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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 September 30, 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 classTrading SymbolName of each exchange on which registered
Common Stock, $0.001 par value per shareSMCINASDAQ 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 filerx  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 October 31, 2020 there were 51,782,128 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 SEPTEMBER 30, 2020

TABLE OF CONTENTS
 
  Page
PART I
ITEM 1.
ITEM 2.
ITEM 3.
ITEM 4.
PART II
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.

    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.


Table of Contents
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) 
September 30,June 30,
20202020
ASSETS
Current assets:
Cash and cash equivalents$300,089 $210,533 
Accounts receivable, net of allowances of $3,290 and $4,586 at September 30, 2020 and June 30, 2020, respectively (including accounts receivable from related parties of $1,202 and $8,712 at September 30, 2020 and June 30, 2020, respectively)
322,845 403,745 
Inventories773,856 851,498 
Prepaid expenses and other current assets (including other receivables from related parties of $7,708 and $19,791 at September 30, 2020 and June 30, 2020, respectively)
82,731 126,985 
Total current assets1,479,521 1,592,761 
Investment in equity investee5,025 2,703 
Property, plant and equipment, net241,852 233,785 
Deferred income taxes, net55,122 54,898 
Other assets35,173 34,499 
Total assets$1,816,693 $1,918,646 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable (including amounts due to related parties of $47,692 and $72,368 at September 30, 2020 and June 30, 2020, respectively)
$333,359 $417,673 
Accrued liabilities (including amounts due to related parties of $12,629 and $16,206 at September 30, 2020 and June 30, 2020, respectively)
121,710 155,401 
Income taxes payable6,325 4,700 
Short-term debt24,047 23,704 
Deferred revenue104,247 106,157 
Total current liabilities589,688 707,635 
Deferred revenue, non-current97,576 97,612 
Long-term debt, net of debt issuance costs11,980 5,697 
Other long-term liabilities (including related party balance of $1,169 and $1,699 at September 30, 2020 and June 30, 2020, respectively)
44,707 41,995 
Total liabilities743,951 852,939 
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: 51,765,627 and 52,408,703 at September 30, 2020 and June 30, 2020, respectively
Issued shares: 54,241,046 and 53,741,828 at September 30, 2020 and June 30, 2020, respectively
400,157 389,972 
Treasury stock (at cost), 2,475,419 and 1,333,125 shares at September 30, 2020 and June 30, 2020, respectively
(50,491)(20,491)
Accumulated other comprehensive gain (loss)95 (152)
Retained earnings722,812 696,211 
Total Super Micro Computer, Inc. stockholders’ equity1,072,573 1,065,540 
Noncontrolling interest169 167 
Total stockholders’ equity1,072,742 1,065,707 
Total liabilities and stockholders’ equity$1,816,693 $1,918,646 
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See accompanying notes to condensed consolidated financial statements.
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SUPER MICRO COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited) 
 Three Months Ended
September 30,
 20202019
Net sales (including related party sales of $13,899 and $27,662 in the three months ended September 30, 2020 and 2019, respectively)
$762,250$799,804
Cost of sales (including related party purchases of $62,199 and $65,033 in the three months ended September 30, 2020 and 2019, respectively)
632,335668,875
Gross profit129,915130,929
Operating expenses:
Research and development 54,79849,572
Sales and marketing20,29220,194
General and administrative24,37928,298
Total operating expenses99,46998,064
Income from operations30,44632,865
Other (expense) income, net (841)1,589
Interest expense(674)(552)
Income before income tax provision28,93133,902
Income tax provision(3,660)(8,568)
Share of income from equity investee, net of taxes1,3301,011
Net income$26,601$26,345
Net income per common share:
Basic$0.51$0.52
Diluted$0.49$0.51
Weighted-average shares used in calculation of net income per common share:
Basic52,32950,274 
Diluted54,42651,704 

See accompanying notes to condensed consolidated financial statements.
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SUPER MICRO COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited) 
 Three Months Ended
September 30,
 20202019
Net income$26,601 $26,345 
Other comprehensive income (loss), net of tax:
Foreign currency translation gain (loss)247 (140)
Total other comprehensive income (loss)247 (140)
Total comprehensive income $26,848 $26,205 

See accompanying notes to condensed consolidated financial statements.
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SUPER MICRO COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
(unaudited)
Three Months Ended September 30, 2020Common Stock and
Additional Paid-In
Capital		Treasury StockAccumulated
Other
Comprehensive
(Loss) Gain		Retained
Earnings		Non-controlling InterestTotal
Stockholders’
Equity
SharesAmountSharesAmount
Balance at June 30, 202053,741,828 $389,972 (1,333,125)$(20,491)$(152)$696,211 $167 $1,065,707 
Exercise of stock options, net of taxes350,830 5,020 — — — — — 5,020 
Release of shares of common stock upon vesting of restricted stock units217,519 — — — — — — — 
Shares of common stock withheld for the withholding tax on vesting of restricted stock units(69,131)(2,005)— — — — — (2,005)
Stock repurchases— — (1,142,294)(30,000)— — — (30,000)
Stock-based compensation— 7,170 — — — — — 7,170 
Foreign currency translation gain— — — — 247 — — 247 
Net income— — — — — 26,601 2 26,603 
Balance at September 30, 202054,241,046 $400,157 (2,475,419)$(50,491)$95 $722,812 $169 $1,072,742 

Three Months Ended September 30, 2019Common Stock and
Additional Paid-In
Capital		Treasury StockAccumulated
Other
Comprehensive
Loss		Retained
Earnings		Non-controlling InterestTotal
Stockholders’
Equity
SharesAmountSharesAmount
Balance at June 30, 201951,289,413 $349,683 (1,333,125)$(20,491)$(80)$611,903 $161 $941,176 
Release of shares of common stock upon vesting of restricted stock units100,186 — — — — — — — 
Shares of common stock withheld for the withholding tax on vesting of restricted stock units(30,789)(580)— — — — — (580)
Stock-based compensation— 5,054 — — — — — 5,054 
Foreign currency translation loss— — — — (140)— — (140)
Net income— — — — — 26,345 1 26,346 
Balance at September 30, 201951,358,810 $354,157 (1,333,125)$(20,491)$(220)$638,248 $162 $971,856 

See accompanying notes to condensed consolidated financial statements.
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SUPER MICRO COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
September 30,
 20202019
OPERATING ACTIVITIES:
Net income$26,601 $26,345 
Reconciliation of net income to net cash provided by operating activities:
Depreciation and amortization7,517 6,826 
Stock-based compensation expense7,170 5,054 
Allowances for (recovery of) doubtful accounts(154)56 
Provision for (recovery of) excess and obsolete inventories(902)8,328 
Share of income from equity investee(1,330)(1,011)
Foreign currency exchange (gain) loss618 (561)
Deferred income taxes, net(224)(585)
Other(719)289 
Changes in operating assets and liabilities:
Accounts receivable (including changes in related party balances of $7,510 and $(4,474) during the three months ended September 30, 2020 and 2019, respectively)
81,035 37,340 
Inventories78,544 (23,371)
Prepaid expenses and other assets (including changes in related party balances of $12,083 and $(3,554) during the three months ended September 30, 2020 and 2019, respectively)
43,724 (31,088)
Accounts payable (including changes in related party balances of $(24,676) and $3,796 during the three months ended September 30, 2020 and 2019, respectively)
(85,704)(24,865)
Income taxes payable1,625 (9,215)
Deferred revenue(1,946)(1,529)
Accrued liabilities (including changes in related party balances of $(3,577) and $5,324 during the three months ended September 30, 2020 and 2019, respectively)
(36,457)12,693 
Other long-term liabilities (including changes in related party balances of $(530) and $1,272 during the three months ended September 30, 2020 and 2019, respectively)
1,157 854 
Net cash provided by operating activities120,555 5,560 
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (including payments to related parties of $2,230 and $813 during the three months ended September 30, 2020 and 2019, respectively)
(11,851)(13,325)
Net cash used in investing activities(11,851)(13,325)
FINANCING ACTIVITIES:
Proceeds from debt6,408 — 
Repayment of debt(271)— 
Net repayment on asset-backed revolving line of credit— (1,116)
Proceeds from exercise of stock options5,020 — 
Payment of withholding tax on vesting of restricted stock units(2,005)(580)
Stock repurchases(28,453)— 
Payments of obligations under finance leases(26)(19)
Net cash used in financing activities(19,327)(1,715)
Effect of exchange rate fluctuations on cash185 (38)
Net increase (decrease) in cash, cash equivalents and restricted cash89,562 (9,518)
Cash, cash equivalents and restricted cash at the beginning of the period212,390 262,140 
Cash, cash equivalents and restricted cash at the end of the period$301,952 $252,622 
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Supplemental disclosure of cash flow information:
Cash paid for interest$512 $777 
Cash paid for taxes, net of refunds1,204 30,800 
Non-cash investing and financing activities:
Unpaid property, plant and equipment purchases (including due to related parties of $1,664 and $1,514 as of September 30, 2020 and 2019, respectively)
$6,661 $6,413 
New operating lease assets obtained in exchange for operating lease liabilities
2,059 — 
Unpaid stock repurchases1,547 — 

See accompanying notes to condensed consolidated financial statements.

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SUPER MICRO COMPUTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1.        Summary of Significant Accounting Policies

Significant Accounting Policies and Estimates

No material changes have been made to the significant accounting policies of Super Micro Computer, Inc., a corporation incorporated under the laws of Delaware, and its consolidated entities (together, the “Company”), disclosed in Note 1, Organization and Summary of Significant Accounting Policies, in its Annual Report on Form 10-K, filed on August 28, 2020, for the year ended June 30, 2020. Management's estimates include, as applicable, the anticipated impacts of the coronavirus ("COVID-19') pandemic.

Basis of Presentation

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 generally accepted accounting principals in the United States of America ("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 months ended September 30, 2020 are not necessarily indicative of the results that may be expected for future quarters or for the fiscal year ending June 30, 2021.

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 is accounted for using the equity method. As such, the Corporate Venture is also a related party.
    The Company recorded a deferred gain related to the contribution of certain technology rights. As of September 30, 2020 and June 30, 2020, the Company had unamortized deferred gain balance of $2.0 million and $2.0 million, respectively, in accrued liabilities and $0.5 million and $1.0 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 impairment and makes appropriate reductions in carrying values if it determines that an impairment charge is required. In June 2020, the third-party parent company that controls the Corporate Venture was placed on a U.S. government export control list, along with
several of the parent's related entities and a separate listing for one of its subsidiaries. The Corporate Venture is not itself a restricted party. The Company is working with the Corporate Venture's management to ensure that the Corporate Venture remains in compliance with the new restrictions. The Company does not believe that the equity investment carrying value is impacted as of September 30, 2020. No impairment charge was recorded for the three months ended September 30, 2020 and 2019, respectively.
The Company sold products worth $0.6 million and $22.1 million to the Corporate Venture in the three months ended September 30, 2020 and 2019, respectively, and the Company’s share of intra-entity profits on the products that remained unsold by the Corporate Venture in the amounts of $2.3 million and $3.0 million as of September 30, 2020 and June 30, 2020, respectively, have been eliminated and have reduced the carrying value of the Company’s investment 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 had $0.6 million and $7.8 million due from the Corporate Venture in accounts receivable, net as of September 30, 2020 and June 30, 2020, respectively.

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SUPER MICRO COMPUTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Concentration of Supplier Risk

    Certain materials used by the Company in the manufacturing 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 22.0% and 28.7% of total purchases for the three months ended September 30, 2020 and 2019, respectively. Ablecom and Compuware, related parties of the Company (see Note 8, "Related Party Transactions") accounted for 9.8% and 9.7% of total cost of sales for the three months ended September 30, 2020 and 2019, 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 months ended September 30, 2020 and 2019. No customer accounted for greater than 10% of the Company's accounts receivable, net as of September 30, 2020, whereas one customer accounted for 10.1% of accounts receivable, net as of June 30, 2020.

Accounting Pronouncements Recently Adopted

In June 2016, the FASB issued authoritative guidance, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. Under this new guidance, a company is required to estimate credit losses on certain types of financial instruments using an expected-loss model, replacing the current incurred-loss model, and record the estimate through an allowance for credit losses, which results in more timely recognition of credit losses. The Company adopted this guidance on July 1, 2020 using the modified retrospective transition method, which requires a cumulative-effect adjustment, if any, to the opening balance of retained earnings to be recognized on the date of adoption with prior periods not restated. The adoption of the guidance had no material impact on the Company’s condensed consolidated financial statements as of July 1, 2020.

The Company maintains an allowance for credit losses for accounts receivable and the investment in an auction rate security. The allowance for credit losses is estimated using a loss rate method, considering factors such as customers’ credit risk, historical loss experience, current conditions, and forecasts. The allowance for credit losses is measured on a collective (pool) basis by aggregating customer balances with similar risk characteristics. The Company also records a specific allowance based on an analysis of individual past due balances or customer-specific information, such as a decline in creditworthiness or bankruptcy. The new guidance has no material impact on the Company's condensed consolidated financial statements for the three months ended September 30, 2020.

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 Company adopted this guidance on July 1, 2020. As of September 30, 2020, the Company’s investment in an auction rate security is the only Level 3 investment measured at fair value on a recurring basis. Changes to the disclosures in the condensed consolidated financial statements were immaterial. See Note 5 below.

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 as well as hosting arrangements that include an internal use software license with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The accounting for the service element of a hosting arrangement that is a service contract is not affected by the new guidance. The Company adopted this guidance on July 1, 2020, prospectively. The adoption of this guidance did not have a material impact on the Company's condensed consolidated financial statements and disclosures.

Accounting Pronouncements Not Yet Adopted

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
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SUPER MICRO COMPUTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
1, 2021; early adoption is permitted. The adoption of the guidance is not anticipated to have a material impact on its consolidated financial statements and disclosures.

    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. 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, as amended, will terminate on June 30, 2021 before the phase out of LIBOR, the Company does not expect the adoption of the guidance to have an impact on its consolidated financial statements and disclosures.

Note 2.         Revenue

    Disaggregation of Revenue

The Company disaggregates revenue by type of product and by geographical market in order to depict the nature, amount, and timing of revenue and cash flows. Service revenues, which are less than 10%, 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
September 30,
 20202019
Server and storage systems$617,788 $636,026 
Subsystems and accessories144,462 163,778 
Total$762,250 $799,804 

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 months ended September 30, 2020 and 2019, of net sales by geographic region (in thousands):
 Three Months Ended
September 30,
 20202019
United States$496,086 $468,841 
Europe112,089 128,059 
Asia126,707 161,639 
Others27,368 41,265 
$762,250 $799,804 

Starting July 1, 2020, the Company no longer separately discloses revenue by products sold to indirect sales channel partners or direct customers and original equipment manufacturers because management does not make business operational decisions based on this set of disaggregation so the disclosure is no longer material to investors.

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SUPER MICRO COMPUTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
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 unconditional right to consideration for performance obligations either partially or fully completed.

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 months ended September 30, 2020, which was included in the opening deferred revenue balance as of June 30, 2020 of $203.8 million, was $28.6 million.

Deferred revenue decreased $1.9 million during the three months ended September 30, 2020 because the recognition of revenue from contracts entered into in prior periods was greater than the invoiced amounts for service contracts during the period.

    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 September 30, 2020 was $201.8 million. The Company expects to recognize approximately 52% 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 applies judgment in the allocation of 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. Contract acquisition costs allocated to service performance obligations that are subject to capitalization are insignificant to the Company’s 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 consolidated financial statements.

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Note 3.        Net Income Per Common Share

    The following table shows the computation of basic and diluted net income per common share for the three months ended September 30, 2020 and 2019 (in thousands, except per share amounts):
 
 Three Months Ended
September 30,
 20202019
Numerator:
Net income$26,601 $26,345 
Denominator:
Weighted-average shares outstanding52,329 50,274 
Effect of dilutive securities2,097 1,430 
Weighted-average diluted shares54,426 51,704 
Basic net income per common share$0.51 $0.52 
Diluted net income per common share$0.49 $0.51 

    For the three months ended September 30, 2020 and 2019, the Company had stock options, restricted stock units ("RSUs") and performance based restricted stock units ("PRSUs") 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 1,177,694 and 3,958,789 for three months ended September 30, 2020, and 2019, respectively.

Note 4.        Balance Sheet Components

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

Inventories:
September 30, 2020June 30, 2020
Finished goods$553,950 $656,817 
Work in process68,322 38,146 
Purchased parts and raw materials151,584 156,535 
Total inventories$773,856 $851,498 
    
The Company recorded a (recovery) provision for excess and obsolete inventory to cost of sales totaling $(0.8) million and $10.1 million in the three months ended September 30, 2020 and 2019, respectively. These amounts exclude a provision (recovery) for adjusting the cost of certain inventories to net realizable value of $0.9 million and $(1.8) million for the three months ended September 30, 2020 and 2019, respectively. The recovery is recognized when previously reserved inventories are sold.

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SUPER MICRO COMPUTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Prepaid Expenses and Other Current Assets:
 September 30, 2020June 30, 2020
Other receivables (1)$40,417 $94,859 
Prepaid income tax13,846 14,323 
Prepaid expenses5,832 7,075 
Deferred service costs4,431 4,161 
Restricted cash250 250 
Others17,955 6,317 
Total prepaid expenses and other current assets$82,731 $126,985 
__________________________
(1) Includes other receivables from contract manufacturers based on certain buy-sell arrangements of $33.6 million and $83.8 million as of September 30, 2020 and June 30, 2020, respectively.

Cash, cash equivalents and restricted cash:
 September 30, 2020June 30, 2020
Cash and cash equivalents$300,089 $210,533 
Restricted cash included in prepaid expenses and other current assets250 250 
Restricted cash included in other assets1,613 1,607 
Total cash, cash equivalents and restricted cash$301,952 $212,390 

Property, Plant, and Equipment:
 September 30, 2020June 30, 2020
Buildings$86,930 $86,930 
Land75,264 75,251 
Machinery and equipment87,876 85,381 
Buildings construction in progress (1)54,555 46,311 
Building and leasehold improvements24,886 24,517 
Software22,616 20,597 
Furniture and fixtures21,769 21,544 
373,896 360,531 
Accumulated depreciation and amortization(132,044)(126,746)
Property, plant and equipment, net$241,852 $233,785 
__________________________
(1) Primarily relates to the development and construction costs associated with the Company’s Green Computing Park located in San Jose, California, and new building in Taiwan.

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SUPER MICRO COMPUTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Other Assets:
 September 30, 2020June 30, 2020
Operating lease right-of-use asset$24,075 $23,784 
Deferred service costs, non-current4,828 4,632 
Restricted cash, non-current1,613 1,607 
Investment in auction rate security1,571 1,571 
Deposits1,252 1,201 
Non-marketable equity securities128 128 
Prepaid expense, non-current1,706 1,576 
Total other assets$35,173 $34,499 

Accrued Liabilities:    
September 30, 2020June 30, 2020
Accrued payroll and related expenses$34,059 $33,577 
Contract manufacturing liabilities20,366 36,249 
Accrued warranty costs11,057 9,984 
Customer deposits10,306 9,942 
Operating lease liability7,027 6,310 
Accrued cooperative marketing expenses5,818 5,925 
Accrued professional fees2,630 5,661 
Accrued legal liabilities (Note 11)— 18,114 
Others (accrued liabilities)30,447 29,639 
Total accrued liabilities$121,710 $155,401 

Performance Awards Liability

    In March 2020, the Board of Directors (the “Board”) approved performance bonuses for the Chief Executive Officer, a senior executive and two members of the Board, which payments will be earned when specified market and performance conditions are achieved.

The Chief Executive Officer’s aggregate cash bonuses of up to $8.1 million are earned in two tranches. The first 50% is payable if the average closing price for the Company’s common stock equals or exceeds $31.61 for any period of 20 consecutive trading days following the date of the agreement and ending prior to September 30, 2021 and the Chief Executive Officer remains employed with the Company through the date that such common stock price goal is determined to have been achieved and the date that the payment is made. This payment can be reduced at the discretion of the Board to the extent the Company has not made adequate progress in remediating its material weaknesses in its internal control over financial reporting as determined by the Board. The second 50% is payable if the average closing price for the Company’s common stock equals or exceeds $32.99 for any period of 20 consecutive trading days following the date of the agreement and ending prior to June 30, 2022 and the Chief Executive Officer remains employed with the Company through the date that such common stock price goal is achieved and the date that the payment is made.

Performance bonuses for a senior executive and two members of the Board are earned based on achieving a specified target average closing price for the Company’s common stock over the specified period as determined by the Board at the grant dates and continuous services through the payment dates. A senior executive earned an aggregate cash payment of $0.1 million when the target average closing price was met in the fourth quarter of fiscal year 2020. The two members of the Board can earn aggregate cash payments of $0.3 million in two tranches if the target average closing price reaches $31.61 for the first tranche
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
and $32.99 per share for the second tranche. These awards expire in two equal amounts at September 30, 2021 and June 30, 2022 for the two Board members' awards.

The Company accounts for the outstanding performance bonuses as liabilities and estimates fair value of payable amounts using a Monte-Carlo simulation model. The awards are re-measured at each period end with changes in fair value recorded in the Company’s consolidated statement of operations in operating expenses. The cumulative recorded expense at each period end is trued-up to the expected payable amount vested through the period end. The requisite service periods over which expenses are recognized are derived from the Monte-Carlo model for all performance awards, except for the first 50% of the Chief Executive Officer’s award that includes a performance condition. The Company estimates if it is probable that the performance condition will be met through the expiration date of this award. If at the measurement date it is determined to be probable, the Company estimates the requisite period as the longer of the service period derived by the Monte-Carlo model and the implicit service period when the Company expects to make adequate progress in remediating its material weaknesses in its internal control over financial reporting, as reported by the Company's Audit Committee. If it is determined to not be probable, then the Company will reverse any previously recognized expense for this award in the period when it is no longer probable that the performance condition will be achieved.

As of September 30, 2020 and June 30, 2020, the fair value of these performance bonuses was $2.2 million and $2.1 million, respectively, of which $2.2 million and $1.5 million, respectively, was recorded within accrued liabilities and $0.0 million and $0.6 million, respectively, was recorded within other long-term liabilities on the Company's consolidated balance sheet. An unrecognized compensation expense of $2.3 million will be recorded over the remaining service periods from 0.26 years to 0.93 years. The fair value of these awards is remeasured each reporting period. The expense recognized during the three months ended September 30, 2020 and September 30, 2019 was $0.1 million and $0.0 million respectively.
Other Long-term Liabilities:
September 30, 2020June 30, 2020
Operating lease liability, non-current$17,892 $18,102 
Accrued unrecognized tax benefits including related interest and penalties16,067 15,496 
Accrued warranty costs, non-current2,670 2,395 
Others8,078 6,002 
Total other long-term liabilities$44,707 $41,995 

Product Warranties:
Three Months Ended
September 30,
 20202019
Balance, beginning of the period$12,379 $11,034 
Provision for warranty8,347 5,872 
Costs utilized(7,607)(7,662)
Change in estimated liability for pre-existing warranties608 2,041 
Balance, end of the period13,727 11,285 
Current portion11,057 8,655 
Non-current portion$2,670 $2,630 

Note 5.        Fair Value Disclosure

    The financial instruments of the Company measured at fair value on a recurring basis are included in cash equivalents, other assets and accrued liabilities. The Company classifies its financial instruments, 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.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

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 September 30, 2020 and June 30, 2020. The Company is using the discounted cash flow method to estimate the fair value of the auction rate security at each period end and the following assumptions: (i) the expected yield based on observable market rate of similar securities, (ii) the security coupon rate that is reset monthly, (iii) the estimated holding period and (iv) a liquidity discount. The liquidity discount assumption is based on the management estimate of lack of marketability discount of similar securities and is determined based on the analysis of financial market trends over time, recent redemptions of securities and other market activities. The Company performed a sensitivity analysis and applying a change of either plus or minus 100 basis points in the liquidity discount does not result in a significantly higher or lower fair value measurement of the auction rate security as of September 30, 2020.

Financial Assets and Liabilities Measured on a Recurring Basis

    The following table sets forth the Company’s financial instruments as of September 30, 2020 and June 30, 2020, 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):
September 30, 2020Level 1Level 2Level 3Asset at
Fair Value
Assets
Money market funds (1)$841 $— $— $841 
Certificates of deposit (2)— 845 — 845 
Auction rate security— — 1,571 1,571 
Total assets measured at fair value$841 $845 $1,571 $3,256 
Liabilities
Performance awards liability (3)$— $2,196 $— $2,196 
Total liabilities measured at fair value$— $2,196 $— $2,196 
June 30, 2020Level 1Level 2Level 3Asset at
Fair Value
Assets
Money market funds (1)$1,163 $— $— $1,163 
Certificates of deposit (2)— 836 — 836 
Auction rate security— — 1,571 1,571 
Total assets measured at fair value$1,163 $836 $1,571 $3,570 
Liabilities
Performance awards liability (3)$— $2,100 $— $2,100 
Total liabilities measured at fair value$— $2,100 $— $2,100 
__________________________
(1) $0.0 million and $0.4 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 September 30, 2020 and June 30, 2020, respectively.

(2) $0.2 million and $0.2 million in certificates of deposit are included in cash and cash equivalents, $0.3 million and $0.3 million in certificates of deposit are included in prepaid expenses and other assets, and $0.3 million and $0.3 million in certificates of deposit are included in restricted cash, non-current in other assets in the condensed consolidated balance sheets as of September 30, 2020 and June 30, 2020, respectively.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
(3) As of September 30, 2020 and June 30, 2020, the current portion of the performance awards liability of $2.2 million and $1.5 million, respectively, is included in accrued liabilities and the noncurrent portion of $0.0 million and $0.6 million, respectively, is included in other long-term liabilities in the condensed consolidated balance sheets.

On a quarterly basis, the Company also evaluates the current expected credit loss by considering factors such as historical experience, market data, issuer-specific factors, and current economic conditions. For the three months ended September 30, 2020, the credit losses related to the Company’s investments was not significant.

    The Company estimated the fair value of performance awards using the Monte-Carlo simulation model and classified them within Level 2 of the fair value hierarchy as estimates are based on the observable inputs. The significant inputs used in estimating the fair value of the awards as of September 30, 2020 and June 30, 2020 are as follows:

September 30, 2020
Stock Price as of Period EndPerformance PeriodRisk-free RateVolatilityDividend Yield
$26.4
1.0 - 1.75 years
0.13%53.58%—%

June 30, 2020
Stock Price as of Period EndPerformance PeriodRisk-free RateVolatilityDividend Yield
$28.39
1.25 - 2.0 years
0.16%53.75%—%

    There was no movement in the balances of the Company's financial assets measured at fair value on a recurring basis, consisting of investment in an auction rate security, using significant unobservable inputs (Level 3) for the three months ended September 30, 2020 and 2019.

There were no transfers between Level 1, Level 2 or Level 3 financial instruments in the three months ended September 30, 2020 and 2019.

    The following is a summary of the Company’s investment in an auction rate security as of September 30, 2020 and June 30, 2020 (in thousands): 
 September 30, 2020 and June 30, 2020
 Cost BasisGross
Unrealized
Holding
Gains		Gross
Unrealized
Holding
Losses		Fair Value
Auction rate security$1,750 $— $(179)$1,571 
 
No gain or loss was recognized in other comprehensive income for the auction rate security for the three months ended September 30, 2020 and 2019.
    
The Company measures the fair value of outstanding debt for disclosure purposes on a recurring basis. As of September 30, 2020 and June 30, 2020, total debt of $36.0 million and $29.4 million, respectively, is 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.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Note 6.        Short-term and Long-term Debt

    Short-term debt obligations as of September 30, 2020 and June 30, 2020 consisted of the following (in thousands):
 
 September 30,June 30,
 20202020
CTBC Bank term loan, due August 31, 2021$24,047 $23,704 
CTBC Bank term loan, due June 4, 203011,980 5,697 
Total debt36,027 29,401 
Short-term debt and current portion of long-term debt24,047 23,704 
Debt, Non-current$11,980 $5,697 

Activities under Revolving Lines of Credit and Term Loans

Bank of America

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 was amended on May 12, 2020. The Company paid a fee of $0.7 million and entered into a third amendment of the 2018 Bank of America Credit Facility that extended the maturity of the credit facility to June 30, 2021 and changed certain terms of the original agreement. The amendment was accounted for as a modification and the impact was immaterial to the consolidated financial statements. Under the terms of the May 12, 2020 amendment of the 2018 Bank of America Credit Facility, in the event of default or if outstanding borrowings are in excess of $220.0 million, 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. In addition, the amendment released the real property of Super Micro Computer as a collateral. 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. Voluntary prepayments are permitted without early repayment fees or penalties. Subject to customary exceptions, the 2018 Bank of America Credit Facility is secured by substantially all of Super Micro Computer’s assets, other than real property assets. Under the terms of the 2018 Bank of America Credit Facility, the Company is not permitted to pay any dividends. The Company is required to pay 0.375% per annum on the 2018 Bank of America Credit Facility for any unused borrowings. The 2018 Bank of America Credit Facility contains customary representations and warranties and customary affirmative and negative covenants applicable to the Company and its subsidiaries and contains a financial covenant, which requires that the Company maintain a certain fixed charge coverage ratio, for each twelve-month period while in a Trigger Period, as defined in the agreement, is in effect.

As of September 30, 2020 and June 30, 2020, the Company had no outstanding borrowings under the 2018 Bank of America Credit Facility. The interest rates under the 2018 Bank of America Credit Facility as of September 30, 2020 and June 30, 2020 were 3.00%. In October 2018, a $3.2 million letter of credit was issued under the 2018 Bank of America Credit Facility and in October 2019, the letter of credit amount was increased to $6.4 million. No amounts have been drawn under the standby letter of credit. The balance of debt issuance costs outstanding were $0.5 million and $0.6 million as of September 30, 2020 and June 30, 2020, respectively. The Company has been in compliance with all the covenants under the 2018 Bank of America Credit Facility, and as of September 30, 2020, the Company's available borrowing capacity was $243.6 million, subject to the borrowing base limitation and compliance with other applicable terms.

CTBC Bank

CTBC Credit Facility

In June 2019, the Company entered into a credit agreement with CTBC Bank, which was amended in August 2020, (collectively, the "CTBC Credit Facility"). The amended credit agreement with CTBC Bank that provides for (i) a 12-month NTD 700.0 million ($24.0 million U.S. dollar equivalent) term loan facility secured by the land and building located in Bade,
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
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 ($3.4 million U.S. dollar equivalent) with an annual fee equal to 0.50% per annum, (ii) a 180-day NTD 1,500.0 million ($51.5 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 plus an 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 0.80% per annum which is adjusted monthly, or equal to the lender’s established NTD interest rate plus an interest rate ranging from 0.30% to 0.50% per annum which is adjusted monthly if the borrowing is in NTD. The total borrowings allowed under the CTBC Credit Facility was capped at $50.0 million. There are no financial covenants associated with the CTBC Credit Facility.

The total outstanding borrowings under the CTBC Credit Facility term loan were denominated in NTD and remeasured into U.S. dollars of $24.0 million and $23.7 million at September 30, 2020 and June 30, 2020, respectively. As of September 30, 2020 and June 30, 2020, the Company did not have any outstanding borrowings under the CTBC Credit Facility revolving line of credit. The interest rate for these loans were 0.73% per annum as of September 30, 2020 and 0.63% per annum as of June 30, 2020. At September 30, 2020, the amount available for future borrowing under the CTBC Credit Facility was $26.0 million. As of September 30, 2020, the net book value of land and building located in Bade, Taiwan, collateralizing the CTBC Credit Facility term loan was $25.3 million.

2020 CTBC Term Loan Facility

In May 2020, the Company entered into a ten-year, non-revolving term loan facility (“2020 CTBC Term Loan Facility”) to obtain up to NTD 1.2 billion ($40.7 million in U.S. dollar equivalents) in financing for use in the expansion and renovation of the Company’s Bade Manufacturing Facility located in Taiwan. Drawdowns on the 2020 CTBC Term Loan Facility are based on 80% of balances owed on commercial invoices from the contractor and shall be drawn according to the progress of the renovations. Borrowings under the 2020 CTBC Term Loan Facility are available through June 2022. The Company is required to pay against total outstanding principal and interest in equal monthly installments starting June 2023 and continuing through the maturity date of June 2030. Interest under the 2020 CTBC Term Loan Facility is the two-year term floating rate of postal saving interest rate plus 0.105% and is established on the date of the drawdown application. If no interest rate is agreed upon, interest shall accrue at the annual base rate for CTBC plus 4.00%. The 2020 CTBC Term Loan Facility is secured by the Bade Manufacturing Facility and its expansion. Fees paid to the lender as debt issuance costs were immaterial. The Company has financial covenants requiring the Company's current ratio, debt service coverage ratio, and financial debt ratio, as defined in the agreement, to be maintained at certain levels under the 2020 CTBC Term Loan Facility.

As of September 30, 2020 and June 30, 2020, the amounts outstanding under the 2020 CTBC Term Loan Facility were $12.0 million and $5.7 million, respectively. The interest rate for these loans were 0.45% per annum as of September 30, 2020 and June 30, 2020. The net book value of the property serving as collateral as of September 30, 2020 was $17.1 million. As of September 30, 2020, the Company was in compliance with all financial covenants under the 2020 CTBC Term Loan Facility.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Note 7.        Leases
The Company leases offices, warehouses and other premises, vehicles and certain equipment leased under non-cancelable operating leases. Operating lease expense recognized and supplemental cash flow information related to operating leases for the three months ended September 30, 2020 and 2019 were as follows (in thousands):
Three Months Ended
September 30,
20202019
Operating lease expense (including expense for lease agreements with related parties of $347 and $365 for the three months ended September 30, 2020 and 2019, respectively)
$2,000 $1,709 
Cash payments for operating leases (including payments to related parties of $347 and $357 for the three months ended September 30, 2020 and, 2019, respectively)
$1,966 $1,845 
    During the three months ended September 30, 2020 and 2019, the Company's costs related to short-term lease arrangements for real estate and non-real estate assets were immaterial. Variable payments expensed in the three months ended September 30, 2020 and September 30, 2019 were immaterial.
    As of September 30, 2020, the weighted average remaining lease term for operating leases was 4.3 years and the weighted average discount rate was 3.5%. Future minimum lease payments under noncancelable operating lease arrangements as of September 30, 2020 were as follows (in thousands):
Fiscal Year:Minimum lease payments
2021$5,857 
20226,492 
20234,933 
20244,267 
20254,354 
2026 and beyond993 
Total future lease payments$26,896 
Less: Imputed interest(1,977)
Present value of operating lease liabilities$24,919 
    
As of September 30, 2020, commitments under short-term lease arrangements, and operating and financing leases that have not yet commenced were immaterial.

    The Company has entered into lease agreements with related parties.  See Note 8, "Related Party Transactions," for discussion.

Note 8.        Related Party Transactions

The Company has a variety of business relationships with Ablecom and Compuware. Ablecom and Compuware are both Taiwan corporations. Ablecom is one of the Company’s major contract manufacturers; Compuware is both a distributor of the Company’s products and a contract manufacturer for the Company. Ablecom’s Chief Executive Officer, Steve Liang, is the brother of Charles Liang, the Company’s President, Chief Executive Officer and Chairman of the Board. Steve Liang and his family members owned approximately