UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________________________________________________________

Form 10-Q

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

For the quarterly period ended December 31, 2018

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

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ¨    No  x

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  ¨	Smaller reporting company  ¨
Emerging growth company ¨   ¬

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

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

As of November 30, 2019 there were 50,085,282 shares of the registrant’s common stock, $0.001 par value, outstanding, which is the only class of common stock of the registrant issued.

Explanatory Note

We have been delayed in filing this Quarterly Report on Form 10-Q (this “Q2 2019 Quarterly Report”). We did not file our Annual Report on Form 10-K for the fiscal year ended June 30, 2017 (the “2017 10-K”) until May 17, 2019. On that date we also filed amended Quarterly Reports on Form 10-Q/A for the quarters ended September 30, 2016, December 31, 2016 and March 31, 2017 (the “2017 Amended Quarterly Reports” and with the 2017 10-K, the “2017 Reports”). Some of the financial statements contained in the 2017 Reports were restated. The circumstances leading to the need to restate those financial statements, and our efforts to investigate, assess and remediate those matters, are more fully described in those reports.

Since the time we filed the 2017 Reports, we have (a) prepared financial statements for each of the quarters in our fiscal year ended June 30, 2018; (b) prepared Quarterly Reports on Form 10-Q for each of the quarters in our fiscal year ended June 30, 2019 (including this Q2 2019 Quarterly Report); (c) prepared our consolidated financial statements for the fiscal years ended June 30, 2019 and 2018; and (d) prepared a comprehensive Annual Report on Form 10-K for the fiscal year ended June 30, 2019 (the “2019 Comprehensive 10-K”) with expanded financial and other disclosures. We included the expanded financial and other disclosures in the 2019 Comprehensive 10-K in lieu of filing a separate Annual Report on Form 10-K for the fiscal year ended June 30, 2018 and in lieu of filing Quarterly Reports on Form 10-Q for the first three quarters of fiscal year 2018. Immediately prior to filing this Q2 2019 Quarterly Report, we filed our Quarterly Report on Form 10-Q for the first quarter of our fiscal year ended June 30, 2019. Immediately following the filing of this Q2 2019 Quarterly Report, we expect to file our Quarterly Report on Form 10-Q for the third quarter of our fiscal year ended June 30, 2019 and the 2019 Comprehensive 10-K. We do not intend to file a separate Annual Report on Form 10-K for the fiscal year ended June 30, 2018 or Quarterly Reports on Form 10-Q for the quarterly periods ended September 30, 2017, December 31, 2017 and March 31, 2018.

Our delay in the filing of this Q2 2019 Quarterly Report was primarily due to the time required to (a) complete the preparation of the 2017 Reports, including the restatement of certain of our previously issued consolidated financial statements; (b) prepare the financial statements for each of the quarters in our fiscal year ended June 30, 2018; (c) prepare and file the Quarterly Reports on Form 10-Q for each of the quarters in our fiscal year ended June 30, 2019 (including this Q2 2019 Quarterly Report); (d) prepare the consolidated financial statements for the fiscal years ended June 30, 2019 and 2018; and (e) prepare other disclosures contained in this Q2 2019 Quarterly Report, the Quarterly Reports on Form 10-Q for the first and third quarters of our fiscal year ended June 30, 2019 and (f) prepare and file the 2019 Comprehensive 10-K.

SUPER MICRO COMPUTER, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE AND

SIX MONTHS ENDED DECEMBER 31, 2018

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION
ITEM 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets as of December 31, 2018 and June 30, 2018	1
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2018 and 2017	2
	Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended December 31, 2018 and 2017	3
	Condensed Consolidated Statements of Stockholders' Equity for the Three and Six Months Ended December 31, 2018 and 2017	4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2018 and 2017	6
	Notes to Condensed Consolidated Financial Statements	8
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	45
ITEM 4.	Controls and Procedures	45
PART II	OTHER INFORMATION
ITEM 1.	Legal Proceedings	47
ITEM 1A.	Risk Factors	47
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
ITEM 3.	Defaults Upon Senior Securities	47
ITEM 4.	Mine Safety Disclosures	47
ITEM 5.	Other Information	47
ITEM 6.	Exhibits	47
	Signatures	48

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 December 31, 2018 Form 10-Q are the property of Super Micro Computer, Inc. or its affiliates. Other trademarks, service marks, or trade names appearing in this December 31, 2018 Form 10-Q are the property of their respective owners.

PART I: FINANCIAL INFORMATION

Item 1.        Financial Statements

SUPER MICRO COMPUTER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

 (unaudited) 

	December 31,			June 30,
	2018			2018
ASSETS
Current assets:
Cash and cash equivalents	$	109,783		$	115,377
Accounts receivable, net of allowances of $3,541and $1,945at December 31, 2018 andJune 30, 2018, respectively (including amounts receivable from related parties of $13,119and $3,082 atDecember 31, 2018and June 30, 2018, respectively)	429,574			451,393
Inventories	829,166			853,252
Prepaid expenses and other current assets (including receivables from related parties of $32,530 and$24,016 at December 31, 2018 and June 30, 2018, respectively)	122,110			110,856
Total current assets	1,490,633			1,530,878
Investment in equity investee	2,053			2,376
Property, plant and equipment, net	198,252			196,631
Deferred income taxes, net	32,004			25,583
Other assets	13,195			14,037
Total assets	$	1,736,137		$	1,769,505
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable (including amounts due to related parties of $82,465and$77,810 at December 31, 2018 and June 30, 2018, respectively)	$	459,592		$	527,158
Accrued liabilities (including amounts due to related parties of $13,958and $18,394 at December 31, 2018 and June 30, 2018, respectively)	112,159			102,478
Income taxes payable	9,724			7,191
Short-term debt	48,172			116,181
Deferred revenue	78,547			58,549
Total current liabilities	708,194			811,557
Deferred revenue, non-current	103,242			89,731
Other long-term liabilities (including related party balance of $4,000and $3,500 at December 31, 2018 and June 30, 2018, respectively)	26,490			24,565
Total liabilities	837,926			925,853
Commitments and contingencies (Note 10)
Stockholders’ equity:
Common stock and additional paid-in capital, $0.001 par value
Authorized shares: 100,000,000
Issued shares: 51,136,062 and 50,914,571 at December 31, 2018 and June 30, 2018, respectively	341,070			331,550
Treasury stock (at cost), 1,333,125 shares at December 31, 2018 and June 30, 2018	(20,491		)	(20,491		)
Accumulated other comprehensive (loss) income	(72		)	165
Retained earnings	577,547			532,271
Total Super Micro Computer, Inc. stockholders’ equity	898,054			843,495
Noncontrolling interest	157			157
Total stockholders’ equity	898,211			843,652
Total liabilities and stockholders’ equity	$	1,736,137		$	1,769,505

See accompanying notes to condensed consolidated financial statements.

1

SUPER MICRO COMPUTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited) 

	Three Months Ended December 31,						Six Months Ended December 31,
	2018			2017			2018			2017
Net sales (including related party sales of $16,794and $16,656 in the three months ended December 31, 2018 and 2017, respectively, and $31,259and $28,585 in the six months ended December 31, 2018 and 2017, respectively)	$	931,509		$	826,983		$	1,902,627		$	1,543,720
Cost of sales (including related party purchases of $74,553and$68,428 in the three months ended December 31, 2018 and 2017, respectively, and $152,707 and $128,944 in the six months ended December 31, 2018 and 2017, respectively)	803,587			721,289			1,651,466			1,351,972
Gross profit	127,922			105,694			251,161			191,748
Operating expenses:
Research and development	45,924			39,544			88,918			80,212
Sales and marketing	19,677			17,995			37,969			34,791
General and administrative	36,580			25,460			70,040			44,731
Total operating expenses	102,181			82,999			196,927			159,734
Income from operations	25,741			22,695			54,234			32,014
Other income (expense), net	624			(394		)	793			(1,190		)
Interest expense	(1,831		)	(1,088		)	(4,209		)	(2,171		)
Income before income tax provision	24,534			21,213			50,818			28,653
Income tax provision	(4,520		)	(20,840		)	(10,043		)	(21,566		)
Share of loss from equity investee, net of taxes	(1,794		)	(1,156		)	(3,213		)	(1,791		)
Net income (loss)	$	18,220		$	(783	)	$	37,562		$	5,296
Net income (loss) per common share:
Basic	$	0.37		$	(0.02	)	$	0.75		$	0.11
Diluted	$	0.36		$	(0.02	)	$	0.73		$	0.10
Weighted-average shares used in calculation of net income (loss) per common share:
Basic	49,844			49,335			49,774			49,216
Diluted	50,810			49,335			51,508			52,220

See accompanying notes to condensed consolidated financial statements.

2

SUPER MICRO COMPUTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited) 

	Three Months Ended December 31,						Six Months Ended December 31,
	2018			2017			2018			2017
Net income (loss)	$	18,220		$	(783	)	$	37,562		$	5,296
Other comprehensive income (loss), net of tax:
Net changes in unrealized loss on investments	—			—			—			(38		)
Foreign currency translation (loss) gain	(6		)	132			(237		)	319
Total other comprehensive (loss) income	(6		)	132			(237		)	281
Total comprehensive income (loss)	$	18,214		$	(651	)	$	37,325		$	5,577

See accompanying notes to condensed consolidated financial statements.

3

SUPER MICRO COMPUTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share amounts)

(unaudited)

Three Months Ended December 31, 2018	Common Stock and Additional Paid-In Capital					Treasury Stock					Accumulated Other Comprehensive Loss			Retained Earnings		Non-controlling Interest		Total Stockholders’ Equity
	Shares		Amount			Shares		Amount
Balance at September 30, 2018	51,037,658		$	336,365		(1,333,125	)	$	(20,491	)	$	(66	)	$	559,327	$	157	$	875,292
Release of common stock shares upon vesting of restricted stock units	139,555		—			—		—			—			—		—		—
Shares withheld for the withholding tax on vesting of restricted stock units	(41,151	)	(542		)	—		—			—			—		—		(542		)
Stock-based compensation	—		5,247			—		—			—			—		—		5,247
Foreign currency translation loss	—		—			—		—			(6		)	—		—		(6		)
Net income	—		—			—		—			—			18,220		—		18,220
Balance at December 31, 2018	51,136,062		$	341,070		(1,333,125	)	$	(20,491	)	$	(72	)	$	577,547	$	157	$	898,211

Three Months Ended December 31, 2017	Common Stock and Additional Paid-In Capital					Treasury Stock					Accumulated Other Comprehensive Income		Retained Earnings			Non-controlling Interest			Total Stockholders’ Equity
	Shares		Amount			Shares		Amount
Balance at September 30, 2017	50,623,630		$	316,203		(1,333,125	)	$	(20,491	)	$	72	$	492,185		$	166		$	788,135
Release of common stock shares upon vesting of restricted stock units	135,558		—			—		—			—		—			—			—
Shares withheld for the withholding tax on vesting of restricted stock units	(47,011	)	(965		)	—		—			—		—			—			(965		)
Stock-based compensation	—		6,500			—		—			—		—			—			6,500
Foreign currency translation gain	—		—			—		—			132		—			—			132
Net loss	—		—			—		—			—		(783		)	(5		)	(788		)
Balance at December 31, 2017	50,712,177		$	321,738		(1,333,125	)	$	(20,491	)	$	204	$	491,402		$	161		$	793,014

See accompanying notes to condensed consolidated financial statements.

4

SUPER MICRO COMPUTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)

(in thousands, except share amounts)

(unaudited)

Six Months Ended December 31, 2018	Common Stock and Additional Paid-In Capital					Treasury Stock					Accumulated Other Comprehensive Loss			Retained Earnings		Non-controlling Interest		Total Stockholders’ Equity
	Shares		Amount			Shares		Amount
Balance at June 30, 2018	50,914,571		$	331,550		(1,333,125	)	$	(20,491	)	$	165		$	532,271	$	157	$	843,652
Cumulative effect of adjustment from adoption of new accounting standards, net of taxes	—		—			—		—			—			7,714		—		7,714
Release of common stock shares upon vesting of restricted stock units	320,762		—			—		—			—			—		—		—
Shares withheld for the withholding tax on vesting of restricted stock units	(99,271	)	(1,601		)	—		—			—			—		—		(1,601		)
Stock-based compensation	—		11,121			—		—			—			—		—		11,121
Foreign currency translation loss	—		—			—		—			(237		)	—		—		(237		)
Net income	—		—			—		—			—			37,562		—		37,562
Balance at December 31, 2018	51,136,062		$	341,070		(1,333,125	)	$	(20,491	)	$	(72	)	$	577,547	$	157	$	898,211

Six Months Ended December 31, 2017	Common Stock and Additional Paid-In Capital					Treasury Stock					Accumulated Other Comprehensive Income			Retained Earnings		Non-controlling Interest			Total Stockholders’ Equity
	Shares		Amount			Shares		Amount
Balance at June 30, 2017	50,273,527		$	308,271		(1,333,125	)	$	(20,491	)	$	(77	)	$	485,973	$	170		$	773,846
Cumulative effect of adjustment from adoption of new accounting standard, net of taxes	—		52			—		—			—			133		—			185
Exercise of stock options, net of taxes	267,970		3,043			—		—			—			—		—			3,043
Release of common stock shares upon vesting of restricted stock units	263,445		—			—		—			—			—		—			—
Shares withheld for the withholding tax on vesting of restricted stock units	(92,765	)	(2,189		)	—		—			—			—		—			(2,189		)
Stock-based compensation	—		12,561			—		—			—			—		—			12,561
Unrealized loss on investments	—		—			—		—			(38		)	—		—			(38		)
Foreign currency translation gain	—		—			—		—			319			—		—			319
Net income (loss)	—		—			—		—			—			5,296		(9		)	5,287
Balance at December 31, 2017	50,712,177		$	321,738		(1,333,125	)	$	(20,491	)	$	204		$	491,402	$	161		$	793,014

See accompanying notes to condensed consolidated financial statements.

5

SUPER MICRO COMPUTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Six Months Ended December 31,
	2018			2017
OPERATING ACTIVITIES:
Net income	$	37,562		$	5,296
Reconciliation of net income to net cash provided by operating activities:
Depreciation and amortization	12,109			10,204
Stock-based compensation expense	11,121			12,561
Allowances for doubtful accounts	1,577			136
Provision for excess and obsolete inventories	14,143			4,587
Share of loss from equity investee	3,213			1,791
Foreign currency exchange (gain) loss	(112		)	620
Deferred income taxes, net	(7,979		)	12,018
Other	(125		)	676
Changes in operating assets and liabilities:
Accounts receivable, net (including changes in related party balances of ($10,037) and $2,043 during the six months ended December 31, 2018 and 2017, respectively)	54,568			(31,101		)
Inventories	(20,861		)	(112,766		)
Prepaid expenses and other assets (including changes in related party balances of ($8,514) and ($6,988) during the six months ended December 31, 2018 and 2017, respectively)	(3,978		)	(23,039		)
Accounts payable (including changes in related party balances of $4,655 and$18,329 during the six months ended December 31, 2018 and 2017, respectively)	(70,109		)	91,272
Income taxes payable	2,533			6,372
Deferred revenue	38,169			24,308
Accrued liabilities (including changes in related party balances of ($4,436) and $6,610 during the six months ended December 31, 2018 and 2017, respectively)	8,847			13,420
Other long-term liabilities (including changes in related party balances of $500 and ($700) during the six months ended December 31, 2018 and 2017, respectively)	424			(140		)
Net cash provided by operating activities	81,102			16,215
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (including payments to related parties of $2,980 and $2,757 during the six months ended December 31, 2018 and 2017, respectively)	(9,306		)	(12,101		)
Investments in privately held companies	—			(2,100		)
Net cash used in investing activities	(9,306		)	(14,201		)
FINANCING ACTIVITIES:
Proceeds from debt, net of debt issuance costs	41,760			67,100
Repayment of debt	(67,700		)	(51,300		)
Net repayment on asset-backed revolving line of credit, net of costs	(41,644		)	—
Proceeds from exercise of stock options	—			3,043
Payment of withholding tax on vesting of restricted stock units	(1,601		)	(2,189		)
Payments of obligations under capital leases	(139		)	(135		)
Net cash (used in) provided by financing activities	(69,324		)	16,519
Effect of exchange rate fluctuations on cash	(101		)	96
Net increase in cash, cash equivalents and restricted cash	2,371			18,629
Cash, cash equivalents and restricted cash at beginning of period	120,382			112,797

6

Cash, cash equivalents and restricted cash at end of period	$	122,753	$	131,426
Supplemental disclosure of cash flow information:
Cash paid for interest	$	2,687	$	2,069
Cash paid for taxes, net of refunds	$	18,388	$	9,214
Non-cash investing and financing activities:
Unpaid property, plant and equipment purchases (including due to related parties of $1,963 and $1,719 as of December 31, 2018 and 2017, respectively)	$	5,015	$	6,423
Contribution of certain technology rights to equity investee	$	3,000	$	—

See accompanying notes to condensed consolidated financial statements.

7

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) 

Note 1.        Organization and Summary of Significant Accounting Policies

Organization

Super Micro Computer, Inc. (“Super Micro Computer”) was incorporated in 1993. Super Micro Computer is a global leader in server technology and green computing innovation. Super Micro Computer develops and provides high performance server and storage solutions based upon an innovative, modular and open-standard architecture. Super Micro Computer has operations primarily in the United States, the Netherlands, Taiwan, China and Japan.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP"). The condensed consolidated financial statements of Super Micro Computer include the accounts of Super Micro Computer and entities consolidated under the variable interest model or the voting interest model. Noncontrolling interests are not presented separately in the condensed consolidated statements of operations and condensed consolidated statements of comprehensive income as the amounts are immaterial. All intercompany accounts and transactions of Super Micro Computer and its consolidated entities (collectively, the "Company") have been eliminated in consolidation. For equity investments over which the Company is able to exercise significant influence over the investee but does not control the investee, and is not the primary beneficiary of the investee’s activities are accounted for using the equity method. Investments in equity securities which do not have readily determinable fair values and for which the Company is not able to exercise significant influence over the investee are accounted for under the measurement alternative which is the cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar securities of the same investee. Prior to July 1, 2018, investments for which the Company was not able to exercise significant influence over the investee were accounted for under the cost method.

The unaudited condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) and include the accounts of Super Micro Computer and its consolidated subsidiaries. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations.

The unaudited condensed consolidated financial statements included herein reflect all adjustments, including normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the periods presented. The consolidated results of operations for the three and six months ended December 31, 2018 are not necessarily indicative of the results that may be expected for future quarters or for the fiscal year ending June 30, 2019.

Use of Estimates

U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Such estimates include, but are not limited 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. The Company’s estimates are evaluated on an ongoing basis and changes in the estimates are recognized prospectively. Actual results could differ from those estimates.

Revenue Recognition

The Company’s revenue recognition policy and related disclosures are discussed in Note 2, “Revenue.”

8

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Product Warranties

The Company offers product warranties ranging from 15 to 39 months against any defective products. These standard warranties are assurance type warranties and the Company does not offer any services beyond the assurance that the product will continue working as specified. Therefore, under recently adopted guidance, Revenue from Contracts with Customers, (“ASC 606”), these warranties are not considered separate performance obligations in the arrangement. Based on historical experience, the Company accrues for estimated returns of defective products at the time revenue is recognized. The Company monitors warranty obligations and may make revisions to its 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. Warranty accruals are based on estimates that are updated on an ongoing basis taking into consideration inputs such as new product introductions, changes in the volume of claims compared with the Company's historical experience, and the changes in the cost of servicing warranty claims. The Company accounts for the effect of such changes in estimates prospectively.

Inventories

Inventories are stated at weighted average cost, subject to lower of cost or net realizable value. Net realizable value is the estimated selling price of our products in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Inventories consist of purchased parts and raw materials (principally electronic components), work in process (principally products being assembled) and finished goods. The Company evaluates inventory on a quarterly basis for lower of cost or net realizable value and excess and obsolescence and, as necessary, writes down the valuation of units based upon the Company's forecasted usage and sales, anticipated selling price, product obsolescence and other factors. Once inventory is written down, its new value is maintained until it is sold or scrapped.

The Company receives various rebate incentives from certain suppliers based on its contractual arrangements, including volume-based rebates. The rebates earned are recognized as a reduction of cost of inventories and reduce the cost of sales in the period when the related inventory is sold.

Income Taxes

The Company accounts 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 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.

The Company recognizes 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 the Company to determine the probability of various possible outcomes. The Company evaluates 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 the Company later determines that its exposure is lower or that the liability is not sufficient to cover its revised expectations, the Company adjusts the liability and effects a related charge in its tax provision during the period in which the Company makes such a determination.

Stock-Based Compensation

The Company measures and recognizes compensation expense for all share-based awards made to employees and non-employees, including stock options and restricted stock units ("RSUs"). The share-based awards granted to non-employees have not been material to date. The Company is required to estimate the fair value of share-based awards on the date of grant. The Company recognizes the grant date fair value of all share-based awards over the requisite service period and accounts for forfeitures as they occur. The fair value of RSUs with service conditions or performance conditions is based on the closing market price of the Company's common stock on the date of grant. The fair value for RSUs with service conditions, or time-based RSUs, is amortized on a straight-line basis over the requisite service period. The fair value for RSUs with performance conditions ("PRSUs") is recognized on a ratable basis over the requisite service period when it is probable the performance

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(Unaudited)

conditions of the awards will be met. The Company reassesses the probability of vesting at each reporting period and adjusts the total compensation expense of the award based on this probability assessment.

The Company estimates the fair value of stock options granted using a Black-Scholes option pricing model. This model requires the Company to make estimates and assumptions with respect to the expected term of the option and the expected volatility of the price of the Company's common stock. The expected term represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on the Company's historical experience. The expected volatility is based on the implied and historical volatility of the Company’s 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.

Variable Interest Entities

The Company determines at the inception of each arrangement whether an entity in which the Company holds an investment or in which the Company has other variable interests is considered a variable interest entity ("VIE"). The Company consolidates VIEs when it is 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, the Company assesses 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 the Company is the primary beneficiary. If the Company is not the primary beneficiary in a VIE, the Company accounts for the investment or other variable interest in accordance with applicable GAAP.

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

The Company and Ablecom jointly established Super Micro Asia Science and Technology Park, Inc. (the "Management Company") in Taiwan to manage the common areas shared by the Company and Ablecom for its separately constructed manufacturing facilities. In fiscal year 2012, each company contributed $0.2 million and owns 50% of the Management Company. The Company has concluded that the Management Company is a VIE, and the Company is the primary beneficiary as it has the power to direct the activities that are most significant to the Management Company. For the three and six months ended December 31, 2018 and 2017, the accounts of the Management Company have been consolidated with the accounts of Super Micro Computer, and a noncontrolling interest has been recorded for Ablecom's interest in the net assets and operations of the Management Company. Net income (loss) attributable to Ablecom's interest was not material for the periods presented and was included in general and administrative expenses in the Company's condensed consolidated statements of operations.

Investment in a Corporate Venture

In October 2016, the Company entered into agreements pursuant to which the Company contributed certain technology rights in connection with an investment in a privately-held company (the "Corporate Venture") located in China to expand the Company's presence in China. The Corporate Venture is 30% owned by the Company and 70% owned by another company in China. The transaction was closed in the third fiscal quarter of 2017 and the investment has been accounted for using the equity method. As such, the Corporate Venture is also a related party. As of December 31, 2018 and June 30, 2018, the Company's equity investment in the Corporate Venture was $2.1 million and $2.4 million, respectively, and was recorded under investment in equity investee on the Company's condensed consolidated balance sheet. The Company's share of losses of the Corporate Venture were $1.8 million and $1.2 million for the three months ended December 31, 2018 and 2017, respectively, and $3.2 million and $1.8 million for the six months ended December 31, 2018 and 2017, respectively.

The Company recorded a deferred gain related to the contribution of certain technology rights of $7.0 million in the third fiscal quarter of 2017. The amortization of the deferred gain is being recognized as a credit to research and development

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(Unaudited)

expenses in the Company's condensed consolidated statement of operations over a period of five years which represents the estimated period over which the remaining obligations will be fulfilled.

As a result of the adoption of new accounting guidance as of the beginning of fiscal year 2019, the Company recorded an increase of $3.0 million to the investment in equity investee for the contribution of those technology rights, and corresponding increases in deferred gain and retained earnings of $2.1 million and $0.9 million, respectively. As of December 31, 2018 and June 30, 2018, the Company had unamortized deferred gain balance of $2.0 million and $1.4 million, respectively, in accrued liabilities and $4.0 million and $3.5 million, respectively, in other long-term liabilities in the Company’s condensed consolidated balance sheets.

The Company monitors the investment for events or circumstances indicative of potential other-than-temporary impairment and makes appropriate reductions in carrying values if it determines that an impairment charge is required. No impairment charge was recorded for the three and six months ended December 31, 2018 and 2017, respectively.

Additionally, the Company sold products worth $12.1 million and $6.4 million to the Corporate Venture in the three months ended December 31, 2018 and December 31, 2017, respectively, and $21.5 million and $11.5 million in the six months ended December 31, 2018 and December 31, 2017, respectively, and the Company's share of intra-entity profits on the products that remained unsold by the Corporate Venture as of December 31, 2018 and June 30, 2018 have been eliminated and have reduced the Company's investment in the Corporate Venture. The Company had $9.2 million and $2.9 million due from the Corporate Venture in accounts receivable, net as of December 31, 2018 and June 30, 2018, respectively, in its condensed consolidated balance sheets.

Concentration of Supplier Risk

Certain materials used by the Company in the manufacture of its products are available from a limited number of suppliers. Shortages could occur in these materials due to an interruption of supply or increased demand in the industry. One supplier accounted for 23.4% and 25.1% of total purchases for the three months ended December 31, 2018 and 2017, respectively, and 21.5% and 25.8% for the six months ended December 31, 2018 and December 31, 2017, respectively. Ablecom and Compuware, related parties of the Company, as noted in Note 8, "Related Party Transactions," accounted for 9.3% and 9.5% of total cost of sales for the three months ended December 31, 2018 and 2017, respectively, and 9.2% and 9.5% for the six months ended December 31, 2018 and December 31, 2017, respectively.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentration of credit risk consist primarily of cash and cash equivalents, restricted cash, investment in an auction rate security and accounts receivable. No single customer accounted for 10% or more of the net sales for the three and six months ended December 31, 2018 and 2017. No country other than the United States represented greater than 10% of the Company’s total net sales in the three and six months ended December 31, 2018, whereas the United States and China represented 54.3% and 14.4%, respectively, of the Company's net sales in the three months ended December 31, 2017, and represented 55.8% and 13.3%, respectively, in the six months ended December 31, 2017. No customer accounted for greater than 10% of the Company's accounts receivable, net as of December 31, 2018, and one customer accounted for 11.6% of the Company's accounts receivable, net as of June 30, 2018.

Accounting Pronouncements Recently Adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance, ASC 606, that supersedes nearly all U.S. GAAP on revenue recognition and eliminates industry-specific guidance. ASC 606 provides a unified model in determining when and how revenue is recognized with the core principle that revenue should be recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Since its issuance, the FASB has issued several amendments to ASC 606. The Company adopted ASC 606 on July 1, 2018 using the modified retrospective method. In connection with the adoption of ASC 606, the Company recorded a transition adjustment to increase retained earnings by $6.8 million as of July 1, 2018. The comparative information has not been recast and continues to be reported under the accounting standards in effect for those periods.

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(Unaudited)

The primary impact of the adoption of ASC 606 was the acceleration of revenue recognition for (i) sales to distributors where the Company previously accounted for such sales on a sell-through basis and (ii) software arrangements. The following tables summarize the impacts of the adoption of ASC 606 on the Company’s condensed consolidated financial statements. The adoption of ASC 606 did not have any impact on the net cash provided by operating activities.

Selected Captions from the Condensed Consolidated Balance Sheet as of December 31, 2018 (in thousands)

	As Reported		Adjustments			Balances without adoption of ASC 606
ASSETS
Accounts receivable, net of allowances	$	429,574	$	(15,024	)	$	414,550
Inventories	829,166		11,406			840,572
Prepaid expenses and other current assets	122,110		(2,106		)	120,004
Deferred income taxes, net	32,004		1,558			33,562
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued liabilities	$	112,159	$	(3,920	)	$	108,239
Deferred revenue	78,547		1,784			80,331
Income taxes payable	9,724		315			10,039
Deferred revenue, non-current	103,242		3,074			106,316
Retained earnings	577,547		(5,419		)	572,128

Selected Captions from the Condensed Consolidated Statement of Operations for the Three and Six Months ended December 31, 2018 (in thousands)

	Three Months Ended December 31, 2018							Six Months Ended December 31, 2018
	As Reported		Adjustments			Balances without adoption of ASC 606		As Reported		Adjustments			Balances without adoption of ASC 606
Net sales	$	931,509	$	8,211		$	939,720	$	1,902,627	$	20,071		$	1,922,698
Cost of sales	803,587		8,818			812,405		1,651,466		19,398			1,670,864
Gross profit	127,922		(607		)	127,315		251,161		673			251,834
General and administrative	36,580		(1,036		)	35,544		70,040		(1,036		)	69,004
Income before income tax provision	24,534		429			24,963		50,818		1,709			52,527
Income tax provision	4,520		126			4,646		10,043		315			10,358
Net income	18,220		303			18,523		37,562		1,394			38,956

In January 2016, the FASB issued new guidance,Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. This guidance changes the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. The most significant impact of this accounting standard update is that it requires the remeasurement of equity investments not accounted for under the equity method to be recorded at fair value through the consolidated statement of operations at the end of each reporting period.  The Company adopted this accounting standard update as of July 1, 2018. The result of the adoption did not have a material impact on the consolidated financial statements. As a result of the adoption of the new standard, the Company’s equity investments are accounted for as follows:

• Marketable equity securities that have a readily determinable fair value are measured and recorded at fair value.

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(Unaudited)

• Non-marketable equity securities that do not have a readily determinable fair value and for which the Company does not control the investee nor is it able to exert significant influence over the investee are measured using a measurement alternative recorded at cost less any impairment, plus or minus changes resulting from qualifying observable price changes.

• Equity method investments are equity securities for which the Company does not control the investee but is able to exert significant influence over the investee. These investments are measured at cost less any impairment, plus or minus the Company's share of equity method investee income or loss.

In August 2016, the FASB issued an amendment to the accounting guidance, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. This amendment consists of eight provisions that provide guidance on the classification of certain cash receipts and cash payments. If practicable, this amendment should be applied using a retrospective transition method to each period presented. For the provisions that are impracticable to apply retrospectively, those provisions may be applied prospectively as of the earliest date practicable. The Company adopted the accounting guidance on July 1, 2018. The result of the adoption did not have a material impact on the consolidated statements of cash flows.

In October 2016, the FASB issued an amendment to the accounting guidance, Intra-Entity Transfers of Assets Other Than Inventory. This amendment simplifies the accounting for income tax consequences of intra-entity transfers of assets other than inventory by requiring recognition of current and deferred income tax consequences when such transfers occur. The Company adopted the accounting guidance on July 1, 2018. The result of the adoption did not have a material impact on the consolidated financial statements and related disclosures.

In November 2016, the FASB issued an amendment to the accounting guidance, Statement of Cash Flows: Restricted Cash. This amendment addresses presentations of total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted the accounting guidance on July 1, 2018 using a retrospective transition method to each period presented. The adoption did not have a material impact on the consolidated statements of cash flows. Presentation of prior period information has been retrospectively adjusted.

In February 2017, the FASB issued new accounting guidance, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets: Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. This guidance clarifies the scope and application on the sale or transfer of nonfinancial assets and in substance nonfinancial assets to noncustomers, including partial sales. The Company adopted this guidance on July 1, 2018. Prior to adoption, the Company had previously contributed certain technology rights in exchange for 30% ownership in a privately-held company (the “Corporate Venture”) and accounted for the transaction in accordance with the guidance related to exchanges of a nonfinancial asset for a noncontrolling ownership interest in ASC 845 - Nonmonetary Transactions, which has been eliminated by the new guidance. As a result of the adoption of the new guidance, the Company recognized $3.0 million increase in the carrying value of the equity-method investment, a $2.1 million increase in deferred gain, and a $0.9 million increase in retained earnings.

In August 2018, the Securities and Exchange Commission (“SEC”) adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. The amendments became effective on November 5, 2018. The SEC staff subsequently indicated that it would not object if a filer’s first presentation of changes in stockholders’ equity is included in its Form 10-Q for the quarter that begins after the final rule’s effective date. Among the amendments is the requirement to present the changes in stockholders’ equity in the interim financial statements (either in a separate statement or footnote) in Quarterly Reports on Form 10-Q. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a consolidated statement of operations is required to be filed. The Company adopted this guidance in the first quarter of fiscal year 2019.

Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued an amendment to the accounting guidance, Leases. The amendment will supersede the existing lease guidance, including on-balance sheet recognition of operating leases for lessees. Since its issuance, the FASB has issued several amendments to the new lease standard. The standard is effective for the Company from July 1, 2019 and the Company will apply this standard using the modified retrospective approach and will not restate prior comparative periods.

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(Unaudited)

The Company will elect the “package of practical expedients” under the transition guidance of the new standard, which permits it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs, for leases that are in effect as of the date of adoption of the new lease guidance. While the Company is currently finalizing its implementation of new policies, processes and internal controls to comply with the new rules, it is anticipated that the adoption of the new standard will result in the recognition of right-of-use assets and lease liabilities on the Company’s consolidated balance sheet of $14.8 million and $15.2 million, respectively, as of July 1, 2019, primarily related to real estate leases. The adoption of the new standard will not have a material impact on the Company’s consolidated statement of operations or consolidated statement of cash flows.

In June 2016, the FASB issued authoritative guidance, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments, that amends the impairment model for certain financial assets by requiring the use of an expected loss methodology, which will result in more timely recognition of credit losses. The amendment is effective for the Company from July 1, 2020. Early adoption is permitted. The Company is currently evaluating the effect the guidance will have on its consolidated financial statement disclosures, results of operations and financial position.

In February 2018, the FASB issued Income Statement - Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows companies to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act ("2017 Tax Reform Act"), from accumulated other comprehensive income to retained earnings. The guidance also requires certain new disclosures regardless of the election and is effective for the Company from July 1, 2019. The adoption of the guidance will not have a material impact on its consolidated financial statements.

In June 2018, the FASB issued amended guidance to expand the scope of ASC 718 - Compensation-Stock Compensation, to include share-based payment transactions for acquiring goods and services from non-employees. The amendments specify that the guidance applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The new amendment is effective for the Company from July 1, 2019. The adoption of the new standard will not have a material impact on its consolidated financial statements and related disclosures.

In August 2018, the FASB issued amended guidance, Fair Value Measurement: Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, to modify the disclosure requirements on fair value measurements based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The new standard is effective for the Company from July 1, 2020. The Company is currently evaluating the effect the guidance will have on its consolidated financial statement disclosures.

In August 2018, the FASB issued amended guidance to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments. According to the amendments, the entity shall determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. It requires the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The new standard is effective for the Company from July 1, 2020. The Company is currently evaluating the effect the guidance will have on its consolidated financial statement disclosures, results of operations and financial position.

Note 2.Revenue

Revenue recognition for periods after the Company’s adoption of ASC 606 as of July 1, 2018

The Company adopted ASC 606 as of July 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. For contracts that were modified before the effective date, the Company considered the effect of all modifications when identifying performance obligations and allocating transaction price, which did not have a material effect on the adjustment to retained earnings. The Company recognized the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of retained earnings. The comparative information has not been recast and continues to be reported under the accounting standards in effect for those periods.

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(Unaudited)

ASC 606 provides a unified model in determining when and how revenue is recognized with the core principle that revenue should be recognized when a customer obtains control of the promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

The Company generates revenues from the sale of server and storage systems, subsystems, accessories, services, server software management solutions, and support services.

Product sales. The Company recognizes revenue from sales of products as control is transferred to customers, which generally happens at the point of shipment or upon delivery, unless customer acceptance is uncertain. Products sold by the Company are delivered via shipment from the Company’s facilities or drop shipment directly to its customer from a Company vendor. The Company may use distributors to sell products to end customers. Revenue from distributors is recognized when the distributor obtains control of the product, which generally happens at the point of shipment or upon delivery, unless customer acceptance is uncertain, and in the amount of consideration to which the Company expects to be entitled.

As part of determining the transaction price in contracts with customers, the Company estimates reserves for future sales returns based on a review of its history of actual returns for each major product line. Based upon historical experience a refund liability is recorded at the time of sale for estimated product returns and an asset is recognized for the amount expected to be recorded in inventory upon product return, less the expected recovery costs. The Company also reduces revenue for the estimated costs of customer and distributor programs and incentive offerings such as price protection and rebates as well as the estimated costs of cooperative marketing arrangements where the fair value of the benefit derived from the costs cannot be reasonably estimated. Any provision for customer and distributor programs and other discounts is recorded as a reduction of revenue at the time of sale based on an evaluation of the contract terms and historical experience.

Services sales. The Company’s sale of services mainly consists of extended warranty and on-site services. Revenue related to extended warranty commences upon the expiration of the standard warranty period and is recognized ratably over the contractual period as the Company stands ready to perform any required warranty service. Revenue related to on-site services commences upon recognition of the product sale and is recognized ratably over the contractual period as the on-site services are made available to the customer. 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.

Contracts with multiple promised goods and services. Certain of the Company’s contracts contain multiple promised goods and services. Performance obligations in a contract are identified based on the promised goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. If these criteria are not met, the promised goods and services are accounted for as a combined performance obligation. Revenue allocated to each performance obligation is recognized at the time the related performance obligation is satisfied by transferring control of the promised good or service to a customer.

If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis. The Company determines standalone selling prices based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information, such as internally approved pricing guidelines with respect to geographies, customer type, internal costs, and gross margin objectives, for the related performance obligations.

When the Company receives consideration from a customer prior to transferring goods or services to the customer, the Company records a contract liability (deferred revenue). The Company also recognizes deferred revenue when it has an unconditional right to consideration (i.e., a receivable) before transfer of control of goods or services to a customer.

The Company considers shipping & handling activities as costs to fulfill the sales of products. Shipping revenue is included in net sales when control of the product is transferred to the customer, and the related shipping and handling costs are included in cost of products sold. Taxes imposed by governmental authorities on the Company's revenue producing activities with customers, such as sales taxes and value added taxes, are excluded from net sales.

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(Unaudited)

Revenue recognition for periods prior to the Company’s adoption of ASC 606 as of July 1, 2018

Product sales. The Company recognizes revenue from sales of products upon meeting all of the following revenue recognition criteria, which is typically met upon shipment or delivery of its 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.

The Company estimates reserves for future sales returns based on a review of its history of actual returns for each major product line. The Company also reduces 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.

The Company 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 Company and the distributor.

The Company records costs related to shipping and handling in sales and marketing expenses. Shipping and handling fees billed to customers are included in net sales.

Services sales. The Company’s 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 the Company’s arrangements contain multiple elements, consisting of both the Company’s products and services. Revenue allocated to each element is recognized when all the revenue recognition criteria are met for that element.

The Company allocates 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.

The Company does not have VSOE for deliverables in its arrangements, and TPE is generally not available because its products are highly differentiated, and the Company is unable to obtain reliable information on the products and pricing practices of the Company’s competitors. BESP reflects the Company’s 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. The Company determines BESP for a product by considering multiple factors including, but not limited to, geographies, customer types, internal costs, gross margin objectives and pricing practices.

Disaggregation of Revenue

The Company disaggregates revenue by type of product, by geographical market, and by products sold to indirect sales channel partners or direct customers and original equipment manufacturers ("OEMs") that depict the nature, amount, and timing of revenue and cash flows. Service revenues are not a significant component of total revenue and are aggregated within the respective categories.

The following is a summary of net sales by product type (in thousands):

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(Unaudited)

	Three Months Ended December 31,								Six Months Ended December 31,
	2018				2017				2018				2017
	Amount		Percent of Net Sales		Amount		Percent of Net Sales		Amount		Percent of Net Sales		Amount		Percent of Net Sales
Server and storage systems	$	762,622	81.9	%	$	629,673	76.1	%	$	1,568,538	82.4	%	$	1,172,104	75.9	%
Subsystems and accessories	168,887		18.1	%	197,310		23.9	%	334,089		17.6	%	371,616		24.1	%
Total	$	931,509	100.0	%	$	826,983	100.0	%	$	1,902,627	100.0	%	$	1,543,720	100.0	%

Server and storage systems constitute an assembly and integration of subsystems and accessories, and related services.

Subsystems and accessories are comprised of serverboards, chassis and accessories.

International net sales are based on the country and region to which the products were shipped. The following is a summary for the three and six months ended December 31, 2018 and 2017, of net sales by geographic region (in thousands):

	Three Months Ended December 31,				Six Months Ended December 31,
	2018		2017		2018		2017
United States	$	511,913	$	449,039	$	1,079,528	$	862,154
Europe	180,976		136,864		343,536		242,478
Asia	196,308		204,566		403,176		373,706
Others	42,312		36,514		76,387		65,382
	$	931,509	$	826,983	$	1,902,627	$	1,543,720

The following table presents the percentages of net sales from products sold through the Company's indirect sales channel and to its direct customers and OEMs for the three and six months ended December 31, 2018 and 2017:

	Three Months Ended December 31,						Six Months Ended December 31,
	2018		2017		%		2018		2017		%
Indirect sales channel	40.8	%	41.5	%	(0.7	)%	37.5	%	44.2	%	(6.7	)%
Direct customers and OEMs	59.2	%	58.5	%	0.7	%	62.5	%	55.8	%	6.7	%
Total net sales	100.0	%	100.0	%			100.0	%	100.0	%

Contract Balances

Generally, the payment terms of the Company’s offerings range from 30 to 60 days. In certain instances, customers may prepay for products and services in advance of delivery. Receivables relate to the Company’s right to consideration for performance obligations completed (or partially completed) for which the Company has an unconditional right to consideration.

Contract assets are rights to consideration in exchange for goods or services that the Company has transferred to a customer when such right is conditional on something other than the passage of time. Such contract assets are insignificant to the Company’s condensed consolidated financial statements.

Contract liabilities consist of deferred revenue and relate to amounts invoiced to or advance consideration received from customers, which precede the Company’s satisfaction of the associated performance obligation(s). The Company’s deferred revenue primarily results from customer payments received upfront for extended warranties and on-site services because these performance obligations are satisfied over time. On July 1, 2018, deferred revenue totaled $143.5 million after recognizing the cumulative effect of initially applying ASC 606. Of that amount, $13.9 million and $25.7 million was recognized as revenue during the three and six months ended December 31, 2018, respectively.

Deferred revenue increased during the six months ended December 31, 2018 because the amounts for service contracts invoiced during the period exceeded the recognition of revenue from contracts entered into in prior periods.

17

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Transaction Price Allocated to the Remaining Performance Obligations

Remaining performance obligations represent in aggregate the amount of transaction price that has been allocated to performance obligations not delivered, or only partially undelivered, as of the end of the reporting period. The Company applies the optional exemption to not disclose information about remaining performance obligations that are part of a contract that has an original expected duration of one year or less. These performance obligations generally consist of services, such as on-site integration services that are contracted for one year or less, and products for which control has not yet been transferred. The value of the transaction price allocated to remaining performance obligations as of December 31, 2018 was approximately $181.8 million. The Company expects to recognize approximately 43% of remaining performance obligations as revenue in the next 12 months, and the remainder thereafter.

Capitalized Contract Acquisition Costs and Fulfillment Cost

Contract acquisition costs are those incremental costs that the Company incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained. Contract acquisition costs consist primarily of incentive bonuses. Contract acquisition costs are considered incremental and recoverable costs of obtaining and fulfilling a contract with a customer and are therefore capitalizable. The Company applies the practical expedient to expense incentive bonus costs as incurred if the amortization period would be one year or less, generally upon delivery of the associated server and storage systems or components. Where the amortization period of the contract cost would be more than a year, the Company allocates the incentive bonus cost asset between hardware and service performance obligations and expenses the cost allocated to the hardware performance obligations upon delivery of associated server and storage systems or components and amortizes the cost allocated to service performance obligations over the period the services are expected to be provided. Such contract acquisition costs that are subject to capitalization are insignificant to the Company’s condensed consolidated financial statements.

Contract fulfillment costs consist of costs paid in advance for outsourced services provided by third parties to the extent they are not in the scope of other guidance. Fulfillment costs paid in advance for outsourced services provided by third parties are capitalized and amortized over the period the services are expected to be provided. Such fulfillment costs are insignificant to the Company’s condensed consolidated financial statements.

Note 3.        Stock-based Compensation

Equity Incentive Plan

In January 2016, the Board of Directors approved the 2016 Equity Incentive Plan (the "2016 Plan") and reserved for issuance 4,700,000 shares of common stock for awards of stock options, stock appreciation rights, restricted stock, RSUs and other equity-based awards. The 2016 Plan was approved by the stockholders of the Company and became effective on March 8, 2016. As of the date the 2016 Plan became effective, 8,696,444 shares of common stock were reserved for outstanding awards under the Company's 2006 Equity Incentive Plan (the "2006 Plan"). Such awards remained outstanding under the 2006 Plan following the adoption of the 2016 Plan, although no further awards have been or will be granted under the 2006 Plan. Up to 2,800,000 shares subject to awards that remained outstanding under the 2006 Plan at the time the 2016 Plan became effective, if those awards were or are forfeited at any time after the 2016 Plan became effective, will become available for use under the 2016 Plan. At the time the 2016 Plan became effective, all remaining ungranted shares under the 2006 Plan were canceled. Under the 2016 Plan, the exercise price per share for incentive stock options granted to employees owning shares representing more than 10% of the Company's outstanding voting stock at the time of grant cannot be less than 110% of the fair value of the underlying shares on the grant date. Nonqualified stock options and incentive stock options granted to all other persons are granted at a price not less than 100% of the fair value. Options generally expire ten years after the date of grant. Stock options and RSUs generally vest over four years; 25% at the end of one year and one sixteenth per quarter thereafter. Under the 2016 Plan, the Company granted PRSUs to its Chief Executive Officer, 50% of which vest based on the achievement of certain performance metrics at the end of the performance period while the remainder vest in equal amounts over the following ten quarters provided he continues to be employed by the Company. As of December 31, 2018, the Company had 556,475 authorized shares available for future issuance under the 2016 Plan.

Determining Fair Value

The Company's fair value of RSUs and PRSUs is based on the closing market price of the Company's common stock on the date of grant. The Company estimates the fair value of stock options granted using the Black-Scholes-option-pricing model. This fair value is then amortized ratably over the requisite service periods of the awards, which is generally the vesting period. The key inputs in using the Black-Scholes-option-pricing model were as follows:

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Expected Term—The Company’s expected term represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on the Company's historical experience.

Expected Volatility—Expected volatility is based on the Company's implied and historical volatility.

Expected Dividend—The Black-Scholes valuation model calls for a single expected dividend yield as an input and the Company has no plans to pay dividends.

Risk-Free Interest Rate—The risk-free interest rate used in the Black-Scholes valuation method is based on the United States Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of option.

The fair value of stock option grants for the three and six months ended December 31, 2018 and 2017 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

	Three Months Ended December 31,						Six Months Ended December 31,
	2018			2017			2018			2017
Risk-free interest rate	2.97		%	2.14		%	2.87% - 2.97%			1.92% - 2.14%
Expected term	6.05 years			5.82 years			6.05 years			5.82 years
Dividend yield	—		%	—		%	—		%	—		%
Volatility	50.02		%	45.32		%	47.34% - 50.02%			45.32% - 48.07%
Weighted-average fair value	$	6.62		$	9.87		$	8.77		$	11.57

The following table shows total stock-based compensation expense included in the condensed consolidated statements of operations for the three and six months ended December 31, 2018 and 2017 (in thousands):

	Three Months Ended December 31,						Six Months Ended December 31,
	2018			2017			2018			2017
Cost of sales	$	428		$	456		$	866		$	913
Research and development	3,212			3,562			6,708			6,922
Sales and marketing	436			605			941			1,063
General and administrative	1,171			1,877			2,606			3,663
Stock-based compensation expense before taxes	5,247			6,500			11,121			12,561
Income tax impact	(1,082		)	(1,551		)	(2,324		)	(3,879		)
Stock-based compensation expense, net	$	4,165		$	4,949		$	8,797		$	8,682

As of December 31, 2018, $7.2 million of unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 2.63 years, $30.7 million of unrecognized compensation cost related to unvested RSUs is expected to be recognized over a weighted-average period of 2.69 years and $0.5 million of unrecognized compensation cost related to unvested PRSUs is expected to be recognized over a period of 2.0 years.

Stock Option Activity

The following table summarizes stock option activity during the six months ended December 31, 2018 under all plans:

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

	Options Outstanding		Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (in Years)
Balance as of June 30, 2018	8,301,138		$	16.50
Granted	267,400		$	17.70
Exercised	—		$	—
Forfeited/Cancelled	(272,458	)	$	8.21
Balance as of December 31, 2018	8,296,080		$	16.81	3.66
Options vested and exercisable at December 31, 2018	7,515,488		$	16.27	3.15

RSU and PRSU Activity

In January 2015, the Company began to grant RSUs to employees. The Company grants RSUs to certain employees as part of its regular employee equity compensation review program as well as to selected new hires. RSUs are share awards that entitle the holder to receive freely tradable shares of the Company's common stock upon vesting.

In August 2017, the Compensation Committee granted two PRSU awards to the Company's Chief Executive Officer, both of which have both performance and service conditions. The first award was a one-year PRSU and the second award was a two-year PRSU. The one-year PRSUs would be earned based on the Company’s performance as it relates to a revenue growth metric and a minimum non-GAAP operating margin metric during the fiscal year ended June 30, 2018 with eligibility up to 200% of the targeted number of units based on revenue growth if the minimum non-GAAP operating margin is achieved. If the performance metrics were met, 50% of the PRSUs would vest at June 30, 2018 while the remainder would vest in equal amounts over the following ten quarters if the Company's Chief Executive Officer continued to be employed during those ten quarters. In December 2019, the Compensation Committee of the Company's Board of Directors determined that the Company achieved the revenue and non-GAAP operating margin metrics for the fiscal year ended June 30, 2018 at a level that entitled the Chief Executive Officer to 200% of the originally targeted number of shares subject to the one-year PRSU. 50% of the PRSUs so earned were vested as of June 30, 2018, and an additional 20% of the PRSUs vested during the four quarters ended June 30, 2019, in accordance with the terms of the grant.

The two-year PRSUs would be earned based on the Company’s performance for the average non-GAAP operating margin metric for the two fiscal years ended June 30, 2019 with eligibility up to 100% of the targeted number of units. If the performance metrics would have been met, 50% of the PRSUs would have vested at June 30, 2019 while the remainder would have been vested in equal amounts over the following ten quarters if the Chief Executive Officer continued to be employed during those ten quarters. In December 2019, the Compensation Committee of the Company's Board of Directors has determined that the Company did not achieve the required performance metrics for these two-year PRSUs to be earned and, consequently, this PRSU terminated in December 2019.

The following table summarizes RSUs and PRSUs activity during the six months ended December 31, 2018 under all plans: 

	Time-Based RSUs Outstanding		Weighted Average Grant-Date Fair Value per Share		PRSUs Outstanding		Weighted Average Grant-Date Fair Value per Share
Balance as of June 30, 2018	1,480,605		$	23.34	120,000	(1)	$	27.10
Granted	571,405		$	16.90	—
Released (2)	(320,762	)	$	24.71	—
Forfeited	(66,200	)	$	21.80	—
Balance as of December 31, 2018	1,665,048		$	20.93	120,000		$	27.10

__________________________

(1) Reflects the number of PRSUs that have been earned based on the achievement of performance metrics.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

(2) The number of shares released excludes 46,896 RSUs that were vested but not released as of December 31, 2018. The number of shares released excludes 72,000 PRSUs that were vested but not released as of December 31, 2018, of which 60,000 PRSUs were vested as of June 30, 2018. These vested RSUs and PRSUs will be released upon the effectiveness of the Company's Registration Statement on Form S-8.

Note 4.        Net Income Per Common Share

The following table shows the computation of basic and diluted net income per common share for the three and six months ended December 31, 2018 and 2017 (in thousands, except per share amounts):

	Three Months Ended December 31,					Six Months Ended December 31,
	2018		2017			2018		2017
Numerator:
Net income (loss)	$	18,220	$	(783	)	$	37,562	$	5,296
Denominator:
Weighted-average shares outstanding	49,844		49,335			49,774		49,216
Effect of dilutive securities	966		—			1,734		3,004
Weighted-average diluted shares	50,810		49,335			51,508		52,220
Basic net income (loss) per common share	$	0.37	$	(0.02	)	$	0.75	$	0.11
Diluted net income (loss) per common share	$	0.36	$	(0.02	)	$	0.73	$	0.10

For the three and six months ended December 31, 2018 and 2017, the Company had stock options and RSUs outstanding that could potentially dilute basic earnings per share in the future, but were excluded from the computation of diluted net income per share in the periods presented, as their effect would have been anti-dilutive. The anti-dilutive common share equivalents resulting from outstanding equity awards were 5,785,490 and 4,385,154 for the three and six months ended December 31, 2018, respectively, and 5,238,185 and 2,261,220 for the three and six months ended December 31, 2017, respectively.     

Note 5.        Balance Sheet Components

The following tables provide details of the selected balance sheet items (in thousands):

Inventories:

	December 31, 2018		June 30, 2018
Finished goods	$	575,779	$	633,348
Work in process	92,732		61,162
Purchased parts and raw materials	160,655		158,742
Total inventories	$	829,166	$	853,252

The Company recorded a provision for excess and obsolete inventory totaling $4.6 million and $12.6 million in the three and six months ended December 31, 2018, respectively, and $2.6 million and $4.3 million in the three and six months ended December 31, 2017, respectively, excluding a provision for adjusting the cost of certain inventories to net realizable value of $1.5 million for the six months ended December 31, 2018. The provision for adjusting the cost of certain inventories to net realizable value for the three months ended December 31, 2018 and three and six months ended December 31, 2017 were not material.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Prepaid Expenses and Other Current Assets:

	December 31, 2018		June 30, 2018
Receivables from vendors (1)	$	86,231	$	93,003
Prepaid expenses	11,122		6,321
Restricted cash	10,670		2,803
Deferred service costs	3,137		2,920
Others	10,950		5,809
Total prepaid expenses and other current assets	$	122,110	$	110,856

__________________________

(1) Includes receivables from contract manufacturers based on certain buy-sell arrangements of $85.0 million and $87.4 million as of December 31, 2018 and June 30, 2018, respectively.

Cash, cash equivalents and restricted cash:

	December 31, 2018		June 30, 2018
Cash and cash equivalents	$	109,783	$	115,377
Restricted cash included in prepaid expenses and other current assets	10,670		2,803
Restricted cash included in other assets	2,300		2,202
Total cash, cash equivalents and restricted cash	$	122,753	$	120,382

Property, Plant, and Equipment:

	December 31, 2018			June 30, 2018
Buildings	$	86,136		$	88,689
Machinery and equipment	77,184			71,081
Land	74,921			74,919
Furniture and fixtures	19,452			18,475
Building and leasehold improvements	19,213			18,760
Software	16,931			15,522
Buildings construction in progress (1)	4,000			1,779
	297,837			289,225
Accumulated depreciation and amortization	(99,585		)	(92,594		)
Property, plant and equipment, net	$	198,252		$	196,631

__________________________

(1) Primarily relates to the development and construction costs associated with the Company’s Green Computing Park located in San Jose, California.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Other Assets:

	December 31, 2018		June 30, 2018
Deferred service costs, non-current	$	3,603	$	3,583
Non-marketable equity securities (1)	3,539		3,539
Restricted cash, non-current	2,300		2,202
Investment in auction rate security	1,571		1,571
Deposits	662		671
Prepaid expense, non-current	1,520		2,471
Total other assets	$	13,195	$	14,037

____________________________

(1) As of December 31, 2018, the balance represents investments in non-marketable equity securities without readily determinable fair values. As of June 30, 2018, the balance represents investments in equity securities accounted for under the cost method.

Accrued Liabilities:

	December 31, 2018		June 30, 2018
Accrued payroll and related expenses	$	28,966	$	25,532
Contract manufacturers liability	25,539		28,754
Customer deposits	13,579		14,938
Accrued warranty costs	8,216		7,589
Accrued cooperative marketing expenses	6,799		6,413
Accrued professional fees	5,527		6,626
Others	23,533		12,626
Total accrued liabilities	$	112,159	$	102,478

Other Long-term Liabilities:

	December 31, 2018		June 30, 2018
Accrued unrecognized tax benefits including related interest and penalties	$	19,572	$	17,872
Accrued warranty costs, non-current	2,218		2,295
Others	4,700		4,398
Total other long-term liabilities	$	26,490	$	24,565

Product Warranties:

	Three Months Ended December 31,						Six Months Ended December 31,
	2018			2017			2018			2017
Balance, beginning of the period	$	10,245		$	8,597		$	9,884		$	7,721
Provision for warranty	5,463			5,174			11,653			10,254
Costs utilized	(5,179		)	(5,817		)	(11,737		)	(10,428		)
Change in estimated liability for pre-existing warranties	(95		)	842			634			1,249
Balance, end of the period	10,434			8,796			10,434			8,796
Current portion	8,216			6,823			8,216			6,823
Non-current portion	$	2,218		$	1,973		$	2,218		$	1,973

23

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Note 6.        Fair Value Disclosure

The financial assets of the Company measured at fair value on a recurring basis are included in cash equivalents and other assets. The Company classifies its cash equivalents and other assets, except for its investment in an auction rate security within Level 1 or Level 2 in the fair value hierarchy because the Company uses quoted prices in active markets or alternative pricing sources and models using market observable inputs to determine their fair value. The Company’s investment in an auction rate security is classified within Level 3 of the fair value hierarchy as the determination of its fair value was not based on observable inputs as of December 31, 2018 and June 30, 2018. The Company used discounted cash flows to estimate the fair value of the auction rate security as of December 31, 2018 and June 30, 2018. The material factors used in preparing the discounted cash flows are (i) the discount rate utilized to present value the cash flows, (ii) the time period until redemption and (iii) the estimated rate of return.

Financial Assets and Liabilities Measured on a Recurring Basis

The following table sets forth the Company’s cash equivalents, certificates of deposit and investment in an auction rate security as of December 31, 2018 and June 30, 2018 which are measured at fair value on a recurring basis by level within the fair value hierarchy. These are classified based on the lowest level of input that is significant to the fair value measurement (in thousands):

December 31, 2018	Level 1		Level 2		Level 3		Asset at Fair Value
Money market funds (1)	$	1,140	$	—	$	—	$	1,140
Certificates of deposit (2)	—		1,292		—		1,292
Auction rate security	—		—		1,571		1,571
Total assets measured at fair value	$	1,140	$	1,292	$	1,571	$	4,003
June 30, 2018	Level 1		Level 2		Level 3		Asset at Fair Value
Money market funds (1)	$	1,136	$	—	$	—	$	1,136
Certificates of deposit (2)	—		30,219		—		30,219
Auction rate security	—		—		1,571		1,571
Total assets measured at fair value	$	1,136	$	30,219	$	1,571	$	32,926

__________________________

(1) $0.3 million and $0.3 million in money market funds are included in cash and cash equivalents and $0.8 million and $0.8 million in money market funds are included in restricted cash, non-current in other assets in the condensed consolidated balance sheets as of December 31, 2018 and June 30, 2018, respectively.

(2) $0.2 million and $29.2 million in certificates of deposit are included in cash and cash equivalents and $1.1 million and $1.0 million in certificates of deposit are included in restricted cash, non-current in other assets in the condensed consolidated balance sheets as of December 31, 2018 and June 30, 2018, respectively.

The above table excludes $109.3 million and $85.9 million of cash included in cash and cash equivalents, $10.7 million and $2.8 million of restricted cash included in prepaid expenses and other current assets, and $0.4 million and $0.4 million of restricted cash, non-current included in other assets in the condensed consolidated balance sheets as of December 31, 2018 and June 30, 2018, respectively. There were no transfers between Level 1, Level 2 or Level 3 securities in the three and six months ended December 31, 2018.

The following table provides a reconciliation of the Company’s financial assets measured at fair value on a recurring basis, consisting of auction rate securities, using significant unobservable inputs (Level 3) for the three and six months ended December 31, 2018 and 2017 (in thousands):

24

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

	Three Months Ended December 31,				Six Months Ended December 31,
	2018		2017		2018		2017
Balance as of the beginning of the period	$	1,571	$	2,571	$	1,571	$	2,625
Total unrealized loss included in other comprehensive income	—		—		—		(54		)
Balance as of the end of the period	$	1,571	$	2,571	$	1,571	$	2,571

The following is a summary of the Company’s investment in an auction rate security as of December 31, 2018 and June 30, 2018 (in thousands):

	December 31 and June 30, 2018
	Cost Basis		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Fair Value
Auction rate security	$	1,750	$	—	$	(179	)	$	1,571

The Company measures the fair value of outstanding debt for disclosure purposes on a recurring basis. As of December 31, 2018 and June 30, 2018, total debt of $48.2 million and $116.2 million, respectively, are reported at amortized cost. This outstanding debt is classified as Level 2 as it is not actively traded. The amortized cost of the outstanding debt approximates the fair value.

Financial Assets Measured on a Non-recurring Basis

The Company's non-marketable equity securities are investments in privately held companies without readily determinable fair values. Prior to July 1, 2018, the Company accounted for its investment in non-marketable equity securities at cost less impairment. Realized gains and losses on non-marketable equity securities sold or impaired were recognized in other income (expense), net. Upon adoption of the new guidance,Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, on July 1, 2018, the Company classifies its investment in non-marketable equity instruments as Level 3 as the fair value is determined using significant unobservable inputs. During the three and six months ended December 31, 2018, the Company did not record any upward or downward adjustments to the carrying values of the non-marketable equity securities. The Company also did not record any impairment to the carrying values of the non-marketable equity securities during the three and six months ended December 31, 2018. For the three and six months ended December 31, 2017, the Company did not record any other-than-temporary impairments on financial assets required to be measured at fair value on a nonrecurring basis.

There were no transfers of financial assets measured on a non-recurring basis between Level 1, Level 2 or Level 3 securities during the three and six months ended December 31, 2018 and 2017.

Note 7.        Short-term Debt

Short-term debt obligations as of December 31, 2018 and June 30, 2018 consisted of the following (in thousands):

	December 31,		June 30,
	2018		2018
Line of credit:
Bank of America	$	25,455	$	67,346
CTBC Bank	—		25,900
Total line of credit	25,455		93,246
Term loan: CTBC Bank	22,717		22,935
Total short-term debt	$	48,172	$	116,181

25

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Activities under Revolving Lines of Credit and Term Loans

Bank of America

2016 Bank of America Credit Facility

In June 2016, the Company entered into a credit agreement with Bank of America (the “2016 Bank of America Credit Facility”). Prior to its maturity in April 2018, the Company repaid and terminated the 2016 Bank of America Credit Facility using the proceeds from its 2018 Bank of America Credit Facility (defined below). Immediately prior to its termination, the 2016 Bank of America Credit Facility (giving effect to all amendments since the inception of the 2016 Bank of America Credit Facility), provided for (i) a $85.0 million revolving line of credit including a $5.0 million letter of credit sublimit (ii) a $20.0 million revolving line of credit for the Company's Taiwan and the Netherlands entities, and (iii) a five-year $50.0 million term loan. The 2016 Bank of America Credit Facility term loan was 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 were payable monthly through June 30, 2021 with an interest rate at the LIBOR rate plus 1.25% per annum. The interest rate for the $85.0 million revolving line of credit was at the LIBOR rate plus 1.25% per annum. The interest rate of the $20.0 million revolving line of credit was equal to a minimum of 0.9% per annum plus the lender's cost of funds, as defined in the agreements.

2018 Bank of America Credit Facility

In April 2018, the Company entered into a revolving line of credit with Bank of America (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, including a $5.0 million letter of credit sublimit, which was extended to $15.0 million in October 2019. The 2018 Bank of America Credit Facility was originally set to expire after 364 days and has been extended to June 30, 2020 through subsequent amendments. Prior to its maturity, at the Company's option and if certain conditions are satisfied, including the Company being current on all of its delinquent quarterly and annual filings with the SEC, the 2018 Bank of America Credit Facility may convert into a five-year revolving credit facility. If and upon such conversion, the lenders for the 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 five-year revolving credit facility, interest shall accrue at the LIBOR rate plus 2.75% per annum. Upon the 2018 Bank of America Credit Facility converting to the five-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. Under the terms of the 2018 Bank of America Credit Facility, the Company is required to grant the lenders a continuing security interest in and lien upon all amounts credited to any of the Company's deposit accounts. 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 as determined by the lenders. Voluntary prepayments are permitted without early repayment fees or penalties. The terms of the arrangement require any amounts in the deposit accounts to be applied against the Company's line of credit the next business day. Subject to customary exceptions, the 2018 Bank of America Credit Facility is secured by substantially all of Super Micro Computer’s assets. If converted to the five-year revolving credit facility, Super Micro Computer’s assets, and at the Company's option, Super Micro Computer B.V.'s assets will be used as collateral for the 2018 Bank of America Credit Facility. Under the terms of the 2018 Bank of America Credit Facility, the Company is not permitted to either repurchase its common stock or pay any dividends.

In the fourth fiscal quarter of 2018, the Company paid $3.2 million in fees to the lenders and third parties in connection with the 2018 Bank of America Credit Facility. The replacement of the 2016 Bank of America Credit Facility by the 2018 Bank of America Credit Facility is accounted for as a modification of the existing credit facility to the extent the lenders before and after the modification were the same. Any unamortized fees relating to the 2016 Bank of America Credit Facility and the fees paid for the 2018 Bank of America Credit Facility are amortized over the term of the 2018 Bank of America Credit Facility as interest expense in the Company's consolidated statements of operation and any unamortized amounts are classified within prepaid and other current assets in the Company's consolidated balance sheets.

On January 31, 2019, the Company 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 from April 19, 2019 to June 30, 2019. On June 27, 2019, the

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Company entered into a second amendment of the 2018 Bank of America Credit Facility that extended the maturity date from June 30, 2019 to June 30, 2020.

As of December 31, 2018 and June 30, 2018, the total outstanding borrowings under the 2018 Bank of America Credit Facility were $25.5 million and $67.3 million, respectively. The interest rates under the 2018 Bank of America Credit Facility as of December 31, 2018 and June 30, 2018 were 5.13% per annum and 4.75% per annum, respectively. In October 2018, a $3.2 million letter of credit was issued under the 2018 Bank of America Credit Facility. The balance of debt issuance costs outstanding were $1.1 million and $2.8 million as of December 31, 2018 and June 30, 2018, respectively. As of December 31, 2018, the Company's available borrowing capacity under the 2018 Bank of America Credit Facility was $221.3 million, subject to the borrowing base limitation and compliance with other applicable terms.

CTBC Bank

In April 2016, the Company entered into a credit agreement with CTBC Bank Co., Ltd ("CTBC Bank") that provides for (i) a 12-month NTD$700.0 million ($21.6 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 was adjusted monthly, the term loan facility also included a 12-month guarantee of up to NTD $100.0 million ($3.1 million U.S. dollar equivalent) with an annual fee equal to 0.50% per annum, and (ii) a 12-month revolving line of credit of 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 “2016 CTBC Credit Facility”). The total borrowings allowed under the 2016 CTBC Credit Facility was capped at $40.0 million. The Company extended the 2016 CTBC Credit Facility to mature on May 31, 2017.

In May 2017, the Company renewed the 2016 CTBC Credit Facility, such that it provided for (i) a 12-month NTD $700.0 million ($23.0 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 was adjusted monthly, which term loan facility also included a 12-month guarantee of up to NTD $100.0 million ($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 of 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 was adjusted monthly. The total borrowings allowed under the renewed 2016 CTBC Credit Facility were capped at $50.0 million. The 2016 CTBC Credit Facility was to mature on April 30, 2018 but prior to the maturity, the Company entered into the 2018 CTBC Credit Facility (defined below) with CTBC Bank in January 2018, which replaced the 2016 CTBC Credit Facility.

In January 2018, the Company entered into a credit agreement with CTBC Bank that provided for (i) a 12-month NTD $700.0 million ($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 was adjusted monthly, which term loan facility also included a 12-month guarantee of up to NTD $100.0 million ($3.4 million U.S. dollar equivalent) with an annual fee equal to 0.50% per annum, and (ii) a 12-month NTD $1,500.0 million ($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 was adjusted monthly (collectively, the “2018 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 June 2019 prior to its maturity, the 2018 CTBC Credit Facility was replaced by the 2019 CTBC Credit Facility (defined below).

In June 2019, the Company entered into a credit agreement with CTBC Bank that provides for (i) a 12-month NTD $700.0 million ($22.5 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 guarantee of up to NTD $100.0 million ($3.2 million U.S. dollar equivalent) with an annual fee equal to 0.50% per annum, (ii) a 180-day NTD $1,500.0 million ($48.2 million U.S. dollar equivalent) term loan facility up to 100% of eligible accounts receivable in an aggregate amount with an interest rate equal to the lender's established NTD interest rate ranging from 0.30% to 0.50% per annum which is adjusted monthly, and (ⅲ) a 12-month revolving line of credit of up to 100% 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 0.30% to 0.50% per annum which is adjusted monthly (collectively, the “2019 CTBC Credit Facility”). The total borrowings allowed under the 2019 CTBC Credit Facility was capped at $50.0 million. The 2019 CTBC Credit Facility is to mature on June 30, 2020.

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