UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________________________________________________________

Form 10-Q

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

For the quarterly period ended March 31, 2020

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	NASDAQ Global Select Market

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

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

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

Large accelerated filer	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  ☒

As of April 30, 2020 there were 51,923,646 shares of the registrant’s common stock, $0.001 par value, outstanding, which is the only class of common stock of the registrant issued.

SUPER MICRO COMPUTER, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE MONTHS ENDED MARCH 31, 2020

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION
ITEM 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets as of March 31, 2020 and June 30, 2019	1
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2020 and 2019	2
	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended March 31, 2020 and 2019	3
	Condensed Consolidated Statements of Stockholders' Equity for the Three and Nine Months Ended March 31, 2020 and 2019	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2020 and 2019	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	46
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	48
ITEM 3.	Defaults Upon Senior Securities	48
ITEM 4.	Mine Safety Disclosures	48
ITEM 5.	Other Information	48
ITEM 6.	Exhibits	49
	Signatures	49

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 Quarterly Report on Form 10-Q are the property of Super Micro Computer, Inc. or its affiliates. Other trademarks, service marks, or trade names appearing in this Quarterly Report on 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) 

	March 31,			June 30,
	2020			2019
ASSETS
Current assets:
Cash and cash equivalents	$	300,859		$	248,164
Accounts receivable, net of allowances of $10,317 and $8,906 at March 31, 2020 and June 30, 2019, respectively (including amounts receivable from related parties of $11,827 and $13,439 at March 31, 2020 and June 30, 2019, respectively)	333,172			393,624
Inventories	866,226			670,188
Prepaid expenses and other current assets (including receivables from related parties of $21,354 and $21,302 at March 31, 2020 and June 30, 2019, respectively)	148,102			109,795
Total current assets	1,648,359			1,421,771
Investment in equity investee	—			1,701
Property, plant and equipment, net	230,477			207,337
Deferred income taxes, net	45,562			41,126
Other assets	35,838			10,659
Total assets	$	1,960,236		$	1,682,594
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable (including amounts due to related parties of $55,124 and $59,809 at March 31, 2020 and June 30, 2019, respectively)	$	462,808		$	360,470
Accrued liabilities (including amounts due to related parties of $20,270 and $10,536 at March 31, 2020 and June 30, 2019, respectively)	177,148			114,678
Income taxes payable	1,979			13,021
Short-term debt	33,158			23,647
Deferred revenue	109,730			94,153
Total current liabilities	784,823			605,969
Deferred revenue, non-current	95,752			109,266
Other long-term liabilities (including related party balance of $2,871 and $3,000 at March 31, 2020 and June 30, 2019, respectively)	41,266			26,183
Total liabilities	921,841			741,418
Commitments and contingencies (Note 11)
Stockholders’ equity:
Common stock and additional paid-in capital, $0.001 par value
Authorized shares: 100,000,000; Outstanding shares: 51,915,646 and 49,956,288 at March 31, 2020 and June 30, 2019, respectively
Issued shares: 53,248,771 and 51,289,413 at March 31, 2020 and June 30, 2019, respectively	381,125			349,683
Treasury stock (at cost), 1,333,125 shares at March 31, 2020 and June 30, 2019	(20,491		)	(20,491		)
Accumulated other comprehensive loss	(166		)	(80		)
Retained earnings	677,761			611,903
Total Super Micro Computer, Inc. stockholders’ equity	1,038,229			941,015
Noncontrolling interest	166			161
Total stockholders’ equity	1,038,395			941,176
Total liabilities and stockholders’ equity	$	1,960,236		$	1,682,594

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 March 31,						Nine Months Ended March 31,
	2020			2019			2020			2019
Net sales (including related party sales of $21,528 and $17,590 in the three months ended March 31, 2020 and 2019, respectively, and $70,974 and $48,849 in the nine months ended March 31, 2020 and 2019, respectively)	$	772,408		$	743,499		$	2,443,155		$	2,646,126
Cost of sales (including related party purchases of $60,387 and $62,624 in the three months ended March 31, 2020 and 2019, respectively, and $200,753 and $215,331 in the nine months ended March 31, 2020 and 2019, respectively)	639,048			631,172			2,040,462			2,282,638
Gross profit	133,360			112,327			402,693			363,488
Operating expenses:
Research and development	49,586			44,800			154,730			133,718
Sales and marketing	21,886			18,494			64,057			56,463
General and administrative	46,342			36,174			107,680			106,214
Total operating expenses	117,814			99,468			326,467			296,395
Income from operations	15,546			12,859			76,226			67,093
Other income (expense), net	937			(86		)	2,110			707
Interest expense	(518		)	(1,271		)	(1,630		)	(5,480		)
Income before income tax provision	15,965			11,502			76,706			62,320
Income tax benefit (provision)	899			(497		)	(9,782		)	(10,540		)
Share of loss from equity investee, net of taxes	(1,057		)	(359		)	(1,066		)	(3,572		)
Net income	$	15,807		$	10,646		$	65,858		$	48,208
Net income per common share:
Basic	$	0.31		$	0.21		$	1.30		$	0.97
Diluted	$	0.29		$	0.21		$	1.26		$	0.94
Weighted-average shares used in calculation of net income per common share:
Basic	51,526			49,988			50,591			49,845
Diluted	53,693			51,558			52,399			51,557

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 March 31,					Nine Months Ended March 31,
	2020			2019		2020			2019
Net income	$	15,807		$	10,646	$	65,858		$	48,208
Other comprehensive income (loss), net of tax:
Foreign currency translation (loss) gain	(31		)	60		(86		)	(177		)
Total other comprehensive income (loss)	(31		)	60		(86		)	(177		)
Total comprehensive income	$	15,776		$	10,706	$	65,772		$	48,031

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 March 31, 2020	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 December 31, 2019	51,923,260		$	360,060		(1,333,125	)	$	(20,491	)	$	(135	)	$	661,954	$	165	$	1,001,553
Exercise of stock options, net of shares withheld for withholding taxes	1,163,309		19,120			—		—			—			—		—		19,120
Release of common stock shares upon vesting of restricted stock units	262,742		—			—		—			—			—		—		—
Shares withheld for the withholding tax on vesting of restricted stock units	(100,540	)	(2,860		)	—		—			—			—		—		(2,860		)
Stock-based compensation	—		4,805			—		—			—			—		—		4,805
Foreign currency translation loss	—		—			—		—			(31		)	—		—		(31		)
Net income	—		—			—		—			—			15,807		1		15,808
Balance at March 31, 2020	53,248,771		$	381,125		(1,333,125	)	$	(20,491	)	$	(166	)	$	677,761	$	166	$	1,038,395

Three Months Ended March 31, 2019	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 December 31, 2018	51,136,062		$	341,070		(1,333,125	)	$	(20,491	)	$	(72	)	$	577,547	$	157	$	898,211
Release of common stock shares upon vesting of restricted stock units	118,617		—			—		—			—			—		—		—
Shares withheld for the withholding tax on vesting of restricted stock units	(39,640	)	(722		)	—		—			—			—		—		(722		)
Stock-based compensation	—		4,960			—		—			—			—		—		4,960
Foreign currency translation gain	—		—			—		—			60			—		—		60
Net income	—		—			—		—			—			10,646		3		10,649
Balance at March 31, 2019	51,215,039		$	345,308		(1,333,125	)	$	(20,491	)	$	(12	)	$	588,193	$	160	$	913,158

See accompanying notes to condensed consolidated financial statements.

4

SUPER MICRO COMPUTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share amounts)

(unaudited)

Nine Months Ended March 31, 2020	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, 2019	51,289,413		$	349,683		(1,333,125	)	$	(20,491	)	$	(80	)	$	611,903	$	161	$	941,176
Exercise of stock options, net of shares withheld for withholding taxes	1,447,296		23,053			—		—			—			—		—		23,053
Release of common stock shares upon vesting of restricted stock units	771,721		—			—		—			—			—		—		—
Shares withheld for the withholding tax on vesting of restricted stock units	(259,659	)	(6,434		)	—		—			—			—		—		(6,434		)
Stock-based compensation	—		14,823			—		—			—			—		—		14,823
Foreign currency translation loss	—		—			—		—			(86		)	—		—		(86		)
Net income	—		—			—		—			—			65,858		5		65,863
Balance at March 31, 2020	53,248,771		$	381,125		(1,333,125	)	$	(20,491	)	$	(166	)	$	677,761	$	166	$	1,038,395

Nine Months Ended March 31, 2019	Common Stock and Additional Paid-In Capital					Treasury Stock					Accumulated Other Comprehensive Gain (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 effective adjustment from adoption of standards, net of taxes	—		—			—		—			—			7,714		—		7,714
Release of common stock shares upon vesting of restricted stock units	439,379		—			—		—			—			—		—		—
Shares withheld for the withholding tax on vesting of restricted stock units	(138,911	)	(2,323		)	—		—			—			—		—		(2,323		)
Stock-based compensation	—		16,081			—		—			—			—		—		16,081
Foreign currency translation loss	—		—			—		—			(177		)	—		—		(177		)
Net income	—		—			—		—			—			48,208		3		48,211
Balance at March 31, 2019	51,215,039		$	345,308		(1,333,125	)	$	(20,491	)	$	(12	)	$	588,193	$	160	$	913,158

See accompanying notes to condensed consolidated financial statements.

5

SUPER MICRO COMPUTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended March 31,
	2020			2019
OPERATING ACTIVITIES:
Net income	$	65,858		$	48,208
Reconciliation of net income to net cash provided by operating activities:
Depreciation and amortization	20,972			18,185
Stock-based compensation expense	14,823			16,081
Allowances for doubtful accounts	1,544			3,110
Provision for excess and obsolete inventories	18,093			24,585
Share of loss from equity investee	1,066			3,572
Foreign currency exchange (gain) loss	311			(292		)
Deferred income taxes, net	(4,436		)	(9,751		)
Other	1,105			923
Changes in operating assets and liabilities:
Accounts receivable (including changes in related party balances of $1,612 and ($8,813) during the nine months ended March 31, 2020 and 2019, respectively)	58,935			155,232
Inventories	(214,131		)	36,750
Prepaid expenses and other assets (including changes in related party balances of ($52) and $9,741 during the nine months ended March 31, 2020 and 2019, respectively)	(34,790		)	26,392
Accounts payable (including changes in related party balances of ($4,685) and ($24,882) during the nine months ended March 31, 2020 and 2019, respectively)	103,880			(201,624		)
Income taxes payable	(11,042		)	1,538
Deferred revenue	2,063			49,710
Accrued liabilities (including changes in related party balances of $9,734 and ($9,288) during the nine months ended March 31, 2020 and 2019, respectively)	49,924			9,706
Other long-term liabilities (including changes in related party balances of ($129) and $0 during the nine months ended March 31, 2020 and 2019, respectively)	(8,459		)	(1,625		)
Net cash provided by operating activities	65,716			180,700
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (including payments to related parties of $4,384 and $4,203 during the nine months ended March 31, 2020 and 2019, respectively)	(34,886		)	(15,781		)
Proceeds from sale of investment in a privately-held company	750			—
Net cash used in investing activities	(34,136		)	(15,781		)
FINANCING ACTIVITIES:
Proceeds from debt	10,000			41,760
Repayment of debt	—			(67,700		)
Net repayment on asset-backed revolving line of credit	(1,116		)	(67,099		)
Payment of other fees for debt financing	—			(375		)
Proceeds from exercise of stock options	23,053			—
Payment of withholding tax on vesting of restricted stock units	(6,434		)	(2,323		)
Payments of obligations under finance leases	(122		)	(206		)
Net cash provided by (used in) financing activities	25,381			(95,943		)
Effect of exchange rate fluctuations on cash	163			(88		)
Net increase in cash, cash equivalents and restricted cash	57,124			68,888
Cash, cash equivalents and restricted cash at the beginning of the period	262,140			120,382
Cash, cash equivalents and restricted cash at the end of the period	$	319,264		$	189,270

6

Supplemental disclosure of cash flow information:
Cash paid for interest	$	1,651	$	3,402
Cash paid for taxes, net of refunds	42,516		21,657
Non-cash investing and financing activities:
Unpaid property, plant and equipment purchases (including due to related parties of $215 and $1,067 as of March 31, 2020 and 2019, respectively)	$	12,609	$	9,039
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. 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.

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”). 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 nine months ended March 31, 2020 are not necessarily indicative of the results that may be expected for future quarters or for the fiscal year ending June 30, 2020.

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, valuation and recognition of performance awards liability, 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. The Company considered estimates of the economic implications of the coronavirus ("COVID-19") pandemic on our critical and significant accounting estimates, including assessment of collectibility of customer contracts, valuation of accounts receivable, provision for excess and obsolete inventory and impairment of long-lived assets. Collectibility of customer contracts assessment resulted in delaying revenue recognition of $3.4 million for certain orders shipped during the three months ended March 31, 2020.

Revenue Recognition

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

8

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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, with a corresponding decrease in revenue, and an asset is recognized for the amount expected to be recorded in inventory upon product return, less the expected recovery costs, with a corresponding decrease in cost of sales. 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.

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

9

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

will continue working as specified. Therefore, these warranties are not considered separate performance obligations in the arrangement. Based on historical experience, the Company accrues for estimated repair and replacement 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.

Research and Development

Research and development expenses consist of personnel expenses including: salaries, benefits, stock-based compensation and incentive bonuses, and related expenses for our research and development personnel, as well as materials and supplies, consulting services, third-party testing services and equipment and facility expenses related to our research and development activities. All research and development costs are expensed as incurred. The Company occasionally receives funding from certain suppliers and customers towards its development efforts. Such amounts are recorded as a reduction of research and development expenses and were $0.8 million and $2.0 million for the nine months ended March 31, 2020 and 2019, respectively. Such amounts recorded as a reduction of research and development expenses were not significant for the three months ended March 31, 2020 and 2019. During the three and nine months ended March 31, 2020, the Company also recorded a $9.5 million net settlement fee as a reduction in the research and development expenses related to the reimbursement of previously incurred expenses for one canceled joint product development agreement.

Inventories

Inventories are stated at lower of cost, using weighted average cost method, or net realizable value. Net realizable value is the estimated selling price of the Company's 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 inventories 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.

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(Unaudited)

Stock-Based Compensation

The Company measures and recognizes compensation expense for all share-based awards made to employees and non-employees, including stock options, restricted stock units ("RSUs") and performance-based restricted stock units (“PRSUs”). 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. Stock options and RSUs awards are recognized to expense on a straight-line basis over the requisite service period. PRSUs awards are recognized to expense using an accelerated method only when it is probable that any performance condition is met during the vesting period. If it is not probable, no expense is recognized and the previously recognized expense is reversed. The Company bases initial accrual of compensation expense on the estimated number of PRSUs that are expected to vest over the requisite service period. That estimate is revised if subsequent information indicates that the actual number of PRSUs is likely to differ from previous estimates. The cumulative effect on current and prior periods of a change in the estimated number of PRSUs expected to vest is recognized as compensation expense in the period of the change. Previously recognized compensation expense is not reversed if vested stock options, RSUs or PRSUs for which the requisite service has been rendered and the performance condition has been met expire unexercised or are not settled.

The 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 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 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.

Leases

Recognition of leases for periods after the Company’s adoption of the new leasing standard as of July 1, 2019

The Company has arrangements for the right to use certain of its office, warehouse spaces and other premises, and equipment. As of July 1, 2019, the Company determines at inception if an arrangement is or contains a lease. When the terms of a lease effectively transfer control of the underlying asset to the Company, it is classified as a finance lease. All other leases are classified as operating leases.

Operating Leases

For operating leases with lease terms of more than 12 months, operating lease right-of-use ("ROU") assets are recorded in long-term other assets, and lease liabilities are recorded in accrued liabilities and other long-term liabilities on the condensed consolidated balance sheet. The Company's lease term includes options to extend or terminate the lease when it is reasonably certain that it will exercise that option. The Company elected to apply the short-term lease recognition exemption and does not recognize ROU asset and lease liabilities for leases with an initial term of 12 months or less and recognizes as expense the payments under such leases on a straight-line basis over the lease term. The Company's leases with an initial term of 12 months or less are immaterial.

Operating lease ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments over the lease term. Operating lease ROU assets and liabilities are recognized at lease commencement based on the present value of the remaining lease payments discounted using the Company’s incremental borrowing rate as the interest rate implicit in the lease arrangements is not readily determinable. The incremental borrowing rate is estimated to be the interest rate on a fully collateralized basis with similar terms and payments and in the economic environment where the leased asset is located. Operating lease ROU assets also include initial direct costs incurred, prepaid lease payments, minus any lease incentives. Operating lease expense is recognized on a straight-line basis over the lease term. The Company accounts for fixed payments for lease and non-lease components as a single lease component which increases the amount of ROU assets and liabilities. Non-lease components that are variable costs, such as common area maintenance, are expensed as incurred and not included in the ROU assets and lease liabilities.

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(Unaudited)

Finance Leases

Assets under finance leases are recorded in property, plant and equipment, net and lease liabilities are included in accrued liabilities and other long-term liabilities on the condensed consolidated balance sheet. Finance lease interest expense is recognized based on an effective interest method and depreciation of assets is recorded on a straight-line basis over the shorter of the lease term and useful life of the asset. The Company's finance leases are immaterial.

Recognition of leases for periods prior to the Company’s adoption of the new leasing standard as of July 1, 2019

Prior to July 1, 2019, leases were evaluated and recorded as capital leases if one of the following was true at inception: (a) the present value of minimum lease payments met or exceeded 90% of the fair value of the asset, (b) the lease term was greater than or equal to 75% of the economic life of the asset, (c) the lease arrangement contained a bargain purchase option, or (d) title to the property transferred to the Company at the end of the lease. The Company recorded an asset and liability for capital leases at present value of the minimum lease payments based on the incremental borrowing rate. Assets were depreciated over the useful life in accordance with the Company’s depreciation policy while rental payments and interest on the liability was accounted for using the effective interest method.

Leases that were not classified as capital leases were accounted for as operating leases. Operating lease agreements that had tenant improvement allowances were evaluated for lease incentives. For leases that contained escalating rent payments, the Company recognized rent expense on a straight-line basis over the lease term, with any lease incentives amortized as a reduction of rent expense over the lease term.

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 with respect to either Ablecom or Compuware 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 and operated 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 nine months ended March 31, 2020 and 2019, the accounts of the Management Company were consolidated with the accounts of Super Micro Computer, and a noncontrolling interest was 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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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 a third party in China. The transaction was closed in the third fiscal quarter of 2017 and the investment is accounted for using the equity method. As such, the Corporate Venture is also a related party. As of March 31, 2020 and June 30, 2019, the Company's equity investment in the Corporate Venture was $0 and $1.7 million, respectively, and was recorded under investment in equity investee on the Company's condensed consolidated balance sheets. The Company's share of losses, net of taxes, of the Corporate Venture were $1.1 million and $0.4 million for the three months ended March 31, 2020 and 2019, respectively, and $1.1 million and $3.6 million for the nine months ended March 31, 2020 and 2019, respectively, and were recorded as share of loss from equity investee, net of taxes in the Company’s condensed consolidated statements of operations. The Company does not have an obligation or commitment to share in losses of the Corporate Venture above its investment amounts and will discontinue equity method accounting if the investment carrying value is below zero.

The Company previously recorded a deferred gain related to the contribution of certain technology rights of $10.0 million. The amortization of the deferred gain is being recognized as a credit to research and development 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 of March 31, 2020 and June 30, 2019, the Company had unamortized deferred gain balance of $2.5 million and $2.0 million, respectively, in accrued liabilities and $1.5 million and $3.0 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 nine months ended March 31, 2020 and 2019, respectively.

In addition, the Company sells products to the Corporate Venture. The Company's share of intra-entity profits on the products that remained unsold by the Corporate Venture as of each period end is eliminated and recorded as a reduction of the Company's investment balance in the Corporate Venture. To the extent that the elimination of intra-entity profits reduces the investment balance below zero, such amounts are recorded within accrued liabilities. The Company sold products worth $14.0 million and $13.7 million to the Corporate Venture in the three months ended March 31, 2020 and 2019, respectively, and $51.5 million and $35.2 million in the nine months ended March 31, 2020 and 2019, respectively. As of March 31, 2020, the Company recorded $0.5 million related to unrealized intra-entity profits in accrued liabilities in the Company’s condensed consolidated balance sheet. The Company had $10.4 million and $13.1 million due from the Corporate Venture in accounts receivable, net as of March 31, 2020 and June 30, 2019, 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. The COVID-19 pandemic has already and may further disrupt our supply chain. One supplier accounted for 26.1% and 20.1% of total purchases for the three months ended March 31, 2020 and 2019, respectively, and 27.9% and 21.2% for the nine months ended March 31, 2020 and 2019, respectively. Ablecom and Compuware, related parties of the Company as noted in Note 9, "Related Party Transactions," accounted for 9.4% and 9.9% of total cost of sales for the three months ended March 31, 2020 and 2019, respectively, and 9.8% and 9.4% for the nine months ended March 31, 2020 and 2019, respectively.

Concentration of Credit Risk

Financial instruments that 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 nine months ended March 31, 2020 and 2019. No country other than the United States represented greater than 10% of the Company’s total net sales in the three and nine months ended March 31, 2020 and 2019. No customer accounted for greater than 10% of the Company's accounts receivable, net as of March 31, 2020, whereas one customer accounted for 17.0% of accounts receivable, net as of June 30, 2019.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Accounting Pronouncements Recently Adopted

In February 2016, the FASB issued an amendment to the accounting guidance, Leases. The new lease accounting guidance supersedes the existing guidance. Under the new lease accounting guidance, lessees are required to recognize assets and liabilities on the balance sheet for most leases and provide enhanced disclosures. Leases will continue to be classified as either finance or operating. The Company adopted the new lease accounting guidance on July 1, 2019 using the modified retrospective approach, and as a result did not restate prior comparative periods. The Company elected the “package of practical expedients” under the transition guidance of the new standard, which permits it not to reassess under the new lease accounting guidance 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 accounting guidance. In connection with the adoption of the new lease accounting guidance, the Company recorded a transition adjustment to recognize ROU assets and lease liabilities on the Company’s consolidated balance sheet of $14.8 million and $15.2 million, respectively, on July 1, 2019, primarily related to real estate leases. See Note 8, "Leases," for further details.

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. The Company adopted this guidance on July 1, 2019. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements and related disclosures.

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 Company adopted this guidance on July 1, 2019. The adoption of the guidance did not have a material impact on the Company's consolidated financial statements and related disclosures.

Accounting Pronouncements Not Yet Adopted

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 has started its accounting assessment of the adoption of the new standard, the process of establishing new accounting policies and evaluation of changes to systems and internal controls necessary to support the requirements of the new standard. The Company will continue to update its assessment as more information becomes available. The Company cannot reasonably estimate quantitative information related to the impact of the new guidance on its consolidated financial statements at this time.

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 FASB Concepts Statements, including the consideration of costs and benefits. The new standard is effective for the Company from July 1, 2020. The adoption of the new guidance will simplify the disclosure of the fair value measurements for the Company's financial assets and liabilities.

In August 2018, the FASB issued authoritative guidance , Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, 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 will adopt the new guidance on a prospective basis for any new hosting arrangement entered into after July 1, 2020.

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(Unaudited)

In December 2019, the FASB issued amended guidance, Simplifying the Accounting for Income Taxes, to remove certain exceptions to the general principles from ASC 740 - Income Taxes, and to improve consistent application of U.S. GAAP for other areas of ASC 740 by clarifying and amending existing guidance. The guidance is effective for the Company from July 1, 2021; 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 March 2020, the FASB issued authoritative guidance, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued.  The guidance also establishes (1) a general contract modification principle that entities can apply in other areas that may be affected by reference rate reform and (2) certain elective hedge accounting expedients. The amendment is effective for all entities through December 15, 2022. The LIBOR is used to calculate the interest on borrowings under the Company's 2018 Bank of America Credit Facility. As the 2018 Bank of America Credit Facility terminates on June 30, 2020 before the phase out of LIBOR, the Company does not expect the adoption of the guidance to have an impact on its consolidated financial statement disclosures, results of operations and financial position.

Note 2.         Revenue

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):

	Three Months Ended March 31,				Nine Months Ended March 31,
	2020		2019		2020		2019
Server and storage systems	$	571,291	$	592,783	$	1,880,043	$	2,161,321
Subsystems and accessories	201,117		150,716		563,112		484,805
Total	$	772,408	$	743,499	$	2,443,155	$	2,646,126

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 nine months ended March 31, 2020 and 2019, of net sales by geographic region (in thousands):

	Three Months Ended March 31,				Nine Months Ended March 31,
	2020		2019		2020		2019
United States	$	422,872	$	436,734	$	1,419,117	$	1,516,262
Europe	158,144		128,789		433,767		472,325
Asia	160,472		146,120		487,827		549,296
Others	30,920		31,856		102,444		108,243
	$	772,408	$	743,499	$	2,443,155	$	2,646,126

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table presents the net sales from products sold through the Company's indirect sales channel and to its direct customers and OEMs for the three and nine months ended March 31, 2020 and 2019 (in thousands):

	Three Months Ended March 31,				Nine Months Ended March 31,
	2020		2019		2020		2019
Indirect sales channel	$	445,980	$	284,204	$	1,292,472	$	997,983
Direct customers and OEMs	326,428		459,295		1,150,683		1,648,143
Total net sales	$	772,408	$	743,499	$	2,443,155	$	2,646,126

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. Accounts receivable 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. Revenue recognized during the three and nine months ended March 31, 2020, which was included in the opening deferred revenue balance as of June 30, 2019, was $22.9 million and $71.6 million, respectively.

Deferred revenue increased during the nine months ended March 31, 2020 because the amounts for service contracts invoiced during the period exceeded the recognition of revenue from contracts entered into in prior periods.

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 and extended warranty 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 March 31, 2020 was approximately $205.5 million. The Company expects to recognize approximately 53% of remaining performance obligations as revenue in the next 12 months, and the remainder thereafter.

Note 3.        Stock-based Compensation

Equity Incentive Plan

Commencing March 8, 2016, the Company began granting stock options, RSUs, PRSUs and other equity-based awards under the 2016 Equity Incentive Plan (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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

sixteenth per quarter thereafter. As of March 31, 2020, the Company had 231,312 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:

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 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 nine months ended March 31, 2020 and 2019 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

	Three Months Ended March 31,						Nine Months Ended March 31,
	2020			2019			2020			2019
Risk-free interest rate	0.53% - 1.49%			2.56		%	0.53% - 1.72%			2.56% - 2.97%
Expected term	6.27 years			6.05 years			6.27 years			6.05 years
Dividend yield	—		%	—		%	—		%	—		%
Volatility	49.61% - 50.46%			50.25		%	49.61% - 50.46%			47.34% - 50.25%
Weighted-average fair value	$	10.15		$	7.55		$	9.50		$	8.56

The following table shows total stock-based compensation expense included in the condensed consolidated statements of operations for the three and nine months ended March 31, 2020 and 2019 (in thousands):

	Three Months Ended March 31,						Nine Months Ended March 31,
	2020			2019			2020			2019
Cost of sales	$	370		$	390		$	1,149		$	1,256
Research and development	3,043			3,107			9,299			9,816
Sales and marketing	417			418			1,276			1,359
General and administrative	975			1,045			3,099			3,650
Stock-based compensation expense before taxes	4,805			4,960			14,823			16,081
Income tax impact	(2,978		)	(1,016		)	(5,142		)	(3,339		)
Stock-based compensation expense, net	$	1,827		$	3,944		$	9,681		$	12,742

As of March 31, 2020, $6.5 million of unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 2.32 years, $34.2 million of unrecognized compensation cost related to unvested RSUs is expected to be recognized over a weighted-average period of 2.63 years and $0.7 million of unrecognized compensation cost related to unvested PRSUs is expected to be recognized over a period of 1.04 years.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Stock Option Activity

The following table summarizes stock option activity during the nine months ended March 31, 2020 under all plans:

 

	Options Outstanding	Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (in Years)
Balance as of June 30, 2019	7,374,635	$	18.02
Granted	251,930	$