)	$	61,841	$	39,676
Customer advances	Customer advances	17,202		15,835		Customer advances	52,061		24,125
		$	40,746	$	35,106		$	113,902	$	63,801


(1)			Contract assets are included in other current and noncurrent 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 $15.6 million and $23.3 million as of February 24, 2023 and August 26, 2022, respectively, related to contracts that contain termination rights.			Contract liabilities are included in other current liabilities and noncurrent liabilities based on the timing of when our customer is expected to take control of the asset or receive the benefit of the service.

Deferred revenue ~~related to~~represents amounts received from customers in advance of satisfying performance obligations. As of February ~~25, 2022,~~24, 2023, we expect to recognize revenue of ~~$19.8~~$49.3 million of the balance of ~~$23.5~~$61.8 million in the next 12 months and the remaining amount thereafter. In the first six months of ~~2022,~~2023, we recognized revenue of ~~$11.2~~$29.8 million from satisfying performance obligations related to amounts included in deferred revenue as of August ~~27, 2021.~~ 26, 2022.

Customer advances represent amounts received from customers for advance payments to secure ~~product and services within the next 12 months.~~product. In the first six months of ~~2022,~~2023, we recognized revenue of ~~$5.1~~$1.8 million from satisfying performance obligations related to amounts included in customer advances as of August ~~27, 2021.~~26, 2022.

As of February ~~25, 2022~~24, 2023 and August ~~27, 2021,~~26, 2022, other current liabilities included ~~$23.4~~$12.0 million and ~~$24.9~~$15.4 million, respectively, for estimates of consideration payable to customers, including estimates for pricing adjustments and returns.

Other Operating (Income) Expense

In the first quarter of 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 $4.2 million and $6.2 million for the second quarter and first six months of 2023, respectively, primarily for employee severance costs and other benefits. We anticipate that these activities will continue into subsequent quarters of 2023 and anticipate recording additional restructure charges. As of February 24, 2023, $3.3 million remained unpaid, which is expected to be paid in the remainder of 2023.


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Other Non-operating (Income) Expense


		Three Months Ended				Six Months Ended					Three Months Ended				Six Months Ended
		February 25, 2022		February 26, 2021		February 25, 2022		February 26, 2021			February 24, 2023		February 25, 2022		February 24, 2023		February 25, 2022
Foreign currency (gains) losses		$	1,408	$	843	$	2,875	$	201
Loss (gain) on extinguishment of debt										Loss (gain) on extinguishment of debt	$	16,691	$	653	$	15,924	$	653
Foreign currency losses										Foreign currency losses	281		1,408		523		2,875
Loss (gain) on disposition of assets										Loss (gain) on disposition of assets	(3,037)		25		(3,116)		46
Other	Other	377		688		145		498		Other	(606)		(301)		(662)		(554)
		$	1,785	$	1,531	$	3,020	$	699		$	13,329	$	1,785	$	12,669	$	3,020

~~Foreign currency (gains) and losses relate primarily to~~In the second quarter of 2023, we recognized a loss in connection with the extinguishment of $150.0 million of our ~~Brazil operating subsidiaries.~~2026 Notes. See “Debt – Convertible Senior Notes – Convertible Senior Notes Exchange.”

Income Taxes

Three Months Ended Six Months Ended
February 25,
2022 February 26,
2021 February 25,
2022 February 26,
2021
Income before income taxes $ 10,558 $ 7,044 $ 39,011 $ 12,346
Income tax provision 7,586 1,200 15,341 4,475


	Three Months Ended				Six Months Ended
	February 24, 2023		February 25, 2022		February 24, 2023		February 25, 2022
Income (loss) before taxes	$	(28,502)	$	10,558	$	(18,288)	$	39,011
Income tax provision (benefit)	(1,716)		7,586		3,174		15,341

Income tax expense includes a provision for federal, state and foreign taxes based on the annual estimated effective tax rate applicable to us and our subsidiaries, adjusted for certain discrete items which are fully recognized in the period they occur. Accordingly, the interim effective tax rate may not be reflective of the annual estimated effective tax rate.

Our provision for income taxes for the first six months ~~ended February 25, 2022 increased~~of 2023 decreased by ~~$10.9~~$12.2 million as compared to the same period in the prior year, primarily due to ~~an increase~~a decrease in ~~the amount of earnings subject to non-U.S.~~profit before tax.

As of February ~~25, 2022~~24, 2023 and August ~~27, 2021,~~26, 2022, we had a full valuation allowance for net deferred tax assets associated with our U.S. operations. Management continues to evaluate future projected financial performance to determine whether such performance is sufficient evidence to support a reduction in or reversal of the valuation allowances. The amount of the deferred tax asset considered realizable could be adjusted if significant positive evidence increases.

Determining the consolidated provision for income tax expense, income tax liabilities and deferred tax assets and liabilities involves judgment. The Company calculates and provides for income taxes in each of the tax jurisdictions in which it operates, which involves estimating current tax exposures as well as making judgments regarding the recoverability of deferred tax assets in each jurisdiction. The estimates used could differ from actual results, which may have a significant impact on operating results in future periods.

~~Earnings Per Share~~

Three Months Ended Six Months Ended
February 25,
2022 February 26,
2021 February 25,
2022 February 26,
2021
Net income attributable to SGH – Basic and Diluted $ 2,458 $ 5,844 $ 22,485 $ 7,871
Weighted-average shares outstanding – Basic 49,522 48,435 49,267 48,778
Dilutive effect of equity plans and convertible notes 8,114 1,972 6,868 1,529
Weighted-average shares outstanding – Diluted 57,636 50,407 56,135 50,307

Earnings per share:
Basic $ 0.05 $ 0.12 $ 0.46 $ 0.16
Diluted $ 0.04 $ 0.12 $ 0.40 $ 0.16


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Earnings Per Share


	Three Months Ended				Six Months Ended
	February 24, 2023		February 25, 2022		February 24, 2023		February 25, 2022
Net income (loss) attributable to SGH – Basic and Diluted	$	(27,219)	$	2,458	$	(22,227)	$	22,485

Weighted-average shares outstanding – Basic	49,116		49,522		49,039		49,267
Dilutive effect of equity plans and convertible notes	—		8,114		—		6,868
Weighted-average shares outstanding – Diluted	49,116		57,636		49,039		56,135

Earnings (loss) per share:
Basic	$	(0.55)	$	0.05	$	(0.45)	$	0.46
Diluted	$	(0.55)	$	0.04	$	(0.45)	$	0.40

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:


		Three Months Ended		Six Months Ended			Three Months Ended		Six Months Ended
		February 25, 2022	February 26, 2021	February 25, 2022	February 26, 2021		February 24, 2023	February 25, 2022	February 24, 2023	February 25, 2022
Equity plans	Equity plans	24	2,145	276	2,303	Equity plans	7,688	24	7,688	276
Convertible notes		—	12,313	—	12,313
Stratus Technologies contingently issuable shares						Stratus Technologies contingently issuable shares	1,787	—	1,787	—
		24	14,458	276	14,616		9,475	24	9,475	276

~~We have the option to pay cash, issue shares or a combination thereof for the aggregate amount due upon~~Upon any conversion of our 2026 ~~Notes. It is our intent~~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 ~~amount of the 2026 Notes~~portion in cash ~~upon any conversion.~~and/or ordinary shares. As a result, only the amounts ~~payable~~settled in excess of the principal ~~amounts upon conversion of the 2026 Notes~~portion are considered in calculating diluted earnings per share under the treasury stock method. The 2026 Notes are dilutive when the average share price of the Company’s ordinary shares for a reporting period exceeds the conversion price of the 2026 Notes of $20.30 per share. See “Debt – Convertible Senior Notes.”

Upon completion of the Earnout period, we will be obligated to pay the Stratus contingent consideration in cash, ordinary shares of SGH or a mix of cash and SGH shares, at our election. See “Equity – SGH Shareholders’ Equity – Stratus Technologies Earnout.”

Segment and Other Information

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

In We have the ~~fourth quarter of 2021, we reorganized SGH into~~following three ~~business units: Memory Solutions, Intelligent Platforms Solutions and LED Solutions. Two of~~businesses, which are our previous segments, specialty memory products and Brazil products, were combined to become Memory Solutions. Intelligent Platform Solutions was formerly referred to as specialty compute and storage solutions. All prior period information in the tables below has been revised to reflect the change to our 3 reportable ~~segments.~~segments:

•Memory Solutions: Our Memory Solutions group, under our SMART Modular brand, provides high performance and reliable memory solutions through the design, development and advanced packaging of leading-edge to extended lifecycle products. These specialty products are tailored to meet customer-specific requirements across networking and communications, enterprise storage, computing, including desktop, notebook and server applications, smartphones and other vertical markets. These products are marketed to OEMs and to commercial and government customers. The Memory Solutions group also offers SMART Supply Chain Services, which provides customized, integrated supply chain services to enable our customers to better manage supply chain planning and execution, reduce costs and increase productivity.

•Intelligent Platform Solutions (“IPS”): Our IPS group, under our Penguin Solutions ~~brand, consists of two major product lines – Penguin Computing~~ and ~~Penguin Edge. Penguin Computing~~newly acquired Stratus Technologies brands, offers specialized platform solutions and services for high-performance computing (“HPC”), artificial intelligence (“AI”), machine learning ~~and~~(“ML”), advanced modeling and the internet of things (“IoT”) that span the continuum of edge, core and cloud. Our solutions are designed specifically for ~~technology research. We provide these leading-edge solutions to~~ customers ~~in the~~across multiple markets, including government, ~~hyper-scale,~~hyperscale, energy, financial services, ~~and education markets. Penguin Edge offers solutions for embedded and wireless applications, specializing in high-reliability products for a wide range of customers in government, telecommunications,~~ health care, ~~smart city, network edge~~education and ~~industrial applications.~~others. On


27

August 29, 2022, we completed the acquisition of Stratus Technologies, a global leader in simplified, protected and autonomous computing solutions in the data center and at the Edge.

•LED Solutions: Our LED Solutions group, under our Cree LED brand, offers a broad portfolio of application-optimized LEDs focused on improving on lumen density, intensity, efficacy, optical control and reliability. Backed by expert design assistance and superior sales support, our LED products enable our customers to develop and market LED-based products for general lighting, video screens and specialty lighting applications. ~~Our LED Solutions is comprised of the LED Business we acquired from Cree, Inc. on March 1, 2021.~~

Segments are determined based on sources of revenue, types of customers and operating performance. There are no differences between the accounting policies for our segment reporting and our consolidated results of operations. Operating expenses directly associated with the activities of a specific segment are charged to that segment. Certain other


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~~Table of Contents~~

indirect operating income and expenses are generally allocated to segments based on their respective percentage of net sales. We do not allocate interest, other non-operating (income) expense or taxes to segments.

Three Months Ended Six Months Ended
February 25,
2022 February 26,
2021 February 25,
2022 February 26,
2021
Net sales:
Memory Solutions $ 260,081 $ 218,597 $ 499,482 $ 444,421
Intelligent Platform Solutions 82,257 85,412 200,911 151,284
LED Solutions 106,833 — 218,722 —
Total net sales 449,171 304,009 919,115 595,705
Segment operating income:
Memory Solutions $ 32,496 $ 18,238 $ 69,166 $ 39,099
Intelligent Platform Solutions 7,702 8,922 21,882 11,803
LED Solutions 17,237 — 35,537 —
Total segment operating income 57,435 27,160 126,585 50,902
Unallocated:
Share-based compensation expense (9,973) (5,398) (19,748) (16,486)
Amortization of acquisition-related intangibles (5,829) (3,413) (12,172) (6,827)
Change in fair value of contingent consideration (24,000) — (41,200) —
Out of period import tax expense (1)
— (4,345) — (4,345)
Other (828) (1,064) (1,866) (2,681)
Total unallocated (40,630) (14,220) (74,986) (30,339)
Consolidated operating income $ 16,805 $ 12,940 $ 51,599 $ 20,563


~~(1)~~			During the second quarter of 2021, we recorded an out-of-period adjustment to correct errors originating in previous periods related to understated import tax costs, which resulted in a $4.3 million increase in cost of sales, $0.8 million increase in interest expense and $1.7 million benefit for income taxes. The adjustment was not considered material to the interim or annual consolidated financial statements for the year ended August 27, 2021 nor to any previously issued interim or annual consolidated financial statements.


	Three Months Ended				Six Months Ended
	February 24, 2023		February 25, 2022		February 24, 2023		February 25, 2022
Net sales:
Memory Solutions	$	151,136	$	260,081	$	343,103	$	499,482
Intelligent Platform Solutions	222,451		82,257		433,422		200,911
LED Solutions	55,587		106,833		118,127		218,722
Total net sales	$	429,174	$	449,171	$	894,652	$	919,115

Segment operating income:
Memory Solutions	$	14,430	$	32,496	$	35,575	$	69,166
Intelligent Platform Solutions	37,978		7,702		72,144		21,882
LED Solutions	(977)		17,237		(1,455)		35,537
Total segment operating income	51,431		57,435		106,264		126,585

Unallocated:
Share-based compensation expense	(10,395)		(9,973)		(20,807)		(19,748)
Amortization of acquisition-related intangibles	(10,815)		(5,829)		(21,673)		(12,172)
Flow through of inventory step up	—		—		(2,599)		—
Cost of sales related restructure	(5,552)		—		(5,552)		—
Acquisition and integration expenses	(2,824)		(252)		(9,556)		(1,290)
Impairment of goodwill	(17,558)		—		(17,558)		—
Change in fair value of contingent consideration	(6,400)		(24,000)		(10,100)		(41,200)
Restructure charge	(4,154)		—		(6,195)		—
Other	(900)		(576)		(1,800)		(576)
Total unallocated	(58,598)		(40,630)		(95,840)		(74,986)
Consolidated operating income (loss)	$	(7,167)	$	16,805	$	10,424	$	51,599


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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report and in our Annual Report on Form 10-K for the fiscal year ended August ~~27, 2021.~~26, 2022. This discussion contains ~~forward-looking~~forward looking statements that involve risks, uncertainties and ~~uncertainties.~~other factors. Our actual results could differ materially from those contained in these forward-looking statements due to a number of risks, uncertainties and other factors, including those discussed below and elsewhere in this ~~report.~~Quarterly Report and in our Annual Report on Form 10-K for the fiscal year ended August 26, 2022. See also “Cautionary Note Regarding Forward-Looking Statements.”

Our fiscal year is the 52 or 53-week period ending on the last Friday in August. Fiscal ~~2022~~2023 and ~~2021~~2022 each contain 52 weeks. All period references are to our fiscal periods unless otherwise indicated. All financial information for our subsidiaries in Brazil is included in our consolidated financial statements on a one-month lag because their fiscal years end on July 31 of each year. All tabular ~~dollar~~ amounts are in ~~millions.~~thousands.

Overview

At SGH, we power growth and expand possibilities by continually investing in our people, innovation and new opportunities. Our diverse lines of businesses – across computing, memory and LED lighting solutions – all focus on serving customers by delivering engineer-driven technology solutions to specialty end markets. SGH serves as a foundation and a support for each of our businesses, while also empowering them to deliver their own unique solutions to their customers to unlock avenues for growth and technological advancement.

Since our inception over 30 years ago, SGH has grown into a diversified group of businesses focused on the design and manufacture of specialty solutions for the computing, memory and LED markets. Our success is based on a customer-focused approach characterized by a commitment to quality, advanced technical expertise, quick time-to-market, build-to-order flexibility and excellence in customer service.

At SGH, we strive to achieve long-term growth by investing in our people, innovation, processes and new opportunities. Since the beginning of fiscal 2018, we have accelerated our growth through the completion of five acquisitions. With our most recent acquisition of the LED Business in 2021, we have organized the Company into three lines of business: Memory Solutions, Intelligent Platform Solutions and LED Solutions.

In addition to driving growth organically and through acquisitions, we use the SGH operating system to support and drive operational efficiency and performance. SGH’s Operating System incorporates best practices to ensure our business lines are empowered to deliver for our customers consistently and efficiently.

Our employees have always played a key role in our success. Today, SGH employs a diverse workforce of approximately 3,900 employees around the world who are focused on innovation and customer satisfaction.

Acquisition of ~~LED Business~~Stratus Technologies

~~In March 2021,~~On August 29, 2022, we completed the acquisition of ~~the LED Business of Cree, Inc.~~Storm Private Holdings I Ltd., a ~~corporation now known as Wolfspeed, Inc.~~Cayman Islands exempted company (“~~Cree”~~Stratus Holding Company” and together with its subsidiaries, “Stratus Technologies”). The acquisition of the LED Business, a leader in LED lighting technology, further enhances our growth and diversification strategy and fits well with our other specialty businesses in computing and memory. The purchase price for the LED Business consisted of cash payments of $72.4 million, the issuance of an unsecured promissory note issued in the amount of $125 million and the potential for Cree to receive an earn-out payment of up to $125 million based on the revenue and gross profit performance of the LED Business in the twelve-month period ended in March 2022.Stratus Technologies, which


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~~COVID-19~~operates as part of IPS, 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.

At the closing, we paid a cash purchase price of $225 million, subject to certain adjustments. In addition, the seller has the right to receive, and we will be obligated to pay, contingent consideration of up to $50 million (the “Earnout”) based on the gross profit performance of Stratus Technologies during the first full 12 fiscal months following the closing. The Earnout, if any, will be payable in cash, ordinary shares of SGH or a mix of cash and SGH Shares, at our election. See “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Business Acquisition – Stratus Technologies.”

Factors Affecting Our Operating Performance

COVID-19:The outbreak of coronavirus disease 2019 (“COVID-19”) has resulted in substantial loss of life, economic disruption and government intervention worldwide. ~~While we have not yet experienced significant disruptions of our operations as a result of the~~The COVID-19 pandemic ~~the pandemic~~has resulted in reduced sales volumes of certain of our product lines since early calendar 2020. COVID-19 also disrupted our product development, marketing and corporate development activities, and has more recently affected our supply chain. ~~Our recently acquired LED Business experienced similar impacts from the pandemic from early in calendar 2020.~~ If these conditions continue, or if we have an outbreak in any of our facilities, sales volumes may be negatively impacted and we may, among other issues, experience, in any or all product lines, delays in product development, a decreased ability to support our customers, disruptions in sales and manufacturing activities and overall reduced productivity each of which could have a negative impact on our ability to meet customer commitments and on our revenue and profitability. The reduction of investment in new capacity due to the pandemic, coupled with strong demand to expand delivery and logistics, internet and cloud services, ~~as well as a rebound in economic conditions and general demand at a pace faster than expected,~~ has resulted in significant supply shortages that may impact our ability to manufacture products for our customers and may result in rising prices of the materials we need to manufacture our products. We may not be able to pass on these rising costs to our customers which could result in a negative impact to our gross margins. Furthermore, if there is a significant outbreak or if travel restrictions or stay-at-home or work remote or from home conditions or other governmental or voluntary restrictions relating to the COVID-19 pandemic significantly impact our suppliers’ ability to manufacture or deliver raw materials or provide key components or services, we could experience more delays or reductions in our ability to manufacture and ship products to our customers. While certain segments of our customer base are experiencing strong demand, the pandemic may negatively impact the demand for other segments for our customer base or those customers’ ability to manufacture their products, which could reduce their demand for our products or services.

~~Factors Affecting Our Operating Performance~~

Our operating expenses have grown in recent periods as we drive innovation, expand our products and services portfolio and invest in greater operational capabilities to support our growth. Our total operating expenses grew in 2021, primarily as a result of the addition of the LED Solutions business. We expect to continue to see increased operating expenses in 2022 as we record a full year of operating expenses for the LED Solutions business, continue to increase our investment in new products and services for the IPS business.

~~Macro-economic~~Macro-Economic Demand Factors. Our business segments each have their own unique set of demand factors. Demand in our Memory Solutions group is driven by end-market demand from OEMs for customer-specific solutions in vertical markets such as industrial, government, networking, high-performance compute and enterprise storage, as well as from OEMs for memory modules used in desktop and notebook computers, smartphones, IoT and SSD products in Brazil. In addition, macro-economic factors specific to the Brazil economy affect this segment, given our sales and operations in that market. Our IPS business is driven by demand for high compute solutions across AI and machine learning initiatives, as well as traditional workload optimization and efficiency applications. Finally, demand for our LED products is derived from targeted end-market applications, such as general high-power and mid-power lighting and specialty lighting, such as video and horticulture applications. We believe our diversified business segments may provide a natural hedge against downturns in any particular industry although broader macro-economic trends, such as the COVID-19 pandemic, can adversely affect all three segments concurrently.

Shifts in the Mix of Our Revenue. Shifts in the mix of revenue from our operating segments, which can vary significantly from period to period, can impact our business and operating results, including gross and operating margins. For example, our Memory Solutions group, while not party to long-term fixed purchasing commitments, has nonetheless historically seen relatively stable demand and margins. By contrast, our IPS group has shown solid growth, but is subject to greater variability in its sales and margin profile from period to period, as recognition of revenue is tied to customer decisions as to the completion of delivery and system go-live events, and margin is driven by the extent to which higher margin software and managed services comprise IPS sales. In addition, while we have experienced favorable demand and overall margin uplift compared to the rest of our businesses from our LED Solutions business to date, this is our newest segment, and it may be subject to unforeseen changes in its business and operating results. Our resource commitments and planning for each segment are relatively fixed in the short term, and as such, variability in expected revenue mix will have direct implications for our operating income and margins.

Our Ability to Identify, Complete and Successfully Integrate Acquisitions. A substantial portion of our growth over the last several years has been driven by acquisitions, and we intend to continue to use corporate development as an engine for growth. Within our existing segments, we plan to pursue acquisitions to expand features and functionality, expand into


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adjacent businesses and grow our customer base and geographic footprint. From time to time, we may seek to expand our


30

addressable market by entering new business segments where, as we did with our LED ~~Business,~~business and our recently acquired Stratus Technologies business, we identify a business opportunity at scale with a path to being accretive to our overall operations in the near term. If we are unable to identify and complete attractive acquisitions, we may not be successful in growing our revenue and/or expanding our margins. Any acquisitions we do complete may require us to ~~raise~~incur debt or raise capital through equity ~~financing~~financings or may subject us to unforeseen liabilities or operational challenges that in turn impede our ability to realize the expected returns on our investment.

Disruptions in Our Supply Chain May Adversely Affect Our Businesses. We depend on third-party suppliers for key components of our products, such as commodity DRAM components from offshore foundries that we use in our specialty memory products and third-party wafers that we use in our memory and LED ~~businesses and electronic components and accessories used in our IPS business.~~businesses. We have adopted this ~~“fab-lite”~~“Fab-Light” business model to reduce our capital expenditures and operating expenses, while affording greater flexibility in adapting to shifts in demand and other market trends. ~~In recent periods, our fab-lite business model has contributed significantly to margin expansion in our overall business.~~ However, our reliance on third-party manufacturers exposes us to risk of supply chain disruption and lost business. ~~For example, the current global semiconductor shortage has adversely affected our operating results.~~ If such disruptions worsen or are prolonged, or if there is meaningful disruption in our supply arrangement with any of our third-party suppliers, our operating results and financial condition could be adversely affected.

~~The outbreak of hostilities in Ukraine may exacerbate certain risks we face.~~Russia’s invasion of Ukraine and the global response, including the imposition of sanctions by the United States and other countries, could create or exacerbate risks facing our business. We have evaluated our operations, vendor contracts and customer arrangements, and at present we do not expect the outbreak to directly have a material and adverse effect on our financial condition or results of operations. However, if the hostilities persist, escalate or expand, our operating results and financial condition could be adversely affected. For example, if our supply or customer arrangements are disrupted due to expanded sanctions or involvement of countries where we have operations or relationships, our business could be materially disrupted. Further, the use of state-sponsored cyberattacks could expand as part of the conflict, which could adversely affect our ability to maintain or enhance our cyber security and data protection measures.


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Results of Operations


		Three Months Ended								Six Months Ended									Three Months Ended								Six Months Ended
		February 25, 2022				February 26, 2021				February 25, 2022				February 26, 2021					February 24, 2023				February 25, 2022				February 24, 2023				February 25, 2022
Net sales:	Net sales:																	Net sales:
Memory Solutions	Memory Solutions	$	260,081	57.9	%	$	218,597	71.9	%	$	499,482	54.3	%	$	444,421	74.6	%	Memory Solutions	$	151,136	35.2	%	$	260,081	57.9	%	$	343,103	38.4	%	$	499,482	54.3	%
Intelligent Platform Solutions	Intelligent Platform Solutions	82,257		18.3	%	85,412		28.1	%	200,911		21.9	%	151,284		25.4	%	Intelligent Platform Solutions	222,451		51.8	%	82,257		18.3	%	433,422		48.4	%	200,911		21.9	%
LED Solutions	LED Solutions	106,833		23.8	%	—		—	%	218,722		23.8	%	—		—	%	LED Solutions	55,587		13.0	%	106,833		23.8	%	118,127		13.2	%	218,722		23.8	%
Total net sales	Total net sales	449,171		100.0	%	304,009		100.0	%	919,115		100.0	%	595,705		100.0	%	Total net sales	429,174		100.0	%	449,171		100.0	%	894,652		100.0	%	919,115		100.0	%
Cost of sales	Cost of sales	336,458		74.9	%	250,553		82.4	%	684,201		74.4	%	489,606		82.2	%	Cost of sales	318,793		74.3	%	336,458		74.9	%	665,861		74.4	%	684,201		74.4	%
Gross profit	Gross profit	112,713		25.1	%	53,456		17.6	%	234,914		25.6	%	106,099		17.8	%	Gross profit	110,381		25.7	%	112,713		25.1	%	228,791		25.6	%	234,914		25.6	%

Operating expenses:	Operating expenses:																	Operating expenses:
Research and development	Research and development	18,794		4.2	%	8,852		2.9	%	36,451		4.0	%	15,816		2.7	%	Research and development	26,665		6.2	%	18,794		4.2	%	50,721		5.7	%	36,451		4.0	%
Selling, general and administrative	Selling, general and administrative	53,114		11.8	%	31,664		10.4	%	105,664		11.5	%	69,720		11.7	%	Selling, general and administrative	62,771		14.6	%	53,114		11.8	%	133,793		15.0	%	105,664		11.5	%
Impairment of goodwill																		Impairment of goodwill	17,558		4.1	%	—		—	%	17,558		2.0	%	—		—	%
Change in fair value of contingent consideration	Change in fair value of contingent consideration	24,000		5.3	%	—		—	%	41,200		4.5	%	—		—	%	Change in fair value of contingent consideration	6,400		1.5	%	24,000		5.3	%	10,100		1.1	%	41,200		4.5	%
Other operating (income) expense																		Other operating (income) expense	4,154		1.0	%	—		—	%	6,195		0.7	%	—		—	%
Total operating expenses	Total operating expenses	95,908		21.4	%	40,516		13.3	%	183,315		19.9	%	85,536		14.4	%	Total operating expenses	117,548		27.4	%	95,908		21.4	%	218,367		24.4	%	183,315		19.9	%
Operating income		16,805		3.7	%	12,940		4.3	%	51,599		5.6	%	20,563		3.5	%
Operating income (loss)																		Operating income (loss)	(7,167)		(1.7)	%	16,805		3.7	%	10,424		1.2	%	51,599		5.6	%

Non-operating (income) expense:	Non-operating (income) expense:																	Non-operating (income) expense:
Interest expense, net	Interest expense, net	4,462		1.0	%	4,365		1.4	%	9,568		1.0	%	7,518		1.3	%	Interest expense, net	8,006		1.9	%	4,462		1.0	%	16,043		1.8	%	9,568		1.0	%
Other non-operating (income) expense	Other non-operating (income) expense	1,785		0.4	%	1,531		0.5	%	3,020		0.3	%	699		0.1	%	Other non-operating (income) expense	13,329		3.1	%	1,785		0.4	%	12,669		1.4	%	3,020		0.3	%
Total non-operating (income) expense	Total non-operating (income) expense	6,247		1.4	%	5,896		1.9	%	12,588		1.4	%	8,217		1.4	%	Total non-operating (income) expense	21,335		5.0	%	6,247		1.4	%	28,712		3.2	%	12,588		1.4	%
Income before taxes		10,558		2.4	%	7,044		2.3	%	39,011		4.2	%	12,346		2.1	%
Income (loss) before taxes																		Income (loss) before taxes	(28,502)		(6.6)	%	10,558		2.4	%	(18,288)		(2.0)	%	39,011		4.2	%

Income tax provision		7,586		1.7	%	1,200		0.4	%	15,341		1.7	%	4,475		0.8	%
Net income		2,972		0.7	%	5,844		1.9	%	23,670		2.6	%	7,871		1.3	%
Income tax provision (benefit)																		Income tax provision (benefit)	(1,716)		(0.4)	%	7,586		1.7	%	3,174		0.4	%	15,341		1.7	%
Net income (loss)																		Net income (loss)	(26,786)		(6.2)	%	2,972		0.7	%	(21,462)		(2.4)	%	23,670		2.6	%
Net income attributable to noncontrolling interest	Net income attributable to noncontrolling interest	514		0.1	%	—		—	%	1,185		0.1	%	—		—	%	Net income attributable to noncontrolling interest	433		0.1	%	514		0.1	%	765,000		0.1	%	1,185		0.1	%
Net income attributable to SGH		$	2,458	0.5	%	$	5,844	1.9	%	$	22,485	2.4	%	$	7,871	1.3	%
Net income (loss) attributable to SGH																		Net income (loss) attributable to SGH	$	(27,219)	(6.3)	%	$	2,458	0.5	%	$	(22,227)	(2.5)	%	$	22,485	2.4	%

Percentages represent percentage of total net sales. Summations pfof percentages may not compute precisely due to rounding.

Net Sales, Cost of Sales and Gross Profit

Net sales ~~increased~~decreased by ~~$145.2~~$20.0 million, or ~~47.7%~~4.5%, in the second quarter of ~~2022~~2023 compared to the same period in the prior year, and by ~~$323.4~~$24.5 million, or ~~54.3%~~2.7%, for the first six months of ~~2022~~2023 compared to the same period in the prior year. These ~~increases~~decreases were primarily due to ~~$106.8 million and $218.7 million of revenue~~lower sales in ~~the second quarter and six months of 2022, respectively, from our acquisition of the LED Business, and to strong performance in~~both our Memory Solutions and IPS businesses. Memory Solutions sales increased by $41.5 million, or 19.0%, in the second quarter of 2022 compared to the same period in the prior year, primarily due to increases in average selling prices for Brazil DRAM and Specialty DRAM products of 77.5% and 13.2%, respectively. Memory Solutions sales increased by $55.1 million, or 12.4%, for the first six months of 2022 compared to the same period in the prior year, primarily due to a 4.1% higher volume of DRAM products, a 52.8% increase in average selling prices for Brazil DRAM products and higher logistics sales. IPS net sales increased by $49.6 million, or 32.8%, in the first six months of 2022 primarily due to higher volumes of sales in our Penguin Computing business.

Cost of sales increased by $85.9 million, or 34.3%, in the second quarter of 2022 compared to the same period in the prior year, and by $194.6 million, or 39.7%, for the first six months of 2022 compared to the same period in the prior year, primarily due to our acquisition of the LED Business and from higher cost of materials and production costs due to a higher level of sales for our IPS and Memory Solutions segments.

Gross margin increased to 25.1% in the second quarter of 2022 compared to 17.6% in the same period in the prior year, and also increased to 25.6% in the first six months of 2022 compared to 17.8% in the first six months of 2021, primarily due to inclusion of higher margin LED Solutions ~~products in 2022 as well as process and efficiency improvement in the Memory Solutions and IPS segments compared to the prior year.~~businesses, offset by strong


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performance from IPS. IPS net sales increased by $140.2 million, or 170.4%, and by $232.5 million, or 115.7%, in the second quarter and first six months of 2023 compared to the same periods in the prior year, respectively, primarily due to higher sales in our Penguin Solutions business and from $40.7 million and $85.9 million, respectively, of revenue from our recent acquisition of Stratus Technologies. Memory Solutions sales decreased by $108.9 million, or 41.9%, and by $156.4 million, or 31.3%, in the second quarter and first six months of 2023 compared to the same periods in the prior year, respectively, primarily due to lower sales volumes of DRAM products, as well as lower sales volumes of mobile memory products in Brazil. LED Solutions sales decreased by $51.2 million, or 48.0%, and by $100.6 million, or 46.0%, in the second quarter and first six months of 2023 compared to the same periods in the prior year, respectively, primarily due to lower customer demand.

Cost of sales increased by $17.7 million, or 5.3%, in the second quarter of 2023, compared to the same period in the prior year, and by $18.3 million, or 2.7%, for the first six months of 2023 compared to the same period in the prior year. Memory Solutions and LED Solutions segments had lower material cost from lower sales, which were offset by additional costs from the operations of our recently-acquired Stratus Technologies business.

Gross margin increased to 25.7% in the second quarter of 2023 compared to 25.1% in the same period in the prior year, and was flat for the first six months of 2023 compared to the same period in 2022, primarily due to lower sales and gross profits for our Memory Solutions and LED Solutions businesses, partially offset by strength in our IPS business, which included higher margins of our recently-acquired Stratus Technologies business.

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 the first six months of 2023 by approximately $5.3 million, which resulted in aggregate reductions of $5.1 million in cost of sales research and development expense and $0.2 million in the cost of our inventories as of the end of the second quarter of 2023.

Non-GAAP Measure of Segment Operating Income

Below is a table of our operating income, measured on a non-GAAP basis, which ~~SGH~~our management uses to supplement ~~SGH's~~SGH’s financial results under GAAP to analyze its operations and make decisions as to future operational ~~plans, and~~plans. Our management believes that this supplemental non-GAAP information is useful to investors in analyzing and assessing ~~the Company's~~our past and future operating performance. These non-GAAP measures exclude certain items, such as share-based compensation expense, amortization of acquisition-related intangible assets (consisting of amortization of developed technology, customer relationships, trademarks/trade names and backlog acquired in connection with business combinations), acquisition-related inventory adjustments, acquisition-related expenses, restructure charges and integration expenses, impairment of goodwill, changes in the fair value of contingent consideration, (gains) losses from changes in currency exchange rates, amortization of debt discount and other costs, gain (loss) on extinguishment of debt, other infrequent or unusual ~~items.~~items and related tax effects and other tax adjustments. While amortization of acquisition-related intangible assets is excluded, the revenues from acquired companies is reflected in our non-GAAP measures and these intangible assets contribute to revenue generation. See ~~“PART I. Financial Information – Item~~“Item 1. Financial Statements – Notes to Consolidated Financial Statements – Segment and Other Information.”

Non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP, as they exclude important information about our financial results, as noted above. The presentation of these adjusted amounts varies from amounts presented in accordance with GAAP and therefore may not be comparable to amounts reported by other companies.

Three Months Ended Six Months Ended
February 25,
2022 February 26,
2021 February 25,
2022 February 26,
2021
GAAP operating income $ 16,805 $ 12,940 $ 51,599 $ 20,563
Share-based compensation expense 9,973 5,398 19,748 16,486
Amortization of acquisition-related intangibles 5,829 3,413 12,172 6,827
Change in fair value of contingent consideration 24,000 — 41,200 —
Out of period import tax expense — 4,345 — 4,345
Other 828 1,064 1,866 2,681
Non-GAAP operating income $ 57,435 $ 27,160 $ 126,585 $ 50,902
Non-GAAP operating income by segment:
Memory Solutions $ 32,496 $ 18,238 $ 69,166 $ 39,099
Intelligent Platform Solutions 7,702 8,922 21,882 11,803
LED Solutions 17,237 — 35,537 —
Total non-GAAP operating income by segment $ 57,435 $ 27,160 $ 126,585 $ 50,902

In the fourth quarter of 2021, we reorganized SGH into three business units: Memory Solutions, Intelligent Platforms Solutions and LED Solutions. Two of our previous segments, specialty memory products and Brazil products, were combined to become Memory Solutions. Intelligent Platform Solutions was formerly referred to as specialty compute and storage solutions. All prior year information in the table above has been revised to reflect the change to our three reportable segments.


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	Three Months Ended				Six Months Ended
	February 24, 2023		February 25, 2022		February 24, 2023		February 25, 2022
GAAP operating income (loss)	$	(7,167)	$	16,805	$	10,424	$	51,599
Share-based compensation expense	10,395		9,973		20,807		19,748
Amortization of acquisition-related intangibles	10,815		5,829		21,673		12,172
Flow-through of inventory step up	—		—		2,599		—
Cost of sales related restructure	5,552		—		5,552		—
Acquisition and integration expenses	2,824		252		9,556		1,289
Impairment of goodwill	17,558		—		17,558		—
Change in fair value of contingent consideration	6,400		24,000		10,100		41,200
Restructure charge	4,154		—		6,195		—
Other	900		576		1,800		577
Non-GAAP operating income	$	51,431	$	57,435	$	106,264	$	126,585

Non-GAAP operating income (loss) by segment:
Memory Solutions	$	14,430	$	32,496	$	35,575	$	69,166
Intelligent Platform Solutions	37,978		7,702		72,144		21,882
LED Solutions	(977)		17,237		(1,455)		35,537
Total non-GAAP operating income (loss) by segment	$	51,431	$	57,435	$	106,264	$	126,585

Memory Solutions operating income ~~increased~~decreased by ~~$14.3~~$18.1 million, or ~~78.2%~~55.6%, in the second quarter of ~~2022~~2023 compared to the same period in the prior year, and by ~~$30.1~~$33.6 million, or ~~76.9%~~48.6%, in the first six months of ~~2022~~2023 compared to the same period in the prior year, primarily due to lower sales and gross profit.

IPS operating income increased by $30.3 million, or 393.1%, in the second quarter of 2023 compared to the same period in the prior year, and by $50.3 million, or 229.7%, in the first six months of 2023 compared to the same period in the prior year, primarily due to higher sales and ~~gross profit,~~margins from our Penguin Solutions business and strong performance from our recently-acquired Stratus Technologies business, partially offset by higher operating expenses ~~mainly driven by~~from the Stratus Technologies business and higher ~~research and development expense due~~personnel-related expenses for increased headcount to ~~less Brazil financial credits.~~support IPS’ revenue growth.

~~IPS~~LED Solutions operating income ~~increased~~decreased by ~~$10.1~~$18.2 million, or ~~85.4%~~105.7%, in the second quarter of 2023 compared to the same period in the prior year, and by $37.0 million, or 104.1%, in the first six months of ~~2022~~2023 compared to the same period in the prior year, primarily due to ~~higher~~lower sales and gross profit from lower sales volumes, partially offset by ~~higher~~lower operating expenses mainly driven by personnel-related expenses due to ~~increased headcount to support the revenue growth.~~lower headcount.

~~LED Solutions operating income of $35.5 million in the first six months of 2022 was due to our acquisition of the LED Business in March 2021.~~


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~~Table of Contents~~

Operating and Non-operating (Income) Expense

Research and Development

Research and development expense increased by ~~$9.9~~$7.9 million, or ~~112.3%~~41.9%, in the second quarter of ~~2022~~2023 compared to the same period in the prior year, and by ~~$20.6~~$14.3 million, or ~~130.5%~~39.1%, for the first six months of ~~2022~~2023 compared to the same period in the prior year, primarily due to ~~additional costs from~~expenses associated with our recently-acquired Stratus Technologies business and a decrease of $4.6 million and $7.9 million, respectively, in the ~~acquisition of the LED Business as well as lower~~ Brazil financial ~~credits.~~credits, which are reflected as a reduction of research and development expenses. The first six months of 2023 also had lower personnel-related expenses. We expect research and development expense to ~~be higher~~increase in ~~2022 as compared~~absolute dollars in 2023 due to ~~2021 primarily because we will include the full year of operations for~~ our ~~LED Solutions segment. In addition, we expect to have~~Stratus Technologies acquisition and lower Brazil financial ~~credits in future periods resulting from a shift in sales mix to products sourced from our new Manaus, Brazil facility.~~credits.

Selling, General and Administrative

Selling, general and administrative expense increased by ~~$21.5~~$9.7 million, or ~~67.7%~~18.2%, in the second quarter of ~~2022~~2023 compared to the same period in the prior year, and by ~~$35.9~~$28.1 million, or ~~51.6%~~26.6%, infor the first six months of ~~2022~~2023 compared to the same period in the prior year, primarily due to ~~additional costs from the acquisition of the LED Business~~expenses associated with our recently-acquired Stratus Technologies business and as well as higher ~~personnel-related expenses due to increased headcount~~acquisition and ~~higher professional services.~~integration expenses. We expect selling, general and administrative expense to ~~be higher~~increase in ~~2022 as compared~~absolute dollars in 2023 due to ~~2021 as~~our Stratus Technologies acquisition.


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Impairment of Goodwill

During the second quarter of 2023, we ~~include~~initiated a plan pursuant to which we intend to wind down manufacturing and discontinue the ~~full year~~sale of ~~operations for~~certain legacy products offered through our ~~LED Solutions~~Penguin Edge business by approximately the end of calendar 2024. In connection therewith and with the preparation of the financial statements included in this quarterly report, we assessed goodwill associated with our Penguin Edge business within our IPS segment and concluded it was partially impaired. As a result, we recorded an impairment charge of $17.6 million in the second quarter of 2023 related to our IPS segment. See “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Intangible Assets and Goodwill – Impairment of Penguin Edge Goodwill.”

Change in Fair Value of Contingent Consideration

Our ~~acquisition~~acquisitions of Stratus Technologies in the first quarter of 2023 and our LED Business in the third quarter of 2021 each included contingent consideration. We estimate the fair value of the ~~LED Business included~~ contingent consideration ~~which we estimated the fair value~~ as of the date of acquisition ~~to be $28.1 million. In 2021,~~ and subsequently recognize changes in the fair value in results of operations. During the second quarter and first six months of 2023, we recorded charges of $6.4 million and $10.1 million, respectively, to adjust the fair value of the contingent consideration from our acquisition of Stratus Technologies. During the second ~~quarters~~quarter and first six months of 2022, we recorded charges of ~~$32.4 million, $17.2~~$24.0 million and ~~$24.0~~$41.2 million, respectively, to adjust the ~~amount~~fair value of the contingent consideration ~~to its fair value.~~from our acquisition of the LED business. See ~~“PART I. Financial Information – Item~~“Item 1. Financial Statements – Notes to Consolidated Financial Statements – Business Acquisition – ~~LED Business.~~Stratus Technologies.”

Other Operating (Income) Expense

Other operating expense in the second quarter and first six months of 2023 included restructure charges of $4.2 million and $6.2 million, respectively, primarily for employee severance costs and other benefits resulting from workforce reductions and the elimination of certain projects across our businesses. We anticipate that these activities will continue into subsequent quarters of 2023 and anticipate recording additional restructure charges.

Interest Expense, Net

~~Interest~~Net interest expense ~~net~~ increased by ~~$2.1~~$3.5 million and $6.5 million in the second quarter and first six months of ~~2022~~2023, respectively, compared to the same ~~period~~periods in the prior year, primarily due to interest ~~incurred related to the LED Purchase Price Note~~expense from the ~~LED acquisition.~~

~~In February 2022, we entered into a~~Amended 2027 TLA Credit Facility with a syndicate of banks pursuant to which we borrowed $275 million under a term loan, which matures in February 2027. In connection therewith, we repaid the $125 million outstanding balance of the LED Purchase Price Note and the outstanding balance under our previous line of credit. In addition, the LED Earnout Note will begin to bear interest in the third quarter of 2022. As a result of these items, we expect net interest expense to increase in future periods.Facility. See ~~“PART I. Financial Information – Item 1. Financial Statements – Notes to Consolidated Financial Statements – Business Acquisition” and “PART I. Financial Information – Item~~“Item 1. Financial Statements – Notes to Consolidated Financial Statements – Debt.”

Other Non-operating (Income) Expense

Other non-operating (income) expense in the second quarter and first six months of ~~both 2022~~2023 increased primarily due to loss on extinguishment of debt, partially offset by gain on disposition of assets. See “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Other Non-operating (Income) Expense” and ~~2021 primarily reflected~~“Item 1. Financial Statements – Notes to Consolidated Financial Statements – Debt – Credit Facility.” The second quarter and first six months of 2023 also had lower foreign currency ~~(gains) and~~ losses related ~~primarily~~ to our Brazil operating ~~subsidiaries.~~subsidiaries compared to the same periods in the prior year.

Income Tax Provision (Benefit)

Our provision (benefit) for income taxes ~~increased~~decreased by ~~$10.9~~$12.2 million in the first six months of ~~2022~~2023 compared to ~~the same period in~~ the prior year, primarily due to ~~higher income~~a decrease in ~~non-U.S. jurisdictions subject to~~profit before tax.

Liquidity and Capital Resources

AtAs of February ~~25, 2022,~~24, 2023, we had cash and cash equivalents of ~~$365.8~~$375.9 million, of which ~~$187.9~~$199.8 million was held outside of the United States. Our principal uses of cash and capital resources have been acquisitions, debt service requirements, capital expenditures, research and development expenditures and working capital requirements. We expect that future capital expenditures will focus on expanding ~~capacity of our operations, expanding~~ our research and development activities, manufacturing equipment upgrades, acquisitions and IT infrastructure and software upgrades. Cash and cash equivalents generally consist of funds held in demand deposit accounts and money market funds. We do not enter into investments for trading or speculative purposes.


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~~Table of Contents~~

We expect that our existing cash and cash equivalents, borrowings available under our credit ~~facility~~facilities and cash generated by operating activities will be sufficient to fund our operations for at least the next twelve months. We may from time to time seek additional equity or debt financing. Any future equity financing may be dilutive to our existing investors, and any future debt financing may include debt service requirements and financial and other restrictive covenants that may


34

constrain our operations and growth strategies. In the event that we seek additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued product innovation, we may not be able to compete successfully, which would harm our business, operations and financial condition.

Credit Facility

On ~~February 7,~~August 29, 2022, we ~~entered into a Credit Facility with a syndicate of banks that provides for (i) a term loan~~amended our credit facility inand borrowed an ~~aggregate principal~~additional $300 million, which amount was added to our existing term loan. The incremental term loans are on the same terms as the term loans incurred under the original credit agreement. In addition, we amended certain covenants under the amended credit agreement. In the first quarter of ~~$275.0 million (the "2027 TLA")~~2023, we applied a portion of the proceeds of the incremental term loans to (i) finance a portion of the purchase price of the acquisition of Stratus Technologies and (ii) ~~a revolving credit facility~~pay in ~~an aggregate principal amount of $250.0~~full the $101.8 million ~~(the "2027 Revolver"), in each case, maturing on February 7, 2027 (subject to certain earlier “springing maturity” dates upon certain conditions specified in~~outstanding under the ~~Credit Agreement). The Credit Agreement provides that up to $35.0 million of the revolving credit facility is available for issuances of letters of credit.~~

In February 2020, we issued $250.0 million in aggregate principal amount of 2.25% convertible senior notes due 2026 (the “2026 Notes”). 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 closing price of our ordinary shares exceeded 130% of the conversion price for our 2026 Notes for at least 20 trading days in the 30 consecutive trading days ended on February 25, 2022. As a result, the 2026 Notes are convertible by holders through May 27, 2022.

~~For information regarding our debt obligations, see “PART I. Financial Information – Item~~LED Earnout Note. See “Item 1. Financial Statements – Notes to Consolidated Financial Statements – ~~Debt.~~Debt – Credit Facility.” ~~For~~

Convertible Senior Notes

On January 18, 2023, we entered into separate, privately negotiated exchange agreements with a limited number of holders of our ~~operating lease obligations, see “PART I. Financial Information – Item~~2026 Notes to exchange $150.0 million principal amount of our 2026 Notes for (i) $150.0 million in aggregate principal amount of new 2.00% Convertible Senior Notes due 2029 and (ii) an aggregate of approximately $15.6 million in cash, with such cash payment representing the premium paid for the 2026 Notes in excess of par value and accrued and unpaid interest on the 2026 Notes. See “Item 1. Financial Statements – Notes to Consolidated Financial Statements – ~~Leases.~~Debt – Convertible Senior Notes – Convertible Notes Exchange.” ~~For~~

On August 26, 2022, we irrevocably elected (i) to eliminate our ~~purchase obligations, see “PART I. Financial Information – Item~~option to elect Physical Settlement (as defined in the 2026 Indenture) on any conversion of our 2026 Notes that occurs on or after August 27, 2022 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. See “Item 1. Financial Statements – Notes to Consolidated Financial Statements – ~~Commitments~~Debt – Convertible Senior Notes – 2026 Notes.”

Acquisition of Stratus Technologies

On August 29, 2022, we completed our previously announced acquisition of Stratus Technologies. At the closing of the transaction, we paid the seller a cash purchase price of $225 million, subject to certain adjustments. In addition, the seller has the right to receive, and ~~Contingencies.~~we will be obligated to pay, contingent consideration of up to $50 million based on the gross profit performance of Stratus Technologies during the first full 12 fiscal months following the closing. The Earnout, if any, will be payable in cash, ordinary shares of SGH or a mix of cash and SGH Shares, at our election. See “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Business Acquisition – Stratus Technologies.”

Cash Flows


Six Months Ended		February 25, 2022		February 26, 2021
							Six Months Ended
							February 24, 2023		February 25, 2022
Net cash provided by operating activities	Net cash provided by operating activities	$	47,311	$	55,990	Net cash provided by operating activities	$	26,550	$	47,311
Net cash used for investing activities	Net cash used for investing activities	(20,834)		(34,628)		Net cash used for investing activities	(236,996)		(20,834)
Net cash provided by (used for) financing activities		117,726		(30,874)
Net cash provided by financing activities						Net cash provided by financing activities	222,348		117,726
Effect of changes in currency exchange rates	Effect of changes in currency exchange rates	(1,421)		(1,496)		Effect of changes in currency exchange rates	1,917		(1,421)
Net increase (decrease) in cash and cash equivalents		$	142,782	$	(11,008)
Net increase in cash, cash equivalents and restricted cash						Net increase in cash, cash equivalents and restricted cash	$	13,819	$	142,782

Operating Activities: Cash flows from operating activities reflects net income, adjusted for certain non-cash items, including depreciation and amortization expense, share-based compensation, adjustments for changes in the fair value of contingent consideration, gains and losses from investing or financing activities and from the effects of changes in operating assets and liabilities.


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Net cash provided by operating activities in the first six months of 2023 resulted primarily from net loss of $21.5 million, adjusted for non-cash items of $110.3 million. Operating cash flows were adversely affected by a $62.2 million net change in our operating assets and liabilities primarily from the effects of a decrease of $229.0 million in accounts payable and accrued expenses and other liabilities and the payment of $73.7 million of contingent consideration related to our 2021 acquisition of the LED business, partially offset by the effect of decreases of $208.2 million in accounts receivable and $36.6 million in inventories. The decreases in accounts payable and accrued expenses and accounts receivable were primarily due to the timing of payments and receipts. The decrease in inventories was primarily due to lower gross sales in our Memory Solutions segment.

Net cash provided by operating activities in the first six months of 2022 ~~was $47.3 million, comprised~~resulted primarily offrom net income of $23.7 million, adjusted for non-cash items of ~~$104.2~~$98.9 million. Operating cash flows were adversely affected by ~~$80.6~~a $75.3 million ~~from changes~~net change in our ~~net~~ operating assets and liabilities ~~consisting~~ primarily from the effects of an increase of $75.6 million in accounts receivable and a decrease of ~~$31.6~~$36.1 million in accounts payable and accrued expenses and other liabilities, partially offset by ~~a decrease~~the effect of decreases of $26.4 million in ~~inventories.~~inventories and $10.4 million in other assets. The decrease in both inventories and accounts payable and accrued expenses and other liabilities was primarily due to the lower inventories ~~primarily~~mainly in our Memory Solutions segment, and the increase in accounts receivable was primarily due to higher gross sales in ~~the same~~our Memory Solutions and IPS segments.

Net cash provided by operating activities in the first six months of 2021 was $56.0 million, comprised primarily of net income of $7.9 million, adjusted for non-cash items of $41.8 million. Operating cash flows were also favorably affected by $6.3 million from changes in our net operating assets and liabilities, consisting primarily of a $45.9 million increase in accounts payable and accrued expenses and a $10.1 million decrease in accounts receivables, partially offset by increases of $28.1 million in inventories and $19.1 million in other assets.


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~~Table of Contents~~

Investing Activities: Net cash used in investing activities in the first six months of 2023 consisted primarily of $213.1 million for the acquisition of Stratus Technologies and $24.3 million for purchases of property and equipment. Net cash used in investing activities in the first six months of 2022 ~~was $20.8 million, consisting~~consisted primarily of purchases of property and equipment. ~~Net cash used for investing activities in the first six months of 2021 was $34.6 million, consisting primarily of purchases of property and equipment and deposits.~~

Financing Activities: Net cash provided by financing activities in the first six months of 2023 consisted primarily of $295.3 million in net proceeds from issuance of a term loan and $4.3 million in proceeds from the issuance of ordinary shares from our equity plans, partially offset by a $28.1 million payment of contingent consideration related to our 2021 acquisition of the LED business, $16.2 million of payments to acquire our ordinary shares,$14.1 million payment of premium in connection with our convertible note exchange, $9.0 million in repayments of debt and $4.3 million net cash paid for settlement and purchase of Capped Calls. Net cash provided by financing activities in the first six months of 2022 ~~was $117.7 million, consisting~~consisted primarily of $270.8 million in net proceeds from the issuance of a term loan and $7.5 million in proceeds from the issuance of ordinary shares, ~~from our equity plans,~~ partially offset by $125.0 million in principal repayment of the LED Purchase Price Note, ~~and~~ $25.0 million in net repayments of borrowings under our line of ~~credit. Net cash used for financing activities in the first six months~~credit and $2.9 million of ~~2021 was $30.9 million, consisting primarily of $48.0 million for the repurchase of~~payments to acquire our ordinary ~~shares, partially offset by $11.4 million in proceeds from debt and $5.7 million in proceeds from the issuance of ordinary shares from our equity plans.~~shares.

Critical Accounting Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to 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 that we believe to be reasonable under the circumstances. We evaluate our estimates and judgments on an ongoing basis. ~~Our management believes these estimates and judgments are critical in the portrayal~~

For a discussion of ~~our financial condition and results of operations and require management’s most difficult, subjective or complex judgments.~~

~~There have been no material changes to~~ our critical accounting estimates, ~~from those described in~~see “PART ~~II. Other Information~~II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” of our Annual Report on Form 10-K for the fiscal year ended August 26, 2022. There have been no material changes to our critical accounting estimates from those described in our Annual Report on Form 10-K for the fiscal year ended August ~~27, 2021.~~


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26, 2022.

~~Table of Contents~~

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Foreign Exchange ~~Rate~~ Risk

We are subject to inherent risks attributed to operating in a global economy. Our international sales and our operations in foreign countries subject us to risks associated with fluctuating currency values and exchange rates. Because a significant portion of our sales are denominated in U.S. dollars, increases in the value of the U.S. dollar could increase the price of our products so that they become relatively more expensive to customers in a particular country, possibly leading to a reduction in sales and profitability in that country. In addition, we have certain costs that are denominated in foreign currencies, and decreases in the value of the U.S. dollar could result in increases in such costs, which could have a material adverse effect on our results of operations.


36

As a result of our international operations, we generate a portion of our net sales and incur a portion of our expenses in currencies other than the U.S. dollar, particularly the Brazilian real. We present our consolidated financial statements in U.S. dollars, and we translate the assets, liabilities, net sales and expenses of a substantial portion of our foreign operations into U.S. dollars at applicable exchange rates. Consequently, increases or decreases in the value of the U.S. dollar may affect the value of these items with respect to our non-U.S. dollar businesses in our consolidated financial statements, even if their value has not changed in their local currency. Our customer pricing and material cost of sales are generally based on U.S. dollars. Accordingly, the impact of currency fluctuations to our consolidated statements of operations is primarily to our other costs of sales (i.e., non-material components) and our operating expenses as those items are typically denominated in local currency. Our consolidated statements of operations are also impacted by foreign currency gains and losses arising from transactions denominated in a currency other than the functional currency of the respective subsidiary. These translations could significantly affect the comparability of our results between financial periods or result in significant changes to the carrying value of our assets, liabilities and equity. As a result, changes in foreign currency exchange rates impact our reported results.

Approximately ~~26%~~13% and ~~35%~~26% of our net sales in the first six months of ~~2022~~2023 and ~~2021,~~2022, respectively, originated in Brazilian real. We utilize foreign exchange forward contracts to mitigate foreign currency exchange rate risk associated with foreign currency-denominated ~~assets and~~ liabilities in ~~Brazil.~~Brazil, primarily third party payables. We do not use foreign currency contracts for speculative or trading purposes.

Based on our monetary assets and liabilities denominated in foreign currencies as of February ~~25, 2022~~24, 2023 and August ~~27, 2021,~~26, 2022, we estimate that a 10% adverse change in exchange rates versus the U.S. dollar would result in losses recorded in non-operating (income) expense of ~~$10.5~~$7.2 million and ~~$7.7~~$5.8 million, respectively, to revalue these assets and liabilities.

Interest Rate Risk

We are subject to interest rate risk in connection with our variable-rate debt. As of February ~~25, 2022,~~24, 2023, we had ~~$275.0~~$566.1 million principal amount outstanding under the Amended 2027 TLA. In addition, ~~the~~our Amended Credit Agreement provides for borrowings of up to $250.0 million under the 2027 Revolver. Assuming that we would satisfy the financial covenants required to borrow and that the amounts available under the 2027 Revolver were fully drawn, a 1.0% increase in interest rates would result in an increase in annual interest expense and a decrease in our cash flows of ~~$5.3~~$8.2 million per year.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the participation of our management, including our ~~Chief Executive Officer~~principal executive officer and ~~Chief Financial Officer,~~principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange ~~Act)~~Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, our management, including our ~~Chief Executive Officer~~principal executive officer and ~~Chief Financial Officer,~~principal financial officer, concluded that our disclosure controls and procedures were effective as of November 25, 2022 to ensure the information required to be disclosed by ~~an issuer~~us in the reports that ~~it files~~we file or submits under the ~~Securities~~ Exchange Act ~~of 1934~~ is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to our management, including our ~~Chief Executive Officer~~principal executive officer and ~~Chief Financial Officer,~~principal financial officer, as appropriate to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.


34

~~Table of Contents~~

Changes in Internal Control Over Financial Reporting

During the second quarter of ~~2022,~~fiscal 2023, there were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


3537

~~Table of Contents~~

PART II. Other Information

Item 1. Legal Proceedings

For a discussion of legal proceedings, see “Item 1A. Risk Factors” and “PART I. Financial Information – Item 1. Financial Statements – Notes to Consolidated Financial Statements – Commitments and ~~Contingencies” and “PART II. Other Information – Item 1A. Risk Factors.~~Contingencies.”

Item 1A. Risk Factors

Except as discussed below, there have been no material changes to the risks described in “PART I – Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended August ~~27, 2021 (our “Annual Report”).~~26, 2022. You should carefully consider the risks and uncertainties and the other information in this Quarterly Report, including “PART I. Financial Information – Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes. Our business, financial condition or results of operations could be materially and adversely affected if any of these risks occurs and, as a result, the market price of our ordinary shares could decline and you could lose all or part of your investment.

~~Recent Developments that May Affect Our Business~~

~~Our efforts to adapt our work environment in the aftermath of the COVID-19 pandemic may be unsuccessful.~~

While the COVID-19 pandemic persists, we and others in the technology industry are evaluating plans for our workforce as the pandemic eases. We have not yet determined whether and to what extent we will require our workforce to return to work, although other companies in our space have begun to announce long-term plans to their employees. We believe that there are costs to remote work in terms of productivity, innovation and community that have adversely affected our business during the pandemic. At the same time, we also believe that certain of our employees have benefited from the ability to work remotely and may be resistant to calls to return to work. To the extent plans we adopt are more restrictive than those of others in our industry, our ability to attract and retain talent may be materially and adversely affected. In addition, if we do not announce our plans in a manner that is considered timely by our employees, the resulting uncertainty may also adversely affect retention. For additional information about risks to us from the COVID-19 pandemic, please refer to the risk factor titled, “The effects of the COVID-19 outbreak could adversely affect our business, results of operations and financial condition” in our Annual Report.

~~The outbreak of hostilities in Ukraine may exacerbate certain risks we face.~~

Russia’s invasion of Ukraine and the global response, including the imposition of sanctions by the United States and other countries, could create or exacerbate risks facing our business. We have evaluated our operations, vendor contracts and customer arrangements, and at present we do not expect the outbreak to directly have a material and adverse effect on our financial condition or results of operations. However, if the hostilities persist, escalate or expand, risks we have identified in our Annual Report may be exacerbated. For example, if our supply or customer arrangements are disrupted due to expanded sanctions or involvement of countries where we have operations or relationships, our business could be materially disrupted. Further, the use of state-sponsored cyberattacks could expand as part of the conflict, which could adversely affect our ability to maintain or enhance our cyber security and data protection measures. These and other risks are described more fully in our Annual Report.

This Quarterly Report also contains forward-looking statements that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements” for additional information. Our actual results could differ materially and adversely from those anticipated in these forward-looking statements as a result of certain factors, including the risks facing our ~~Company~~company described in this Quarterly Report.

Our indebtedness could impair our financial condition and harm our ability to operate our business.

We have a significant amount of debt outstanding as of February 24, 2023, including the debt described in “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Debt.” Our indebtedness may have important consequences, including, but not limited to, the following:

•increasing our vulnerability to general economic downturns and adverse industry conditions;

•limiting our ability to obtain additional financing;

•requiring us to dedicate a significant portion of our cash flows from operations to the payment of interest and principal on our debt, which would reduce the funds available to us for our working capital, capital expenditures or other general corporate requirements;

•diluting the interests of our existing shareholders to the extent ordinary shares are issued upon conversion of our convertible notes;

•limiting our flexibility in planning for, or reacting to, changes in our business and industry;

•placing us at a competitive disadvantage compared to our competitors with less indebtedness or more liquidity; and

•limiting our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes.

Our ability to make scheduled payments on, to refinance or to pay off our debt obligations when due depends on the financial condition and operating performance of our business. This, to a certain extent, is subject to prevailing economic and competitive conditions, including general conditions prevailing in the financial markets and global economy, and to certain financial, business, regulatory and other factors beyond our control, including the risks described herein. Our business may not generate sufficient cash flows from operations, and future borrowings may not be available to us under our debt arrangements, including our Amended Credit Agreement (as defined below), in an amount sufficient to enable us to service our debt or to fund our other liquidity needs. In addition, certain of our debt is subject to terms that may require the use of significant cash in the future under certain circumstances. For example, holders of the 2.25% Convertible Senior Notes due 2026 (“2026 Notes”) and 2.00% Convertible Senior Notes due 2029 (“2029 Notes” and, together with the 2026 Notes, the “Convertible Notes”), may, subject to a limited exception, require us to repurchase their Convertible Notes following a “fundamental change,” as described in more detail in “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Debt – Convertible Senior Notes.” In addition, all conversions of the Convertible Notes will be settled partially or entirely in cash. We may not have enough available cash or be able to obtain financing at the time we are required to repurchase the Convertible Notes or pay the cash amounts due upon conversion. Applicable law, regulatory authorities and the agreements governing our other indebtedness, including our Amended Credit Agreement, may restrict our ability to repurchase the Convertible Notes or pay the cash amounts due upon conversion. Our failure to repurchase the


38

Convertible Notes or to pay the cash amounts due upon conversion when required will constitute a default under the Indenture. A default under the Indenture or the fundamental change itself could also lead to a default under agreements governing our other indebtedness, which may result in that other indebtedness becoming immediately payable in full. We may not have sufficient funds to satisfy all amounts due under the other indebtedness and the Convertible Notes.

If we are unable to meet our debt obligations or fund our other liquidity needs, we may need to restructure or refinance all or a portion of our debt or sell certain of our assets on or before the maturity of our debt. We may not be able to restructure or refinance any of our debt on commercially reasonable terms, or at all, which could cause us to default on our debt obligations and impair our liquidity, which in turn could cause the acceleration of other indebtedness under certain of our debt agreements which could exacerbate our liquidity problems. Any refinancing of our indebtedness will likely be at higher interest rates in the current environment and may require us to comply with more onerous covenants that could further restrict our business operations. If we are not able to repay our debt obligations as they become due, or if we are not able to refinance or restructure our debt obligations before they become due, this could cause us to default on our debt obligations and impair our liquidity.

In addition, if our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets or seek additional capital. These alternative measures may not be available to us, may not be successful and may not permit us to meet our scheduled debt service obligations, which could result in substantial liquidity problems. Our Amended Credit Facility restricts our ability to dispose of our assets and use the proceeds from the disposition. We may not be able to consummate any such disposition or dispositions or to obtain the proceeds which we could realize from them, and these proceeds may not be adequate to meet any debt service obligations then due. Any of these circumstances could have a material adverse effect on our business, results of operations and financial condition.

Breaches of our security systems, or those of our customers, suppliers or business partners, could expose us to losses.

We manage, store, transmit and otherwise process various proprietary information and sensitive personal or confidential data. In addition, our cloud computing businesses routinely process, store and transmit data, including sensitive and personally identifiable information, for our customers. We have experienced, and may in the future experience, data security incidents, cybersecurity events, data breaches, ransomware attacks or other compromises of the information technology systems we use for these purposes or that our vendors use to process data on our behalf, as criminal or other actors have been able to, and may in the future be able, penetrate our or our service providers’ network security and misappropriate or compromise our information or that of third parties, create system disruptions or cause shutdowns. There are numerous and evolving risks to cybersecurity and privacy, including criminal hackers, hacktivists, state-sponsored intrusions, industrial espionage, employee malfeasance and human or technological error. Computer hackers and others routinely attempt to breach the security of technology products, services and systems, and to fraudulently induce employees, customers and other third parties to disclose information or unwittingly provide access to systems or data. The risk of such attacks includes attempted breaches not only of our own products, services and systems, but also those of customers, contractors, business partners, vendors and other third parties. Our products, services and systems may be used in critical company, customer, government or other third-party operations, or involve the storage, processing and transmission of sensitive data, including valuable intellectual property, classified information, other proprietary or confidential data, regulated data and personal information of employees, customers and others. Successful breaches, employee malfeasance or human or technological error could result in, for example, unauthorized access to, disclosure, modification, misuse, loss or destruction of company, customer, government or other third party data or systems; theft of sensitive, regulated, classified or confidential data including personal information and intellectual property; the loss of access to critical data or systems through DDOS attacks, denial-of-service attacks, ransomware attacks, destructive attacks or other means; and business delays, service or system disruptions or denials of service. Further, hardware and operating system software and applications that we produce or procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of such systems.

The costs to address product defects or any of the foregoing security problems and security vulnerabilities before or after a cyber-incident could be significant. Remediation efforts may not be successful and could result in interruptions, delays or cessation of service and loss of existing or potential customers that may impede our sales, manufacturing, distribution or other critical functions. We could lose existing or potential customers for outsourcing services or other information technology solutions in connection with any actual or perceived security vulnerabilities in our products. In addition, breaches of our security measures and the unapproved dissemination of proprietary information or sensitive or confidential data about us or our customers or other third parties could expose us, our customers or other third parties affected to a risk of loss or misuse of this information, result in regulatory enforcement, litigation and potential liability, damage our brand


39

and reputation or otherwise harm our business. Further, we rely in certain limited capacities on third-party data management providers and other vendors whose possible security problems and security vulnerabilities may have similar detrimental effects on us.

We are subject to laws, rules and regulations in the United States and other countries relating to the collection, use, transmission, processing and security of user and other data. Our ability to execute transactions and to possess, process, transmit and use personal information and data in conducting our business subjects us to legislative and regulatory burdens that, among other things, may require us to notify regulators and customers, employees or other individuals of a data security breach, including in the EU and the European Economic Area where the General Data Protection Regulation (“GDPR”) took effect in May 2018, in Brazil where the Lei Geral de Proteção de Dados (“LGPD”) data privacy laws took effect in August 2021, and in the United States where the California Consumer Privacy Act (“CCPA”) recently became law and the California Privacy Rights Act (“CPRA”), Virginia Consumer Data Protection Act (“VCDPA”) and the Colorado Privacy Act (“CPA”) will come into effect in 2023. Additional U.S. states and the federal government also are considering privacy and cybersecurity legislation. We have incurred, and will continue to incur, significant expenses to comply with mandatory privacy and security standards and protocols under applicable laws, regulations, industry standards and contractual obligations. Despite such expenditures, we may face regulatory and other legal actions in the event of a data security incident, cybersecurity event or data breach or perceived or actual non-compliance with such applicable obligations. The various data privacy enactments impose significant obligations and compliance with these requirements depends in part on how particular regulators apply and interpret them. In particular, if we fail to comply with the GDPR, or if regulators assert we have failed to comply with the GDPR, it may lead to regulatory enforcement actions, which can result in monetary penalties of up to 4% of worldwide revenue, private lawsuits or reputational damage.

We have incurred, and may in the future incur, impairment charges related to our goodwill, which could have a material adverse effect on our business, results of operations and financial condition.

We have a significant amount of goodwill. As of February 24, 2023, we had goodwill of approximately $182.7 million, which represented approximately 11% of our total assets as of such date. The carrying value of goodwill may be reduced if we determine that goodwill is impaired. 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 a reporting unit is less than its carrying value. The testing of goodwill for impairment requires us to make significant estimates about future performance and cash flows, as well as other assumptions. These estimates can be affected by numerous factors, including potential changes in economic, industry or market conditions; changes in business operations; changes in competition or changes in our stock price and market capitalization and other relevant events and factors affecting the fair value of the reporting unit. Changes in these factors, or changes in actual performance compared with estimates of our future performance, may affect the fair value of goodwill and could result in an impairment charge, which could have a material adverse effect on our business, results of operations and financial condition. During the quarter ended February 24, 2023, we recorded an impairment charge of $17.6 million related to our Penguin Edge business. If actual results differ from the assumptions and estimates used in the goodwill calculations, we could incur future impairment charges, which could have a material adverse effect on our business, results of operations and financial condition.

Our capped call transactions may affect the value of our publicly traded debt and ordinary shares.

In connection with the pricing of the 2029 Notes, we entered into privately negotiated capped call transactions (“2029 Capped Calls”) with certain financial institutions. The 2029 Capped Calls are expected generally to reduce potential dilution to our ordinary shares upon any conversion of 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.

In connection with establishing their initial hedges of the 2029 Capped Calls, the 2029 Capped Call counterparties or their respective affiliates likely purchased our ordinary shares concurrently with the pricing of the 2029 Notes. In addition, the 2029 Capped Call counterparties and/or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our ordinary shares and/or purchasing or selling our ordinary shares or other securities of ours in secondary market transactions and prior to the maturity of the 2029 Notes (and are likely to do so during any Observation Period (as defined in the Indenture) related to a conversion of 2029 Notes). This activity could cause or avoid an increase or a decrease in the market price of our ordinary shares or the 2029 Notes.

The potential effect, if any, of these transactions and activities on the trading price of our ordinary shares or the 2029 Notes will depend in part on market conditions. Any of these activities could adversely affect the trading price of our ordinary shares or the 2029 Notes.


40

Item 22. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

On April 5, 2022, we announced that our Board of Directors approved a $75 million share repurchase authorization, under which we may repurchase our outstanding ordinary shares from time to time through open market purchases, privately-negotiated transactions or otherwise. The share repurchase authorization has no expiration date but may be suspended or terminated by our Board of Directors at any time.


36

~~Table~~On January 18, 2023, we entered into separate, privately negotiated exchange agreements with a limited number of ~~Contents~~

~~Ordinary shares withheld as~~holders of our 2026 Notes to exchange $150.0 million principal amount of the 2026 Notes for (i) $150.0 million in aggregate principal amount of 2029 Notes and (ii) an aggregate of approximately $15.6 million in cash, with such cash payment representing the premium paid for the 2026 Notes in excess of ~~withholding taxes~~par value and ~~exercise prices in~~accrued and unpaid interest on the 2026 Notes (collectively, the “Exchange Transactions”). In connection with the ~~vesting or exercise of equity awards are not required~~Exchange Transactions, we repurchased 325,699 shares for $5.4 million.

The following table sets forth information relating to ~~be disclosed under Item 703 of Regulation S-K and accordingly are not described under “PART II. Other Information – Item 2. Unregistered Sales of Equity Securities and Use of Proceeds."~~

~~Credit Facility~~

~~We are subject to certain restrictions with respect to the use~~repurchases of our working capital and our ability to pay dividends under our Credit Facility, as described in “PART I. Financial Information – Item 1. Financial Statements – Notes to Consolidated Financial Statements – Debt,” which information is incorporated herein by reference.equity securities during the three months ended February 24, 2023:


Period	Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs	Approximate dollar value of shares that may yet be purchased under the plans or programs
November 26, 2022 – December 23, 2022	184,044	$	16.30	184,044
December 24, 2022 – January 20, 2023	492,693	$	16.26	166,994
January 21, 2023 – February 24, 2023	—	$	—	—
	676,737	$	16.27	351,038	$	16,620,000

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.


41

Item 5. Other Information

~~Not applicable.~~


37

None.

~~Table of Contents~~

Item 6. Exhibits

INDEX TO EXHIBITS

Incorporated by Reference

Exhibit
No.

Description

Filed
Herewith

Form

File No.

Exhibit

Filing
Date

Exhibit
No.

Description

Filed
Herewith

Form

File No.

Exhibit

Filing
Date

3.1

Second Amended and Restated Memorandum and Articles of Association of SMART Global Holdings, Inc.

8-K

001-38102

3.1

03/31/2020

3.1

Second Amended and Restated Memorandum and Articles of Association of SMART Global Holdings, Inc.

10-Q

001-38102

3.1

04/07/2020

4.1

Description of Securities Registered Under Section 12 of the Exchange Act

10-K

001-38102

4.1

10/25/2021

4.1

Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Exchange Act of 1934

10-K

001-38102

4.1

10/25/2021

10.1*

Consulting Agreement dated December 9, 2021 by and between SMART Global Holdings, Inc. and Ajay Shah

10-Q

001-38102

10.1

01/04/2022

10.2

Credit Agreement, dated as of February 7, 2022, by and among SMART Global Holdings, Inc., SMART Modular Technologies, Inc., the lenders party thereto and Citizens Bank, N.A., as Administrative Agent, Collateral Agent and an Issuing Bank

8-K

001-38102

10.1

02/08/2022

4.2

Indenture, dated as of January 23, 2023, between SMART Global Holdings, Inc. and U.S. Bank Trust Company, National Association, as Trustee

8-K

001-38102

4.1

01/23/2023

4.3

Form of certificate representing the 2.000% Convertible Senior Notes due 2029 (included as Exhibit A to Exhibit 10 .1)

8-K

001-38102

4.2

01/23/2023

10.1

Form of confirmation for the Capped Call Transactions

8-K

001-38102

10.1

01/23/2023

31.1

Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002

31.1

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002

31.2

Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification of Principal Executive Officer pursuant 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification of Principal Financial Officer pursuant 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.1*

Certification of C hief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*

Certification of C hief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document

101.INS

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

104

Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101)

104

Cover Page Interactive Data File (embedded within the Inline XBRL document)

*~~Constitutes a management contract~~ The certifications attached as Exhibit 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q are deemed furnished and not filed with the SEC and are not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933, as amended, or ~~compensatory plan~~the Exchange Act, whether made before or ~~arrangement.~~after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.


3842

~~Table of Contents~~

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	SMART Global Holdings, Inc.
Date: April ~~5, 2022~~4, 2023	By:	/s/ Mark Adams
		Mark Adams
		President and Chief Executive Officer
		(Principal Executive Officer)

Date: April ~~5, 2022~~4, 2023	By:	/s/ Ken Rizvi
		Ken Rizvi
		Senior Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)


3943


		Page

PART I. Financial Information

Item 1	Financial Statements	4
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2629
Item 3	Quantitative and Qualitative Disclosures About Market Risk	3436
Item 4	Controls and Procedures	3437

PART II. Other Information

Item 1	Legal Proceedings	3638
Item 1A	Risk Factors	3638
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	3641
Item 3	Defaults Upon Senior Securities	3741
Item 4	Mine Safety Disclosures	3741
Item 5	Other Information	3742
Item 6	Exhibits	3842

Signatures			3943


	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 27, 2021	50,138	$	1,504	$	396,120	$	184,787	$	(50,545)	$	(221,615)	$	310,251	$	8,673	$	318,924
Net income	—	—		—		20,027		—		—		20,027		671		20,698
Other comprehensive income (loss)	—	—		—		—		—		(19,440)		(19,440)		—		(19,440)
Shares issued under equity plans	734	22		5,007		—		—		—		5,029		—		5,029
Repurchase of ordinary shares	(51)	(2)		2		—		(2,666)		—		(2,666)		—		(2,666)
Share-based compensation expense	—	—		9,739		—		—		—		9,739		—		9,739
As of November 26, 2021	50,821	1,524		410,868		204,814		(53,211)		(241,055)		322,940		9,344		332,284
Net income	—	—		—		2,458		—		—		2,458		514		2,972
Other comprehensive income (loss)	—	—		—		—		—		11,379		11,379		—		11,379
Shares issued under equity plans	372	11		2,420		—		—		—		2,431		—		2,431
Repurchase of ordinary shares	(4)	—		—		—		(229)		—		(229)		—		(229)
Share-based compensation expense	—	—		9,848		—		—		—		9,848		—		9,848
Distribution to noncontrolling interest	—	—		—		—		—		—		—		(3,773)		(3,773)
As of February 25, 2022	51,189	$	1,535	$	423,136	$	207,272	$	(53,440)	$	(229,676)	$	348,827	$	6,085	$	354,912

	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	$	163,475	$	(2,032)	$	(228,241)	$	282,102	$	—	$	282,102
Net income	—	—		—		2,027		—		—		2,027		—		2,027
Other comprehensive income (loss)	—	—		—		—		—		(16,525)		(16,525)		—		(16,525)
Shares issued under equity plans	956	29		3,077		—		—		—		3,106		—		3,106
Repurchase of ordinary shares	(139)	(4)		4		—		(3,483)		—		(3,483)		—		(3,483)
Share-based compensation expense	—	—		11,088		—		—		—		11,088		—		11,088
As of November 27, 2020	49,805	1,494		361,600		165,502		(5,515)		(244,766)		278,315		—		278,315
Net income	—	—		—		5,844		—		—		5,844		—		5,844
Other comprehensive income (loss)	—	—		—		—		—		10,934		10,934		—		10,934
Shares issued under equity plans	371	11		2,534		—		—		—		2,545		—		2,545
Repurchase of ordinary shares	(1,104)	(33)		33		—		(44,481)		—		(44,481)		—		(44,481)
Share-based compensation expense	—	—		5,398		—		—		—		5,398		—		5,398
As of February 26, 2021	49,072	$	1,472	$	369,565	$	171,346	$	(49,996)	$	(233,832)	$	258,555	$	—	$	258,555


Remainder of 2022	$	6,820
2023	10,805
2024	7,272
2025	4,664
2026	3,581
2027 and thereafter	15,652
	48,794
Less imputed interest	(10,618)
Present value of total lease liabilities	$	38,176