10-K 1 smci-2017630x10kxa.htm 10-K Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________________________________
Form 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2017
or
¨
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 001-33383
__________________________________________________________________________
Super Micro Computer, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
77-0353939
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
980 Rock Avenue
San Jose, CA 95131
(Address of principal executive offices, including zip code)
(408) 503-8000
(Registrant’s telephone number, including area code)
__________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, $0.001 par value per share
SMCI
OTC
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x
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 x 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨     No  x
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
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  x
  
Accelerated filer  ¨
Non-accelerated filer  ¨  (Do not check if a smaller reporting company)
  
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 of the Exchange Act)    Yes  ¨    No  x
The aggregate market value of the registrant’s common stock held by non-affiliates, based upon the closing price of the common stock on December 31, 2016, as reported by the Nasdaq Global Select Market, was $1,110,444,831. Shares of common stock held by each executive officer and director and by each person who owns 5% or more of the outstanding common stock, based on filings with the Securities Exchange Commission, have been excluded since such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.




As of March 31, 2019, there were 49,881,914 shares of the registrant’s common stock, $0.001 par value, outstanding, which is the only class of common stock of the registrant issued.
DOCUMENTS INCORPORATED BY REFERENCE
None




SUPER MICRO COMPUTER, INC.

ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2017

TABLE OF CONTENTS
 
 
 
Page
 
 
PART I
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
PART II
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
PART III
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
PART IV
 
Item 15.
 

Unless the context requires otherwise, the words “Super Micro,” “Supermicro,” “we,” “Company,” “us” and “our” in this document refer to Super Micro Computer, Inc. and where appropriate, our wholly owned subsidiaries. Supermicro, the Company logo and our other registered or common law trademarks, service marks, or trade names appearing in this Annual Report on Form 10-K are the property of Super Micro Computer, Inc. or its affiliates. Other trademarks, service marks, or trade names appearing in this Annual Report on Form 10-K are the property of their respective owners.


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Explanatory Note

This Annual Report on Form 10-K includes restatement of: (1) our consolidated balance sheet as of June 30, 2016 and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the fiscal years ended June 30, 2016 and 2015 in Part II, Item 8 of this Annual Report on Form 10-K; (2) our selected financial data as of and for our fiscal years ended June 30, 2016 and 2015 located in Part II, Item 6 of this Annual Report on Form 10-K; (3) our management’s discussion and analysis of financial condition and results of operations as of and for our fiscal years ended June 30, 2016 and 2015 contained in Part II, Item 7 of this Annual Report on Form 10-K; and (4) our quarterly financial information for the three months ended June 30, 2016 in Part II, Item 8, Note 17, “Quarterly Financial Information (Unaudited)” of the notes to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K. See below and Part II, Item 8, Note 19, “Restatement of Previously Issued Consolidated Financial Statements” of the notes to the consolidated financial statements of this Annual Report on Form 10-K for a detailed discussion of the effect of the restatement.

Prior to filing this Annual Report on Form 10-K, we filed Quarterly Reports on Form 10-Q/A for the quarterly periods ended March 31, 2017, December 31, 2016, and September 30, 2016, which included restatement of the condensed consolidated financial statements (and related disclosures) for the periods described therein, as set forth in those reports.

We have not previously issued consolidated financial statements as of and for the year ended June 30, 2017, for the reasons set forth below under “Background of Restatement.” This Annual Report on Form 10-K includes our consolidated balance sheet as of June 30, 2017 and related consolidated statements of operations, comprehensive income, stockholders’ equity for the fiscal year then ended, and unaudited quarterly financial information for the quarter ended June 30, 2017.

Background of Restatement

In August 2017, prior to the issuance of our consolidated financial statements for the fiscal year ended June 30, 2017, the audit committee (the “Audit Committee”) of our Board of Directors (the “Board”) commenced an investigation (the “Investigation”) into certain accounting and internal control matters, principally focused on certain revenue recognition matters. The Investigation was conducted with the assistance of outside counsel, which retained forensic accountants to assist them in their work. Following the conclusion of the Investigation, the Audit Committee directed its outside counsel and its forensic accountants to conduct additional procedures on an expanded scope of revenue recognition matters. Concurrent with these additional procedures, new members of our management, under the direction of the Audit Committee, performed a thorough analysis of our historical financial statements, accounting policies and financial reporting, as well as our disclosure controls and procedures and our internal control over financial reporting. During the course of the Investigation, the further procedures by outside counsel and the management analysis (collectively, the “Investigation, Procedures and Analysis”), the Audit Committee and management determined certain employees had violated our Code of Business Conduct and Ethics and discovered accounting and financial reporting errors and certain irregularities. On November 14, 2018, the Board, upon the recommendation, and with the concurrence of the Audit Committee and new members of management, concluded that certain previously filed consolidated financial statements and related financial information should no longer be relied upon.

The Investigation, Procedures and Analysis identified certain material weaknesses in our internal control over financial reporting. See Part II, Item 9A, “Controls and Procedures” of this Annual Report on Form 10-K for the conclusions of our Chief Executive Officer and Chief Financial Officer regarding disclosure controls and procedures and our internal control over financial reporting.



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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
    
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended that involve risks and uncertainties. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology including “would,” “could,” “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of these terms or other comparable terminology. In evaluating these statements, you should specifically consider various factors, including the risks described below, under Part I, Item 1A, “Risk Factors”, and in other parts of this Form 10-K as well as in our other filings with the SEC. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Annual Report on Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
    
We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. We cannot guarantee future results, levels of activity, performance or achievements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

PART I

Item 1.        Business

Overview

We are a Silicon Valley founded, headquartered and operated provider of application optimized high performance and high efficiency server and storage systems. We develop and provide end-to-end green computing solutions to the cloud computing, data center, enterprise, artificial intelligence and machine learning, big data, hyper-converged, OEM, high performance computing ("HPC"), and Internet of Things ("IoT")/embedded markets. Our solutions range from complete server, storage, blade and workstations to full racks, networking devices, server management software and global support and services. We offer our customers a high degree of flexibility and customization by providing a broad array of server configurations from which they can choose the optimal solutions to fit their computing needs. Our server systems, subsystems and accessories are architecturally designed to provide high levels of reliability, quality, configurability and scalability, thereby enabling our customers to benefit from improvements in compute performance, density, thermal management and power efficiency, which lead to lower total cost of ownership.

We perform the majority of our research and development efforts in-house, at our San Jose, California headquarters, which we believe increases the efficiency of communication and collaboration between design teams, streamlines the development process and reduces time-to-market. We have developed a set of design principles which allow us to aggregate individual industry standard components and materials to develop optimized products, such as serverboards, chassis, power supplies, and networking and storage devices. This building block approach allows us to provide a broad range of products, and enables us to build and deliver application-optimized solutions based upon customers’ requirements.

Core to our business is our focus on green computing. We are committed to leveraging the best new and emerging technologies and designs to reduce the environmental impact of the systems we deliver to market. Building these higher efficiency resource optimized systems brings a dual benefit to our customers of lower acquisition and operating costs while at the same time reducing the energy consumption and eWaste.

We conduct our operations principally from our Silicon Valley headquarters in California and subsidiaries in Taiwan and the Netherlands. We sell through our direct sales force as well as through distributors, including value added resellers and system integrators, and OEMs who develop their products on our systems. During fiscal year 2017, our products were purchased by over 900 customers in 110 countries. We commenced operations in 1993 and have been profitable every year since inception. For fiscal years 2017, 2016 and 2015, our net sales were $2,484.9 million, $2,225.0 million and $1,954.4 million, respectively, and our net income was $66.9 million, $72.1 million and $92.6 million, respectively.

The Supermicro Solution


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We develop and manufacture high performance server solutions based upon an innovative, modular and open architecture. Our primary competitive advantages are the breadth of our product portfolio that can better match exact customer requirements and our ability to deliver new technologies to market faster. Our competitive advantages arise from how we combine our integrated internal research and development resources with our deep understanding of complex computing requirements to develop the intellectual property used in our server solutions. These competitive advantages have enabled us to develop a set of design principles and performance specifications that meet industry standard Server System Infrastructure ("SSI") requirements and also incorporate the advanced functionality and capabilities required by our customers. We believe that our approach provides us with greater flexibility to quickly and efficiently develop new server solutions that are optimized for our customers' specific application requirements.

Flexible and Customizable Server Solutions

We provide a broad portfolio of flexible and customizable server solutions to better address the specific application needs of our customers. Our design principles allow us to aggregate industry standard components and materials to develop optimized server subsystems and accessories, such as serverboards, mid/backplanes, chassis and power supplies to deliver a broad range of products with superior features. This building block approach allows us to provide a broad range of optimized solution SKUs.

Rapid Time-to-Market

We are able to reduce the design and development time required to incorporate the latest technologies into the next generation of application optimized server solutions. Our in-house design competencies, control of the design of many of the components used within our server systems and our building block architecture enable us to rapidly develop, build and test server systems, subsystems and accessories with unique configurations. As a result, when new technologies are brought to market, we are generally able to quickly design, integrate and assemble solutions with little need to re-engineer other portions of our solution. Our efficient design capabilities allow us to offer our customers server solutions incorporating the latest technology with a better price-to-performance ratio. We work closely with the leading microprocessor, GPU, memory, disk/flash, and interconnect vendors and other hardware and software suppliers to coordinate the design of our new products with their product release schedules, thereby enhancing our ability to rapidly introduce new products incorporating the latest technology.

Improved Power Efficiency and Thermal Management

We leverage advanced technology and system design expertise to reduce the power consumption of our server, blade, workstation and storage systems. We believe that we are an industry leader in power saving technology. Our server solutions include many design innovations to optimize power consumption and manage heat dissipation. We have designed flexible power management systems which customize or eliminate components in an effort to reduce overall power consumption. We have developed proprietary power supplies that can be integrated across a wide range of server system form factors which can significantly enhance power efficiency. We have also developed technologies that are specifically designed to reduce the effects of heat dissipation from our servers. Our thermal management technology allows our products to achieve a better price-to-performance ratio while minimizing energy costs and reducing the risk of server malfunction caused by overheating. We have also developed power management software that controls power consumption of server clusters by policy-based administration.

High Density Servers

Our servers are designed to enable customers to maximize computing power while minimizing the physical space utilized, which allows our customers to efficiently deploy our server systems in scale-out configurations. Through our industry-leading technology, our systems offer significantly more memory, hard drive storage and expansion slots than traditional server systems with a comparable server form factor. For example, our BigTwin solutions contain two or four full feature dual processor hot-pluggable compute nodes with All-Flash Non-Volatile Memory express (“NVMe”) support in a 2 rack unit (“2U”) server. This high density design is well suited for our customers that require highly space-efficient solutions and delivers higher efficiency through sharing resources across systems.

Strategy

Our objective is to be the world’s leading provider of application optimized, high performance server, storage and networking solutions. Achieving this objective requires continuous development and innovation of our solutions with better price performance and architectural advantages compared with our prior generation of solutions and with solutions offered by our competitors. We believe that many of these product innovations are gaining momentum based on the strong year-over-year

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revenue growth across these next-generation products. We believe that our strategy and our ability to innovate and execute will enable us to maintain our relative competitive position in many of our product areas and improve our competitive position in others, while providing us with additional long-term growth opportunities. Key elements of our strategy include maintaining our time-to-market advantage, enhancing our software management solutions, expand our service and support offerings, further optimize our global operating structure and deepen our relationships with suppliers and manufacturers.

Maintain Our Time-to-Market Advantage

We believe one of our major competitive advantages is our ability to rapidly incorporate the latest computing innovations into our products. We intend to maintain our time-to-market advantage by continuing our investment in our research and development efforts to rapidly develop new proprietary server, storage and networking solutions based on industry standard components. We plan to continue to work closely with technology partners such as Intel Corporation ("Intel"), Nvidia Corporation ("Nvidia") and Advanced Micro Devices, Inc. ("AMD"), to develop products that are compatible with the latest generation of industry standard technologies. We believe these efforts will allow us to continue to offer products that lead in price for performance as each generation of computing innovations becomes available.

Enhance Our Software Management Solutions

We have introduced and plan to continue developing additional server, storage and networking management software capabilities and partnering with certain software suppliers for software solutions that are integrated with our server products. This will enable our customers to simplify and automate the large scale deployment, configuration and monitoring of our servers.

Expand Our Service & Support Offerings

We intend to continue to expand our global customer service and support offerings and enable our customers to purchase service and support together with our complete server systems as total solution packages around the world. Our service and support is designed to help our customers improve uptime, reduce costs and enhance the productivity of their investment in our products. We believe that continued enhancement of these offerings will support the continued growth of our business and increase our penetration with enterprise customers.

Further Optimize Our Global Operating Structure

We plan to continue to increase our worldwide manufacturing capacity and logistics capabilities in the US, Netherlands and Taiwan in order to more efficiently serve our customers and lower our manufacturing costs. We continue to assess the efficiency of our global tax structure to manage our tax costs. Within our global operating structure, we employ stringent due diligence and qualification processes to select our contract manufacturers, which we regularly audit for process, quality and control. Our global manufacturing process is designed to ensure the end-to-end security of our products.

Deepen Our Relationships with Suppliers and Manufacturers
    
Our efficient supply chain and combined internal and outsourced manufacturing allow us to build customized systems to order, while minimizing costs. We plan to continue leveraging our relationships with suppliers and contract manufacturers in order to maintain and improve our cost structure as we benefit from economies of scale. We intend to continue to source non-core products from external suppliers.

Products and Services

We offer a broad range of application-optimized server solutions, including storage, rackmount and blade server systems and subsystems and accessories, which can be used to build complete server systems serving a variety of markets including cloud computing, data center, enterprise, big data, HPC, deep learning and IoT embedded. The percentage of our net sales represented by sales of server systems increased to 70.0% in fiscal year 2017 from 68.9% in fiscal year 2016 and from 60.7% in fiscal year 2015, and the percentage of our net sales represented by sales of subsystems and accessories was 30.0% in fiscal year 2017, 31.1% in fiscal year 2016 and 39.3% in fiscal year 2015.
    
Server Systems

We sell server systems in rackmount, blade, Twin and multi-node form factors, which support single, dual and multiprocessor architectures. A summary of our server systems and their markets are listed below.

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Our SuperBlade® and MicroBlade™ system families are each designed to share common computing resources, thereby saving space and power over standard rackmount servers. We believe that our SuperBlade and MicroBlade servers, with our unique disaggregated resource-saving architectures that enable the independent upgrade of compute modules and other Blade resources, offer a unique value to our customers. They provide industry-leading density, price-to-performance per square foot and energy savings to reduce data center total cost of ownership ("TCO").

Our SuperStorage systems in 2U, 3 rack unit (“3U”) and 4 rack unit (“4U”) platforms provide high density storage while leveraging high- efficiency power to maximize performance-per-watt savings to reduce TCO for Enterprise Data Centers, Big Data and other high performance applications. For example, our All-Flash NVMe systems that deliver better performance and efficiency than traditional storage solutions and our Simply Double SuperStorage systems that include twice the number of hot-swap bays as 2U industry standard systems, offer up to twice the storage capacity and input/output operations per second in the same amount of space.

Our Twin family of multi-node server systems including 1U and 2U Twin™, 2U Twin²™, 1U and 2U TwinPro™, 4U FatTwin™, and new 2U BigTwin™ are optimized for density, performance and efficiency for customers' storage, HPC, Hyper-converged infrastructure (HCI) and cloud computing requirements. The new 2U four node BigTwin delivers double the density of traditional rackmounts while supporting max performance and functionality with up to 205 watt Intel Xeon Scalable Processors, 24 DIMMS and All-Flash NVMe.
    
Our Ultra Server systems in 1U and 2U platforms are designed to deliver performance, flexibility, scalability, and serviceability that are ideal for demanding enterprise workloads. They allow enterprise IT professionals the ability to select a single server platform that can easily be reconfigured for many applications, to reduce qualification time and to manage the need for excessive spares inventories.

Our GPU or Accelerated Computing server systems in 1U, 2U, 4U, 7U and blade platforms achieve higher parallel processing capability with advanced GPU designs, and provide high performance in calculation-intensive applications. We have introduced a complete portfolio of Xeon Phi and Nvidia Pascal based systems.
    
Our MP product line supports four and eight socket configurations for high performance memory intensive enterprise applications with 96 DIMMS for up to 12 terabytes memory capacity and 23 PCI-E expansion slots. We recently expanded the offerings to support SAP Hana in-memory databases with optimal performance.

Our Data Center Optimized ("DCO") server systems deliver superior performance-per-watt to optimize data center TCO with an improved thermal architecture utilizing power efficient components and offset processors to help eliminate CPU preheating and support a 5+ year product life cycle.

Our MicroCloud server systems are high density, multi-node UP servers with up to 24 hot-pluggable nodes in a compact 3U form factor. MicroCloud integrates advanced technologies within a compact functional design to deliver high performance in environments with space and power constraints. These combined features provide a cost-effective solution for IT professionals implementing new hosting architectures for SMB and Public/Private Cloud Computing applications.
    
Our IoT/embedded server systems are compact, smart and secure products that reside on the edge of the network, connecting smart sensors and devices to the cloud over wireless or local networks (for example, 5G, LAN, WiFi, Zigbee and RF). These server systems are built on open architecture to ensure interoperability between systems, for ease of services deployment, and to enable a broad ecosystem of solution providers. The IoT/embedded server systems empower users to securely aggregate, share, and filter data for analysis. These server systems help ensure that data generated by devices can travel securely and safely from the edge to the cloud and back - without replacing existing infrastructure.

Our internally developed switch products 1G/10G/40G/100G Ethernet, InfiniBand and Omni Path switches for rack-mount servers help us to offer more complete solutions for our customers.

Our SuperRack total server solutions offer a wide range of flexible accessory options including front, rear and side expansion units to provide modular solutions for system configuration. Data center, Cloud, HPC computing and server farm customers can use us as a one-stop shop for all of their IT hardware needs. Our SuperRack total solutions offer easy installation and rear access with no obstructions for hot-swap devices, user-friendly cabling and cable identification, and effortless integration of our high density server, storage and blade systems.
    
Server Software Management Solutions

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Our remote system management solutions, such as our Server Management suite ("SSM"), including Supermicro Power Management software ("SPM"), Supermicro Update Manager ("SUM") and SuperDoctor 5 ("SD5"), have been designed to manage large-scale heterogeneous hyper scale data center environments. SPM is designed specifically for HPC/Data Center cluster deployment and management. We have also partnered with certain software suppliers for software solutions that are integrated with our server systems.

Server Subsystems and Accessories

We offer a large array of modular server subsystems and accessories. These components are the foundation of our server solutions and span product offerings from the entry-level single and dual processor server segment to the high-end multi-processor market. The majority of the subsystems and accessories we sell individually are optimized to work together and are ultimately integrated into complete server systems.

Serverboards

We design our serverboards with the latest hardware technologies and infrastructure software. Each serverboard is designed and optimized to adhere to specific physical, electrical and design requirements in order to work with certain combinations of chassis and power supplies and achieve maximum functionality. For our rackmount server systems, we not only adhere to SSI specifications, but our customized specifications provide an advanced set of features that increase the functionality and flexibility of our products.

 Chassis and Power Supplies

Our chassis are designed to efficiently house our servers while maintaining interoperability, adhering to industry standards and increasing output efficiency through power supply design. We believe that our latest generation of power supplies achieves the maximum power efficiency available in the industry. Our Battery Backup Power ("BBP") Module provides backup power to systems during an electricity outage and provides flexible backup power capability and reduces total cost of ownership. Our server chassis come with hot-plug, heavy-duty fans, fan speed control and an advanced air shroud design to maximize airflow redundancy. Our Powerstick design provides the slim form factor of a redundant power supply that increases system computing and storage density across our multiple product lines.

Supermicro Global Services

Our Supermicro Global Services are comprised of customer support services and hardware enhanced services. Both customer support services and hardware enhanced services develop and implement services solutions for our direct and OEM customers as well as our distributors. Services are provided to our customers directly or through approved distributors and third-party partners.

Support Services: Our customer support services offer market competitive warranties, generally from one to three years, and warranty extension options for products sold by our direct sales team and approved distributors. Our customer support team provides ongoing maintenance and technical support for our products through our website and 24-hour continuous direct phone based support.

Hardware Enhanced Services: Our strategic direct and OEM customers may purchase a variety of on-site support service plans. Our service plans vary depending on specific services, response times, coverage hours and duration, repair priority levels, spare parts requirements, logistics, data privacy and security needs. Our hardware enhanced services team provides help desk services and product on-site support for our server systems.

Our services include server system integration, configuration and software upgrades and updates. We also identify service requirements, create and execute project plans, conduct verification testing and training and provide technical documentation.

Research and Development
    
We perform the majority of our research and development activities in-house in San Jose, California, increasing the communication and collaboration between design teams to streamline the development process and reducing time-to-market. We believe that the combination of our focus on internal research and development activities, our close working relationships with customers and vendors and our modular design approach allows us to minimize time-to-market. We continue to invest in

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reducing our design and manufacturing costs and improving the performance, cost-effectiveness and thermal and space-efficiency of our solutions.

Our research and development teams focus on the development of new and enhanced products that can support emerging innovations while highly optimizing the overall system performance. Much of our research and development activity relates to the new product cycles of leading processor vendors. We work closely with Intel, Nvidia, and AMD among others, to develop products that are compatible with the latest generation of industry standard technologies under development. Our collaborative approach with these vendors allows us to coordinate the design of our new products with their product release schedules, thereby enhancing our ability to rapidly introduce new products incorporating the latest technology. We work closely with their respective development teams to optimize system performance and reduce system level issues. Similarly, we work very closely with our customers to identify their needs and develop our new product plans accordingly.

As of June 30, 2017, we had 1,254 employees and 14 engineering consultants dedicated to research and development. Our total research and development expenses were $144.0 million, $124.2 million, and $101.4 million for fiscal years 2017, 2016 and 2015, respectively.

Customers

For fiscal year 2017, our products were purchased by over 900 customers, in 110 countries. These customers represent a diverse set of market verticals including cloud computing, data center, enterprise, artificial intelligence and machine learning, big data, HPC and IoT/embedded. In fiscal year 2017, no customer represented greater than 10% of our total net sales. In fiscal years 2016 and 2015, sales to SoftLayer, a division of IBM Corporation, represented 11.4% and 10.4%, respectively, of our total net sales.

Sales and Marketing

Our sales and marketing activities are conducted through a combination of our direct sales force and indirect sales channels. As of June 30, 2017, our sales and marketing team consisted of 358 employees and 37 independent sales representatives in 23 locations worldwide.

Our direct sales force is focused on selling complete systems and solutions, including management software and global services to large scale cloud service, enterprise and OEM customers.

We work with distributors, resellers, system integrators, and OEMs to market and sell customized solutions to their end customers. We provide sales and marketing assistance and training to our distributors and OEMs, who in turn provide service and support to end customers. We leverage our relationships with key distributors and OEMs, to penetrate select industry segments where our products can provide a superior alternative to existing solutions.

We maintain close contact with our distributors and end customers. We often collaborate during the sales process with our distributors and the customer’s technical point of contact to help determine the optimal system configuration for the customer’s needs. Our interaction with distributors and end customers allows us to monitor customer requirements and develop new products to better meet their needs.

International Sales

Our international sales efforts are supported both by our international offices in the Netherlands, Taiwan, United Kingdom, China and Japan as well as by our United States sales team. Product fulfillment and first level support for our international customers are provided by Supermicro Global Services and our distributors and OEMs. Sales to customers located outside of the United States represented 42.8%, 36.7% and 41.2% of net sales in fiscal years 2017, 2016 and 2015, respectively. Our long-lived assets located outside of the United States represented 22.1%, 24.0% and 23.8% of total long-lived assets in fiscal years 2017, 2016 and 2015, respectively. See Part II, Item 8, Note 16, “Segment Reporting” to the consolidated financial statements in this Annual Report on Form 10-K for a summary of international net sales and long-lived assets by geographic region.

Marketing

Our marketing programs are designed to create global awareness for our company, understanding of the unique value we bring to customers, and inform existing and potential customers, the trade press, distributors and OEMs about the capabilities and benefits of using our products and solutions. Our marketing efforts support the sale and distribution of our

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products through direct sales and distribution channels. We rely on a variety of marketing vehicles, including advertising, public relations, web, social media, participation in industry trade shows and conferences to help gain market acceptance. We provide funds for cooperative marketing to our distributors and partners to scale the reach of our marketing efforts. We also utilize our suppliers’ cooperative marketing programs and jointly benefit from their marketing development funds.
 
Intellectual Property

We seek to protect our intellectual property rights with a combination of patents, trademarks, copyrights, trade secret laws and disclosure restrictions. We rely primarily on trade secrets, technical know-how and other unpatented proprietary information relating to our design and product development activities. We also enter into confidentiality and proprietary rights agreements with our employees, consultants and other third parties and control access to our designs, documentation and other proprietary information.

Manufacturing and Quality Control

We manufacture the majority of our systems at our San Jose, California headquarters. We believe we are the only major Server and Storage vendor that designs, develops and manufactures the majority of their systems in the United States. Global assembly, test and quality control of our servers are performed at our manufacturing facilities in San Jose, California, the Netherlands and Taiwan. Each of our facilities has been certified by Quality / Environmental Management System or, Q/EMS, according to ISO 9001, ISO 14001 and ISO 13485 standards. Our suppliers and contract manufacturers are required to support the same standards in order to maintain consistent product and service quality and continuous improvement of quality and environmental performance.    
    
We use several third-party suppliers and contract manufacturers for materials and sub-assemblies, such as serverboards, chassis, disk drives, power supplies, fans and computer processors. We believe that selectively using outsourced manufacturing services allows us to focus on our core competencies in product design and development and increases our operational flexibility. We believe our manufacturing strategy allows us to adjust manufacturing capacity in response to changes in customer demand and to rapidly introduce new products to the market. We use Ablecom Technology, Inc. (“Ablecom”) and its affiliate Compuware Technology, Inc. ("Compuware"), both of which are related parties, for contract design and manufacturing coordination support. We work with Ablecom to optimize modular designs for our chassis and certain of our other components. Ablecom also coordinates the manufacturing of chassis for us. In addition to providing a large volume of contract manufacturing services for us, Ablecom warehouses for us a number of components and subassemblies manufactured by multiple suppliers prior to shipment to our facilities in the United States, Europe and Asia. We also have a series of agreements with Compuware, including multiple product development, production and service agreements, product manufacturing agreements, and lease agreements for office space.

We monitor our inventory on a continuous basis in order to be able to meet customer orders and to avoid inventory obsolescence. Due to our modular designs, our inventory can generally be used with multiple different products, further reducing the risk of inventory write-downs.

Competition

The market for our products is highly competitive, rapidly evolving and subject to new technological developments, changing customer needs and new product introductions. In particular, in recent years the market has been subject to substantial change. We compete primarily with large vendors of X86 general purpose servers and components. In addition, we also compete with a number of smaller vendors that specialize in the sale of server components and systems. Over the last several years, we have experienced increased competition from Original Design Manufacturers ("ODMs") that benefit from very low cost manufacturing and are increasingly offering their own branded products. We believe our principal competitors include:

Global technology vendors such as Cisco, Dell, Hewlett-Packard Enterprise, IBM, Inspur, Lenovo, and Huawei; and
ODMs, such as Quanta Computer, Inc. and Asus Tek Computer, Inc.

The principal competitive factors in our market include the following:

First to market with new emerging technologies;
High product performance, efficiency and reliability;
Early identification of emerging opportunities;
Cost-effectiveness;

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Interoperability of products;
Scalability; and
Localized and responsive customer support on a worldwide basis.

We believe that we compete favorably with respect to most of these factors. However, most of our competitors have longer operating histories, significantly greater resources, greater name recognition and deeper market penetration. They may be able to devote greater resources to the development, promotion and sale of their products than we can, which could allow them to respond more quickly to new technologies and changes in customer needs. See also the risk factor in Part I, Item IA, titled “The market in which we participate is highly competitive, and if we do not compete effectively, we may not be able to increase our market penetration, grow our net sales or improve our gross margins.”

Employees

As of June 30, 2017, we employed 2,996 full time employees, consisting of 1,254 employees in research and development, 358 employees in sales and marketing, 296 employees in general and administrative and 1,088 employees in manufacturing. Of these employees, 1,943 employees are based in our Silicon Valley facilities. We consider our highly qualified and motivated employees to be a key factor in our business success. Our employees are not represented by any collective bargaining organization and we have never experienced a work stoppage. We believe that our relations with our employees are good.

Corporate Information

Supermicro was founded, and maintains our worldwide headquarters and the majority of our employees, at our Green Computing Park facility in San Jose, California. We are one of the largest employers in the City of San Jose and an active member of the San Jose and Silicon Valley community.
    
We were incorporated in California in September 1993. We reincorporated in Delaware in March 2007. Our common stock is quoted on the OTC Markets under the symbol "SMCI." Our principal executive offices are located at 980 Rock Avenue, San Jose, CA 95131 and our telephone number is (408) 503-8000. Our website address is www.supermicro.com.

Financial Information about Segments and Geographic Areas

Please see Part II, Item 8, Note 16, “Segment Reporting” to the consolidated financial statements in this Annual Report on Form 10-K for information regarding our international operations, and see Part II, Item 1A, “Risk Factors” for further information on risks attendant to our international operations.

Working Capital

We focus considerable attention on managing our inventories and other working-capital-related items. We manage inventories by communicating with our customers and partners and then using our industry experience to forecast demand. We then place manufacturing orders for our products that are based on forecasted demand. We generally maintain substantial inventories of our products because the computer server industry is characterized by short lead time orders and quick delivery schedules.

Available Information

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are available free of charge, on or through our website at www.supermicro.com, as soon as reasonably practicable after we electronically file such reports with, or furnish those reports to, the SEC. Information contained on our website is not incorporated by reference in, or made part of this Annual Report on Form 10-K or our other filings with or reports furnished to the SEC. The SEC also maintains a website that contains our SEC filings. The address of the site is www.sec.gov. Further, a copy of this Annual Report on Form 10-K is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
 

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Item 1A.    Risk Factors

Risks Related to Our Investigation, Procedures and Analysis, Consolidated Financial Statements, Internal Control Over Financial Reporting and Related Matters

We face risks related to being delinquent in our SEC reporting obligations if we are unable to resume a timely filing schedule.
    
Due to the circumstances discussed in the Explanatory Note and in Part II, Item 8, Note 19, “Restatement of Previously Issued Consolidated Financial Statements” to the consolidated financial statements in this Annual Report on Form 10-K and “Financial Statements and Supplementary Data” contained elsewhere in this Annual Report on Form 10-K, our SEC filings, including this Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q for the quarterly periods ended September 30, 2017, December 31, 2017, and March 31, 2018 (the “2018 Form 10-Qs”), our Annual Report on Form 10-K for the fiscal year ended June 30, 2018 (the “2018 Form 10-K”), and our Quarterly Reports on Form 10-Q for the quarterly periods ended September 30, 2018, December 31, 2018 and March 31, 2019 (the “2019 Form 10-Qs”, and collectively with the 2018 Form 10-Qs and the 2018 Form 10-K, the “Delinquent Reports”) are delinquent. We cannot ensure when we will file our Delinquent Reports and resume a timely filing schedule with respect to our future SEC reports. We expect to continue to face many of the risks and challenges related to the Investigation, Procedures and Analysis, including the following:

We may fail to remediate material weaknesses in our internal control over financial reporting and other material weaknesses may be identified in the future, which would adversely affect the accuracy and timing of our financial reporting;
Failure to timely file our SEC reports and make our current financial information available, has placed, and will continue to place, downward pressure on our stock price and result in the continued inability of our employees to sell the shares of our common stock underlying their awards granted pursuant to our equity compensation plans, which has adversely affected, and may continue adversely affect, hiring and employee retention;
Further delay in filing our SEC reports will delay our ability to seek the relisting of our common stock on a national securities exchange, and as a result, may continue to reduce the liquidity of our common stock;
Litigation and claims as well as regulatory examinations, investigations, proceedings and orders arising out of our failure to file SEC reports on a timely basis, including the reasons and causes for such failure to file, will continue to divert management attention and resources from the operation of our business;
We may not be able to recapture lost business or business opportunities due to ongoing reputational harm;
Noncompliance with the covenants in our revolving credit facility will prohibit us from borrowing under the facility unless we are able to obtain additional amendments to the facility or waivers of the covenants from the lender; and
Negative reports or actions on our commercial credit ratings would increase our costs of, or reduce our access to, future commercial credit arrangements and limit our ability to refinance existing indebtedness.

If one or more of the foregoing risks or challenges persist, our business, operations and financial condition are likely to be materially and adversely affected.

We have identified material weaknesses in our internal control over financial reporting, which could, if not remediated, adversely affect our ability to report our financial condition and results of operations in a timely and accurate manner.

We have concluded that our internal control over financial reporting was not effective as of June 30, 2017 due to the existence of material weaknesses in such controls, and we have also concluded that our disclosure controls and procedures were not effective as of June 30, 2017 due to material weaknesses in our internal control over financial reporting, all as described in Part II, Item 9A, “Controls and Procedures” of this Annual Report on Form 10-K. While having initiated remediation measures to address the identified weaknesses, we cannot provide assurance that our remediation efforts will be adequate to allow us to conclude that such controls will be effective in the future. In addition, because we are a large accelerated filer, we are required to file disclosure and financial statements sooner than companies that are non-accelerated filers, accelerated filers or smaller reporting companies, which gives us less time to fully remediate our material weaknesses by the filing deadlines. We also cannot assure you that additional material weaknesses in our internal control over financial reporting will not arise or be identified in the future. We intend to continue our control remediation activities and to continue to improve our overall control environment and our operational, information technology, financial systems, and infrastructure procedures and controls, as well as to continue to train, retain and manage our personnel who are essential to effective internal controls. In doing so, we will continue to incur expenses and expend management time on compliance-related issues. In addition, we previously identified a material weakness in our internal control over financial reporting related to the revenue recognition of contracts with extended product warranties that impacted prior periods. If we are unable to successfully complete our remediation efforts or favorably

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assess the effectiveness of our internal control over financial reporting, our operating results, financial position, ability to accurately report our financial results and timely file our SEC reports, and stock price could be adversely affected.

Moreover, because of the inherent limitations of any control system, material misstatements due to error or fraud may not be prevented or detected on a timely basis, or at all. If we are unable to provide reliable and timely financial reports in the future, our business and reputation may be further harmed. Restated financial statements and failures in internal controls may also cause us to fail to meet reporting obligations, negatively affect investor and customer confidence in our management and the accuracy of our financial statements and disclosures, or result in adverse publicity and concerns from investors and customers, any of which could have a negative effect on the price of our common stock, subject us to further regulatory investigations and penalties or stockholder litigation, and have a material adverse impact on our business and financial condition.

The subject matters of the Investigation, Procedures and Analysis and the findings thereof have caused substantial delays in filing this Annual Report on Form 10-K and the Delinquent Reports, which may result in future delays in our SEC reporting.

Our ability to resume a timely filing schedule with respect to our SEC reporting is subject to a number of contingencies, including whether and how quickly we are able to effectively remediate the identified material weaknesses in our internal control over financial reporting. It is uncertain when we will resume a timely filing schedule with respect to our future SEC reporting requirements, including our Delinquent Reports. It is likely that future reports will become delinquent until the Delinquent Reports are filed with the SEC.

Investors will need to evaluate certain decisions with respect to our common stock in light of a lack of current financial information. Accordingly, any investment in our common stock involves a greater degree of risk. Our lack of current public information may have an adverse impact on investor confidence, which could lead to a reduction in our stock price. In addition, for so long as we are not current in our SEC filings, we are precluded from registering our securities with the SEC for offer and sale. This precludes us from raising debt or equity financing in the public markets and limits our access to the private markets and also limits our ability to use stock options and other equity-based awards to attract, retain and provide incentives to our employees.

The delisting of our common stock may have a material adverse effect on the trading and price of our common stock, and we cannot assure you that our common stock will be relisted, or that once relisted, it will remain listed.

As a result of the delay in filing our periodic reports with the SEC, we were unable to comply with Nasdaq’s listing standards and our common stock was suspended from trading on The Nasdaq Global Select Market effective August 23, 2018 and formally delisted effective March 22, 2019.
The delisting of our common stock from Nasdaq may have a material adverse effect on us by, among other things, causing investors to dispose of our shares and limiting:
The liquidity of our common stock;
The market price of our common stock;
The number of institutional and other investors that will consider investing in our common stock;
The availability of information concerning the trading prices and volume of our common stock;
The number of broker-dealers willing to execute trades in shares of our common stock; and
Our ability to obtain equity or debt financing for the continuation of our operations.

Following the filing of our Delinquent Reports and compliance with any other prerequisite requirements, we intend to apply to relist our common stock on a national securities exchange. However, while we are working expeditiously to relist our common stock, no assurances can be provided that we will be able to do so in a timely manner or at all. If we are unable to relist our common stock, or even if our common stock is relisted, no assurance can be provided that an active trading market will develop or, if one develops, that it will continue. The lack of an active trading market may limit the liquidity of an investment in our common stock, meaning you may not be able to sell any shares of common stock you own at times, or at prices, attractive to you. Any of these factors may materially adversely affect the price of our common stock.

The outcome of litigation and other claims as well as regulatory examinations, investigations, proceedings and orders arising out of the matters that were the subject of the Investigation, Procedures and Analysis, and our failure to file SEC reports on a timely basis are unpredictable, and any orders, actions or rulings not in our favor could have a material adverse effect on our business, results of operations and financial condition.


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Our company and certain of our current and former executive officers are defendants in certain legal proceedings and putative class actions. Please see Part I, Item 3, “Legal Proceedings.” These proceedings have resulted in significant expenses and the diversion of management attention from our business. In addition, the circumstances which gave rise to the Investigation, Procedures and Analysis, and the related SEC filing delays continue to create the risk of additional litigation and claims by investors and examinations, investigations, proceedings and orders by regulatory authorities. These include a broad range of potential actions that may be taken against us by the SEC or other regulatory agencies, including a cease and desist order, suspension of trading of our securities, deregistration of our securities and/or the assessment of possible civil monetary penalties. Any such further actions could be expensive and damaging to our business, results of operations and financial condition.

We have incurred and expect to continue to incur significant expenses related to the Investigation, Procedures and Analysis, the remediation of deficiencies in our internal control over financial reporting and disclosure controls and procedures, and any resulting litigation.

We have devoted and expect to continue to devote substantial internal and external resources towards remediation efforts relating to the results of the Investigation, Procedures and Analysis and revision of our previously issued consolidated financial statements, the management review process and other efforts to regain timely compliance with the filing of our future SEC periodic and other reports. As a result of these efforts, we have incurred and expect that we will continue to incur significant incremental fees and expenses for additional accounting, financial and other consulting and professional services, as well as the implementation and maintenance of systems and processes that will need to be updated, supplemented or replaced. Specifically, in connection with the Audit Committee’s Investigation, Procedures and Analysis, audit and compliance efforts and related litigation, we have incurred professional fees totaling $40.6 million in fiscal year 2018 and $50.7 million through the third quarter of fiscal year 2019. As described in this Annual Report on Form 10-K, we have taken a number of steps in order to strengthen our corporate culture, sales processes, and accounting function so as to allow us to be able to provide timely and accurate financial reporting. To the extent these steps are not successful, we could be required to incur significant additional time and expense. The expenses we are incurring in this regard, as well as the substantial time devoted by our management towards identifying and addressing the internal control deficiencies, could have a material adverse effect on our business, results of operations and financial condition.

The Investigation, Procedures and Analysis and the findings thereof, have diverted, and continue to divert, management and other human resources from the operation of our business. The absence of timely and accurate financial information has hindered and may in the future hinder our ability to effectively manage our business.

The Investigation, Procedures and Analysis have diverted, and continue to divert, management and other human resources from the operation of our business. The Board of Directors, members of management, and our accounting, legal, administrative and other staff have spent significant time on the Investigation, Procedures and Analysis and will continue to spend significant time on remediation of disclosure controls and procedures and internal control over our financial reporting. These resources have been, and will likely continue to be, diverted from the strategic and day-to-day management of our business and may have an adverse effect on our ability to accomplish our strategic objectives.

Our failure to file SEC reports timely and the resulting delisting of our common stock could impact our ability to comply with covenants in our debt instruments, which could adversely affect our access to outside financing.

Under the terms of the credit agreement with Bank of America, N.A. (“Bank of America”), dated April 19, 2018, we are required to deliver certain financial statements to Bank of America on a periodic basis. The delay in our SEC filings could impact our ability to comply with our financial statement delivery covenant, which could result in an event of default and eventual termination of the credit agreement. If this were to occur, we may be unable to secure outside financing, if needed, to fund ongoing operations and for other capital needs. Any sources of financing that may be available to us could also be at higher costs and require us to satisfy more restrictive covenants, which could limit or restrict our operations, cash flows and earnings. We cannot ensure that additional financing would be available to us, or be sufficient or available on satisfactory terms. In addition, unless and until we have filed all required reports with the SEC, we will be precluded from registering our securities with the SEC for offer and sale, and the failure to timely file our SEC reports will limit our ability to use “short-form” Form S-3 registration statements for registering our securities for sale with the SEC until we again meet the timely filing requirements of Form S-3.

Matters relating to or arising from the restatement and the results of the Investigation, Procedures and Analysis of our internal control over financial reporting, including adverse publicity and potential concerns from our customers, have had and could continue to have an adverse effect on our business and financial condition.


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We have been and could continue to be the subject of negative publicity focused on the matters underlying the Investigation, Procedures and Analysis, the lengthy delay in filing our SEC reports, and the resulting restatement of our historical financial statements. We may be adversely impacted by negative reactions to this publicity from our customers or others with whom we do business. Concerns include the time and effort required to address our accounting and control environment and our ability to be a long-term provider to our customers. The continued occurrence of any of the foregoing could harm our business and have an adverse effect on our financial condition.

If we are unable to maintain the effectiveness of our internal control over financial reporting, our operating results, financial position and stock price could be adversely affected.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), our management is required to report on the effectiveness of our internal control over financial reporting in our annual reports, and annually our independent auditors must attest to and report on the effectiveness of our internal control over financial reporting. It is necessary for us to maintain effective internal control over financial reporting to prevent fraud and errors and to maintain effective disclosure controls and procedures so that we can provide timely and reliable financial and other information. A failure to maintain adequate internal controls may adversely affect our ability to provide financial statements that accurately reflect our financial condition and report information on a timely basis.

As described in Part II, Item 9A, “Controls and Procedures” of this Annual Report on Form 10-K, we have concluded that there are material weaknesses in our internal control over financial reporting and that our disclosure controls and procedures were ineffective as of June 30, 2017. We have concluded that there are material weaknesses in our internal control over financial reporting, which have adversely affected our ability to timely and accurately report our results of operations and financial condition. In addition, in November 2015, we reported a material weakness in our internal control over financial reporting related to the revenue recognition of contracts with extended product warranties. This material weakness has not been fully remediated as of the filing date of this Annual Report on Form 10-K, and we cannot ensure that other errors or material weaknesses will not be identified in the future. If we fail to maintain an effective system of internal control over financial reporting, the accuracy and timeliness of our financial reporting may be adversely affected.”

Although we are working to remediate the material weaknesses identified in the course of the Investigation, Procedures and Analysis, and are focused on re-establishing effective internal controls over financial reporting in order to prevent and detect material misstatements in our annual and quarterly financial statements and prevent fraud, we cannot ensure that such efforts will be effective. If we fail to maintain effective internal controls in future periods, this could further cause investors to lose confidence in our reported financial and other information, and our operating results, financial position and stock price could be adversely affected.

Risks Related to Our Business and Industry
Our quarterly operating results will likely fluctuate in the future, which could cause rapid declines in our stock price.
We believe that our quarterly operating results will continue to be subject to fluctuation due to various factors, many of which are beyond our control. Factors that may affect quarterly operating results include:
    
Fluctuations based upon seasonality, with the quarters ending March 31 and September 30 typically being weaker;
Fluctuations in the timing and size of large customer orders;
Variability of our margins based on the mix of server systems, subsystems and accessories we sell and the percentage of our sales to internet data center cloud customers or certain geographical regions;
Fluctuations in availability and costs associated with key components, particularly storage solutions, and other materials needed to satisfy customer requirements;
The timing of the introduction of new products by leading microprocessor vendors and other suppliers;
Changes in our product pricing policies, including those made in response to new product announcements;
Mix of whether customer purchases are of full systems or subsystems and accessories and whether made directly or through indirect sales channels;
The effect of mergers and acquisitions among our competitors, suppliers, customers, or partners;
General economic conditions in our geographic markets;
Impact of regulatory changes on our cost of doing business; and
Costs associated with the Investigation, Procedures and Analysis and related legal proceedings.

Customers may hesitate to purchase, or continue to purchase, our products based upon our delay in filing our reports with the SEC and/or unwarranted reports about malicious chips being inserted in our products. Accordingly, it is difficult to accurately forecast our growth and results of operations on a quarterly basis. If we fail to meet expectations of investors or

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analysts, our stock price may fall rapidly and without notice. Furthermore, the fluctuation of quarterly operating results may render less meaningful period-to-period comparisons of our operating results, and you should not rely upon them as an indication of future performance.

As we increasingly target larger customers and larger sales opportunities, our customer base may become more concentrated, our cost of sales may increase, our margins may be lower and our sales may be less predictable.

As our business continues to grow, we have become increasingly dependent upon larger sales to maintain our rate of growth. In particular, in recent years, we have completed larger sales to leading internet data center companies and large enterprise customers. Although no customer represented greater than 10% of our total net sales in the fiscal year ended June 30, 2017, one of our customers accounted for 11.4% and 10.4% of our net sales in the fiscal years ended June 30, 2016 and 2015, respectively. As customers buy our products in greater volumes and their business becomes a larger percentage of our net sales, we may grow increasingly dependent on those customers to maintain our growth. If our largest customers do not purchase our products at the levels, timeframes or geographies that we expect, our ability to maintain or grow our net sales will be adversely affected.
    
Increased sales to larger customers may also cause fluctuations in results of operations. Large orders are generally subject to intense competition and pricing pressure which can have an adverse impact on our margins and results of operations. Likewise, larger customers may seek to fulfill all or substantially all of their requirements in a single or a few orders, and not make another significant purchase for a substantial period of time. Accordingly, a significant increase in revenue during the period in which we recognize the revenue from a large customer may be followed by a period of time during which the customer purchases none or few of our products.

Additionally, as we and our partners focus increasingly on selling to larger customers and attracting larger orders, we expect greater costs of sales. Our sales cycle may become longer and more expensive, as larger customers typically spend more time negotiating contracts than smaller customers. Larger customers often seek greater levels of support in the implementation and use of our server solutions.

As a result of the above factors, our quarter-to-quarter results of operations may be subject to greater fluctuation and our stock price may be adversely affected.

We may fail to meet publicly announced financial guidance or other expectations about our business, which would cause our stock to decline in value.

We typically provide forward looking financial guidance when we announce our financial results from the prior quarter. We undertake no obligation to update such guidance at any time. Frequently in the past, our financial results have failed to meet the guidance we provided. There are a number of reasons why we have failed to meet guidance in the past and might fail again in the future, including, but not limited to, the factors described in these Risk Factors.

Increases in average selling prices for our server solutions have significantly contributed to our increases in net sales. Such prices are subject to decline if customers do not continue to purchase our latest generation products or additional components, which could harm our results of operations.

Increases in average selling prices for our server solutions have significantly contributed to our increases in net sales. As with most electronics based products, average selling prices of servers typically are highest at the time of introduction of new products, which utilize the latest technology, and tend to decrease over time as such products become commoditized and are ultimately replaced by even newer generation products. As our business continues to grow, we may increasingly be subject to this industry risk. We cannot predict the timing or amount of any decline in the average selling prices of our server solutions that we may experience in the future. In some instances, our agreements with our distributors limit our ability to reduce prices unless we make such price reductions available to them, or price protect their inventory. If we are unable to decrease per unit manufacturing costs faster than the rate at which average selling prices continue to decline, our business, financial condition and results of operations will be harmed.

Our cost structure and ability to deliver server solutions to customers in a timely manner may be adversely affected by volatility of the market for core components and materials for our products.

Prices of materials and core components utilized in the manufacture of our server solutions, such as serverboards, chassis, central processing units (“CPUs”), memory and hard drives, represent a significant portion of our cost of sales. We generally do not enter into long-term supply contracts for these materials and core components, but instead purchase these

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materials and components on a purchase order basis. Prices of these core components and materials are volatile, and, as a result, it is difficult to predict expense levels and operating results. In addition, if our business growth renders it necessary or appropriate to transition to longer term contracts with materials and core component suppliers, our costs may increase and our gross margins could correspondingly decrease.

Because we often acquire materials and core components on an as needed basis, we may be limited in our ability to effectively and efficiently respond to customer orders because of the then-current availability or the terms and pricing of materials and core components. Our industry has experienced materials shortages and delivery delays in the past, and we may experience shortages or delays of critical materials in the future. From time to time, we have been forced to delay the introduction of certain of our products or the fulfillment of customer orders as a result of shortages of materials and core components, which can adversely impact our revenue. For example, our net sales were adversely impacted in fiscal years 2013 and 2012 by disk drive shortages resulting from flooding in Thailand. In other periods, our cost of sales as a percentage of revenue has been adversely impacted by higher component prices resulting from shortages. For example, our gross margin was adversely impacted in the quarters ended December 31, 2016, March 31, 2017 and June 30, 2017 due to higher costs related to shortages of memory and solid-state drives ("SSD"). If shortages or delays arise, the prices of these materials and core components may increase or the materials and core components may not be available at all. In the event of shortages, some of our larger competitors may have greater abilities to obtain materials and core components due to their larger purchasing power. We may not be able to secure enough core components or materials at reasonable prices or of acceptable quality to build new products to meet customer demand, which could adversely affect our business, results of operations and financial condition. In addition, from time to time, we have accepted customer orders with various types of component pricing protection. Such arrangements have increased our exposure to component pricing fluctuations and have adversely affected our financial results in certain quarters.

If we were to lose any of our current supply or contract manufacturing relationships, the process of identifying and qualifying a new supplier or contract manufacturer who will meet our quality and delivery requirements, and who will appropriately safeguard our intellectual property, may require a significant investment of time and resources, adversely affecting our ability to satisfy customer purchase orders and delaying our ability to rapidly introduce new products to market. Similarly, if any of our suppliers were to cancel, materially change contracts or commitments to us or fail to meet the quality or delivery requirements needed to satisfy customer demand for our products, whether due to shortages or other reasons, our reputation and relationships with customers could be damaged. We could lose orders, be unable to develop or sell some products cost-effectively or on a timely basis, if at all, and have significantly decreased revenues, margins and earnings, which would have a material adverse effect on our business, results of operations and financial condition.

We may lose sales or incur unexpected expenses relating to insufficient, excess or obsolete inventory.

As a result of our strategy to provide greater choice and customization of our products to our customers, we are required to maintain a high level of inventory. If we fail to maintain sufficient inventory, we may not be able to meet demand for our products on a timely basis, and our sales may suffer. If we overestimate customer demand for our products, we could experience excess inventory of our products and be unable to sell those products at a reasonable price, or at all. As a result, we may need to record higher inventory reserves. In addition, from time to time we assume greater inventory risk in connection with the purchase or manufacture of more specialized components in connection with higher volume sales opportunities. We have from time to time experienced inventory write downs associated with higher volume sales that were not completed as anticipated. We expect that we will experience such write downs from time to time in the future related to existing and future commitments. Excess or obsolete inventory levels for these or other reasons could result in unexpected expenses or increases in our reserves against potential future charges which would adversely affect our business, results of operations and financial condition.
 
We may encounter difficulties with our ERP systems.

We commenced using a new enterprise resource planning ("ERP") system in the United States in July 2015 and in Taiwan and the Netherlands in January 2016. We have incurred and expect to continue to incur additional expenses related to our ERP systems, as we continue to further enhance and develop them, including by automating certain internal controls. Many companies have experienced delays and difficulties with the implementation of new or changed ERP systems that have had a negative effect on their business. Any future disruptions, delays or deficiencies in the design and further enhancement of our ERP system could result in potentially much higher costs than we currently anticipate and could adversely affect our ability to provide services, fulfill contractual obligations, file reports with the SEC in a timely manner and/or otherwise operate our business, or otherwise impact our controls environment. Any of these consequences could have an adverse effect on our business, results of operations and financial condition.


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System security risks, data protection breaches, cyber-attacks and other related cyber-security issues could disrupt our internal operations or interfere with our products, and any such disruption could reduce our expected revenues, increase our expenses, damage our reputation and adversely affect our stock price.
 
Experienced computer programmers and hackers may be able to penetrate our network and misappropriate or compromise our confidential information or that of third parties, create system disruptions or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities of our products. While we employ a number of protective measures, including firewalls, anti-virus and endpoint detection and response technologies, these measures may fail to prevent or detect attacks on our systems. We experienced unauthorized intrusions into our network between 2011 and 2018. None of these intrusions, individually or in the aggregate, has had a material adverse effect on our business, operations, or products. We have taken steps to enhance the security of our network and computer systems but, despite these efforts, we may experience future intrusions, which could adversely affect our business, operations, or products. In addition, our hardware and software or third party components and software that we utilize in our products may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation or security of the products. The costs to us to eliminate or mitigate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant and, if our efforts to address these problems are not successful, could result in interruptions, delays, cessation of service and loss of existing or potential customers that may impede our sales, manufacturing, distribution or other critical functions. Any claim that our products or systems are subject to a cyber-security risk, whether valid or not, could damage our reputation and adversely impact our revenues and results of operations.

We manage and store various proprietary information and sensitive or confidential data relating to our business as well as information from our suppliers and customers. Breaches of our or any of our third party suppliers’ security measures or the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive or confidential data about us or our customers or suppliers, including the potential loss or disclosure of such information or data as a result of fraud, trickery or other forms of deception, could expose us or our customers or suppliers to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our brand and reputation or otherwise harm our business.

To the extent we experience cyber-security incidents in the future, our relationships with our customers and suppliers may be materially impacted, our brand and reputation may be harmed and we could incur substantial costs in responding to and remediating the incidents and in resolving any investigations or disputes that may arise with respect to them, any of which would cause our business, operations, or products to be adversely affected. In addition, the cost and operational consequences of implementing and adding further data protection measures could be significant. 

Because our products and services may store, process and use data, some of which contains personal information, we are subject to complex and evolving federal, state and foreign laws and regulations regarding privacy, data protection and other matters, which are subject to change.
 
We are subject to a variety of laws and regulations in the United States and other countries that involve matters central to our business, including with respect to user privacy, rights of publicity, data protection, content, protection of minors and consumer protection. These laws can be particularly restrictive in countries outside the United States. Both in the United States and abroad, these laws and regulations constantly evolve and remain subject to significant change. In addition, the application and interpretation of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in which we operate. Because our products and services store, process and use data, some of which contains personal information, we are subject to complex and evolving federal, state and foreign laws and regulations regarding privacy, data protection and other matters. Many of these laws and regulations are subject to change and uncertain interpretation and even our inadvertent failure to comply with such laws and regulations could result in investigations, claims, damages to our reputation, changes to our business practices, increased cost of operations and declines in user growth, retention or engagement, any of which could materially adversely affect our business, results of operations and financial condition. Costs to comply with and implement these privacy-related and data protection measures could be significant.
 
Global privacy legislation, enforcement, and policy activity for privacy and data protection are rapidly expanding and creating a complex regulatory compliance environment. Costs to comply with and implement these privacy-related and data protection measures could be significant. For example, the EU General Data Protection Regulation 2016/679 (“GDPR”), which came into effect on May 25, 2018, imposes stringent EU data protection requirements on companies established in the European Union or companies that offer goods or services to, or monitor the behavior of, individuals in the European Union. The GDPR establishes a robust framework of data subjects’ rights and imposes onerous accountability obligations on companies, with penalties for noncompliance of up to the greater of 20 million euros or four percent of annual global revenue. While we have implemented policies and procedures to address GDPR requirements, failure to comply or concerns about our

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practices or compliance with GDPR or other privacy-related laws and regulations could materially adversely affect our business, results of operations and financial condition.

If we do not successfully manage the expansion of our international manufacturing capacity, our business could be harmed.

Since inception, we have conducted a substantial majority of our manufacturing operations in San Jose, California. We continue to increase our manufacturing capacity in Taiwan and in the Netherlands. If we are unable to successfully ramp up our international manufacturing capacity, we may incur unanticipated costs, difficulties in making timely delivery of products or suffer other business disruptions which could adversely impact our results of operations.

We may not be able to successfully manage our planned growth and expansion.

Over time we expect to continue to make investments to pursue new customers and expand our product offerings to grow our business rapidly. We expect that our annual operating expenses will continue to increase as we invest in sales and marketing, research and development, manufacturing and production infrastructure, and strengthen customer service and support resources for our customers. Our failure to expand operational and financial or internal control systems timely or efficiently could result in additional operating inefficiencies, which could increase our costs and expenses more than we had planned and prevent us from successfully executing our business plan. We may not be able to offset the costs of operation expansion by leveraging the economies of scale from our growth in negotiations with our suppliers and contract manufacturers. Additionally, if we increase our operating expenses in anticipation of the growth of our business and this growth does not meet our expectations, our financial results will be negatively impacted.

If our business grows, we will have to manage additional product design projects, materials procurement processes and sales efforts and marketing for an increasing number of SKUs, as well as expand the number and scope of our relationships with suppliers, distributors and end customers. If we fail to manage these additional responsibilities and relationships successfully, we may incur significant costs, which may negatively impact our operating results. Additionally, in our efforts to be first to market with new products with innovative functionality and features, we may devote significant research and development resources to products and product features for which a market does not develop quickly, or at all. If we are not able to predict market trends accurately, we may not benefit from such research and development activities, and our results of operations may suffer.

Managing the growth of our business also requires us to successfully manage a substantial increase in our number of employees. We have grown from 1,837 employees on July 1, 2014 to 2,996 employees on June 30, 2017. We must continue to hire, train and manage new employees as needed. Our failure to timely file our SEC reports and the delisting of our common stock on Nasdaq has adversely impacted, and will likely continue to adversely impact, our ability to attract new employees and retain existing employees. If our new hires perform poorly, or if we are unsuccessful in hiring, training, managing and integrating these new employees, or fail in establishing and maintaining an effective corporate culture, or if we are not successful in retaining our existing employees, our business may be harmed. The additional headcount we have added and may continue to add has increased and will continue to increase our cost base, which will make it more difficult for us to offset any future revenue shortfalls by offsetting expense reductions in the short term. If we fail to successfully manage our growth, we will be unable to execute our business plan.

Our future effective income tax rates could be affected by changes in the relative mix of our operations and income among different geographic regions and by United States federal income tax legislation, which could affect our future operating results, financial condition and cash flows.

We seek to structure our worldwide operations to take advantage of certain international tax planning opportunities and incentives. Our future effective income tax rates could be adversely affected if tax authorities challenge our international tax structure or if the relative mix of our United States and international income changes for any reason, or due to changes in United States or international tax laws. In particular, a substantial portion of our revenue is generated from customers located outside the United States. Foreign withholding taxes and United States income taxes were not provided on undistributed earnings for certain non-United States subsidiaries as of June 30, 2017, because such earnings were intended to be indefinitely reinvested in the operations of those subsidiaries. On December 22, 2017, the U.S. federal government enacted the Tax Cuts and Jobs Act (“2017 Tax Reform Act”). The 2017 Tax Reform Act significantly changed the existing U.S. corporate income tax laws by, among other things, lowering the corporate tax rate, implementing a territorial tax system, and imposing a one-time deemed repatriation toll tax on cumulative undistributed foreign earnings. We cannot predict the impact of all of these changes to our business as we have not yet finalized our fiscal year 2018 financial statements. However, it is possible that these changes

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could adversely affect our business as we are currently evaluating whether to change our indefinite reinvestment assertion in light of the 2017 Tax Act, and, we consider that assessment to be incomplete.

The effectiveness of our tax planning activities is based upon certain assumptions that we make regarding our future operating performance. It is possible that we will seek to revise our tax structure further in the future. We cannot assure you that we will be able to lower our effective tax rate as a result of our current or future tax planning activities nor that such rate will not increase in the future.

If negative publicity arises with respect to us, our employees, our third-party service providers or our partners, our business and operating results could be adversely affected, regardless of whether the negative publicity is true.

Negative publicity about our company or our products, even if inaccurate, could adversely affect our reputation and the confidence in our products, which could harm our business and operating results. For example, in October 2018, Bloomberg Businessweek published an article alleging that malicious hardware chips were implanted on our motherboards during the manufacturing process at the facilities of a contract manufacturer in China. We undertook a thorough investigation of this claim with the assistance of a leading, third-party investigations firm wherein we tested a representative sample of our motherboards, including the specific type of motherboard depicted in the Bloomberg Businessweek article and motherboards purchased by companies referenced in the article, as well as more recently manufactured motherboards. After completing these examinations as well as a range of functional tests, the investigations firm reported that it had found no evidence of malicious hardware on our motherboards. In addition, neither Bloomberg Businessweek nor any of our customers have ever provided a single example of any such altered motherboard. However, despite repeated denials of any tampering by our customers and us, and the announcement of the results of this independent investigation, the impact of this false allegation continues to have a substantial negative impact on the trading price of our common stock as well as our reputation.

Harm to our reputation can also arise from many other sources, including employee misconduct, as has been experienced in the past, and misconduct by our partners and outsourced service providers. Additionally, negative publicity with respect to our partners or service providers could also affect our business and operating results to the extent that we rely on these partners or if our customers or prospective customers associate our company with these partners.

The market in which we participate is highly competitive, and if we do not compete effectively, we may not be able to increase our market penetration, grow our net sales or improve our gross margins.

The market for server solutions is intensely competitive and rapidly changing. Barriers to entry in our market are relatively low and we expect increased challenges from existing as well as new competitors. Some of our principal competitors offer server solutions at a lower price, which has resulted in pricing pressures on sales of our server solutions. We expect further downward pricing pressure from our competitors and expect that we will have to price some of our server solutions aggressively to increase our market share with respect to those products or geographies, particularly for internet data center customers and other large sale opportunities. If we are unable to maintain the margins on our server solutions, our operating results could be negatively impacted. In addition, if we do not develop new innovative server solutions, or enhance the reliability, performance, efficiency and other features of our existing server solutions, our customers may turn to our competitors for alternatives. In addition, pricing pressures and increased competition generally may also result in reduced sales, less efficient utilization of our manufacturing operations, lower margins or the failure of our products to achieve or maintain widespread market acceptance, any of which could have a material adverse effect on our business, results of operations and financial condition.

Our principal competitors include global technology companies such as Cisco, Dell, Hewlett-Packard Enterprise, IBM, Inspur, Lenovo and Huawei. In addition, we also compete with a number of other vendors who also sell application optimized servers, contract manufacturers and original design manufacturers (“ODMs”), such as Quanta Computer, Inc. and AsusTek Computer, Inc. ODMs sell server solutions marketed or sold under a third-party brand.

Many of our competitors enjoy substantial competitive advantages, such as:

Greater name recognition and deeper market penetration;
Longer operating histories;
Larger sales and marketing organizations and research and development teams and budgets;
More established relationships with customers, contract manufacturers and suppliers and better channels to reach larger customer bases and larger sales volume allowing for better costs;
Larger customer service and support organizations with greater geographic scope;
A broader and more diversified array of products and services; and

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Substantially greater financial, technical and other resources.

Some of our current or potential ODM competitors are also currently or have in the past been suppliers to us. As a result, they may possess sensitive knowledge or experience which may be used against us competitively and/or which may require us to alter our supply arrangements or sources in a way which could adversely impact our cost of sales or results of operations.

Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. Competitors may seek to copy our innovations and use cost advantages from greater size to compete aggressively with us on price. Certain customers are also current or prospective competitors and as a result, assistance that we provide to them as customers may ultimately result in increased competitive pressure against us. Furthermore, because of these advantages, even if our application optimized server solutions are more effective than the products that our competitors offer, potential customers might accept competitive products in lieu of purchasing our products. The challenges we face from larger competitors will become even greater if consolidation or collaboration between or among our competitors occurs in our industry. Also, initiatives like the Open Compute Project (“OCP”), a project to establish more industry standard data center configurations, could have the impact of supporting an approach which is less favorable to the flexibility and customization that we offer. These changes could have a significant impact on the market and impact our results of operations. For all of these reasons, we may not be able to compete successfully against our current or future competitors, and if we do not compete effectively, our ability to increase our net sales may be impaired.

Any failure to adequately expand or retain our sales force will impede our growth.

We expect that our direct sales force will continue to grow as larger customers increasingly require a direct sales approach. Competition for direct sales personnel with the advanced sales skills and technical knowledge we need is intense. Our ability to grow our revenue in the future will depend, in large part, on our success in recruiting, training, retaining and successfully managing sufficient qualified direct sales personnel. We have traditionally experienced much greater turnover in our sales and marketing personnel as compared to other departments and other companies. New hires require significant training and may take six months or longer before they reach full productivity. Our recent hires and planned hires may not become as productive as we would like, and we may be unable to hire sufficient numbers of qualified individuals in the future in the markets where we do business. If we are unable to hire, develop and retain sufficient numbers of productive sales personnel, our customer relationships and resulting sales of our server solutions will suffer.

We must work closely with our suppliers to make timely new product introductions.

We rely on our close working relationships with our suppliers, including Intel, AMD and Nvidia, to anticipate and deliver new products on a timely basis when new generation materials and core components are made available. Intel, AMD and Nvidia are the only suppliers of the microprocessors we use in our server systems. If we are not able to maintain our relationships with our suppliers or continue to leverage their research and development capabilities to develop new technologies desired by our customers, our ability to quickly offer advanced technology and product innovations to our customers would be impaired. We have no long term agreements that obligate our suppliers to continue to work with us or to supply us with products.

Our suppliers’ failure to improve the functionality and performance of materials and core components for our products may impair or delay our ability to deliver innovative products to our customers.

We need our material and core component suppliers, such as Intel, AMD and Nvidia, to provide us with core components that are innovative, reliable and attractive to our customers. Due to the pace of innovation in our industry, many of our customers may delay or reduce purchase decisions until they believe that they are receiving best of breed products that will not be rendered obsolete by an impending technological development. Accordingly, demand for new server systems that incorporate new products and features is significantly impacted by our suppliers’ new product introduction schedules and the functionality, performance and reliability of those new products. If our materials and core component suppliers fail to deliver new and improved materials and core components for our products, we may not be able to satisfy customer demand for our products in a timely manner, or at all. If our suppliers’ components do not function properly, we may incur additional costs and our relationships with our customers may be adversely affected.

We rely on a limited number of suppliers for certain raw materials used to manufacture our products.

Certain raw materials used in the manufacture of our products are available from a limited number of suppliers. Shortages could occur in these essential materials due to an interruption of supply or increased demand in the industry. One of

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our suppliers accounted for 31.0%, 35.2% and 28.7% of total purchases of raw materials for the fiscal years ended June 30, 2017, 2016 and 2015, respectively. Ablecom and Compuware, related parties, accounted for 11.1%, 12.8% and 13.8% of our total cost of sales for the fiscal years ended June 30, 2017, 2016 and 2015, respectively. If any of our largest suppliers discontinue their operations or if our relationships with them are adversely impacted, we could experience a material adverse effect on our business, results of operations and financial condition.

We rely on indirect sales channels for a significant percentage of our revenue and any disruption in these channels could adversely affect our sales.

Sales of our products through third-party distributors and resellers accounted for 47.8%, 45.8% and 49.6% of our net sales in fiscal years 2017, 2016 and 2015, respectively. We depend on our distributors to assist us in promoting market acceptance of our products and anticipate that a significant portion of our revenues will continue to result from sales through indirect channels. To maintain and potentially increase our revenue and profitability, we will have to successfully preserve and expand our existing distribution relationships as well as develop new distribution relationships. Our distributors also sell products offered by our competitors and may elect to focus their efforts on these sales. If our competitors offer our distributors more favorable terms or have more products available to meet the needs of their customers, or utilize the leverage of broader product lines sold through the distributors, those distributors may de-emphasize or decline to carry our products. In addition, our distributors’ order decision-making process is complex and involves several factors, including end customer demand, warehouse allocation and marketing resources, which can make it difficult to accurately predict total sales for the quarter until late in the quarter. We also do not control the pricing or discounts offered by distributors to end customers. To maintain our participation in distributors’ marketing programs, in the past we have provided and expect to continue cooperative marketing arrangements or made short-term pricing concessions.

The discontinuation of cooperative marketing arrangements or pricing concessions could have a negative effect on our business, results of operations and financial condition. Our distributors could also modify their business practices, such as payment terms, inventory levels or order patterns. If we are unable to maintain successful relationships with distributors or expand our distribution channels or we experience unexpected changes in payment terms, inventory levels or other practices by our distributors, our business will suffer.

Our direct sales efforts may create confusion for our end customers and harm our relationships with our distributors and OEMs.

We expect our direct sales force to continue to grow as our business grows. As our direct sales force becomes larger, our direct sales efforts may lead to conflicts with our distributors and OEMs, who may view our direct sales efforts as undermining their efforts to sell our products. If a distributor or OEM deems our direct sales efforts to be inappropriate, the distributor or OEM may not effectively market our products, may emphasize alternative products from competitors, or may seek to terminate our business relationship. Disruptions in our distribution channels could cause our revenues to decrease or fail to grow as expected. Our failure to implement an effective direct sales strategy that maintains and expands our relationships with our distributors and OEMs could lead to a decline in sales, harm relationships and adversely affect our business, results of operations and financial condition.

Our research and development expenditures, as a percentage of our net sales, are considerably higher than many of our competitors and our earnings will depend upon maintaining revenues and margins that offset these expenditures.

Our strategy is to focus on being consistently rapid-to-market with flexible and customizable server systems that take advantage of our own internal development and the latest technologies offered by microprocessor manufacturers and other component vendors. Consistent with this strategy, we spend higher amounts, as a percentage of revenues, on research and development costs than many of our competitors. If we cannot sell our products in sufficient volume and with adequate gross margins to compensate for such investment in research and development, our earnings may be materially and adversely affected.

Our failure to deliver high quality server solutions could damage our reputation and diminish demand for our products.

Our server solutions are critical to our customers’ business operations. Our customers require our server solutions to perform at a high level, contain valuable features and be extremely reliable. The design of our server solutions is sophisticated and complex, and the process for manufacturing, assembling and testing our server solutions is challenging. Occasionally, our design or manufacturing processes may fail to deliver products of the quality that our customers require. For example, in the past a vendor provided us with a defective capacitor that failed under certain heavy use applications. As a result, our product

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needed to be repaired. Though the vendor agreed to pay for a large percentage of the costs of the repairs, we incurred costs in connection with the recall and diverted resources from other projects.

New flaws or limitations in our server solutions may be detected in the future. Part of our strategy is to bring new products to market quickly, and first-generation products may have a higher likelihood of containing undetected flaws. If our customers discover defects or other performance problems with our products, our customers’ businesses, and our reputation, may be damaged. Customers may elect to delay or withhold payment for defective or underperforming server solutions, request remedial action, terminate contracts for untimely delivery, or elect not to order additional server solutions, which could result in an increase in our provision for doubtful accounts or in collection cycles for accounts receivable or subject us to the expense and risk of litigation. We may incur expense in recalling, refurbishing or repairing defective server solutions sold to our customers or remaining in our inventory. If we do not properly address customer concerns about our products, our reputation and relationships with our customers may be harmed. For all of these reasons, customer dissatisfaction with the quality of our products could substantially impair our ability to grow our business.

Conflicts of interest may arise between us and Ablecom and Compuware, and those conflicts may adversely affect our operations.
    
We use Ablecom, a related party, for contract design and manufacturing coordination support and warehousing, and Compuware, also a related party and an affiliate of Ablecom, for distribution, contract manufacturing and warehousing. We work with Ablecom to optimize modular designs for our chassis and certain of other components. We outsource to Compuware a portion of our design activities and a significant part of our manufacturing of components, particularly power supplies. Our purchases of products from Ablecom and Compuware represented 11.1%, 12.8% and 13.8% of our cost of sales for fiscal years 2017, 2016 and 2015, respectively. Ablecom and Compuware’s sales to us constitute a substantial majority of Ablecom and Compuware’s net sales. Ablecom and Compuware are both privately-held Taiwan-based companies. In addition, we have entered into a distribution agreement with Compuware, under which we have appointed Compuware as a nonexclusive distributor of our products in Taiwan, China and Australia.

Steve Liang, Ablecom’s Chief Executive Officer and largest shareholder, is the brother of Charles Liang, our President, Chief Executive Officer and Chairman of the Board. Ablecom owns approximately 0.4% of our common stock. Charles Liang and his spouse, Sara Liu, our Co-Founder, Senior Vice President and director, jointly own approximately 10.5% of Ablecom’s capital stock, while Mr. Steve Liang and other family members own approximately 36.0% of Ablecom’s outstanding common stock. Certain family members of Yih-Shyan (Wally) Liaw, who until January 2018 was our Senior Vice President of International Sales and director, own approximately 11.7% of Ablecom’s capital stock. Bill Liang, a brother of both Charles Liang and Steve Liang, also is a member of the Board of Directors of Ablecom.
    
Bill Liang is also the Chief Executive Officer of Compuware, a member of Compuware’s Board of Directors and a holder of a significant equity interest in Compuware. Steve Liang is also a member of Compuware’s Board of Directors and is an equity holder of Compuware.

Mr. Liang as our Chief Executive Officer and Chairman of the Board and as a significant stockholder of our company, has considerable influence over the management of our business relationships. Accordingly, we may be disadvantaged by the economic interests of Mr. Liang and Ms. Liu as stockholders of Ablecom and his personal relationship with Ablecom’s Chief Executive Officer. We may not negotiate or enforce contractual terms as aggressively with Ablecom or Compuware as we might with an unrelated party, and the commercial terms of our agreements may be less favorable than we might obtain in negotiations with third parties. If our business dealings with Ablecom or Compuware are not as favorable to us as arms-length transactions, our results of operations may be harmed.

If Ablecom or Compuware are acquired or sold, new ownership could reassess the business and strategy of Ablecom or Compuware, and as a result, our supply chain could be disrupted or the terms and conditions of our agreements with Ablecom or Compuware may change. As a result, our operations could be negatively impacted or costs could increase, either of which could adversely affect our margins and results of operations.

Our reliance on Ablecom could be subject to risks associated with our reliance on a limited source of contract manufacturing services and inventory warehousing.

We plan to continue to maintain our manufacturing relationship with Ablecom in Asia. In order to provide a larger volume of contract manufacturing services for us, we anticipate that Ablecom will continue to warehouse for us an increasing number of components and subassemblies manufactured by multiple suppliers prior to shipment to our facilities in the United States and Europe. We also anticipate that we will continue to lease office space from Ablecom in Taiwan to support our

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research and development efforts. We operate a joint management company with Ablecom to manage the common areas shared by us and Ablecom for our separately constructed manufacturing facilities in Taiwan.

If our commercial relationship with Ablecom deteriorates, we may experience delays in our ability to fulfill customer orders. Similarly, if Ablecom’s facility in Asia is subject to damage, destruction or other disruptions, our inventory may be damaged or destroyed, and we may be unable to find adequate alternative providers of contract manufacturing services in the time that we or our customers require. We could lose orders and be unable to develop or sell some products cost-effectively or on a timely basis, if at all.

Currently, we purchase contract manufacturing services primarily for our chassis products from Ablecom. If our commercial relationship with Ablecom were to deteriorate or terminate, establishing direct relationships with those entities supplying Ablecom with key materials for our products or identifying and negotiating agreements with alternative providers of warehouse and contract manufacturing services might take a considerable amount of time and require a significant investment of resources. Pursuant to our agreements with Ablecom and subject to certain exceptions, Ablecom has the exclusive right to be our supplier of the specific products developed under such agreements. As a result, if we are unable to obtain such products from Ablecom on terms acceptable to us, we may need to discontinue a product or develop substitute products, identify a new supplier, change our design and acquire new tooling, all of which could result in delays in our product availability and increased costs. If we need to use other suppliers, we may not be able to establish business arrangements that are, individually or in the aggregate, as favorable as the terms and conditions we have established with Ablecom. If any of these things should occur, our net sales, margins and earnings could significantly decrease, which would have a material adverse effect on our business, results of operations and financial condition.

Our growth into markets outside the United States exposes us to risks inherent in international business operations.

We market and sell our systems and components both inside and outside the United States. We intend to expand our international sales efforts, especially into Asia, and we are expanding our business operations in Europe and Asia, particularly in Taiwan, the Netherlands, China and Japan. In particular, we have made, and continue to make, substantial investments for the purchase of land and the development of new facilities in Taiwan to accommodate our expected growth. Our international expansion efforts may not be successful. Our international operations expose us to risks and challenges that we would otherwise not face if we conducted our business only in the United States, such as:

Heightened price sensitivity from customers in emerging markets;
Our ability to establish local manufacturing, support and service functions, and to form channel relationships with resellers in non-United States markets;
Localization of our systems and components, including translation into foreign languages and the associated expenses;
Compliance with multiple, conflicting and changing governmental laws and regulations;
Foreign currency fluctuations;
Limited visibility into sales of our products by our distributors;
Laws favoring local competitors;
Weaker legal protections of intellectual property rights and mechanisms for enforcing those rights;
Market disruptions created by public health crises in regions outside the United States, such as Avian flu, SARS and other diseases;
Difficulties in staffing and managing foreign operations, including challenges presented by relationships with workers’ councils and labor unions; and
Changing regional economic and political conditions.

These factors could limit our future international sales or otherwise adversely impact our operations or our results of operations.

Our results of operations may be subject to fluctuations based upon our investment in corporate ventures.

We have a 30% minority interest in a China corporate venture that was established to market and sell corporate venture branded systems in China based upon components and technology we supply. We record earnings and losses from the corporate venture using the equity method of accounting. Our loss exposure is limited to the remainder of our equity investment in the corporate venture which as of June 30, 2017 was $6.1 million. Although we currently do not intend to make any additional investment in the corporate venture, if we were to do so in the future, our exposure to potential losses would increase. We do not control the corporate venture and any fluctuation in the results of operations of the corporate venture or any

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other similar transaction that we may enter into in the future could adversely impact, or result in fluctuations in, our results of operations.

The United States could withdraw from or materially modify certain international trade agreements, or change tariff, trade, or tax provisions related to the global manufacturing and sales of our products in ways that we currently cannot predict.

A portion of our business activities are conducted in foreign countries, including the Netherlands, Taiwan, China, United Kingdom and Japan. Our business benefits from free trade agreements, and we also rely on various U.S. corporate tax provisions related to international commerce as we manufacture, market and sell our products globally. The U.S. has announced trade policy changes, including an intention to impose new tariffs on imported goods, which have created significant uncertainty about the future relationship between the United States and other countries with respect to trade, treaties and tariffs. For example, on June 15, 2018, the Office of the United States Trade Representative (the “USTR”) published a list of products covering 818 separate U.S. tariff lines valued at approximately $34 billion in imports from China, imposing an additional duty of 25% on the listed product lines. The list primarily covers products from industrial sectors that contribute to or benefit from the Chinese government’s “Made in China 2025” industrial policy, which include industries such as aerospace, information and communications technology, robotics, industrial machinery, new materials, and automobiles. The USTR also announced a second set of 284 proposed tariff lines, which cover approximately $16 billion worth of imports from China, which will undergo further review in a public notice and comment process, including a public hearing. After completion of this process, USTR stated that it will issue a final determination on the products from this list that would be subject to the additional duties. We are continuing to evaluate the impact of the announced and other proposed tariffs on products and components that we import from China, and we may experience a material increase in the cost of our products, which may result in our products becoming less attractive relative to products offered by our competitors.

These developments, or the perception that any of them could occur, may have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global trade and, in particular, trade between the impacted nations and the United States. Any of these factors, or any changes to U.S. corporate tax policies related to international commerce, could depress economic activity and have a material adverse effect on our business, financial condition and results of operations.

Failure to comply with the U.S. Foreign Corrupt Practices Act, other applicable anti-corruption and anti-bribery laws, and applicable trade control laws could subject us to penalties and other adverse consequences.

We manufacture and sell our products in several countries outside of the United States, both to direct and OEM customers as well as to our distributors. Our operations are subject to the U.S. Foreign Corrupt Practices Act (the “FCPA”) as well as the anti-corruption and anti-bribery laws in the countries where we do business. The FCPA prohibits covered parties from offering, promising, authorizing or giving anything of value, directly or indirectly, to a “foreign government official” with the intent of improperly influencing the official’s act or decision, inducing the official to act or refrain from acting in violation of lawful duty or obtaining or retaining an improper business advantage. The FCPA also requires publicly traded companies to maintain records that accurately and fairly represent their transactions, and to have an adequate system of internal accounting controls. In addition, other applicable anti-corruption laws prohibit bribery of domestic government officials, and some laws that may apply to our operations prohibit commercial bribery, including giving or receiving improper payments to or from non-government parties, as well as so-called “facilitation” payments. In addition, we are subject to U.S. and other applicable trade control regulations that restrict with whom we may transact business, including the trade sanctions enforced by the U.S. Treasury, Office of Foreign Assets Control (“OFAC”). If we fail to comply with laws and regulations restricting dealings with sanctioned countries, we may be subject to civil or criminal penalties. Any future violations could have an adverse impact on our ability to sell our products to United States federal, state and local government and related entities.

In addition, while we have implemented policies, internal controls and other measures reasonably designed to promote compliance with applicable anti-corruption and anti-bribery laws and regulations, and certain safeguards designed to ensure compliance with U.S. trade control laws, our employees or agents have in the past engaged and may in the future engage in improper conduct for which we could be held responsible. If we, or our employees or agents acting on our behalf, are found to have engaged in practices that violate these laws and regulations, we could suffer severe fines and penalties, profit disgorgement, injunctions on future conduct, securities litigation, bans on transacting government business and other consequences that may have a material adverse effect on our business, results of operations and financial condition. In addition, our brand and reputation, our sales activities or our stock price could be adversely affected if we become the subject of any negative publicity related to actual or potential violations of anti-corruption, anti-bribery or trade control laws and regulations.


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Any failure to protect our intellectual property rights, trade secrets and technical know-how could impair our brand and our competitiveness.

Our ability to prevent competitors from gaining access to our technology is essential to our success. If we fail to protect our intellectual property rights adequately, we may lose an important advantage in the markets in which we compete. Trademark, patent, copyright and trade secret laws in the United States and other jurisdictions as well as our internal confidentiality procedures and contractual provisions are the core of our efforts to protect our proprietary technology and our brand. Our patents and other intellectual property rights may be challenged by others or invalidated through administrative process or litigation, and we may initiate claims or litigation against third parties for infringement of our proprietary rights. Such administrative proceedings and litigation are inherently uncertain and divert resources that could be put towards other business priorities. We may not be able to obtain a favorable outcome and may spend considerable resources in our efforts to defend and protect our intellectual property.

Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain. Effective patent, trademark, copyright and trade secret protection may not be available to us in every country in which our products are available. The laws of some foreign countries may not be as protective of intellectual property rights as those in the United States, and mechanisms for enforcement of intellectual property rights may be inadequate.

Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property and using our technology for their competitive advantage. Any such infringement or misappropriation could have a material adverse effect on our business, results of operations and financial condition.

Resolution of claims that we have violated or may violate the intellectual property rights of others could require us to indemnify our customers, resellers or vendors, redesign our products, or pay significant royalties to third parties, and materially harm our business.

Our industry is marked by a large number of patents, copyrights, trade secrets and trademarks and by frequent litigation based on allegations of infringement or other violation of intellectual property rights. Our primary competitors have substantially greater numbers of issued patents than we have which may position us less favorably in the event of any claims or litigation with them. Other third parties have in the past sent us correspondence regarding their intellectual property or filed claims that our products infringe or violate third parties’ intellectual property rights. In addition, increasingly non-operating companies are purchasing patents and bringing claims against technology companies. We have been subject to several such claims and may be subject to such claims in the future.

Successful intellectual property claims against us from others could result in significant financial liability or prevent us from operating our business or portions of our business as we currently conduct it or as we may later conduct it. In addition, resolution of claims may require us to redesign our technology, to obtain licenses to use intellectual property belonging to third parties, which we may not be able to obtain on reasonable terms, to cease using the technology covered by those rights, and to indemnify our customers, resellers or vendors. Any claim, regardless of its merits, could be expensive and time consuming to defend against, and divert the attention of our technical and management resources.

If we lose Charles Liang, our President, Chief Executive Officer and Chairman, or any other current key employee or are unable to attract additional key employees, we may not be able to implement our business strategy in a timely manner.

Our future success depends in large part upon the continued service of our current executive management team and other current key employees. In particular, Charles Liang, our President, Chief Executive Officer and Chairman of the Board, is critical to the overall management of our company as well as to our strategic direction. Mr. Liang co-founded our company and has been our Chief Executive Officer since our inception. His experience in running our business and his personal involvement in key relationships with suppliers, customers and strategic partners are extremely valuable to our company. We currently do not have a succession plan for the replacement of Mr. Liang if it were to become necessary. Additionally, we are particularly dependent on the continued service of our existing research and development personnel because of the complexity of our products and technologies. Our employment arrangements with our executives and employees do not require them to provide services to us for any specific length of time, and they can terminate their employment with us at any time, with or without notice, without penalty. The loss of services of any of these executives or of one or more other key members of our team could seriously harm our business.


25



If we are unable to attract and integrate additional key employees in a manner that enables us to scale our business and operations effectively, or if we do not maintain competitive compensation policies to retain our employees, our ability to operate effectively and efficiently could be limited.

To execute our growth plan, we must attract additional highly qualified personnel, including additional engineers and executive staff. Competition for qualified personnel is intense, especially in Silicon Valley, where we are headquartered. We have experienced in the past and may continue to experience difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Our lack of current public information precludes us from registering our securities with the SEC for offer and sale and limits our ability to use stock options and other equity-based awards to attract, retain and provide incentives to employees. Since the initiation of the Investigation, our employees have been unable to sell their holdings of our common stock, which has contributed to the loss of experienced engineering and sales personnel. If we are unable to attract and integrate additional key employees in a manner that enables us to scale our business and operations effectively, or if we do not maintain competitive compensation policies to retain our employees, our ability to operate effectively and efficiently could be limited.

Backlog does not provide a substantial portion of our net sales in any quarter.

Our net sales are difficult to forecast because we do not have sufficient backlog of unfilled orders to meet our quarterly net sales targets at the beginning of a quarter. Rather, a majority of our net sales in any quarter depend upon customer orders that we receive and fulfill in that quarter. Because our expense levels are based in part on our expectations as to future net sales and to a large extent are fixed in the short term, we might be unable to adjust spending in time to compensate for any shortfall in net sales. Accordingly, any significant shortfall of revenues in relation to our expectations would harm our operating results.

Our business and operations are especially subject to the risks of earthquakes and other natural catastrophic events.

Our corporate headquarters, including our most significant research and development and manufacturing operations, are located in the Silicon Valley area of Northern California, a region known for seismic activity. We have also established significant manufacturing and research and development operations in Taiwan which is also subject to seismic activity risks. We do not currently have a comprehensive disaster recovery program and as a result, a significant natural disaster, such as an earthquake, could have a material adverse impact on our business, operating results, and financial condition. Although we are in the process of preparing such a program, there is no assurance that it will be effective in the event of such a disaster.

Our operations involve the use of hazardous and toxic materials, and we must comply with environmental laws and regulations, which can be expensive, and may affect our business, results of operations and financial condition.

We are subject to federal, state and local regulations relating to the use, handling, storage, disposal and human exposure to hazardous and toxic materials. If we were to violate or become liable under environmental laws in the future as a result of our inability to obtain permits, human error, accident, equipment failure or other causes, we could be subject to fines, costs or civil or criminal sanctions, face third-party property damage or personal injury claims or be required to incur substantial investigation or remediation costs, which could be material, or experience disruptions in our operations, any of which could have a material adverse effect on our business, results of operations and financial condition. In addition, environmental laws could become more stringent over time imposing greater compliance costs and increasing risks and penalties associated with violations, which could harm our business, results of operations and financial condition.

We also face increasing complexity in our product design as we adjust to new and future requirements relating to the materials composition of our products, including the restrictions on lead and other hazardous substances applicable to specified electronic products placed on the market in the European Union (Restriction on the Use of Hazardous Substances Directive 2002/95/EC, also known as the RoHS Directive). We are also subject to laws and regulations such as California’s “Proposition 65” which requires that clear and reasonable warnings be given to consumers who are exposed to certain chemicals deemed by the State of California to be dangerous, such as lead. We expect that our operations will be affected by other new environmental laws and regulations on an ongoing basis. Although we cannot predict the ultimate impact of any such new laws and regulations, they will likely result in additional costs, and could require that we change the design and/or manufacturing of our products, any of which could have a material adverse effect on our business, results of operations and financial condition.
    
We are also subject to the regulations concerning the supply of minerals coming from the conflict zones in and around the Democratic Republic of Congo. This United States legislation includes disclosure requirements regarding the use of conflict minerals mined from the Democratic Republic of Congo and adjoining countries and procedures regarding a manufacturer’s efforts to prevent the sourcing of such conflict minerals. These requirements could affect the sourcing and availability of minerals used in the manufacture of semiconductor or other devices. As a result, there may only be a limited pool of suppliers

26



who provide conflict-free metals, and we cannot assure you that we will be able to obtain products in sufficient quantities or at competitive prices.

Risks Related to Owning Our Stock

The trading price of our common stock is likely to be volatile, and you might not be able to sell your shares at or above the price at which you purchased the shares.

The trading prices of technology company securities historically have been highly volatile and the trading price of our common stock has been and is likely to continue to be subject to wide fluctuations. Factors, in addition to those outlined elsewhere in this filing, that may affect the trading price of our common stock include:

The risk that we are not able to relist our common stock on a national securities exchange;
The outcome of litigation and claims as well as regulatory examinations, investigations, proceedings and orders arising out of our failure to file SEC reports on a timely basis and results of the Investigation, Procedures and Analysis;
Actual or anticipated variations in our operating results, including failure to achieve previously provided guidance;
Announcements of technological innovations, new products or product enhancements, strategic alliances or significant agreements by us or by our competitors;
Changes in recommendations by any securities analysts that elect to follow our common stock;
The financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
False or misleading press releases or articles regarding our company or our products;
The loss of a key customer;
The loss of key personnel;
Technological advancements rendering our products less valuable;
Lawsuits filed against us, including those described in Part I, Item 3, “Legal Proceedings”;
Changes in operating performance and stock market valuations of other companies that sell similar products;
Price and volume fluctuations in the overall stock market;
Market conditions in our industry, the industries of our customers and the economy as a whole; and
Other events or factors, including those resulting from war, incidents of terrorism or responses to these events.

Future sales of shares by existing stockholders could cause our stock price to decline.

Attempts by existing stockholders to sell substantial amounts of our common stock in the public market could cause the trading price of our common stock to decline significantly. All of our shares are eligible for sale in the public market, including shares held by directors, executive officers and other affiliates, sales of which are subject to volume limitations and other requirements under Rule 144 under the Securities Act. In addition, shares subject to outstanding options and reserved for future issuance under our stock option plans are eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements. If these additional shares are sold, or if it is perceived that they will be sold in the public market, the trading price of our common stock could decline.

If securities analysts do not publish research or reports about our business or if they downgrade our stock, the price of our stock could decline.

The research and reports that industry or financial analysts publish about us or our business likely have an effect on the trading price of our common stock. If an industry analyst decides not to cover our company, or if an industry analyst decides to cease covering our company at some point in the future, we could lose visibility in the market, which in turn could cause our stock price to decline. If an industry analyst downgrades our stock, our stock price would likely decline rapidly in response.

The concentration of our capital stock ownership with insiders will likely limit your ability to influence corporate matters.

As of March 31, 2019, our executive officers, directors, current five percent or greater stockholders and affiliated entities together beneficially owned 27.8% of our common stock, net of treasury stock. As a result, these stockholders, acting together, have significant influence over all matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. Corporate action might be taken even if other stockholders oppose them.

27



This concentration of ownership might also have the effect of delaying or preventing a change of control of our company that other stockholders may view as beneficial.

Provisions of our certificate of incorporation and bylaws and Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, as a result, depress the trading price of our common stock.

Our certificate of incorporation and bylaws contain provisions that could discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:

Establish a classified Board of Directors so that not all members of our Board are elected at one time;
Require super-majority voting to amend some provisions in our certificate of incorporation and bylaws;
Authorize the issuance of “blank check” preferred stock that our Board could issue to increase the number of outstanding shares and to discourage a takeover attempt;
Limit the ability of our stockholders to call special meetings of stockholders;
Prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;
Provide that the Board of Directors is expressly authorized to adopt, or to alter or repeal our bylaws; and
Establish advance notice requirements for nominations for election to our Board or for proposing matters that can be acted upon by stockholders at stockholder meetings.

In addition, we are subject to Section 203 of the Delaware General Corporation Law, which, subject to some exceptions, prohibits “business combinations” between a Delaware corporation and an “interested stockholder,” which is generally defined as a stockholder who becomes a beneficial owner of 15% or more of a Delaware corporation’s voting stock for a three-year period following the date that the stockholder became an interested stockholder. Section 203 could have the effect of delaying, deferring or preventing a change in control that our stockholders might consider to be in their best interests.

These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and cause us to take corporate actions other than those stockholders desire.

Our common stock is currently quoted on the OTC Market, which may have an unfavorable impact on our stock price and liquidity.
 
Effective at the open of business on August 23, 2018, our common stock was suspended from trading on the Nasdaq Global Select Market, and our common stock was subsequently delisted on March 22, 2019. Since the date our common stock was suspended from trading on the Nasdaq Global Select Market, our common stock has been quoted on the OTC Market. The OTC Market is a significantly more limited market than Nasdaq. The quotation of our shares on the OTC Market may result in a less liquid market available for existing and potential stockholders to trade shares of our common stock, could depress the trading price of our common stock and could have a long-term adverse impact on our ability to raise capital in the future.

We do not expect to pay any cash dividends for the foreseeable future.

We do not anticipate that we will pay any cash dividends to holders of our common stock in the foreseeable future. In addition, under the terms of the credit agreement with Bank of America, dated April 19, 2018, we cannot pay any dividends, with limited exceptions. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.
 
Item 1B.    Unresolved Staff Comments

None.

Item 2.        Properties

As of June 30, 2017, we owned approximately 1,408,000 square feet and leased approximately 558,000 square feet of office and manufacturing space.


28



Our principal executive offices, research and development center and production operations are located in San Jose, California where we own approximately 1,197,000 square feet of office and manufacturing space which is subject to existing term loans and revolving line of credit with $123.2 million outstanding as of June 30, 2017. We lease approximately 246,000 square feet of warehouse space in Fremont, California under a lease that expires in July 2020, lease approximately 46,000 square feet of office space in San Jose, California under a lease that expires in January 2022, and lease approximately 5,000 square feet of office in Jersey City, New Jersey under a lease that expires in July 2020. Our European headquarters for manufacturing and service operations is located in Den Bosch, the Netherlands where we lease approximately 124,000 square feet of office and manufacturing space under two leases, which expire in July 2025 and June 2026. In Asia, our manufacturing facilities are located in Taoyuan County, Taiwan where we own approximately 211,000 square feet of office and manufacturing space on 7.0 acres of land. These manufacturing facilities are subject to an existing term loan with $19.7 million remaining outstanding as of June 30, 2017. Our research and development center and service operations in Asia are located in an approximately 131,000 square feet facility in Taipei, Taiwan under eleven leases that expire at various dates ranging from May 2019 through January 2022. We lease approximately 3,000 square feet of office space in Shanghai and Beijing, China for sales and service operations under two leases that expire in April 2020 and August 2020, respectively. In addition, we lease approximately 2,000 square feet of office space in Japan under one lease, which expires in January 2020.

Additionally, we own 36 acres of land in San Jose, California that would allow us to expand our Green Computing Park. We remodeled one warehouse with approximately 310,000 square feet of storage space and completed the construction of a new manufacturing and warehouse building with approximately 182,000 square feet of manufacturing space in August 2015. In fiscal year 2017, we continued to engage several contractors for the development and construction of improvements on the property. We completed the construction of a second new manufacturing and warehouse building in the first quarter of fiscal year 2018. We financed this development through our operating cash flows and additional borrowings from banks. See Part II, Item 8, Note 9, “Short-term and Long-term Obligations” to the consolidated financial statements in this Annual Report on Form 10-K for a discussion of our company’s short-term and long-term obligations.

We believe that our existing properties, including both owned and leased, are in good condition and are suitable for the conduct of our business.


Item 3.        Legal Proceedings

From time to time, we have been involved in various legal proceedings arising from the normal course of business activities. In management’s opinion, the resolution of any matters will not have a material adverse effect on our consolidated financial condition, results of operations or liquidity.

On September 4, 2015, a complaint was filed against us, our CEO, and our former CFO in the U.S. District Court for the Northern District of California (Deason v. Super Micro Computer, Inc., et al., No. 15-cv-04049). The complaint claimed that the defendants violated Section 10(b) of the Securities Exchange Act of 1934 because of alleged misrepresentations and/or omissions in public statements which supposedly were revealed when we announced on August 31, 2015 that the filing of our Annual Report on Form 10-K for fiscal 2015 would be delayed to allow us to complete an investigation into certain marketing expenses. On January 12, 2018, after an initial round of successful motion to dismiss briefing leading to Plaintiff filing an amended complaint, we and the named individual defendants filed another motion to dismiss on the grounds that the amended complaint failed to state a claim because it did not plead falsity or scienter. On June 27, 2018, the Court granted our motion to dismiss without leave to amend and entered judgment in favor of us and the other defendants. On July 24, 2018, Plaintiff filed a notice of appeal to the 9th Circuit Court of Appeals; however, Plaintiff subsequently filed a voluntary notice dismissing the appeal and, thus, ending the litigation on November 1, 2018.

On February 8, 2018, two putative class action complaints were filed against us, our CEO, and our former CFO in the U.S. District Court for the Northern District of California (Hessefort v. Super Micro Computer, Inc., et al., No. 18-cv-00838 and United Union of Roofers v. Super Micro Computer, Inc., et al., No. 18-cv-00850). The complaints contain similar allegations, claiming that the defendants violated Section 10(b) of the Securities Exchange Act due to alleged misrepresentations and/or omissions in public statements regarding recognition of revenue. The court subsequently appointed New York Hotel Trades Council & Hotel Association of New York City, Inc. Pension Fund as lead plaintiff and it filed an amended complaint naming our Senior Vice President of Investor Relations, as an additional defendant. The court approved the parties’ agreement to permit a further amendment of the complaint, which was filed on January 22, 2019. We believe the allegations filed are without merit, and intend to vigorously defend against the lawsuit.


29


Between late 2015 and 2017, we cooperated with the SEC in its investigation of marketing expenses that contained certain irregularities discovered by our management, which irregularities were disclosed on August 31, 2015. In addition, we have received subpoenas from the SEC in connection with the matters underlying our inability to timely file our Form 10-K for the fiscal year ending June 30, 2017. We also received a subpoena from the SEC following the false and widely-discredited reporting in October 2018 by Bloomberg Businessweek concerning our products. We are cooperating fully to comply with these government requests.

Due to the inherent uncertainties of legal proceedings, we cannot predict the outcome of these proceedings at this time, and we can give no assurance that they will not have a material adverse effect on our financial position or results of operations.

Item 4.        Mine Safety Disclosures
    
Not applicable.

30



PART II
 
Item 5.        Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Effective at the open of business on August 23, 2018, our common stock was suspended from trading on the Nasdaq Global Select Market. Effective March 22, 2019, our common stock was delisted from the Nasdaq Global Select Market. Since the date our common stock was suspended from trading on the Nasdaq Global Select Market, our common stock has been quoted on the OTC Market and is currently traded under the symbol “SMCI.” Prior to the suspension, we had traded on the Nasdaq Global Select Market since March 29, 2007, and prior to that time there was no public market for our common stock.

The following table sets forth, for the periods indicated, the high and low sales closing prices of our Common Stock as reported by The Nasdaq Global Select Market. On March 31, 2019, the last reported bid price of our common stock on the OTC Markets was $21.13 per share. The OTC Markets quotations reflect inter-dealer prices, without retail mark-up, mark down or commission and may not represent actual transactions.
 
 
High
 
Low
Fiscal Year 2016:
 
 
 
First Quarter
$
30.25

 
$
24.24

Second Quarter
$
31.82

 
$
22.32

Third Quarter
$
34.08

 
$
21.52

Fourth Quarter
$
34.49

 
$
23.78

 
High
 
Low
Fiscal Year 2017:
 
 
 
First Quarter
$
26.34

 
$
19.02

Second Quarter
$
29.00

 
$
21.37

Third Quarter
$
28.85

 
$
24.60

Fourth Quarter
$
25.25

 
$
23.60


Holders

As of March 31, 2019, there were 31 registered stockholders of record of our common stock. Because most of our shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial stockholders represented by these holders of record.

Dividend Policy

We have never declared or paid cash dividends on our capital stock. We intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Under the terms of the credit agreement with Bank of America, dated April 19, 2018, we cannot pay any dividends.

Equity Compensation Plan

Please see Part III, Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters of this report for disclosure relating to our equity compensation plans.

Stock Performance Graph

This performance graph shall not be deemed “soliciting material” or to be "filed" with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Super Micro Computer, Inc. under the Securities Act of 1933, as amended, or the Exchange Act.    

31



The following graph compares our cumulative five-year total stockholder return on our common stock with the cumulative return of the Nasdaq Computer Index and the Nasdaq Composite Index, which both included our common stock, for the comparable period.

The graph reflects an investment of $100 (with reinvestment of all dividends, if any) in our common stock, the Nasdaq Computer Index and the Nasdaq Composite Index, on June 30, 2012 and our relative performance tracked through June 30, 2017. The stockholder return shown on the graph below is not necessarily indicative of future performance, and we do not make or endorse any predictions as to future stockholder returns.

smci201663chartx50683a01a11.jpg

 
 
6/30/2012
 
6/30/2013
 
6/30/2014
 
6/30/2015
 
6/30/2016
 
6/30/2017
Super Micro Computer, Inc.
 
100.00

 
67.09

 
159.33

 
186.51

 
156.68

 
155.42

Nasdaq Composite Index
 
100.00

 
115.95

 
150.19

 
169.91

 
164.99

 
209.21

Nasdaq Computer Index
 
100.00

 
102.24

 
142.18

 
157.55

 
159.77

 
217.77


Recent Sales of Unregistered Securities

None.

Issuer Purchases of Equity Securities
    
None.


32



Item 6.        Selected Financial Data

The following selected consolidated financial data is qualified by reference to, and should be read in conjunction with, our consolidated financial statements and notes thereto in Part II, Item 8, "Financial Statements and Supplementary Data" and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7, of this Annual Report on Form 10-K.
 
Fiscal Years Ended June 30,
 
Fiscal Years Ended June 30,
 
Fiscal Years Ended June 30,
 
2017
 
2016
 
2015
 
2014
 
2013
 
 
 
(As Revised) (1)
 
(As Revised) (1)
 
As Reported
Adjustments (2)
As Adjusted
 
As Reported
Adjustments (2)
As Adjusted
 
(in thousands, except per share data)
Consolidated Statements of Operations Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
$
2,484,929

 
$
2,225,022

 
$
1,954,353

 
$
1,467,202

$
(17,037
)
$
1,450,165

 
$
1,162,561

$
(15,332
)
$
1,147,229

Cost of sales
2,134,971

 
1,894,521

 
1,647,769

 
1,241,657

(10,610
)
1,231,047

 
1,002,508

(12,488
)
990,020

Gross profit
349,958

 
330,501

 
306,584

 
225,545

(6,427
)
219,118

 
160,053

(2,844
)
157,209

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
143,992

 
124,223

 
101,402

 
84,257

917

85,174

 
75,208

60

75,268

Sales and marketing
66,445

 
58,338

 
47,496

 
38,012

264

38,276

 
33,785

108

33,893

General and administrative
44,646

 
40,449

 
25,040

 
23,017

(192
)
22,825

 
23,902

4

23,906

Total operating expenses
255,083

 
223,010

 
173,938

 
145,286

989

146,275

 
132,895

172

133,067

Income from operations
94,875

 
107,491

 
132,646

 
80,259

(7,416
)
72,843

 
27,158

(3,016
)
24,142

Other income (expense), net
(1,287
)
 
1,507

 
956

 
92


92

 
48


48

Interest expense
(2,300
)
 
(1,594
)
 
(965
)
 
(757
)

(757
)
 
(610
)

(610
)
Income before income tax provision
91,288

 
107,404

 
132,637

 
79,594

(7,416
)
72,178

 
26,596

(3,016
)
23,580

Income tax provision
24,434

 
35,323

 
40,082

 
25,437

(1,342
)
24,095

 
5,317

(473
)
4,844

Net income
$
66,854

 
$
72,081

 
$
92,555

 
$
54,157

$
(6,074
)
$
48,083

 
$
21,279

$
(2,543
)
$
18,736

Net income per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
$
1.38

 
$
1.50

 
$
1.99

 
$
1.24

 
$
1.10

 
$
0.50

 
$
0.45

Diluted
$
1.29

 
$
1.39

 
$
1.85

 
$
1.16

 
$
1.03

 
$
0.48

 
$
0.43

Shares used in per share calculation:
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
48,383

 
47,917

 
46,434

 
43,599

 
43,599

 
41,992

 
41,992

Diluted
51,679

 
51,836

 
50,094

 
46,512

 
46,512

 
43,907

 
43,907

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
$
1,382

 
$
1,157

 
$
962

 
$
941

$
(21
)
$
920

 
$
953

$
(21
)
$
932

Research and development
12,559

 
10,651

 
9,195

 
6,783

147

6,930

 
6,527

(144
)
6,383

Sales and marketing
2,144

 
1,934

 
1,601

 
1,260

(26
)
1,234

 
1,541

(34
)
1,507

General and administrative
3,580

 
3,188

 
2,678

 
2,078

(100
)
1,978

 
2,340

(52
)
2,288

Total stock-based compensation
$
19,665

 
$
16,930

 
$
14,436

 
$
11,062

$

$
11,062

 
$
11,361

$
(251
)
$
11,110

__________________________
(1) See Part II, Item 8, Note 19, "Restatement of Previously Issued Consolidated Financial Statements", in our notes to the consolidated financial statements.
(2) The adjustments are similar in nature to those discussed in Part II, Item 8, Note 19, "Restatement of Previously Issued Consolidated Financial Statements", in our notes to the consolidated financial statements.


33



 
As of June 30,
 
2017
 
2016
 
2015
 
2014
 
2013
 
 
 
(As Revised) (1)
 
(As Revised) (2)
 
As Reported
Adjustments (2)
As Adjusted
 
As Reported
Adjustments (2)
As Adjusted
 
(in thousands)
Consolidated Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
110,606

 
$
178,820

 
$
92,920

 
$
96,872

$
(1,390
)
$
95,482

 
$
93,038

$
(1,306
)
$
91,732

Working capital
588,636

 
544,698

 
438,144

 
343,195

(14,255
)
328,940

 
281,528

(9,437
)
272,091

Total assets
1,515,130

 
1,191,483

 
1,122,031

 
796,325

29,970

826,295

 
632,257

38,412

670,669

Long-term obligations
68,754

 
85,200

 
26,062

 
16,208

4,710

20,918

 
16,869

2,121

18,990

Total stockholders’ equity
773,846

 
696,653

 
593,585

 
469,231

(17,072
)
452,158

 
373,724

(10,999
)
362,725

__________________________
(1)
See Part II, Item 8, Note 19, "Restatement of Previously Issued Consolidated Financial Statements", in our notes to the consolidated financial statements.
(2)
The adjustments are similar in nature to those discussed in Part II, Item 8, Note 19, "Restatement of Previously Issued Consolidated Financial Statements", in our notes to the consolidated financial statements.



34



Item 7.        Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements and related notes which appear elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report on Form 10-K, particularly under the heading "Risk Factors." The following discussion gives effect to the restatement discussed in Part II, Item 8, Note 19, “Restatement of Previously Issued Consolidated Financial Statements” to the consolidated financial statements of this Annual Report on Form 10-K. See related discussion in the Explanatory Note.

Background of Investigation, Procedures and Analysis

See "Explanatory Note" to this Annual Report on Form-10K.

Nasdaq Delisting of our Common Stock

As a result of the delay in filing our periodic reports with the SEC and failure to hold an annual meeting, we were unable to comply with the Nasdaq listing standards and our common stock was suspended from trading on the Nasdaq Global Select Market effective August 23, 2018 and formally delisted effective March 22, 2019. Following the suspension of trading, our common stock has been quoted on the OTC Market and is currently traded under the symbol “SMCI.” For further information regarding trading in our common stock, refer to Part II, Item 5, “Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” in this Annual Report on Form 10-K.

Overview

We are a global leader in high performance, high efficiency server technology and innovation. We develop and provide end-to-end green computing solutions to the cloud computing, data center, enterprise, big data, high performance computing ("HPC" and internet of things ("IoT")/embedded markets. Our solutions range from complete server, storage, blade and workstations to full racks, networking devices, server management software and technology support and services.

We commenced operations in 1993 and have been profitable every year since inception. For fiscal years 2017, 2016 and 2015, our net income was $66.9 million, $72.1 million and $92.6 million, respectively. In order to increase our sales and profits, we believe that we must continue to develop flexible and customizable server solutions and be among the first to market with new features and products. We must also continue to expand our software and customer service and support offerings, particularly as we increasingly focus on larger enterprise sales. We measure our financial success based on various indicators, including growth in net sales, gross profit margin and operating margin as key measures of profitability, and cash conversion cycle as a key measure of working capital management. Among the key non-financial indicators of our success is our ability to rapidly introduce new products and deliver the latest application optimized server solutions. In this regard, we work closely with microprocessor and other component vendors to take advantage of new technologies as they are introduced. Historically, our ability to introduce new products rapidly has allowed us to benefit from the introduction of new microprocessors and as a result we monitor the introduction cycles of Intel Corporation, Advanced Micro Devices, Inc., and Nvidia Corporation carefully. This also impacts our research and development expenditures as we continue to invest more in our current and future product development efforts.

Financial Highlights

The following is a summary of other financial highlights of fiscal year 2017:

Net sales increased by 11.7% as compared to fiscal year 2016 primarily due to increased unit shipments, reflecting the successful execution of our strategy to ship more complete systems, which increased by 13.5% as compared to fiscal year 2016.

Gross margin declined to 14.1% from 14.9% in fiscal year 2016 primarily due to increased component prices for memory and storage relative to our ability to pass cost increases to our customers as well as increased sales where pricing is typically more competitive and lower total capacity utilization while we ramp up use of our new facilities.


35


Operating expenses increased by 14.4% as compared to fiscal year 2016, but remained approximately 10% of sales as we continued to increase our human talent, primarily with respect to further investments in research and development.

Net income declined to $66.9 million as compared to $72.1 million in fiscal 2016, which was primarily due to a $16.1 million decline in income before taxes, which was partially offset by a reduction in our effective tax rate to 26.8% as compared to 32.9% in fiscal 2016.

Our cash and cash equivalents were $110.6 million at the end of fiscal year 2017, compared with $178.8 million at the end of fiscal year 2016. The decrease in our cash and cash equivalents at the end of fiscal year 2017 was primarily due to $96.2 million of cash used in our operating activities and $29.4 million of purchases of property, plant and equipment, of which $16.1 million was related to property and equipment in connection with the construction of buildings at our Green Computing Park in San Jose, California, partially offset by $66.6 million of borrowings, net of repayments.

The cash conversion cycle is the sum of days of sales outstanding (“DSO”) and days of inventory outstanding (“DIO”), less days of purchases outstanding (“DPO”). Cash conversion cycle at the end of fiscal year 2017 was 86 days compared with 76 at the end of fiscal year 2016. DSO and DIO at the end of fiscal year 2017 were 3 days higher and 6 days higher, respectively, than at the end of fiscal year 2016. DPO at the end of fiscal year 2017 was 1 day lower than at the end of fiscal year 2016.

Our inventory balance was $736.7 million at the end of fiscal year 2017, compared with $516.8 million at the end
of fiscal year 2016. The increase in inventory was to meet current demand and expected future sales volume growth.

Our purchase commitments with contract manufacturers and suppliers were $309.1 million at the end of fiscal year 2017 and $334.0 million at the end of fiscal year 2016.

Subsequent Events

For details, see Part II, Item 8, Note 18, “Subsequent Events” in our notes to the consolidated financial statements in this Annual Report on Form 10-K.

Fiscal Year

Our fiscal year ends on June 30. References to fiscal year 2017, for example, refer to the fiscal year ended June 30, 2017.

Critical Accounting Policies

General

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses. We evaluate our estimates on an on-going basis, including those related to allowances for doubtful accounts and sales returns, inventory valuation, useful lives of property, plant and equipment, product warranty accruals, stock-based compensation, impairment of investments and long-lived assets, and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making the judgments we make about the carrying values of assets and liabilities that are not readily apparent from other sources. Because these estimates can vary depending on the situation, actual results may differ from the estimates.

A summary of significant accounting policies is included in Part II, Item 8, Note 1, “Organization and Summary of Significant Accounting Policies” in our notes to the consolidated financial statements in this Annual Report on Form 10-K. Management believes the following are the most critical accounting policies and reflect the significant estimates and assumptions used in the preparation of the consolidated financial statements.


36



Revenue Recognition

Product sales. We recognize revenue from sales of products upon meeting all of the following revenue recognition criteria, which is typically met upon shipment or delivery of our products to customers, unless customer acceptance is uncertain or significant obligations to the customer remain: (i) persuasive evidence of an arrangement exists through customer contracts and orders, (ii) the customer takes title and assumes the risks and rewards of ownership, (iii) the sales price charged is fixed or determinable as evidenced by customer contracts and orders and (iv) collectibility is reasonably assured.

We estimate reserves for future sales returns based on a review of our history of actual returns for each major product line. We also reduce revenue for customer and distributor programs and incentive offerings such as price protection and rebates as well as cooperative marketing arrangements where the fair value of the benefit identified from the costs cannot be reasonably estimated.

We may use distributors to sell products to end customers. Revenue from distributors may be recognized on sell-in or sell-through basis depending on the terms of the arrangement between the distributor and us.

Services sales. Our sale of services mainly consists of extended warranty and on-site services. These services are sold at the time of the sale of the underlying products. Revenue related to extended warranty commences upon the expiration of the standard warranty period and is recognized ratably over the contractual period. Revenue related to on-site services commences upon recognition of the product sale and is recognized ratably over the contractual period. These service contracts are typically one to five years in length. Service revenue has been less than 10% of net sales for all periods presented and is not separately disclosed.    

Multiple-element arrangements. Certain of our arrangements contain multiple elements, consisting of both our products and services. Revenue allocated to each element is recognized when all the revenue recognition criteria are met for that element.

We allocate arrangement consideration at the inception of an arrangement to all deliverables, if they represent a separate unit of accounting, based on their relative estimated stand-alone selling prices. A deliverable qualifies as a separate unit of accounting when the delivered element has stand-alone value to the customer. The guidance establishes the following hierarchy to determine the relative estimated stand-alone selling price to be used for allocating arrangement consideration to deliverables: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”) if VSOE is not available, or (iii) the vendor's best estimated selling price (“BESP”) if neither VSOE nor TPE are available. We do not have VSOE for deliverables in our arrangements, and TPE is generally not available because our products are highly differentiated, and we are unable to obtain reliable information on the products and pricing practices of our competitors. BESP reflects our estimate of what the selling price of a deliverable would be if it were sold regularly on a stand-alone basis.

As such, BESP is generally used to allocate the total arrangement consideration at the arrangement inception. We determine BESP for a product by considering multiple factors including, but not limited to, geographies, customer types, internal costs, gross margin objectives and pricing practices.

Product Warranties

We offer product warranties ranging from 15 to 39 months against any defective products. We accrue for estimated returns of defective products at the time revenue is recognized based on historical warranty experience and recent trends. We monitor warranty obligations and may make revisions to our warranty reserve if actual costs of product repair and replacement are significantly higher or lower than estimated. Accruals for anticipated future warranty costs are charged to cost of sales and included in accrued liabilities and other long-term liabilities. We adjust the changes in estimates on an ongoing basis as a result of new product introductions or changes in unit volumes compared with our historical experience, or if the cost of servicing warranty claims is greater or lesser than expected, and we account for the changes in estimates prospectively.

Inventories

Inventories are stated at weighted average cost, subject to lower of cost or market. Inventories consist of purchased parts and raw materials (principally components), work in process (principally products being assembled) and finished goods. Market value represents net realizable value for finished goods and work in process and replacement value for purchased parts and raw materials. We evaluate inventory on a quarterly basis for lower of cost or market and excess and obsolescence and, as necessary, write down the valuation of units based upon usage and sales, anticipated sales price, product obsolescence and other factors. Once a reserve is established, it is maintained until the product to which it relates is sold or scrapped.

37



We receive various rebate incentives from certain suppliers based on our contractual arrangements, including volume-based rebates. The rebates are recognized as a reduction of cost of inventories and reduces the cost of sales in the period when the related inventory is sold.

Income Taxes

We account for income taxes under an asset and liability approach. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax reporting purposes, net of operating loss carry-forwards and other tax credits measured by applying enacted tax laws related to the financial statement periods. Valuation allowances are provided when necessary to reduce deferred tax assets to an amount that is more likely than not to be realized.

We recognize tax liabilities for uncertain income tax positions on the income tax return based on the two-step process. The first step is to determine whether it is more likely than not that each income tax position would be sustained upon audit. The second step is to estimate and measure the tax benefit as the amount that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority. Estimating these amounts requires us to determine the probability of various possible outcomes. We evaluate these uncertain tax positions on a quarterly basis. This evaluation is based on the consideration of several factors, including changes in facts or circumstances, changes in applicable tax law, settlement of issues under audit and new exposures. If we later determine that our exposure is lower or that the liability is not sufficient to cover our revised expectations, we adjust the liability and effect a related charge in our tax provision during the period in which we make such determination.

Stock-Based Compensation

We measure and recognize compensation expense for all share-based awards made to employees, consultants and non-employee members of our Board of Directors including stock options and restricted stock units ("RSUs"). We are required to estimate the fair value of share-based awards on the date of grant. The value of awards that are ultimately expected to vest is recognized as an expense over the requisite service periods. The fair value of RSUs is based on the closing market price of our common stock on the date of grant. We estimated the fair value of stock options granted using a Black-Scholes option-pricing model and a single option award approach. This model requires us to make estimates and assumptions with respect to the expected term of the option and the expected volatility of the price of our common stock. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.

The expected term represents the period that our stock-based awards are expected to be outstanding and was determined based on a combination of our peer group and our historical experience. The expected volatility is based on a combination of our implied and historical volatility. In addition, forfeitures of share-based awards are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option and restricted stock unit forfeitures and record stock-based compensation expense only for those awards that are expected to vest.
    
Variable Interest Entities

We determine at the inception of each arrangement whether an entity in which we hold an investment or in which we have other variable interests in is considered a variable interest entity ("VIE"). We consolidate VIEs when we are the primary beneficiary. The primary beneficiary of a VIE is the party that meets both of the following criteria: (1) has the power to make decisions that most significantly affect the economic performance of the VIE; and (2) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE. Periodically, we assess whether any changes in the interest or relationship with the entity affect the determination of whether the entity is still a VIE and, if so, whether we are the primary beneficiary. If we are not the primary beneficiary in a VIE, we account for the investment under the equity method or cost method in accordance with the applicable GAAP.

We have concluded that Ablecom Technology, Inc. ("Ablecom") and its affiliate, Compuware Technology, Inc. ("Compuware") are VIEs in accordance with applicable accounting standards and guidance; however, we are not the primary beneficiary as we do not have the power to direct the activities that are most significant to the entities and therefore, we do not consolidate these entities. In performing this analysis, our management considered our explicit arrangements with Ablecom and Compuware, including the supplier arrangements. Also, as a result of the substantial related party relationships between us and these two companies, management considered whether any implicit arrangements exist that would cause us to protect those related parties’ interests from suffering losses. Management determined that no implicit arrangements exist with Ablecom, Compuware, or their shareholders.

38



We and Ablecom jointly established Super Micro Asia Science and Technology Park, Inc. (the “Management Company”) in Taiwan to manage the common areas shared by us and Ablecom for our separately constructed manufacturing facilities. In fiscal year 2012, each company contributed $0.2 million and owns 50% of the Management Company. We have concluded that the Management Company is a VIE, and although the operations of the Management Company are independent, through governance rights we have the power to direct the activities that are most significant to the Management Company. Therefore, we concluded that we are the primary beneficiary of the Management Company. For the fiscal years ended 2017, 2016 and 2015, the accounts of the Management Company have been consolidated with our accounts, and a noncontrolling interest has been recorded for Ablecom’s interests in the net assets and operations of the Management Company. In fiscal years 2017, 2016 and 2015, $(14,000), $20,000 and $(11,000) of net income (loss) attributable to Ablecom’s interest was included in our general and administrative expenses in the consolidated statements of operations, respectively.

Results of Operations
    
Net Sales

Net sales consist of sales of our server solutions, including server systems and related services, subsystems, accessories. The main factors that impact our net sales are the number of compute nodes sold, the average selling prices per node for our server system sales and units shipped and the average selling price per unit for our subsystem and accessories. The prices for our server systems range widely depending upon the configuration, including the number of compute nodes, and the prices for our subsystems and accessories vary based on the type. A compute node is a hardware configuration having its own CPU, RAM and storage and that is capable of running its own instance of a non-virtualized operating system. Measuring volume using compute nodes enables more consistent measurement across different server form factors and across different vendors. As with most electronics-based products, average selling prices typically are highest at the time of introduction of new products that utilize the latest technology and tend to decrease over time as such products mature in the market and are replaced by next generation products.

The following table presents net sales by product type for fiscal years 2017, 2016 and 2015 (dollars in millions):

 
Fiscal Years Ended June 30,
 
2017 over 2016 Change
 
2016 over 2015 Change
 
2017
 
2016
 
2015
 
$
 
%
 
$
 
%
Server systems
$
1,740.6

 
$
1,533.4

 
$
1,186.3

 
$
207.2

 
13.5
%
 
$
347.1

 
29.3
 %
Percentage of total net sales
70.0
%
 
68.9
%
 
60.7
%
 
 
 
 
 
 
 
 
Subsystems and accessories
744.3

 
691.6

 
768.1

 
52.7

 
7.6
%
 
(76.5
)
 
(10.0
)%
Percentage of total net sales
30.0
%
 
31.1
%
 
39.3
%
 
 
 
 
 
 
 
 
Total net sales
$
2,484.9

 
$
2,225.0

 
$
1,954.4

 
$
259.9

 
11.7
%
 
$
270.6

 
13.8
 %

Fiscal Year 2017 compared with Fiscal Year 2016

The year-over-year increase of $259.9 million in our net sales in fiscal year 2017 compared with fiscal year 2016 was primarily due to an increase in sales of our server systems.

The year-over-year increase in server system sales was primarily due to an increase of average selling price per node from $2,902 in fiscal year 2016 to $3,118 in fiscal year 2017. The increase in average selling prices of our server systems was primarily due to higher sales of our complete server systems that offer higher density computing and more memory and hard drive capacity. The year-over-year increase in net sales of our subsystems and accessories in fiscal year 2017 was primarily due to higher sales of server accessories to our distributors.

Fiscal Year 2016 compared with Fiscal Year 2015
    
The year-over-year increase of $270.6 million in our net sales in fiscal year 2016 compared with fiscal year 2015 was due to an increase in sales of our server systems partially offset by reduced sales of subsystems.

The year-over-year increase in server system sales was primarily due to an approximately 15% increase in server system shipping volume and an increase of average selling price per node from $2,661 in fiscal year 2015 to $2,902 in fiscal year 2016. The increase in average selling prices of our server systems was primarily due to higher sales of our complete server

39



systems that offer higher density computing and more memory and hard drive capacity. The year-over-year decrease in net sales of our subsystems and accessories in fiscal year 2016 was primarily due lower sales of hard drives and memory bundled with our server solutions to our distributors and system integrators as we continued to promote our sales of complete server systems to our OEM and direct customers.

The following table presents the percentages of net sales from products sold to distributors and OEMs and direct customers for fiscal years 2017, 2016 and 2015:

 
Years Ended June 30,
 
2017 over 2016
 
2016 over 2015
 
2017
 
2016
 
2015
 
%
 
%
Distributors
47.8
%
 
45.8
%
 
49.6
%
 
2
 %
 
(3.8
)%
OEMs and direct customers
52.2
%
 
54.2
%
 
50.4
%
 
(2
)%
 
3.8
 %
Total net sales
100.0
%
 
100.0
%
 
100.0
%
 
 
 
 

Fiscal Year 2017 compared with Fiscal Year 2016

The year-over-year increase in net sales to distributors in fiscal year 2017 as a percentage of total net sales as compared with fiscal year 2016 was primarily due to the higher sales to our system integrator customers. The year-over-year decrease in net sales to direct and OEM customers in fiscal year 2017 as a percentage of total net sales as compared with fiscal year 2016 was primarily due to lower demand for our complete server systems from cloud computing and internet data center customers.
    
Fiscal Year 2016 compared with Fiscal Year 2015

The year-over-year decrease in net sales to distributors in fiscal year 2016 as a percentage of total net sales as compared with fiscal year 2015 was primarily due to the lower sales of our subsystem and accessories, which are typically sold through distributors. The year-over-year increase in net sales to direct and OEM customers in fiscal year 2016 as a percentage of total net sales as compared with fiscal year 2015 was primarily due to the higher sales of our complete server systems to our cloud computing and internet data center customers.

The following table presents percentages of net sales by geographic region for fiscal years 2017, 2016 and 2015:
 
Years Ended June 30,
 
2017 over 2016
 
2016 over 2015
 
2017
 
2016
 
2015
 
%
 
%
United States
57.2
%
 
63.3
%
 
58.8
%
 
(6.1
)%
 
4.5
 %
Asia
20.2
%
 
14.4
%
 
16.0
%
 
5.8
 %
 
(1.6
)%
Europe
18.3
%
 
17.4
%
 
18.8
%
 
0.9
 %
 
(1.4
)%
Others
4.3
%
 
4.9
%
 
6.4
%
 
(0.6
)%
 
(1.5
)%
Total net sales
100.0
%
 
100.0
%
 
100.0
%
 
 
 
 


Fiscal Year 2017 compared with Fiscal Year 2016

The year-over-year decrease in net sales in the United States in fiscal year 2017 was primarily due to the lower sales of our server systems to our cloud computing and internet data center customers. As a result, our United States sales as a percentage of total net sales decreased in fiscal year 2017 compared with fiscal year 2016. The year-over-year increase in net sales in Asia and Europe in fiscal 2017 as a percentage of total net sales as compared with fiscal year 2016 was due primarily to increased sales to our channel partners in China, Taiwan, Japan and the United Kingdom.

Fiscal Year 2016 compared with Fiscal Year 2015

The year-over-year increase in net sales in the United States in fiscal year 2016 as a percentage of total net sales as compared with fiscal year 2015 was primarily due to the higher sales of our server systems to our cloud computing and internet data center customers, which sales represent a higher portion of sales in the United States than in other regions. The year-over-year decrease in net sales in Asia and Europe in fiscal year 2016 as a percentage of total net sales as compared with fiscal year

40



2015 was primarily due to lower sales growth of our server systems in China and the United Kingdom as compared to other regions.

Cost of Sales and Gross Margin

Cost of sales primarily consists of the costs to manufacture our products, including the costs of materials, contract manufacturing, shipping, personnel and related expenses including stock-based compensation, equipment and facility expenses, warranty costs and inventory excess and obsolescence provisions. The primary factors that impact our cost of sales are the mix of products sold and cost of materials, which include raw material costs, shipping costs and salary and benefits related to production. Cost of sales as a percentage of net sales may increase over time if decreases in average selling prices are not offset by corresponding decreases in our costs. Our cost of sales as a percentage of net sales is also impacted by the extent to which we are able to efficiently utilize our expanding manufacturing capacity. Because we generally do not have long-term fixed supply agreements, our cost of sales is subject to change in the cost of materials based on market conditions. As a result, our cost of sales as a percentage of sales in any period can be negatively impacted by significant component price increases resulting from component shortages.

We use several suppliers and contract manufacturers to design and manufacture components in accordance with our specifications, with most final assembly and testing performed at our manufacturing facility in San Jose, California. During fiscal year 2017, we continued to increase manufacturing and service operations in Taiwan and the Netherlands primarily to support our Asian and European customers and have continued to work on improving our utilization of our overseas manufacturing capacity. We work with Ablecom, one of our key contract manufacturers and also a related party to optimize modular designs for our chassis and certain of other components. We also outsource to Compuware, also a related party, a portion of our design activities and a significant part of our manufacturing of components, particularly power supplies. Our purchases of products from Ablecom and Compuware represented 11.1%, 12.8% and 13.8% of our cost of sales for fiscal years 2017, 2016 and 2015, respectively. For further details on our dealings with related parties, see Part II, Item 8, Note 11, “Related Party Transactions.”

Cost of sales and gross margin for fiscal years 2017, 2016 and 2015, are as follows (dollars in millions):

 
Years Ended June 30,
 
2017 over 2016 Change
 
2016 over 2015 Change
 
2017
 
2016
 
2015
 
$
 
%
 
$
 
%
Cost of sales
$
2,135.0

 
$
1,894.5

 
$
1,647.8

 
$
240.5

 
12.7
 %
 
$
246.7

 
15.0
 %
Gross profit
350.0

 
330.5

 
306.6

 
19.5

 
5.9
 %
 
23.9

 
7.8
 %
Gross margin
14.1
%
 
14.9
%
 
15.7
%
 
 
 
(0.8
)%
 
 
 
(0.8
)%

Fiscal Year 2017 compared with Fiscal Year 2016

The year-over-year increase of $240.5 million in cost of sales in fiscal year 2017 compared with fiscal year 2016 was primarily attributable to an increase of $225.1 million in product cost as related to the increase in net sales and shortages of memory and SSD components, an increase of $6.3 million in inventory provision primarily due to an increase in aged inventory and an increase in reserves for specific product issues, an increase of $4.4 million in warranty provision due to higher cost of servicing warranty claims from increased net sales in fiscal year 2017, and an increase of $4.2 million in compensation and benefits including stock-based compensation as a result of an increase in annual salaries and an increase of 81 operations personnel to support the growth of our business.

The year-over-year decrease in the gross margin percentage in fiscal year 2017 compared with fiscal year 2016 was primarily due to higher costs related to shortages of memory and SSD components, as well as a higher percentage of sales of our server systems being comprised of mature, late life cycle processors that generally are lower margin sales. In addition, in fiscal year 2017 as compared with fiscal year 2016, we had higher sales in Asia where pricing is typically more competitive, which had a negative impact on our gross margin percentage.

Fiscal Year 2016 compared with Fiscal Year 2015

The year-over-year increase of $246.7 million in cost of sales in fiscal year 2016 compared with fiscal year 2015 was primarily attributable to an increase of $222.2 million in product cost as related to the increase in net sales, an increase of $9.1 million in compensation and benefits including stock-based compensation as a result of an increase in annual salaries and an

41



increase of 137 operations personnel to support the growth of our business, an increase of $4.7 million in facility expense, an increase of $3.5 million in inventory provision due to more reserves for specific products, an increase of $1.7 million in warranty provision due to higher cost of servicing warranty claims from increased net sales in fiscal year 2016 and an increase of $1.6 million of depreciation expenses.

The year-over-year decrease in the gross margin percentage in fiscal year 2016 compared with fiscal year 2015 was primarily due to significantly lower gross margins from sales of our subsystem and accessories and lower utilization of manufacturing capacity partially offset by higher sales of our complete server systems such as storage servers which have a higher gross margin.

Operating Expenses

Research and development expenses consist of the personnel and related expenses including stock-based compensation of our research and development teams, and materials and supplies, consulting services, third-party testing services and equipment and facility expenses related to our research and development activities. All research and development costs are expensed as incurred. We occasionally receive non-recurring engineering (“NRE”) funding from certain suppliers and customers for joint development. Under these programs, we are reimbursed for certain research and development costs that we incur as part of the joint development of our products and those of our suppliers and customers. These amounts offset a portion of the related research and development expenses and have the effect of reducing our reported research and development expenses.

Sales and marketing expenses consist primarily of salaries, stock-based compensation and incentive bonuses for our sales and marketing personnel, costs for tradeshows, independent sales representative fees and marketing programs. From time to time, we receive cooperative marketing funding from certain suppliers. Under these programs, we are reimbursed for certain marketing costs that we incur as part of the joint promotion of our products and those of our suppliers. These amounts offset a portion of the related expenses and have the effect of reducing our reported sales and marketing expenses. The timing, magnitude and estimated usage of these programs can result in significant variations in reported sales and marketing expenses from period to period. Spending on cooperative marketing, reimbursed by our suppliers, typically increases in connection with significant product releases by our suppliers.

General and administrative expenses consist primarily of general corporate costs, including personnel expenses, financial reporting, information technology, corporate governance and compliance and outside legal, audit and tax fees.

Operating expenses for fiscal years 2017, 2016 and 2015 are as follows (dollars in millions):
 
Years Ended June 30,
 
2017 over 2016 Change
 
2016 over 2015 Change
 
2017
 
2016
 
2015
 
$
 
%
 
$
 
%
Research and development
$
144.0

 
$
124.2

 
$
101.4

 
$
19.8

 
15.9
%
 
$
22.8

 
22.5
%
Percentage of total net sales
5.8
%
 
5.6
%
 
5.2
%
 
 
 
 
 
 
 
 
Sales and marketing
$
66.4

 
$
58.3

 
$
47.5

 
$
8.1

 
13.9
%
 
$
10.8

 
22.7
%
Percentage of total net sales
2.7
%
 
2.6
%
 
2.4
%
 
 
 
 
 
 
 
 
General and administrative
$
44.7

 
$
40.5

 
$
25.0

 
$
4.2

 
10.4
%
 
$
15.5

 
62.0
%
Percentage of total net sales
1.8
%
 
1.8
%
 
1.3
%
 
 
 
 
 
 
 
 
Total operating expenses
$
255.1

 
$
223.0

 
$
173.9

 
$
32.1

 
14.4
%
 
$
49.1

 
28.2
%
Percentage of total net sales
10.3
%
 
10.0
%
 
8.9
%
 
 
 
 
 
 
 
 
    
Fiscal Year 2017 compared with Fiscal Year 2016
    
Research and development expenses increased by $19.8 million, or 15.9% in fiscal year 2017 as compared with fiscal year 2016 primarily due to an increase of $21.0 million in compensation and benefits expense, including stock-based compensation expense and an increase of $1.4 million in product development expenses for prototype materials. The increase was partially offset by an increase of $3.4 million reimbursement received for certain research and development costs that we incur as part of the joint development of our and our suppliers’ and customers’ products. Our compensation and benefit expense increased primarily as a result of an increase in annual salaries and an increase of 168 research and development personnel to support our expanded product development initiatives in the United States and in Taiwan and to support the growth of our business.

42




Sales and marketing expenses increased by $8.1 million, or 13.9%, in fiscal year 2017 as compared with fiscal year 2016 primarily due to an increase of $4.8 million in compensation and benefits, including stock-based compensation, as a result of an increase in annual salaries and an increase of 47 sales and marketing personnel, and an increase of $1.5 million in advertising and promotion expenses.

General and administrative expenses increased by $4.2 million, or 10.4% in fiscal year 2017 as compared with fiscal year 2016. The increase was primarily due to an increase of $7.1 million in compensation and benefits including stock-based compensation expense, partially offset by a $2.4 million decrease in legal and professional fees. Our compensation and benefit expense in general and administrative expenses increased primarily as a result of an increase in annual salaries and an increase of 45 personnel to support our expanded business.

Fiscal Year 2016 compared with Fiscal Year 2015
    
Research and development expenses increased by $22.8 million, or 22.5% in fiscal year 2016 compared with fiscal year 2015 primarily due to an increase of $18.1 million in compensation and benefits, including stock-based compensation expense and an increase of $3.3 million in development expenses for prototype materials. Our compensation and benefit expense increased primarily as a result of an increase in annual salaries and an increase of 146 research and development personnel to support our expanded product development initiatives in the United States and in Taiwan and to support the growth of our business in many market verticals.
 
Sales and marketing expenses increased by $10.8 million, or 22.7%, in fiscal year 2016 as compared with fiscal year 2015 primarily due to an increase of $7.4 million in compensation and benefits, including stock-based compensation as a result of an increase in annual salaries and an increase of 42 sales and marketing personnel, and an increase of $2.5 million in advertising and promotion expenses.

General and administrative expenses increased by $15.5 million, or 62.0% in fiscal year 2016 as compared with fiscal year 2015. The increase was primarily due to an increase of $9.8 million in compensation and benefits including stock-based compensation expense, an increase of $4.8 million increase in legal, audit and accounting fees primarily due to costs incurred in connection with an out of period correction of errors in the first quarter of fiscal year 2016 and remediation of internal control deficiencies and an increase of $1.1 million in bad debt expenses. Our compensation and benefit expense in general and administrative expenses increased primarily as a result of an increase in annual salaries and an increase of 83 personnel to support our expanded business.

Interest and Other Income (Expense), Net

Other income (expense), net consists primarily of interest earned on our investment and cash balances, share of loss from equity investee and foreign exchange gains and losses.

Interest expense represents interest expense on our term loans and lines of credit.

Interest and other income (expense), net for fiscal years 2017, 2016 and 2015 are as follows (dollars in millions):
 
Years Ended June 30,
 
2017 over 2016 Change
 
2016 over 2015 Change
 
2017
 
2016
 
2015
 
$
 
%
 
$
 
%
Other income (expense), net
$
(1.3
)
 
$
1.5

 
$
1.0

 
$
(2.8
)
 
(186.7
)%
 
$
0.5

 
50.0
%
Interest expense
(2.3
)
 
(1.6
)
 
(1.0
)
 
(0.7
)
 
43.8
 %
 
(0.6
)
 
60.0
%
Interest and other income (expense), net
$
(3.6
)
 
$
(0.1
)
 
$

 
$
(3.5
)
 
*

 
$
(0.1
)
 
*

* Not meaningful

Interest and other income (expense), net. Interest and other income (expense), net increased by $3.5 million in fiscal year 2017 compared with fiscal year 2016. The increase was primarily due to an unrealized foreign currency loss related the remeasurement of our NTD$700.0 million term loan denominated in NTD. Interest and other expense, net remained consistent in fiscal year 2016 as compared with fiscal year 2015.

Provision for Income Taxes

43




Our income tax provision is based on our taxable income generated in the jurisdictions in which we operate, primarily the United States, Taiwan and the Netherlands. Our effective tax rate differs from the statutory rate primarily due to research and development tax credits and the domestic production activities deduction which were partially offset by state taxes and unrecognized tax benefits related to permanent establishment exposures. A reconciliation of the federal statutory income tax rate to our effective tax rate is set forth in Part II, Item 8, Note 13, “Income Taxes” to the consolidated financial statements in this Annual Report on Form 10-K.

Provision for income taxes and effective tax rates for fiscal years 2017, 2016 and 2015 are as follows (dollars in millions):
 
Years Ended June 30,
 
2017 over 2016 Change
 
2016 over 2015 Change
 
2017
 
2016
 
2015
 
$
 
%
 
$
 
%
Income tax provision
$
24.4

 
$
35.3

 
$
40.1

 
$
(10.9
)
 
(30.9
)%
 
$
(4.8
)
 
(12.0
)%
Percentage of total net sales
1.0
%
 
1.6
%
 
2.1
%
 
 
 
 
 
 
 
 
Effective tax rate
26.8
%
 
32.9
%
 
30.2
%
 
 
 
 
 
 
 
 

Fiscal Year 2017 compared with Fiscal Year 2016
    
Provision for income taxes decreased by $10.9 million, or 30.9% in fiscal year 2017 compared with fiscal year 2016. The lower income tax provision for fiscal year 2017 was primarily attributable to our lower income from operations as compared with fiscal year 2016. The effective tax rate for fiscal year 2017, was lower than in fiscal year 2016 and the statutory tax rate of 35%, primarily due to tax benefits resulting from the completion of U.S. federal income tax audit and an income tax audit in a foreign jurisdiction as well as research and development tax credit and domestic production activities deductions.

Fiscal Year 2016 compared with Fiscal Year 2015

Provision for income taxes decreased by $4.8 million, or 12.0% in fiscal year 2016 compared with fiscal year 2015. The lower income tax provision for fiscal year 2016 was primarily attributable to our lower operating income as compared with fiscal year 2015. The effective tax rate for fiscal year 2016 was higher as compared with fiscal year 2015 primarily due to the lower foreign rate benefits and foreign unrecognized tax benefits offset in part by the increase in federal research and development credit as a result of the enactment of the Protecting Americans from Tax Hikes ("PATH") Act of 2015.
    
Liquidity and Capital Resources

Since our inception, we have financed our growth primarily with funds generated from operations and from the proceeds of our initial public offering. In addition, we have, from time to time, utilized borrowing facilities, particularly in relation to the financing of real property acquisitions. Our cash and cash equivalents were $110.6 million and $178.8 million as of June 30, 2017 and 2016, respectively. Our cash in foreign locations was $50.8 million and $46.5 million as of June 30, 2017 and 2016, respectively. It is management's intention to reinvest the undistributed foreign earnings indefinitely in foreign operations. We believe that our current cash and cash equivalents are adequate to meet our needs, including any debt balances due at maturity, for the next twelve months from the issuance of these consolidated financial statements.

Fiscal Year 2017

Operating Activities. Net cash used in operating activities was $96.2 million in fiscal year 2017.

Net cash used in our operating activities for fiscal year 2017 was primarily due to an increase in inventories of $235.6 million and an increase in accounts receivable of $149.5 million, which were partially offset by an increase in accounts payable of $135.3 million, our net income of $66.9 million, an increase in accrued liabilities of $27.6 million, stock-based compensation expense of $19.7 million, an increase in other long term liabilities of $17.9 million, provision for excess and obsolete inventories of $15.7 million, and depreciation and amortization expense of $16.4 million. The increase in accounts receivable was primarily due to higher sales volume in the fourth quarter of fiscal year 2017. The increase in inventories and accounts payable was primarily due to increased sales as well as increased market prices for inventories related to memory and SSD components. In addition, we staged inventory to support new product launches.


44



Investing activities. Net cash used in our investing activities was $29.7 million in fiscal year 2017 due primarily to $29.4 million associated with investments in property, plant and equipment, of which $16.1 million was related to the construction of buildings at our Green Computing Park in San Jose, California.

Financing activities. Net cash provided by our financing activities was $57.7 million for fiscal year 2017. In fiscal year 2017, we drew down $207.0 million on our revolving credit facility with Bank of America and CTBC Bank and repaid $140.5 million in loans. We received $10.9 million in connection with the exercise of stock options in fiscal year 2017. Further, we used $18.5 million in the repurchase of our outstanding common stock.

Fiscal Year 2016

Operating Activities. Net cash provided by operating activities was $108.0 million for fiscal year 2016. Net cash provided by our operating activities for fiscal year 2016 was primarily due to our net income of $72.1 million, a decrease in accounts receivable of $53.6 million, an increase in other long term liabilities of $20.0 million, stock-based compensation expense of $16.9 million, depreciation and amortization expense of $13.3 million, provision for excess and obsolete inventories of $9.4 million and an increase in accrued liabilities of $12.9 million, which were partially offset by a decrease in accounts payable of $65.8 million and an increase in prepaid expenses and other current assets of $23.5 million. The decrease for fiscal year 2016 as compared with fiscal year 2015 in accounts receivable was primarily due to lower sales volume in the fourth quarter of fiscal year 2016. The decrease for fiscal year 2016 as compared with fiscal year 2015 in inventories and accounts payable was primarily due to anticipated lower sales volume in the first quarter of fiscal year 2017.

Investing activities. Net cash used in our investing activities was $35.1 million in fiscal year 2016, which was primarily due to $34.1 million associated with investments in property, plant and equipment, of which $16.7 million was related to the construction of buildings at our Green Computing Park in San Jose, California, and of which $3.4 million was related to the implementation of a new ERP system for our United States headquarters and our subsidiaries.

Financing activities. Net cash provided by our financing activities was $13.1 million for fiscal year 2016. In fiscal year 2016, we drew down $34.2 million on our revolving lines of credit with Bank of America and CTBC Bank and repaid $34.1 million in loans. Further, we received $12.2 million in connection with the exercise of stock options in fiscal year 2016.

Fiscal Year 2015

Operating Activities. Net cash used in operating activities was $46.1 million for fiscal year 2015. Net cash used in our operating activities for fiscal year 2015 was primarily due to an increase in inventories of $177.6 million and an increase in accounts receivable of $78.2 million, which were partially offset by our net income of $92.6 million, an increase in accounts payable of $81.7 million, stock-based compensation expense of $14.4 million, an increase in net income taxes payable of $9.0 million, an increase in accrued liabilities of $13.9 million, depreciation and amortization expense of $8.1 million, increase in other long-term liabilities of $7.7 million and provision for excess and obsolete inventories of $5.9 million. The increase in accounts receivable was primarily due to an increase in our sales late in the fourth quarter. The increase in inventories and accounts payable was primarily due to higher purchases to support the anticipated level of growth in our net sales in fiscal year 2016.
    
Investing activities. Net cash used in our investing activities was $36.2 million in fiscal year 2015, which was primary due to a $35.1 million investment in property, plant and equipment, of which $21.8 million related to the development and construction of our first manufacturing building and warehouse at our Green Computing Park in San Jose, California, which was completed in August 2015, and of which $4.8 million related to the implementation of a new ERP system.

Financing activities. Net cash provided by our financing activities was $80.0 million for fiscal year 2015. In fiscal year 2015, we drew down $84.9 million on our revolving line of credit from Bank of America and CTBC Bank and repaid $36.0 million in loans. Further, we received $23.3 million in connection with the exercise of stock options in fiscal year 2015.

We expect to experience continued growth in our working capital requirements and capital expenditures as we continue to expand our business. Our long-term future capital requirements will depend on many factors, including our level of revenues, the timing and extent of spending to support our product development efforts, the expansion of sales and marketing activities, the timing of our introductions of new products, the costs to ensure access to adequate manufacturing capacity and the continuing market acceptance of our products. We intend to fund this continued expansion through cash generated by operations and by drawing on our revolving credit facility or through other debt financing. However, we cannot be certain whether such financing will be available on commercially reasonable or otherwise favorable terms or that such financing will

45



be available at all. We anticipate that working capital and capital expenditures will constitute a material use of our cash resources.

Other factors affecting liquidity and capital resources

Activities under Revolving Lines of Credit and Term Loans

Bank of America

2015 Bank of America Credit Facility

In June 2015, we entered into an amendment to our then existing credit agreement with Bank of America N.A. (“Bank of America”) which provided for (i) a $65.0 million revolving line of credit facility that would have matured on November 15, 2015 and (ii) a five-year $14.0 million term loan facility (collectively, the “2015 Bank of America Credit Facility”). The term loan was secured by three buildings located in San Jose, California and the principal and interest was payable monthly through September 30, 2016 with an interest rate at the LIBOR rate plus 1.50% per annum. In May 2016, we extended the revolving line of credit to mature on June 30, 2016.

2016 Bank of America Credit Facility

In June 2016, we entered into a new credit agreement with Bank of America, which provided for (i) a $55.0 million revolving line of credit facility including a $5.0 million letter of credit sublimit that was to mature on June 30, 2017 and (ii) a five-year $50.0 million term loan facility (collectively, the “2016 Bank of America Credit Facility”). The 2016 Bank of America Credit Facility replaced the 2015 Bank of America Credit Facility. The 2016 Bank of America Credit Facility term loan is secured by seven buildings located in San Jose, California and the property, plant and equipment and the inventory in those buildings. The principal and interest of the 2016 Bank of America Credit Facility term loan are payable monthly through June 30, 2021 with an interest rate at the LIBOR rate plus 1.25% per annum. The interest rate for the 2016 Bank of America Credit Facility revolving line of credit is at the LIBOR rate plus 1.25% per annum. The LIBOR rate was 1.04% at June 30, 2017. The letter of credit bears interest at a rate of 1.25% per annum. In May 2017, we entered into an amendment to the 2016 Bank of America Credit Facility to increase the revolving line of credit to $85.0 million and extended the maturity date of the revolving lines of credit to October 31, 2018. Prior to the maturity, in April 2018, we repaid and terminated the 2016 Bank of America Credit Facility with proceeds from a new revolving line of credit (the "2018 Bank of America Credit Facility").

In June 2016, we also entered into a separate credit agreement as a part of the 2016 Bank of America Credit Facility, which provided for a revolving line of credit of $10.0 million for our Taiwan and Netherlands subsidiaries that was to mature on June 30, 2017. The interest rate of the revolving line of credit is equal to a minimum of 0.9% per annum plus the lender's cost of funds. In December 2016, we entered into an amendment to this separate credit agreement to increase the revolving line of credit from $10.0 million to $20.0 million. We extended the revolving line of credit to mature on October 31, 2018. Under the terms of this separate credit agreement, we cannot directly or indirectly pay any dividends, except in limited situations.
        
As of June 30, 2017 and 2016, the total outstanding borrowings under the 2016 Bank of America Credit Facility term loans was $40.0 million and $0.9 million, respectively. The total outstanding borrowings under the 2016 Bank of America Credit Facility revolving lines of credit was $83.2 million and $62.2 million as of June 30, 2017 and 2016, respectively. The interest rates for these loans ranged from 1.61% to 2.46% per annum as of June 30, 2017 and from 1.02% to 1.96% per annum as of June 30, 2016, respectively. As of June 30, 2017, the amount of the unused revolving lines of credit with Bank of America under the credit agreements was $21.8 million. As of June 30, 2017, assets amounting to $1,168.6 million collateralized the line of credit with Bank of America under the credit agreement, which represent our total assets of the United States headquarters, except for seven buildings located in San Jose, California and property, plant and equipment and inventory in those buildings. As of June 30, 2017, total assets collateralizing the term loan with Bank of America under the credit agreement were $67.9 million.
    
2018 Bank of America Credit Facility

In April 2018, we entered into the 2018 Bank of America Credit Facility, which replaced the 2016 Bank of America Credit Facility. The 2018 Bank of America Credit Facility provides for a revolving credit line and other financial accommodations of up to $250.0 million extended by certain lenders. The 2018 Bank of America Credit Facility expires after 364 days, or at our option, and if certain conditions are satisfied, including being current on all of our delinquent quarterly and annual filings with the SEC, may convert into a 5-year revolving credit facility. If and upon such conversion, the lenders for the

46



2018 Bank of America Credit Facility shall extend, in aggregate, a principal amount of up to $400.0 million. Prior to the 2018 Bank of America Credit Facility’s conversion to the 5-year revolving credit facility, interest shall be at the LIBOR rate plus 2.75% per annum. Upon the 2018 Bank of America Credit Facility converting to the 5-year revolving credit facility, interest shall accrue at the LIBOR rate plus an amount between 1.50% and 2.00% for loans to both Super Micro Computer and Super Micro Computer B.V. Interest accrued on any loans under the 2018 Bank of America Credit Facility is due on the first day of each month, and the loans are due and payable in full on the termination date of the 2018 Bank of America Credit Facility, unless payment is required earlier. Voluntary prepayments are permitted without early repayment fees or penalties. Subject to customary exceptions, the 2018 Bank of America Credit Facility is secured by substantially all of our assets. Upon conversion to the 5-year revolving credit facility both Super Micro Computer’s assets, and at our option, Super Micro Computer B.V.'s assets will be used as collateral. Under the terms of the 2018 Bank of America Credit Facility, we cannot pay any dividends.

On January 31, 2019, we paid a fee and entered into an amendment of the 2018 Bank of America Credit Facility that resulted in the extension of the maturity date of the 2018 Bank of America Credit Facility from April 19, 2019 to June 30, 2019.

CTBC Bank
    
In April 2016, we entered into a credit agreement with CTBC Bank Co., Ltd ("CTBC Bank") that provides for (i) a 12-month NTD$700.0 million or $21.6 million U.S. dollar equivalent term loan facility secured by our land and building located in Bade, Taiwan with an interest rate equal to the lender's established NTD interest rate plus 0.25% per annum which was adjusted monthly, which term loan facility also included a 12-month line of guarantee up to NTD$100.0 million or $3.1 million U.S. dollar equivalent with an annual fee equal to 0.5% per annum, and (ii) a 12-month revolving line of credit up to 80.0% of eligible accounts receivable in an aggregate amount of up to $40.0 million with an interest rate equal to the lender's established USD interest rate plus 0.30% per annum which was adjusted monthly (collectively, the “CTBC Credit Facility”). The total borrowings allowed under the CTBC Credit Facility was capped at $40.0 million. We extended the CTBC Credit Facility to mature on May 31, 2017.

In May 2017, we renewed the credit agreement with respect to the CTBC Credit Facility, such that it provides for (i) a 12-month NTD$700.0 million or $23.0 million U.S. dollar equivalent term loan facility secured by our land and building located in Bade, Taiwan with an interest rate equal to the lender's established NTD interest rate plus 0.25% per annum which is adjusted monthly, which term loan facility also included a 12-month line of guarantee up to NTD$100.0 million or $3.3 million U.S. dollar equivalent with an annual fee equal to 0.5% per annum, and (ii) a 12-month revolving line of credit up to 80.0% of eligible accounts receivable in an aggregate amount of up to $50.0 million with an interest rate equal to the lender's established USD interest rate plus an interest rate ranging from 0.40% to 0.45% per annum which is adjusted monthly. The total borrowings allowed under the CTBC Credit Facility were capped at $50.0 million.

The total outstanding borrowings under the CTBC Credit Facility term loan were denominated in Taiwanese dollars and remeasured into U.S. dollars of $19.7 million and $20.4 million at June 30, 2017 and 2016, respectively. At June 30, 2017 and 2016, the total outstanding borrowings under the CTBC Credit Facility revolving line of credit was $19.0 million and $10.1 million, respectively, in U.S. dollars. The interest rate for these loans ranged from 0.93% and 2.00% at June 30, 2017 and 0.90% and 1.25% per annum at June 30, 2016. At June 30, 2017, the amount available for future borrowing under the CTBC Credit Facility was $11.3 million. As of June 30, 2017, the net book value of land and building located in Bade, Taiwan collateralizing the CTBC Credit Facility term loan was $26.4 million. Under the terms of the May 2017 renewed credit agreement, the CTBC Credit Facility was to mature on April 30, 2018 but prior to the maturity we entered into a new credit agreement with CTBC Bank in January 2018.
    
In January 2018, we entered into a credit agreement with CTBC Bank that provides for (i) a 12-month NTD$700.0 million or $23.6 million U.S. dollar equivalent term loan facility secured by the land and building located in Bade, Taiwan with an interest rate equal to the lender's established NTD interest rate plus 0.25% per annum which is adjusted monthly, which term loan facility also includes a 12-month line of guarantee up to NTD$100.0 million or $3.4 million U.S. dollar equivalent with an annual fee equal to 0.5% per annum, and (ii) a 12-month NTD$1,500.0 million or $50.5 million U.S. dollar equivalent term loan facility with an interest rate equal to the lender's established NTD interest rate plus 0.25% per annum which is adjusted monthly, (collectively, the “2018 CTBC Credit Facility”). The 2018 CTBC Credit Facility replaced the CTBC Credit Facility. The total borrowings allowed under the 2018 CTBC Credit Facility was initially capped at $50.0 million and in August 2018, was reduced to $40.0 million. In April 2019, we extended the maturity of 2018 CTBC Credit Facility to June 30, 2019.

Covenant Compliance

2018 Bank of America Credit Facility

47




The credit agreement with Bank of America related to the 2018 Bank of America Credit Facility contains customary representations and warranties and customary affirmative and negative covenants applicable to us. The credit agreement contains a financial covenant, which requires that we maintain a Fixed Charge Coverage Ratio, as defined in the agreement of at least 1.00 for each twelve-month period while a Trigger Period, as defined in the agreement, is in effect. We have maintained compliance with this covenant.

On September 7, 2018, Bank of America issued an extension letter to us in connection with the 2018 Bank of America Credit Facility, which extended the delivery date of our audited consolidated financial statements, compliance certificates and other material reports for the fiscal year ended June 30, 2018 to January 31, 2019. On January 31, 2019, we entered into an amendment of the loan and security agreement with respect to the 2018 Bank of America Credit Facility to, among other matters, (a) extend the delivery date of our audited consolidated financial statements, compliance certificates and other material reports for the fiscal year ended June 30, 2018 to June 30, 2019, and (b) require the delivery, by no later than March 31, 2019, of our audited consolidated financial statements for the fiscal year ended June 30, 2017. In April 2019, we paid a fee to extend the delivery of our audited consolidated financial statements for the fiscal year ended June 30, 2017 to June 30, 2019. We intend to negotiate the further extension for delivery of our audited consolidated financial statements, compliance certificates and other material reports for the fiscal year ended June 30, 2018.

CTBC Bank

There are no financial covenants associated with the CTBC Credit Facility or the 2018 CTBC Credit Facility.

Share Repurchase Program

In July 2016, our Board of Directors adopted a program to repurchase from time to time at management’s discretion up to $100.0 million of our common stock in the open market or in private transactions during the next twelve months at prevailing market prices. In fiscal year 2017, we purchased 888,097 shares of our common stock in the open market at a weighted average price of $20.79 per share for approximately $18.5 million. Repurchases were made under the program using our cash resources. The repurchase program ended in July 2017.

Contractual Obligations

The following table describes our contractual obligations as of June 30, 2017:
 
 
Payments Due by Period
 
 Less Than 
1 Year
 
1 to 3
 Years    
 
3 to 5
Years    
 
More Than
5 Years
 
Total     
 
(in thousands)
Operating leases
$
4,844

 
$
8,505

 
$
3,605

 
$
3,951

 
$
20,905

Capital leases, including interest
309

 
433

 
140

 

 
882

Debt, including interest (1)
163,823

 

 

 

 
163,823

Purchase commitments (2)
309,120

 

 

 

 
309,120

Total (3)
$
478,096

 
$
8,938

 
$
3,745

 
$
3,951

 
$
494,730

 
__________________________
(1)
Amount reflects total anticipated cash payments, including anticipated interest payments based on the interest rate at June 30, 2017. In 2018, we amended our existing credit agreement with CTBC Bank, which changed our maximum borrowing capacity to $40.0 million and in January 2019 extended the maturity to June 30, 2019. In April 2018, we repaid and terminated the 2016 Bank of America Credit Facility with proceeds from the 2018 Bank of America Credit Facility. The 2018 Bank of America Credit Facility increases our borrowing capacity from $155.0 million to $250.0 million with Bank of America. In January 2019, we extended the maturity of the 2018 Bank of America Credit Facility from April 19, 2019 to June 30, 2019.
(2)
Amount reflects total gross purchase commitments under our manufacturing arrangements with third-party contract manufacturers or vendors. See Part II, Item 8, Note 14, “Commitments and Contingencies” to the consolidated financial statements in this Annual Report on Form 10-K for a discussion of purchase commitments.
(3)
The table above excludes liabilities for deferred revenue of $80.5 million, $6.3 million of deferred gain related to our remaining performance obligations in association with the contribution of certain technology rights to a privately-held company located in China, and unrecognized tax benefits and related interest and penalties accrual of $13.3 million.

48



Deferred revenue represents billed services in advance which include extended warranty, on-site technical support, and hardware and software maintenance. We have not provided a detailed estimate of the payment timing of unrecognized tax benefits due to the uncertainty of when the related tax settlements will become due. See Part II, Item 8, Note 13, “Income Taxes” to the consolidated financial statements in this Annual Report on Form 10-K for a discussion of income taxes.

We expect to fund our remaining contractual obligations from our ongoing operations and existing cash and cash equivalents on hand.

Recent Accounting Pronouncements

For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see Part II, Item 8, Note 1, “Organization and Summary of Significant Accounting Policies” to the consolidated financial statements in this Annual Report on Form 10-K.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.


49



Item 7A.    Quantitative and Qualitative Disclosure About Market Risk

Interest Rate Risk

The primary objectives of our investment activities are to preserve principal, provide liquidity and maximize income without significantly increasing the risk. Some of the securities we invest in are subject to market risk. This means that a change in prevailing interest rates may cause the fair value of the investment to fluctuate. To minimize this risk, we maintain our portfolio of cash equivalents and short-term investments in money market funds and certificates of deposit. Our long-term investments include auction rate securities, which have been classified as long-term due to the lack of a liquid market for these securities. Since our results of operations are not dependent on investments, the risk associated with fluctuating interest rates is limited to our investment portfolio, and we believe that a 10% change in interest rates would not have a significant impact on our results of operations. As of June 30, 2017, our investments were in money market funds, certificates of deposits and auction rate securities.

We are exposed to changes in interest rates as a result of our borrowings under our term loan and revolving lines of credit. The interest rates for the term loans and the revolving lines of credit ranged from 0.93% to 2.46% at June 30, 2017 and 0.90% to 1.96% at June 30, 2016. Based on the outstanding principal indebtedness of $161.4 million under our credit facilities as of June 30, 2017, we believe that a 10% change in interest rates would not have a significant impact on our results of operations.

Foreign Currency Risk

To date, our international customer and supplier agreements have been denominated primarily in U.S. dollars and accordingly, we have limited exposure to foreign currency exchange rate fluctuations from customer agreements, and do not currently engage in foreign currency hedging transactions. The functional currency of our subsidiaries in the Netherlands and Taiwan is the U.S. dollar. However, certain transactions in these entities are denominated in a currency other than the U.S. dollar, and thus we are subject to foreign currency exchange rate fluctuations associated with re-measurement to U.S. dollars. Such fluctuations have not been significant historically. Foreign exchange gain (loss) for fiscal years 2017, 2016 and 2015 was $(1.3) million, $1.3 million and $0.8 million, respectively.

50



Item 8.        Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS*
 

*The consolidated financial statements for the fiscal years ended June 30, 2016 and 2015 have been restated as further discussed in Note 19, "Restatement of Previously Issued Consolidated Financial Statements."

51


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Super Micro Computer, Inc.
San Jose, California

We have audited the accompanying consolidated balance sheets of Super Micro Computer, Inc. and subsidiaries (the “Company”) as of June 30, 2017 and 2016, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2017. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Super Micro Computer, Inc. and subsidiaries as of June 30, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2017, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 19 to the consolidated financial statements, the accompanying 2016 and 2015 consolidated financial statements have been restated to correct misstatements.

As discussed in Note 11 to the consolidated financial statements, the Company has significant purchases from and sales to two related parties.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of June 30, 2017, based on the criteria established in Internal Control -Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated May 16, 2019 expressed an adverse opinion on the Company's internal control over financial reporting because of material weaknesses.



/s/ Deloitte & Touche LLP
San Jose, California
May 16, 2019



52



SUPER MICRO COMPUTER, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
 
June 30,
 
June 30,
 
2017
 
2016
 
 
 
(As Restated- see Note 19)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
110,606

 
$
178,820

Accounts receivable, net of allowances of $2,699 and $2,413 at June 30, 2017 and 2016, respectively (including amounts receivable from related parties of $6,877 and $49 at June 30, 2017 and 2016, respectively)
324,004

 
174,933

Inventories
736,668

 
516,807

Prepaid income taxes
675

 
4,341

Prepaid expenses and other current assets (including receivables from related parties of $13,327 and $9,622 at June 30, 2017 and 2016, respectively)
89,213

 
79,427

Total current assets
1,261,166

 
954,328

Investment in equity investee
6,067

 

Long-term investments
2,625

 
2,643

Property, plant and equipment, net
195,576

 
187,949

Deferred income taxes, net
39,119

 
33,678

Other assets
10,577

 
12,885

Total assets
$
1,515,130

 
$
1,191,483

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable (including amounts due to related parties of $55,928 and $44,941 at June 30, 2017 and 2016, respectively)
$
396,895

 
$
267,391

Accrued liabilities (including amounts due to related parties of $8,450 and $5,354 at June 30, 2017 and 2016, respectively)
112,824

 
83,596

Income taxes payable
1,364

 
5,054

Short-term debt and current portion of long-term debt, net of debt issuance costs
161,447

 
53,589

Total current liabilities
672,530

 
409,630

Long-term debt

 
40,000

Other long-term liabilities (including related party balance of $4,900 and $0 at June 30, 2017 and 2016, respectively)
68,754

 
45,200

Total liabilities
741,284

 
494,830

Commitments and contingencies (Note 14)


 


Stockholders’ equity:
 
 
 
Common stock and additional paid-in capital, $0.001 par value
 
 
 
Authorized shares: 100,000,000
 
 
 
Issued shares: 50,273,527 and 48,999,717 at June 30, 2017 and 2016, respectively
308,271

 
279,465

Treasury stock (at cost), 1,333,125 and 445,028 shares at June 30, 2017 and 2016, respectively
(20,491
)
 
(2,030
)
Accumulated other comprehensive loss
(77
)
 
(85
)
Retained earnings
485,973

 
419,119

Total Super Micro Computer, Inc. stockholders’ equity
773,676

 
696,469

Noncontrolling interest
170

 
184

Total stockholders’ equity
773,846

 
696,653

Total liabilities and stockholders’ equity
$
1,515,130

 
$
1,191,483


See accompanying notes to consolidated financial statements.

53




SUPER MICRO COMPUTER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
 
Years Ended June 30,
 
2017
 
2016
 
2015
 
 
 
(As Restated- see Note 19)
 
(As Restated- see Note 19)
Net sales (including related party sales of $33,821, $29,110 and $47,684 in fiscal years 2017, 2016 and 2015, respectively)
$
2,484,929

 
$
2,225,022

 
$
1,954,353

Cost of sales (including related party purchases of $236,062, $242,638 and $227,661 in fiscal years 2017, 2016 and 2015, respectively)
2,134,971

 
1,894,521

 
1,647,769

Gross profit
349,958

 
330,501

 
306,584

Operating expenses:
 
 
 
 
 
Research and development
143,992

 
124,223

 
101,402

Sales and marketing
66,445

 
58,338

 
47,496

General and administrative
44,646

 
40,449

 
25,040

Total operating expenses
255,083

 
223,010
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