Business Acquisition

9 Months Ended

May 27, 2022

LED Business

On March 1, 2021, pursuant to the previously announced Asset Purchase Agreement, dated October 18, 2020, as amended by the Amendment to Asset Purchase Agreement, dated March 1, 2021 (as amended, the “CreeLED Purchase Agreement”), (i) we acquired the LED business of Cree, Inc., a corporation now known as Wolfspeed, Inc. (“Cree”), including (a) certain equipment, inventory, intellectual property rights, contracts and real estate comprising Cree’s LED products segment, (b) all of the issued and outstanding equity interests of Cree Huizhou Solid State Lighting Company Limited, a limited liability company organized under the laws of the People’s Republic of China and an indirect wholly owned subsidiary of Cree and (c) Cree’s 51% ownership interest in Cree Venture LED Company Limited (“Cree Joint Venture”), Cree’s joint venture with San’an Optoelectronics Co., Ltd. (“San’an”) and (ii) we assumed certain liabilities related to the LED business (collectively, (i) and (ii), the “LED Business”). In connection with the transaction, Cree retained certain assets used in and pre-closing liabilities associated with its LED products segment.

Purchase Price: The purchase price for the LED Business consisted of (i) a payment of $50 million in cash, subject to customary adjustments, (ii) an unsecured promissory note issued to Cree by the Company in the amount of $125 million (“LED Purchase Price Note”), (iii) an earn-out payment of up to $125 million based on the revenue and gross profit performance of the LED Business in Cree’s first four full fiscal quarters following the closing (“Earnout Period”), with a minimum payment of $2.5 million, payable in the form of an unsecured promissory note to be issued by us (“Earnout Note”) and (iv) the assumption of certain liabilities. The LED Purchase Price Note bears interest at LIBOR plus 3.0% and is due on August 15, 2023. The Earnout Note began to bear interest as of March 28, 2022 at LIBOR plus 3.0% and is due on March 27, 2025. In the second quarter of 2022, we repaid the LED Purchase Price Note. See “Debt.”

Contingent Consideration: The Earnout Note is accounted for as contingent consideration. The fair value of the Earnout Note was estimated as of the date of acquisition to be $28.1 million and was valued using a Monte Carlo simulation analysis in a risk-neutral framework with assumptions for volatility, market price of risk adjustment, risk-free rate and cost of debt. The fair value measurement was based on significant inputs not observable in the market.

The Earnout Note is revalued each quarter and changes in valuation are reflected in results of operations. In the second half of 2021, we recorded charges of $32.4 million to adjust the value of the Earnout Note to its fair value as of August 27, 2021, and in 2022, through the end of the Earnout Period, we recorded additional aggregate charges of $41.3 million to adjust the value of the Earnout Note to its fair value as of May 27, 2022. The changes in fair value reflected new information about the probability and timing of meeting the conditions of the revenue and gross profit targets of the LED Business.

Based on the revenue and gross profit performance of the LED Business in Cree’s first four full fiscal quarters following the closing, the final calculated value of the contingent consideration was $101.8 million and, subsequent to the end of the third quarter of 2022, we issued the Earnout Note to Cree for this amount.

Unaudited Pro Forma Financial Information: The following unaudited pro forma financial information presents our combined results of operations as if the acquisition of the LED Business had occurred on August 31, 2019. The unaudited pro forma financial information is based on various adjustments and assumptions and is not necessarily indicative of what our results of operations actually would have been had the acquisition been completed as of August 31, 2019 or will be for any future periods. Furthermore, the pro forma financial information does not include adjustments to reflect any potential revenue, synergies or dis-synergies or cost savings that may be achievable in connection with the acquisition, or the associated costs that may be necessary to achieve such revenues, synergies or cost savings.

The unaudited pro forma financial information for the first nine months of 2021 combines our results of operations for the nine months ended May 28, 2021 (which includes the results of the LED Business from the March 1, 2021 acquisition date) and the results of operations of the LED Business for the six months ended December 27, 2020.


Nine months ended	May 28, 2021
Net sales	$	1,237,627
Net loss attributable to SGH	(162,969)

Earnings (loss) per share:
Basic	$	(3.36)
Diluted	$	(3.36)

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

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

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

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

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

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