SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended that involve risks and uncertainties. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology including “would,” “could,” “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of these terms or other comparable terminology. In evaluating these statements, you should specifically consider various factors, including the risks described below, under Part I, Item 1A, “Risk Factors”, and in other parts of this Form 10-K as well as in our other filings with the SEC. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Annual Report on Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. We cannot guarantee future results, levels of activity, performance or achievements.Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
PART I
Item 1. Business
We are a Silicon Valley founded, headquartered and operatedValley-based provider of application optimized high performanceapplication-optimized high-performance and high efficiencyhigh-efficiency server and storage systems. We develop and provide end-to-end green computing solutions to thesystems for various markets, including enterprise data centers, cloud computing, data center, enterprise, artificial intelligence, 5G and machine learning, big data, hyper-converged, OEM,high performance computing ("HPC"), and Internet of Things ("IoT")/embedded markets.edge computing. Our solutions range frominclude complete server,servers, storage systems, modular blade servers, blades, workstations, complete rack scale plug and workstations toplay solutions delivering pre-defined and pre-tested full racks,rack solutions, networking devices, serversystem management software, and server sub-systems. We also provide global support and services.services to help our customers install, upgrade and maintain their computing infrastructure. We offer our customers a high degree of flexibility and customization by providing a broad array of server models and configurations from which they can choose the optimalbest solutions to fit their computing needs. Our server and storage systems, subsystemssub-systems and accessories are architecturally designed to provide high levels of reliability, quality, configurability,and scalability, thereby enabling our customers to benefit from improvements in compute performance, density, thermal management and power efficiency, which lead to lower total cost of ownership.scalability.
We conduct our operations principally from our Silicon Valley headquarters in California and in our Taiwan and the Netherlands facilities. Our sales and marketing activities operate through a combination of our direct sales force and indirect
2
sales channel partners. We work with distributors, value-added resellers, system integrators, and original equipment manufacturers ("OEMs") to market and sell our optimized solutions to their end customers that require highly space-efficient solutions and delivers higher efficiency through sharing resources across systems.in our indirect sales channels.
Strategy
Our objective is to be the world’s leading provider of application optimized, high performanceapplication-optimized, high-performance server, storage and networking solutions. Achieving this objective requires continuous development and innovation of our solutions with better price performanceprice-performance and architectural advantages compared with our prior generation of solutions and with solutions offered by our competitors. We believe that many of these product innovations are gaining momentum based on the strong year-over-year
A Strong Internal Research and support offerings, further optimize our global operating structureDevelopment and deepen our relationships with suppliers and manufacturers.Internal Manufacturing Capability
We believe oneare continually investing in our engineering organization. As of our major competitive advantages is our ability to rapidly incorporate the latest computing innovations into our products. We intend to maintain our time-to-market advantage by continuing our investmentJune 30, 2021, we employed over 1,800 persons in our research and development effortsorganization. These resources, along with our understanding of complex computing and storage requirements, enable us to rapidly developdeliver product innovation featuring advanced functionality and capabilities required by our customers. Also, substantially all of our servers are tested and assembled in our facilities, and more than half of our final server and storage production is completed in San Jose, California. Our engineering aptitude, coupled with our internal manufacturing capability, enables rapid prototyping and product roll-out, contributing to a high level of responsiveness to our customers.
Introducing More Innovative Products, Faster
We seek to sustain advantages in both time-to-market and breadth of products incorporating the latest technological innovations, such as new proprietary server,processors, advancements in storage and networking solutions basedevolving I/O technologies. We seek these advantages by leveraging our in-house design capabilities and our Building Block Solutions ® architecture. This allows us to offer customers a broad choice of products to match their target application requirements. For example, in early April 2021, we introduced over 100 new application optimized systems in support of Intel’s introduction of its 3rd Gen Intel Xeon Scalable processors. In March 2021, Supermicro announced one of the most versatile portfolio of AMD EPYC™ 7003-based systems delivering world record performance – 36% improvement -- for today’s most critical workloads.
Capitalizing on industry standard components. We planNew Applications and Technologies
In addition to serving traditional needs for server and storage systems, we have devoted, and will continue to work closely with technology partners such as Intel Corporation ("Intel"), Nvidia Corporation ("Nvidia")devote, substantial resources to developing systems that support emerging and Advanced Micro Devices, Inc. ("AMD"),growing applications including cloud computing, artificial intelligence, 5G/edge computing, storage and others. We believe there are significant opportunities for us in each of these rapidly developing markets due to develop productsstringent design requirements for these applications that are compatible withoften require the use of the latest generation of industry standard technologies. We believe these efforts will allowtechnologies, allowing us to continueleverage our capabilities in product innovation, superior time-to-market, and portfolio breadth.
Driving Software and Services Sales to offerour Global Enterprise Customers
We seek to grow our global enterprise revenue by bolstering and expanding our software management products that lead in priceand support services. These software products and services arerequired for performance as each generation of computing innovations becomes available.
We plan to continue to increase our worldwide manufacturing capacity and logistics capabilitiesabilities in the US,United States, the Netherlands and Taiwan in order to more efficiently serve our customers and lower our overall manufacturing costs. We continuehave recently completed the construction of a new 749,000 square feet building in Taiwan to assessincrease our manufacturing capacity and diversify our operating base and optimize relatively low labor costs as compared to the efficiency ofUnited States.In addition, we have added a new building devoted to manufacturing at our global tax structure to manage our tax costs. Within our global operating structure, we employ stringent due diligence and qualification processes to select our contract manufacturers, which we regularly audit for process, quality and control. Our global manufacturing process is designed to ensure the end-to-end security of our products.San Jose, California headquarters.
Products and Services
3
We offer a broad range of application-optimized server solutions, including storage, rackmount and blade server systemsservers, storage, and subsystems and accessories, which can be used to build complete server systems servingand storage systems. These solutions and products are designed to serve a variety of markets, includingsuch as enterprise data centers, cloud computing, data center, enterprise, big data, HPC, deep learning and IoT embedded.artificial intelligence (“AI”), 5G/edge computing. The percentage of our net sales represented by sales of server and storage systems increased to 70.0%was flat in fiscal year 2017 from 68.9%2021 compared to fiscal year 2020 and decreased to 78.5% in fiscal year 2016 and2020 from 60.7%81.7% in fiscal year 2015,2019, and the percentage of our net sales represented by sales of subsystems and accessories was 30.0%21.6% in fiscal year 2017, 31.1%2021, 21.5% in fiscal year 20162020 and 39.3%18.3% in fiscal year 2015.2019. We complement our server and storage system offerings with software management solutions as well as global services and support, the revenue for which is included in our server and storage systems revenue.
Server and Storage Systems
We sell server and storage systems in rackmount, blade, Twinmulti-node and multi-nodeembedded form factors, which support single, dual, and multiprocessor architectures. A summary of our server systemsOur key product lines include:
•SuperBlade® and their markets are listed below.
•SuperStorage systems that our SuperBlade and MicroBlade servers, with our unique disaggregated resource-saving architectures that enable the independent upgrade of compute modules and other Blade resources, offer a unique value to our customers. They provide industry-leading density, price-to-performance per square foot and energy savings to reduce data center total cost of ownership ("TCO").
•GPU or Accelerated systems for many applications, to reduce qualification time and to manage the need for excessive spares inventories.rapidly growing AI markets;
•Embedded (5G/IoT/Edge) systems optimized for evolving networks and offset processors to help eliminate CPU preheatingintelligent management of connected devices; and support a 5+ year product life cycle.
In addition to our complete server and Public/Private Cloud Computing applications.
Our chassis areopen industry-standard remote system management solutions, such as our Server Management suite, including Supermicro Server Manager (“SSM”), Supermicro Power Management software (“SPM”), Supermicro Update Manager (“SUM”), and SuperDoctor 5, have been designed to efficiently house our servers while maintaining interoperability, adhering to industry standards and increasing output efficiency through power supply design. We believe that our latest generation of power supplies achieves the maximum power efficiency available in the industry. Our Battery Backup Power ("BBP") Module provides backup power to systems during an electricity outage and provides flexible backup power capability and reduces total cost of ownership. Our server chassis come with hot-plug, heavy-duty fans, fan speed control and an advanced air shroud design to maximize airflow redundancy. Our Powerstick design provides the slim form factor of a redundant power supply that increases system computing and storage density across our multiple product lines.help manage large-scale heterogeneous data center environments.
Supermicro Global Services
4
Support Services:Our customer support services include server system integration, configurationoffer competitive market warranties, generally from one-to-three years, and software upgradeswarranty extension options for products sold by our direct sales team and updates. We also identify service requirements, createapproved indirect sales channel partners. Our customer support team provides ongoing maintenance and execute project plans, conduct verification testingtechnical support for our products through our website and training and provide technical documentation.24-hour continuous direct phone-based support.
Research and Development
We perform the majoritymost of our research and development activities in-house in the United States at our facilities in San Jose, California, and in Taiwan, increasing the communication and collaboration between design teams to streamline the development process and reducingreduce time-to-market. We believe that the combination of our focus on internal research and development activities, our close working relationships with customers and vendors and our modular design approach allows us to minimizedecrease time-to-market. We continue to invest in
reducing our design and manufacturing costs and improving the performance, cost-effectiveness and thermalpower- and space-efficiency of our solutions.
Our research and development teams focus on the development of new and enhanced products that can support emerging technological and engineering innovations while highly optimizing theachieving high overall system performance. Much of our research and development activity relates to the new product cycles of leading processor vendors. We work closely with Intel, Nvidia and AMD, among others, to develop products that are compatible with the latest generation of industry standardindustry-standard technologies under development. Our collaborative approach with these vendors allows us to coordinate the design of our new products with their product release schedules, thereby enhancing our ability to rapidly introduce new products incorporating the latest technology. We work closely with their respective development teams to optimizeenhance system performance and reduce system levelsystem-level issues. Similarly, we work very closely with our customers to identify their needs and develop our new product plans accordingly.
During fiscal year 2021, we sold to over 1,000 direct customers in over 100 countries. During each of fiscal years 2020 and 2019, we sold to over 820 and 850 direct customers respectively. In addition, over the three years ended June 30, 2017,2021 we had 1,254 employees and 14 engineering consultants dedicatedhave sold to research and development. Our total research and development expenses were $144.0 million, $124.2 million, and $101.4 million for fiscal years 2017, 2016 and 2015, respectively.
Sales and Marketing
Our sales and marketing activities are conducted through a combination of our direct sales force and our indirect sales channels. As of June 30, 2017, our sales and marketing team consisted of 358 employees and 37 independent sales representatives in 23 locations worldwide.
channel partners. Our direct sales force is primarily focused on selling complete systems and solutions, including management software and global services to large scale cloud, service, enterprise and OEM customers.
We work with distributors, value-added resellers, system integrators, and OEMs to market and sell customizedour optimized solutions to their end customers. We provide sales and marketing assistance and training to our distributorsindirect sales channel partners and OEMs, who in turn provide service and support to end customers. We leverage our relationships in our indirect sales channel and with key distributors andour OEMs to penetrate select industry segments where our products can provide a superior alternativebetter alternatives to existing solutions.
We maintain close contact with our distributorsindirect sales channel partners and end customers. We often collaborate during the sales process with our distributorsindirect sales channel partners and the end customer’s technical point of contactstaff to help determine the optimal system configuration for the customer’s needs. Our interaction with distributorsour indirect sales channel partners and end customers allows us to monitor customer requirements and develop new products to better meet their needs.
International Sales
Our internationalglobal sales efforts are supported both by our international offices in the Netherlands, Taiwan, United Kingdom, China and Japan as well as by our United States based sales team. Product fulfillment and first level support for our international customers are provided by Supermicro Global Services and through our distributorsindirect sales channel and OEMs. Sales to customers located outside of the United States represented 42.8%40.7%, 36.7%41.4% and 41.2%41.9% of net sales in fiscal years 2017, 20162021, 2020 and 2015,2019, respectively. Our long-lived assets located outside of the United States represented 22.1%, 24.0% and 23.8% of total long-lived assets in fiscal years 2017, 2016 and 2015, respectively. See Part II, Item 8, Note 16, “Segment Reporting” to the consolidated financial statements in this Annual Report on Form 10-K for a summary of international net sales and long-lived assets by geographic region.
Marketing
5
Our marketing programs are designed to create a global awareness and branding for our company and products, as well as an understanding of the uniquesignificant value we bring to customers, andcustomers. These programs also inform existing and potential customers, the trade press, distributorsmarket analysts, indirect sales channel partners and OEMs about the strong capabilities and benefits of using our products and solutions. Our marketing efforts support the sale and distribution of our
products through both direct sales and distributionindirect channels. We rely on a variety of marketing vehicles, including advertising, public relations, web, social media, participation in industry trade shows and conferences to help gain market acceptance. We provide funds for cooperative marketing to our distributors andindirect sales channel partners to scaleextend the reach of our marketing efforts. We also actively utilize our suppliers’ cooperative marketing programs and jointly benefit from their marketing development funds.funds to which we are entitled.
Intellectual Property
We seek to protect our intellectual property rights with a combination of patents, trademarks, copyrights, trade secret laws, and disclosure restrictions. We rely primarily on trade secrets, technical know-how, and other unpatented proprietary information relating to our design and product development activities. We also enter into confidentiality and proprietary rights agreements with our employees, consultants, and other third parties and control access to our designs, documentation and other proprietary information.
Manufacturing and Quality Control
We manufacture the majority of our systems at our San Jose, California headquarters. We believe we are the only major Serverserver and Storagestorage vendor that designs, develops, and manufactures the majoritya significant portion of their systems in the United States. Global assembly, test and quality control of our servers are performed at our manufacturing facilities in San Jose, California, Taiwan and the Netherlands and Taiwan.Netherlands. Each of our facilities has been certified by Quality /and Environmental Management System or, Q/EMS,has been certified according to ISO 9001, ISO 14001 andand/or ISO 13485 standards. Our suppliers and contract manufacturers are required to support the same standards in order to maintain consistent product and service quality and continuous improvement of quality and environmental performance.
We use several third-party suppliers and contract manufacturers for materials and sub-assemblies, such as serverboards, chassis, disk drives, power supplies, fans and computer processors.sub-assemblies. We believe that selectively using outsourced manufacturing services allows us to focus on our core competencies in product design and development and increases our operational flexibility. We believe our manufacturing strategy allows us to adjust manufacturing capacity in response to changes in customer demand and to rapidly introduce new products to the market. We use Ablecom Technology, Inc. (“Ablecom”) and its affiliate Compuware Technology, Inc. ("Compuware"), both of which are related parties, for contract design and manufacturing coordination support. We work with Ablecom to optimize modular designs for our chassis and certain of ourseveral other components. Ablecom also coordinates the manufacturing of chassis for us. In addition to providing a large volume of contract manufacturing services forto us, Ablecom warehouses for us a number ofmultiple components and subassemblies manufactured by multiplevarious suppliers prior tobefore shipment to our facilities in the United States, Europe and Asia. We also have a series of agreements with Compuware, including multiple product development, production and service agreements, product manufacturing agreements and lease agreements for office space. See Part II, Item 8, Note 13, “Related Party Transactions,” to the consolidated financial statements and Part III, Item 13, “Certain Relationships and Related Transactions and Director Independence.”
We monitor our inventory on a continuous basis in ordercontinuously to be able to meet customer ordersdelivery requirements and to avoid inventory obsolescence. Due to our modularbuilding-block designs, our inventory can generally be used with multiple different products, furtherlowering working capital requirements and reducing the risk of inventory write-downs.
Competition
The market for our products is highly competitive, rapidly evolving and subject to new technological developments, changing customer needs and new product introductions. In particular, in recent years the market has been subject to substantial change. We compete primarily with large vendors of X86x86-based general purpose servers and components. In addition, we also compete with a number of smaller vendors that specialize in the sale of server components and systems. Over the last severalIn recent years, we have experienced increased competition from Original Design Manufacturersoriginal design manufacturers ("ODMs"ODMs”) that benefit from their scale and very low cost manufacturing and are increasingly offering their own branded products. We believe our principal competitors include:
•Global technology vendors, such as Cisco, Dell, Hewlett-Packard Enterprise, IBM, Inspur, Lenovo, and Huawei;Lenovo; and
•ODMs, such as Foxconn, Quanta Computer, Inc. and Asus Tek Computer, Inc.Wiwynn Corporation.
•OEMs, such as Inspur
6
The principal competitive factors in our market include the following:
•First to market with new emerging technologies;
•High product performance, efficiency and reliability;
•Early identification of emerging opportunities;
•Cost-effectiveness;
•Interoperability of products;
•Scalability; and
•Localized and responsive customer support on a worldwide basis.
We believe that we compete favorably with respect to most of these factors. However, most of our competitors have longer operating histories, significantly greater resources, greater name recognition and deeper market penetration. They may be able to devote greater resources to the development, promotion and sale of their products than we can, which could allow them to respond more quickly to new technologies and changes in customer needs. In addition, it is possible that new competitors could emerge and acquire significant market share. See also the risk factor in Part I, Item IA,1A, "Risk Factors" risk titled “The market in which we participate is highly competitive, and if we do not compete effectively, we may not be able to increase our market penetration, grow our net sales or improve our gross margins.”
Employees and Human Capital Resources
As of June 30, 2017,2021, we employed 2,9964,155 full time employees, consisting of 1,2541,858 employees in research and development, 358460 employees in sales and marketing, 296425 employees in general and administrative and 1,0881,412 employees in manufacturing. Of these employees, 1,9432,367 employees are based in our Silicon ValleySan Jose facilities. We consider our highly qualified and motivated employees to be a key factor in our business success. Our employees are not represented by any collective bargaining organization, and we have never experienced a work stoppage. We believe that our relations with our employees are good.
“The key to success in technology is designing a company around people committed to work that they love”, quote from Charles Liang, our President, Chief Executive Officer and Chairman. We are motivated to attract, develop and retain a high performing team engaged in work that they love, motivated by growth opportunities.
Talent Strategy
Our talent strategy focuses on attracting skilled, engaged employees who contribute the talent and skills critical to our innovative and forward-looking workforce. Our recruiting process actively sources talent supporting our ability to hire candidates with professional qualifications and potentials. We identify opportunities through tracking and analyzing data from various sources such as annual performance reviews to assess our progress in ensuring critical talents are in critical roles.
It is our policy to ensure equal employment opportunity for all applicants and employees without regard to prohibited considerations of race, color, religion, sex (including pregnancy, gender identity and sexual orientation), national origin, age, disability or genetic information, marital status or any other classification protected by applicable local, state or federal laws. All employees receive training in the prevention of sexual harassment and abusive conduct in the workplace.
Total Rewards Program
Our total rewards program is designed to attract and reward talented individuals who possess the skills necessary to support our business objectives, assist in the achievement of our strategic goals and create long-term value for our stockholders. We provide employees with compensation packages that include base salary, incentive bonus programs, and long-term equity awards, including restricted stock units and options, tied to the value of our stock price. We believe that a compensation program with both short-term and long-term awards provides fair and competitive compensation and aligns employee and stockholder interests, including by incentivizing business and individual performance (pay for performance), motivating based on long-term company performance and integrating compensation with our business plans. In addition to cash and equity compensation, we also offer U.S. employees benefits such as life and health (medical, dental & vision) insurance, paid time off, sick leave, holiday pay, and a 401(k) plan. Outside of the U.S., we provide benefits based on local requirement and needs.
Health & Safety
From the start of the COVID-19 pandemic, we proactively implemented preventative protocols, which we continuously assess and update for changes in conditions and applicable regulations. These preventative protocols are intended to safeguard our employees, contractors, suppliers, customers, and communities, and to ensure business continuity. We are
7
following government policies and recommendations designed to slow the spread of COVID-19 and are committed to the health and safety of our employees, contractors, suppliers, customers, and communities.
We continuously assess our efforts to respond to the COVID-19 pandemic, which include the following:
•We require that on-site employees complete a daily health questionnaire, pass through thermal scanning equipment installed in some of our buildings to ensure they do not have an elevated body temperature, and adhere to social distance requirement and mask protocols;
•We have enhanced our contact tracing, significantly decreased non-priority business travel, and provided personal air purifier for each of the employees; and
•To respond to changing COVID-19 updates, we continue to work closely with our Environmental Health and Safety team to monitor and provide weekly updates to managers and promote and encourage employees to receive COVID-19 vaccinations.
We believe these actions are appropriate and essential to safeguard our employees, contractors, suppliers, customers, and communities while allowing us to safely continue operations.
Corporate Information
We were incorporated in California in September 1993. We reincorporated in Delaware in March 2007. Our common stock is quotedlisted on the OTC MarketsNasdaq Global Select Market under the symbol "SMCI."“SMCI.” Our principal executive offices are located at 980 Rock Avenue, San Jose, CACalifornia 95131, and our telephone number is (408) 503-8000. Our website address is www.supermicro.com.
Financial Information about Segments and Geographic Areas
Please see Part II, Item 8, Note 16,18, “Segment Reporting” to the consolidated financial statements in this Annual Report on Form 10-Kfor information regarding segment reporting and Part II, Item 8, Note 3, “Revenue - Disaggregation of Revenue” to the consolidated financial statements in this Annual Report for information regarding our international operations, and seenet sales by geographic region. See Part II,I, Item 1A, “Risk Factors” for further information on risks attendant toassociated with our international operations.
Working Capital
We focus considerable attention on managing our inventories and other working-capital-relatedworking capital related items. We manage inventories by communicating with our customers and partners and then using our industry experience to forecast demand. We then place manufacturing orders for our products that are based on forecasted demand. We generally maintain substantial inventories of our products because the computer server industry is characterized by short lead timelead-time orders and quick delivery schedules.
Additionally, during the fiscal year 2021, the computer server industry is experiencing global supply chain shortage, which requires us to carry more inventories to fulfill our customers and partners’ demands and backlogs.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are available free of charge, on or through our website at www.supermicro.com, as soon as reasonably practicable after we electronically file such reports with, or furnish those reports to, the SEC. Information contained on our website is not incorporated by reference in, or made part of, this Annual Report on Form 10-K or our other filings with, or reports furnished to the SEC. The SEC also maintains a website that contains our SEC filings. The address of the site is www.sec.gov. Further, a copy of this Annual Report on Form 10-K is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
8
Item 1A.Risk Factors
The risks and uncertainties described below are not the only ones facing us. Other events that we do not currently anticipate or that we currently deem immaterial also may affect our business, financial condition, results of operations, cash flows, other key metrics and the trading price of our common stock.
Risk Factor Summary
Operational and Execution Risks Related
•The effects of the COVID-19 pandemic adversely affected our business operations, financial condition and results of operations, and there are no assurances adverse effects will not continue.
•Our quarterly operating results have fluctuated and will likely fluctuate in the future.
•Our revenue and margins for a particular period are difficult to predict, and a shortfall in revenue or decline in margins may harm our operating results.
•As we increasingly target larger customers and larger sales opportunities, our customer base may become more concentrated, our cost of sales may increase, our margins may be lower and our sales may be less predictable.
•If we fail to meet any publicly announced financial guidance or other expectations about our business, it could cause our stock to decline in value.
•Increases in average selling prices for our server solutions have historically significantly contributed to increases in net sales in some of the periods covered by this Annual Report. Such prices are subject to decline if customers do not continue to purchase our latest generation products or additional components, which could harm our results of operations.
•Our Investigation, Procedurescost structure and Analysis, Consolidated Financial Statements, Internal Control Over Financial Reportingability to deliver server solutions to customers in a timely manner may be adversely affected by volatility of the market for core components and Related Matterscertain materials for our products.
•We may lose sales or incur unexpected expenses relating to insufficient, excess or obsolete inventory.
•System security violations, data protection breaches, cyber-attacks and other related cyber-security issues could disrupt our internal operations or compromise the security of our products, and any such disruption could reduce our expected revenues, increase our expenses, damage our reputation and adversely affect our stock price.
•Any failure to adequately expand or retain our sales force will impede our growth.
•Conflicts of interest may arise between us and Ablecom and Compuware, and those conflicts may adversely affect our operations.
•Our reliance on Ablecom could be subject to risks relatedassociated with our reliance on a limited source of contract manufacturing services and inventory warehousing.
•If negative publicity arises with respect to being delinquentus, our employees, our third-party service providers or our partners, our business and operating results could be adversely affected, regardless of whether the negative publicity is true.
•If we lose Charles Liang, our President, Chief Executive Officer and Chairman, or any other key employee, we may not be able to implement our business strategy in a timely manner.
•Our direct sales efforts may create confusion for our end customers and harm our relationships in our SEC reporting obligations ifindirect sales channel and with our OEMs.
•If we are unable to resumeattract and integrate additional key employees in a timely filing schedule.
Strategic and Industry Risks
•If we do not successfully manage the relistingexpansion of our common stock on a national securities exchange,international manufacturing capacity and as a result, may continue to reduce the liquidity ofbusiness operations, our common stock;business could be harmed.
•We may not be able to recapture lostsuccessfully manage our business for growth and expansion.
•We depend upon the development of new products and enhancements to our existing products, and if we fail to predict or business opportunities duerespond to ongoing reputational harm;emerging technological trends and our customers’ changing needs, our operating results and market share may suffer.
9
•Industry consolidation may lead to increased competition and may harm our operating results.
•We must work closely with our suppliers to make timely new product introductions.
•Our suppliers’ failure to improve the covenants infunctionality and performance of materials and key components for our revolving credit facility will prohibit us from borrowing under the facility unless we are able to obtain additional amendments to the facilityproducts may impair or waivers of the covenants from the lender; and
•We rely on a limited number of suppliers for certain components used to manufacture our products.
•We rely on indirect sales channels and any disruption in these channels could adversely affect our sales.
•Our failure to deliver high quality server and storage solutions could damage our reputation and diminish demand for our products.
•Our growth into markets outside the United States exposes us to risks inherent in international business operations.
•Our results of operations may be subject to fluctuations based upon our investment in corporate ventures.
Legal and Regulatory Risks
•Because our products and services may store, process and use data, some of which contains personal information, we are subject to complex and evolving laws and regulations regarding privacy, data protection and other matters.
•Our operations could involve the use of regulated materials, and we must comply with environmental, health and safety laws and regulations, which can be expensive.
•If one or more of the foregoing risks or challenges persist, our business, operationswe are unable to maintain and financial condition are likely to be materially and adversely affected.
•The subject matters of the Investigation, Procedures and Analysis and the findings thereof have caused substantial delays in filing this Annual Report on Form 10-K and the Delinquent Reports, which may result in future delays in our SEC reporting.
•Failure to comply with the U.S. Foreign Corrupt Practices Act, other applicable anti-corruption and anti-bribery laws, and applicable trade control laws could subject us to penalties and other adverse consequences.
•Any failure to protect our intellectual property could impair our brand and our competitiveness.
•Resolution of claims that we have violated or may violate the intellectual property rights of others could require us to indemnify others, or pay significant royalties to third parties.
•Provisions of our governance documents and Delaware law might discourage, delay or prevent a change of control of our company or changes in our management.
Financial Risks
•We incurred significant expenses related to the matters that led to the delay in the filing of our 2017 10-K and may incur expenses related to any resulting litigation.
•Our research and development expenditures, as a percentage of our net sales, are considerably higher than many of our competitors.
•Our future effective income tax rates could be affected by changes in the relative mix of our operations and income among different geographic regions and by changes in domestic and foreign income tax laws.
•Backlog does not provide a substantial portion of our net sales in any quarter.
Risks Related to Owning our Common Stock
•The trading price of our common stock is likely to be volatile.
•Future sales of shares by existing stockholders could cause our stock price to decline.
•The concentration of our capital stock ownership with insiders will likely limit your ability to influence corporate matters.
•We do not expect to pay any cash dividends for the foreseeable future.
General Risks
•Our products may not be viewed as supporting climate change mitigation in the IT sector.
•Our business and operations may be impacted by natural disaster events, including those brought on by climate change.
10
Operational and Execution Risks
The effects of Contentsthe COVID-19 pandemic adversely affected our business operations, financial condition and results of operations, and there are no assurances adverse effects will not continue.
During the pandemic, we continued our manufacturing operations and customers’ orders processing and services, although our productivity at times slowed especially in the United States and in the Netherlands. Travel restrictions and logistics challenges impacted, by negative reactionsand continue to this publicity fromhave an impact on, our supply chain. The pandemic also impacted shipments to our customers or others with whom we do business. Concerns include the time and effort required to address our accounting and control environment and our ability to be(to a long-term provider to our customers. The continued occurrence of any of the foregoing could harm our business and have an adverse effect on our financial condition.
The extent to which the effects of the COVID-19 pandemic will continue to impact our business, operations, financial condition and report information on a timely basis.
•the duration and financial condition. In addition, in November 2015, we reported a material weakness in our internal control over financial reporting related to the revenue recognition of contracts with extended product warranties. This material weakness has not been fully remediated asscope of the filing dateCOVID-19 pandemic;
•the extent and effectiveness of this Annual Reportresponsive actions by authorities and the impact of these and other factors on Form 10-K,our employees, customers and we cannot ensure that other errors or material weaknesses will not be identifiedvendors;
•difficulty in adding new customers due to inability to gain direct access;
•the rate of spending on server and storage solutions, including delays in prospective customers’ purchasing decisions and delays in the future. If we fail to maintain an effective system of internal control over financial reporting, the accuracy and timelinessprovisioning of our financial reporting may be adversely affected.”products;
•the rate at which our suppliers develop and release new components such as microprocessors and memory;
•the length of heightened unemployment and economic recession pressures;
•the health impact of the pandemic on our employees, including key personnel;
•the impact on the liquidity of our sales partners and end customers, including lengthening of customers payment terms and potential bankruptcies;
•our continued ability to execute on business continuity plans for the maintenance of our critical business processes and managing our liquidity and access to credit facilities on terms acceptable to us;
•availability of and fluctuations in the cost of materials, logistics and labor; and
•erosion of economic activity by small and medium size business or sectors to which we are working to remediate the material weaknesses identified in the course of the Investigation, Proceduresexposed through OEMs and Analysis, and are focused on re-establishing effective internal controls over financial reporting in order to prevent and detect material misstatements in our annual and quarterly financial statements and prevent fraud, we cannot ensure that such efforts will be effective. If we fail to maintain effective internal controls in future periods, this could further cause investors to lose confidence in our reported financial and other information, and our operating results, financial position and stock price could be adversely affected.indirect sales channels.
Our quarterly operating results have fluctuated and will likely fluctuate in the future, which could cause rapid declines in our stock price.
We believe that our quarterly operating results will continue to be subject to fluctuation due to various factors, many of which are beyond our control. Factors that may affect quarterly operating results include:
•Fluctuations in demand for our products, in part due to changes in the global economic environment;
•Fluctuations based upon seasonality, with the quarters ending March 31 and September 30 typically being weaker;
11
•The occurrence of global pandemics, including COVID-19, and other events that impact the global economy or one or more sectors of the global economy;
•The ability of our customers and suppliers to obtain financing or fund capital expenditures;
•Fluctuations in the timing and size of large customer orders;orders, including with respect to changes in sales and implementation cycles of our products into our customers’ spending plans and associated revenue;
•Variability of our margins based on the mix of server and storage systems, subsystems and accessories we sell and the percentage of our sales to internet data center, cloud computing customers or certain geographical regions;
•Fluctuations in availability and costs associated with key components, particularly semiconductors, memory, storage solutions, and other materials needed to satisfy customer requirements;requirements, especially during a period of global market disruption, and, in particular, the impact of the extended duration of the COVID-19 pandemic on our supply chain and the supply chain of our suppliers;
•The timing of the introduction of new products by leading microprocessor vendors and other suppliers;
•The introduction and market acceptance of new technologies and products, and our success in new and evolving markets, and incorporating emerging technologies in our products, as well as the adoption of new standards;
•Changes in our product pricing policies, including those made in response to new product announcements;
•Mix of whether customer purchases are of fullpartially or fully integrated systems or subsystems and accessories and whether made directly or through our indirect sales channels;channel partners;
•The effect of mergers and acquisitions among our competitors, suppliers, customers, or partners;
•General economic conditions in our geographic markets;
•Geopolitical tensions, including trade wars, tariffs and/or sanctions in our geographic markets;
•Impact of regulatory changes on our cost of doing business; and
•Costs associated with the Investigation, Proceduresremediation and Analysis andlegal proceedings related legal proceedings.to restatement of our financial statements in prior years.
analysts, our stock price may fall rapidly and without notice. Furthermore, the fluctuation of quarterly operating results may render less meaningful period-to-period comparisons of our operating results, and you should not rely upon them as an indication of future performance.
Our revenue and margins for a particular period are difficult to predict, and a shortfall in revenue or decline in margins may harm our operating results.
As a result of a variety of factors discussed in this Annual Report, our revenue and margins for a particular quarter are difficult to predict, especially in light of a challenging and inconsistent global macroeconomic environment, the significant impacts of the COVID-19 pandemic, steps we are taking in response to the COVID-19 pandemic, increased competition, the effects of the ongoing trade disputes between the United States and China and related market uncertainty. Our revenue may grow at a slower rate than in past periods or decline. Our ability to meet financial expectations could also be adversely affected if the nonlinear sales pattern seen in some of our past quarters recurs in future periods.
The timing of large orders can also have a significant effect on our business and operating results from quarter to quarter. From time to time, we receive large orders that have a significant effect on our operating results in the period in which the order is recognized as revenue. For instance, our larger customers may seek to fulfill all or substantially all of their requirements in a single or a few orders, and not make another significant purchase for a substantial period of time. The timing of such orders is difficult to predict, and the timing of revenue recognition from such orders may affect period to period changes in revenue. As a result, our operating results could vary materially from quarter to quarter based on the receipt of such orders and their ultimate recognition as revenue.
We plan our operating expense levels based primarily on forecasted revenue levels. These expenses and the impact of long-term commitments are relatively fixed in the short term. A shortfall in revenue could lead to operating results being below expectations because we may not be able to quickly reduce these fixed expenses in response to short-term business changes.
Any of the above factors could have a material adverse impact on our operations and financial results.
12
As we increasingly target larger customers and larger sales opportunities, our customer base may become more concentrated, our cost of sales may increase, our margins may be lower and our sales may be less predictable.
Increased sales to larger customers may also cause fluctuations in results of operations. Large orders are generally subject to intense competition and pricing pressure which can have an adverse impact on our margins and results of operations. Likewise, larger customers may seek to fulfill all or substantially all of their requirements in a single or a few orders, and not make another significant purchase for a substantial period of time. Accordingly, a significant increase in revenue during the period in which we recognize the revenue from a large customer may be followed by a period of time during which the customer purchases noneeither does not purchase any products or fewonly a small number of our products.
Additionally, as we and our partners focus increasingly on selling to larger customers and attracting larger orders, we expect greater costs of sales. Our sales cycle may become longer and more expensive, as larger customers typically spend more time negotiating contracts than smaller customers. Larger customers also often seek greater levels of support in the implementation and use of our server solutions. An actual or perceived inability to meet customer support demands may adversely affect our relationship with such customers, which may affect the likelihood of future purchases of our products.
As a result of the above factors, our quarter-to-quarter results of operations may be subject to greater fluctuation and our stock price may be adversely affected.
Increases in average selling prices for our server solutions have historically significantly contributed to our increases in net sales.sales in some of the periods covered by this Annual Report. Such prices are subject to decline if customers do not continue to purchase our latest generation products or additional components, which could harm our results of operations.
Increases in average selling prices for our server solutions have significantly contributed to our increases in net sales.sales in some of the periods covered by this Annual Report. Recently, the market for key components has become more volatile during the COVID-19 pandemic. As with most electronics based products, average selling prices of serversserver and storage products are typically are highest at the time of introduction of new products, which utilize the latest technology, and tend to decrease over time as such products become commoditized and are ultimately replaced by even newer generation products. As our business continues to grow, we may increasingly be subject to this industry risk. We cannot predict the timing or amount of any decline in the average selling prices of our server solutions that we may experience in the future.future, which may be exacerbated by continued effects from the COVID-19 pandemic. In some instances, our agreements with our distributorsindirect sales channel partners limit our ability to reduce prices unless we make such price reductions available to them, or price protect their inventory. If we are unable to decrease the average per unit manufacturing costs faster than the rate at which average selling prices continue to decline, our business, financial condition and results of operations will be harmed.
Our cost structure and ability to deliver server solutions to customers in a timely manner may be adversely affected by volatility of the market for core components and certain materials for our products.
13
Prices of certain materials and core components utilized in the manufacture of our server and storage solutions, such as serverboards, chassis, central processing units (“CPUs”),CPUs, memory, and hard drives and SSDs, represent a significant portion of our cost of sales. We generallyWhile we have increased our purchases of certain critical materials and core components in response to the supply and demand uncertainties associated with the COVID-19 pandemic, we do not enter intohave long-term supply contracts for theseall critical materials and core components, but instead often purchase these
materials and components on a purchase order basis. Prices of these core components and materials are volatile, and, as a result, it is difficult to predict expense levels and operating results. In addition, if our business growth renders it necessary or appropriate to transition to longer term contracts with materials and core component suppliers, our costs may increase and our gross margins could correspondingly decrease.
Because we often acquire materials and corekey components on an as needed basis, we may be limited in our ability to effectively and efficiently respond to customer orders because of the then-current availability or the terms and pricing of these materials and corekey components. Our industry has experienced materials shortages and delivery delays in the past, including as a result of the negative impact of COVID-19 on global supply chains, and we may experience shortages or delays of critical materials or increased logistics costs to obtain necessary materials in a timely manner in the future. The COVID-19 pandemic has resulted in widely reported shortages of semiconductors.From time to time, we have been forced to delay the introduction of certain of our products or the fulfillment of customer orders as a result of shortages of materials and corekey components, which can adversely impact our revenue. For example, our net sales were adversely impacted in fiscal years 2013 and 2012 by disk driveIf shortages, resulting from flooding in Thailand. In other periods, our cost of sales as a percentage of revenue has been adversely impacted by higher component prices resulting from shortages. For example, our gross margin was adversely impacted in the quarters ended December 31, 2016, March 31, 2017 and June 30, 2017 due to higher costs related to shortages of memory and solid-state drives ("SSD"). If shortagessupply or demand imbalances or delays arise, the prices of these materials and corekey components may increase or the materials and corekey components may not be available at all. In the event of shortages, some of our larger competitors may have greater abilities to obtain materials and corekey components due to their larger purchasing power. We may not be able to secure enough corekey components or materials at reasonable prices or of acceptable quality to build new products to meet customer demand, which could adversely affect our business, results of operations and financial condition. In addition, from time to time, we have accepted customer orders with various types of component pricing protection. Such arrangements have increased our exposure to component pricing fluctuations and have adversely affected our financial results in certain quarters.
If we were to lose any of our current supply or contract manufacturing relationships, the process of identifying and qualifying a new supplier or contract manufacturer who will meetmeets our quality and delivery requirements, and who will appropriately safeguard our intellectual property, may require a significant investment of time and resources, adversely affecting our ability to satisfy customer purchase orders and delaying our ability to rapidly introduce new products to market. Similarly, if any of our suppliers were to cancel, materially change contracts or commitments to us or fail to meet the quality or delivery requirements needed to satisfy customer demand for our products, whether due to shortages or other reasons, our reputation and relationships with customers could be damaged. We could lose orders, be unable to develop or sell some products cost-effectively or on a timely basis, if at all, and have significantly decreased revenues, margins and earnings, which would have a material adverse effect on our business, results of operations and financial condition.
We may lose sales or incur unexpected expenses relating to insufficient, excess or obsolete inventory.
14
Difficulties we encounter difficulties withrelating to automating internal controls utilizing our ERP systems.systems or integrating processes that occur in other IT applications could adversely impact our controls environment.
System security risks,violations, data protection breaches, cyber-attacksand other related cyber-security issues could disrupt our internal operations or interfere withcompromise the security of our products, and any such disruption could reduce our expected revenues, increase our expenses, damage our reputation and adversely affect our stock price.
We manage and store various proprietary information and sensitive or confidential data relating to our business as well as information from our suppliers and customers. Breaches of our or any of our third party suppliers’ security measures or the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive or confidential data about us or our customers or suppliers, including the potential loss or disclosure of such information or data as a result of fraud, trickery or other forms of deception, could expose us or our customers or suppliers to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our brand and reputation or otherwise harm our business.
To the extent we experience cyber-security incidents in the future, our relationships with our customers and suppliers may be materially impacted, our brand and reputation may be harmed and we could incur substantial costs in responding to and remediating the incidents and in resolving any investigations or disputes that may arise with respect to them, any of which would cause our business, operations, or products to be adversely affected. In addition, the cost and operational consequences of implementing and adding further data protection measures could be significant.
Any failure to adequately expand or retain our sales force will impede our growth.
We expect that our direct sales force will continue to grow as larger customers increasingly require a direct sales approach. Competition for direct sales personnel with the advanced sales skills and technical knowledge we need is intense, and we face significant competition for direct sales personnel from our competitors. Our ability to grow our revenue in the future will depend, in large part, on our success in recruiting, training, retaining and successfully managing sufficient qualified direct sales personnel. New hires require significant training and may take six months or longer before they reach full productivity. Our recent hires and planned hires may not become as productive as we would like, and we may be unable to hire sufficient numbers of qualified individuals in the future in the markets where we do business. If we are unable to hire, develop and retain sufficient numbers of productive sales personnel, our customer relationships and resulting sales of our server solutions will suffer.
15
Conflicts of interest may arise between us and Ablecom and Compuware, and those conflicts may adversely affect our operations.
We use Ablecom, a related party, for contract design and manufacturing coordination support and warehousing, and Compuware, also a related party and an affiliate of Ablecom, for distribution, contract manufacturing and warehousing. We work with Ablecom to optimize modular designs for our chassis and certain of other components. We outsource to Compuware a portion of our design activities and a significant part of our manufacturing of subassemblies, particularly power supplies. Our purchases of products from Ablecom and Compuware represented 7.8%, 10.1% and 9.2% of our cost of sales for fiscal years 2021, 2020 and 2019, respectively. Ablecom and Compuware’s sales to us constitute a substantial majority of Ablecom and Compuware’s net sales. Ablecom and Compuware are both privately-held Taiwan-based companies. In addition, we have entered into a distribution agreement with Compuware, under which we have appointed Compuware as a nonexclusive distributor of our products in Taiwan, China and Australia.
Steve Liang, Ablecom’s Chief Executive Officer and largest shareholder, is the brother of Charles Liang, our President, Chief Executive Officer and Chairman of our Board of Directors (“the Board”). Steve Liang owned no shares of our common stock as of June 30, 2021, 2020 or 2019. Charles Liang and his spouse, Sara Liu, our Co-Founder, Senior Vice President and Director, jointly owned approximately 10.5% of Ablecom’s capital stock, while Mr. Steve Liang and other family members owned approximately 28.8% of Ablecom’s outstanding common stock as of June 30, 2021. Bill Liang, a brother of both Charles Liang and Steve Liang, is a member of the Board of Directors of Ablecom as well.
In October 2018, our Chief Executive Officer, Charles Liang, personally borrowed approximately $12.9 million from Chien-Tsun Chang, the spouse of Steve Liang. The loan is unsecured, has no maturity date and bore interest at 0.8% per month for the first six months, increased to 0.85% per month through February 28, 2020, and reduced to 0.25% effective March 1, 2020. The loan was originally made at Mr. Liang's request to provide funds to repay margin loans to two financial institutions, which loans had been secured by shares of our common stock that he held. The lenders called the loans in October 2018, following the suspension of our common stock from trading on NASDAQ in August 2018 and the decline in the market price of our common stock in October 2018. As of June 30, 2021, the amount due on the unsecured loan (including principal and accrued interest) was approximately $15.3 million.
Bill Liang is also the Chief Executive Officer of Compuware, a member of Compuware’s Board of Directors and a holder of a significant equity interest in Compuware. Steve Liang is also a member of Compuware’s Board of Directors and is an equity holder of Compuware.
Mr. Charles Liang is our Chief Executive Officer and Chairman of the Board, is a significant stockholder of our company, and has considerable influence over the management of our business relationships. Accordingly, we may be disadvantaged by the economic interests of Mr. Charles Liang and his spouse, Ms. Sara Liu, as stockholders of Ablecom and Mr. Charles Liang's personal relationship with Ablecom’s Chief Executive Officer and Compuware's Chief Executive Officer. We may not negotiate or enforce contractual terms as aggressively with Ablecom or Compuware as we might with an unrelated party, and the commercial terms of our agreements may be less favorable than we might obtain in negotiations with third parties. If our business dealings with Ablecom or Compuware are not as favorable to us as arms-length transactions, our results of operations may be harmed.
If Ablecom or Compuware are acquired or sold, new ownership could reassess the business and strategy of Ablecom or Compuware, and as a result, our supply chain could be disrupted or the terms and conditions of our agreements with Ablecom or Compuware may change. As a result, our operations could be negatively impacted or costs could increase, either of which could adversely affect our margins and results of operations.
Our reliance on Ablecom could be subject to risks associated with our reliance on a limited source of contract manufacturing services and inventory warehousing.
We plan to continue to maintain our manufacturing relationship with Ablecom in Asia. In order to provide a larger volume of contract manufacturing services for us, we anticipate that Ablecom will continue to warehouse for us an increasing number of components and subassemblies manufactured by multiple suppliers prior to shipment to our facilities in the United States and Europe. We also anticipate that we will continue to lease office space from Ablecom in Taiwan to support our
16
research and development efforts. We operate a joint management company with Ablecom to manage the common areas shared by us and Ablecom for our separately constructed manufacturing facilities in Taiwan.
If our commercial relationship with Ablecom deteriorates, we may experience delays in our ability to fulfill customer orders. Similarly, if Ablecom’s facility in Asia is subject to damage, destruction or other disruptions, our inventory may be damaged or destroyed, and we may be unable to find adequate alternative providers of contract manufacturing services in the time that we or our customers require. We could lose orders and be unable to develop or sell some products cost-effectively or on a timely basis, if at all.
Currently, we purchase contract manufacturing services primarily for our chassis products from Ablecom. If our commercial relationship with Ablecom were to deteriorate or terminate, establishing direct relationships with those entities supplying Ablecom with key materials for our products or identifying and negotiating agreements with alternative providers of warehouse and contract manufacturing services might take a considerable amount of time and require a significant investment of resources. Pursuant to our agreements with Ablecom and subject to certain exceptions, Ablecom has the exclusive right to be our supplier of the specific products developed under such agreements. As a result, if we are unable to obtain such products from Ablecom on terms acceptable to us, we may need to discontinue a product or develop substitute products, identify a new supplier, change our design and acquire new tooling, all of which could result in delays in our product availability and increased costs. If we need to use other suppliers, we may not be able to establish business arrangements that are, individually or in the aggregate, as favorable as the terms and conditions we have established with Ablecom. If any of these things should occur, our net sales, margins and earnings could significantly decrease, which would have a material adverse effect on our business, results of operations and financial condition.
If negative publicity arises with respect to us, our employees, our third-party service providers or our partners, our business and operating results could be adversely affected, regardless of whether the negative publicity is true.
Negative publicity about our company or our products, even if inaccurate or untrue, could adversely affect our reputation and the confidence in our products, which could harm our business and operating results. For example, in October 2018, a news article was published alleging that malicious hardware chips were implanted on our motherboards during the manufacturing process at the facilities of a contract manufacturer in China. We undertook a thorough investigation of this claim with the assistance of a leading, independent third-party investigations firm wherein we tested a representative sample of our motherboards, including the specific type of motherboard depicted in the news article and motherboards purchased by companies referenced in the article, as well as more recently manufactured motherboards. After completing these examinations as well as a range of functional tests, the investigations firm reported that it had found no evidence of malicious hardware on our motherboards. In addition, neither the publisher of the news article nor any of our customers have ever provided a single example of any such altered motherboard. However, despite repeated denials of any tampering by our customers and us, and the announcement of the results of this independent investigation, the publication of this false allegation in 2018 had a substantial negative impact on the trading price of our common stock and our reputation. The October 2018 news article, the follow up news article published in January 2021, and any similar future article making similar false allegations, may continue to have a negative impact in the future.
Harm to our reputation can also arise from many other sources, including employee misconduct, which we have experienced in the past, and misconduct by our partners and outsourced service providers. Additionally, negative publicity with respect to our partners or service providers could also affect our business and operating results to the extent that we rely on these partners or if our customers or prospective customers associate our company with these partners.
If we lose Charles Liang, our President, Chief Executive Officer and Chairman, or any other key employee or are unable to attract additional key employees, we may not be able to implement our business strategy in a timely manner.
Our future success depends in large part upon the continued service of our current executive management team and other key employees. In particular, Charles Liang, our President, Chief Executive Officer and Chairman of the Board, is critical to the overall management of our company as well as to our strategic direction. Mr. Liang co-founded our company and has been our Chief Executive Officer since our inception. His experience in leading our business and his personal involvement in key relationships with suppliers, customers and strategic partners are extremely valuable to our company. We currently do not have a succession plan for the replacement of Mr. Liang if it were to become necessary. Additionally, we are particularly dependent on the continued service of our existing research and development personnel because of the complexity of our products and technologies. Our employment arrangements with our executives and employees do not require them to provide services to us for any specific length of time, and they can terminate their employment with us at any time, with or without
17
notice, without penalty. The loss of services of any of these executives or of one or more other key members of our team could seriously harm our business.
Our direct sales efforts may create confusion for our end customers and harm our relationships in our indirect sales channel and with our OEMs.
We expect our direct sales force to continue to grow as our business grows. As our direct sales force becomes larger, our direct sales efforts may lead to conflicts in our indirect sales channel and with our OEMs, who may view our direct sales efforts as undermining their efforts to sell our products. If an indirect sales channel partner or OEM deems our direct sales efforts to be inappropriate, they may not effectively market our products, may emphasize alternative products from competitors, or may seek to terminate our business relationship. Disruptions in our indirect channels could cause our revenues to decrease or fail to grow as expected. Our failure to implement an effective direct sales strategy that maintains and expands our relationships in our indirect sales channel and with our OEMs could lead to a decline in sales, harm relationshipsand adversely affect our business, results of operations and financial condition.
If we are unable to attract and integrate additional key employees in a manner that enables us to scale our business and operations effectively, or if we do not maintain competitive compensation policies to retain our employees, our ability to operate effectively and efficiently could be limited.
To execute our growth plan, we must attract additional highly qualified personnel, including additional engineers and executive staff. Competition for qualified personnel is intense, especially in Silicon Valley, where we are headquartered. We have experienced and may continue to experience difficulty in hiring and retaining highly skilled employees with appropriate qualifications. If we are unable to attract and integrate additional key employees in a manner that enables us to scale our business and operations effectively, or if we do not maintain competitive compensation policies to retain our employees, our ability to operate effectively and efficiently could be limited.
Strategic and Industry Risks
If we do not successfully manage the expansion of our international manufacturing capacity and business operations, our business could be harmed.
Since inception, we have conducted a majority of our manufacturing operations in San Jose, California. We continue to increase our manufacturing capacity in Taiwan and in the Netherlands, and as a result of the COVID-19 pandemic have sought to accelerate manufacturing in Taiwan in order to better diversify our geographical manufacturing concentration. In order to continue to successfully increase our operations in Taiwan, we must efficiently manage our Taiwan operations from our headquarters in San Jose, California and continue to develop a strong local management team. If we are unable to successfully ramp up our international manufacturing capacity, including the associated increased logistics and warehousing, we may incur unanticipated costs, difficulties in making timely delivery of products or suffer other business disruptions which could adversely impact our results of operations.
We may not be able to successfully manage our business for growth and expansion.
Over time we expect to continue to make investments to pursue new customers and expand our product and service offerings to grow our business. We also expect that our annual operating expenses will continue to increase as we invest in sales and marketing, research and development, manufacturing and production infrastructure, software and product service offerings, and strengthen customer service and support resources for our customers. Our failure to expand operational and financial or internal control systems timely or efficiently could result in additional operating inefficiencies, which could increase our costs and expenses more than we had planned and prevent us from successfully executing our business plan. We may not be able to offset the costs of operation expansion by leveraging the economies of scale from our growth in negotiations with our suppliers and contract manufacturers. Additionally, if we increase our operating expenses in anticipation of the growth of our business and this growth does not meet our expectations, our financial results will be negatively impacted.
If our business grows, we will have to manage additional product design projects, materials procurement processes and sales efforts and marketing for an increasing number of SKUs, provide and update an increasing amount of software utilized in our hardware offerings, provide more sophisticated product service offerings to support our customers, and expand the number and scope of our relationships with suppliers, distributors and end customers. If we fail to manage these additional
18
responsibilities and relationships successfully, we may incur significant costs, which may negatively impact our operating results. Additionally, in our efforts to be first to market with new products with innovative functionality and features, we may devote significant research and development resources to products and product features for which a market does not develop quickly, or at all. If we are not able to predict market trends accurately, we may not benefit from such research and development activities, and our results of operations may suffer.
Managing our business for long-term growth also requires us to successfully manage our employee headcount. We must continue to hire, train and manage new employees as needed. If our new hires perform poorly, or if we are unsuccessful in hiring, training, managing and integrating these new employees, or if we are not successful in retaining our employees, our business may be harmed. While in the past we have had significant growth in headcount, particularly during periods of rapid growth, our headcount has remained relatively flat in recent periods. A growth in headcount would continue to increase our cost base, which would make it more difficult for us to offset any future revenue shortfalls by offsetting expense reductions in the short term. If we fail to successfully manage our growth, we will be unable to execute our business plan.
We depend upon the development of new products and enhancements to our existing products, and if we fail to predict or respond to emerging technological trends and our customers’ changing needs, our operating results and market share may suffer.
The markets for our products are characterized by rapidly changing technology, evolving industry standards, new product introductions, and evolving methods of operations. Our operating results depend on our ability to develop and introduce new products into existing and emerging markets and to reduce the production costs of existing products. If our customers do not purchase our products, our business will be harmed. The COVID-19 pandemic may also result in long-term changes in customer needs for our products in various sectors, along with capital spending reductions or shifts in spending focus, that could materially adversely affect us if we are unable to adjust our product offerings to match customer needs.
The process of developing products incorporating new technologies is complex and uncertain, and if we fail to accurately predict customers’ changing needs and emerging technological trends our business could be harmed. We must commit significant resources, including the investments we have been making in our strategic priorities to developing new products before knowing whether our investments will result in products and services the market will accept. If the industry does not evolve as we believe it will, or if our strategy for addressing this evolution is not successful, many of our strategic initiatives and investments may be of no or limited value. Also, suppliers of our key components may introduce new technologies that are critical to the functionality of our products at a slower rate than their competition, which could adversely impact our ability to timely develop and provide competitive offerings to our customers. Similarly, our business could be harmed if we fail to develop, or fail to develop in a timely fashion, offerings to address other transitions, or if the offerings addressing these other transitions that ultimately succeed are based on technology, or an approach to technology, different from ours.In addition, our business could be adversely affected in periods surrounding our new product introductions if customers delay purchasing decisions to qualify or otherwise evaluate the new product offerings.
Furthermore, we may not execute successfully on our vision or strategy because of challenges with regard to product planning and timing, technical hurdles that we fail to overcome in a timely fashion, or a lack of appropriate resources. This could result in competitors, some of which may also be our suppliers, providing those solutions before we do and loss of market share, revenue, and earnings. The success of new products depends on several factors, including proper new product and service definition, component costs, timely completion and introduction of these products, differentiation of new products from those of our competitors, market acceptance of these products, and providing appropriate support of these products. There can be no assurance that we will successfully identify new product opportunities, develop and bring new products to market in a timely manner, or achieve market acceptance of our products or that products and technologies developed by others will not render our products or technologies obsolete or noncompetitive. The products and technologies in our other product categories and key priority and growth areas may not prove to have the market success we anticipate, and we may not successfully identify and invest in other emerging or new products.
The market in which we participate is highly competitive, and if we do not compete effectively, we may not be able to increase our market penetration, grow our net sales or improve our gross margins.
The market for server and storage solutions is intensely competitive and rapidly changing. The market continues to evolve with the growth of public cloud shifting server and storage purchasing from traditional data centers to lower margin public cloud vendors. Barriers to entry in our market are relatively low and we expect increased challenges from existing as well as new competitors. Some of our principal competitors offer server solutions at a lower price, which has resulted in pricing
19
pressures on sales of our server solutions. We expect further downward pricing pressure from our competitors and expect that we will have to price some of our server and storage solutions aggressively to increase our market share with respect to those products or geographies, particularly for internet data center and cloud customers and other large sale opportunities. If we are unable to maintain the margins on our server and storage solutions, our operating results could be negatively impacted. In addition, if we do not develop new innovative solutions, or enhance the reliability, performance, efficiency and other features of our existing server and storage solutions, our customers may turn to our competitors for alternatives. In addition, pricing pressures and increased competition generally may also result in reduced sales, less efficient utilization of our manufacturing operations, lower margins or the failure of our products to achieve or maintain widespread market acceptance, any of which could have a material adverse effect on our business, results of operations and financial condition.
Our principal competitors include global technology companies such as Cisco, Dell, Hewlett-Packard Enterprise and Lenovo. In addition, we also compete with a number of other vendors who also sell application optimized servers, contract manufacturers/OEMs and original design manufacturers (“ODMs”), such as Foxconn, Inspur, Quanta Computer and Wiwynn Corporation. ODMs sell server solutions marketed or sold under a third-party brand.
Many of our competitors enjoy substantial competitive advantages, such as:
•Greater name recognition and deeper market penetration;
•Longer operating histories;
•Larger sales and marketing organizations and research and development teams and budgets;
•More established relationships with customers, contract manufacturers and suppliers and better channels to reach larger customer bases and larger sales volume allowing for better costs;
•Larger customer service and support organizations with greater geographic scope;
•A broader and more diversified array of products and services; and
•Substantially greater financial, technical and other resources.
Some of our current or potential ODM competitors are also currently or have in the past been suppliers to us. As a result, they may possess sensitive knowledge or experience which may be used against us competitively and/or which may require us to alter our supply arrangements or sources in a way which could adversely impact our cost of sales or results of operations.
Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. Competitors may seek to copy our innovations and use cost advantages from greater size to compete aggressively with us on price. Certain customers are also current or prospective competitors and as a result, assistance that we provide to them as customers may ultimately result in increased competitive pressure against us. Furthermore, because of these advantages, even if our application optimized server and storage solutions are more effective than the products that our competitors offer, potential customers might accept competitive products in lieu of purchasing our products. The challenges we face from larger competitors will become even greater if consolidation or collaboration between or among our competitors occurs in our industry. Also, initiatives like the Open Compute Project, a project to establish more industry standard data center configurations, could have the impact of supporting an approach which is less favorable to the flexibility and customization that we offer. These changes could have a significant impact on the market and impact our results of operations. For all of these reasons, we may not be able to compete successfully against our current or future competitors, and if we do not compete effectively, our ability to increase our net sales may be impaired.
Industry consolidation may lead to increased competition and may harm our operating results.
There has been a trend toward consolidation in our industry. We expect this trend to continue as companies attempt to strengthen or hold their market positions in an evolving industry and as companies are acquired or are unable to continue operations. Companies that are suppliers in some areas of our business may acquire or form alliances with our competitors, thereby reducing their business with us. We believe that industry consolidation may result in stronger competitors that are more likely to compete as sole-source vendors for customers. Additionally, at times in the past, our competitors have acquired certain customers of ours and terminated our business relationships with such customers. As such, acquisitions by our competitors could also lead to more variability in our operating results and could have a material adverse effect on our business, operating results, and financial condition.
20
We must work closely with our suppliers to make timely new product introductions.
We rely on our close working relationships with our suppliers, including Intel, AMD and Nvidia, to anticipate and deliver new products on a timely basis when new generation materials and key components are made available. If we are not able to maintain our relationships with our suppliers or continue to leverage their research and development capabilities to develop new technologies desired by our customers, our ability to quickly offer advanced technology and product innovations to our customers would be impaired. We have no long term agreements that obligate our suppliers to continue to work with us or to supply us with products.
Our suppliers’ failure to improve the functionality and performance of materials and key components for our products may impair or delay our ability to deliver innovative products to our customers.
We need our material and key component suppliers, such as Intel, AMD and Nvidia, to provide us with components that are innovative, reliable and attractive to our customers. Due to the pace of innovation in our industry, many of our customers may delay or reduce purchase decisions until they believe that they are receiving best of breed products that will not be rendered obsolete by an impending technological development. Accordingly, demand for new server and storage systems that incorporate new products and features is significantly impacted by our suppliers’ new product introduction schedules and the functionality, performance and reliability of those new products. If our materials and key component suppliers fail to deliver new and improved materials and components for our products, we may not be able to satisfy customer demand for our products in a timely manner, or at all. If our suppliers’ components do not function properly, we may incur additional costs and our relationships with our customers may be adversely affected.
We rely on a limited number of suppliers for certain components used to manufacture our products.
Certain components used in the manufacture of our products are available from a limited number of suppliers. Shortages could occur in these essential materials due to an interruption of supply, including interruptions on the global supply chain in connection with COVID-19, or increased demand in the industry. One of our suppliers accounted for 20.3%, 26.8%, and 21.8% of total purchases of components for the fiscal years ended June 30, 2021, 2020 and 2019, respectively. Ablecom and Compuware, related parties, accounted for 7.8%, 10.1% and 9.2% of our total cost of sales for the fiscal years ended June 30, 2021, 2020 and 2019, respectively. If any of our largest suppliers discontinue their operations or if our relationships with them are adversely impacted, we could experience a material adverse effect on our business, results of operations and financial condition. See also “—Our cost structure and ability to deliver server solutions to customers in a timely manner may be adversely affected by volatility of the market for core components and certain materials for our products.”
We rely on indirect sales channels and any disruption in these channels could adversely affect our sales.
We depend on our indirect sales channel partners to assist us in promoting market acceptance of our products. To maintain and potentially increase our revenue and profitability, we will have to successfully preserve and expand our existing distribution relationships as well as develop new channel relationships. Our indirect sales channel partners also sell products offered by our competitors and may elect to focus their efforts on these sales. If our competitors offer our indirect sales channel more favorable terms or have more products available to meet the needs of their customers, or utilize the leverage of broader product lines sold through the indirect sales channel, those channel partners may de-emphasize or decline to carry our products. In addition, the order decision-making process in our indirect sales channel is complex and involves several factors, including end customer demand, warehouse allocation and marketing resources, which can make it difficult to accurately predict total sales for the quarter until late in the quarter. We also do not control the pricing or discounts offered by our indirect sales channel partners to the end customers. To maintain our participation in the marketing programs of our indirect sales channel partners, we have provided and expect to continue to offer cooperative marketing arrangements and offer short-term pricing concessions.
The discontinuation of cooperative marketing arrangements or pricing concessions could have a negative effect on our business, results of operations and financial condition. Our indirect sales channel partners could also modify their business practices, such as payment terms, inventory levels or order patterns. If we are unable to maintain successful relationships in our indirect sales channel or expand our channel or we experience unexpected changes in payment terms, inventory levels or other practices in our indirect sales channel, our business will suffer.
Our failure to deliver high quality server and storage solutions could damage our reputation and diminish demand for our products.
21
Our server and storage solutions are critical to our customers’ business operations. Our customers require our server and storage solutions to perform at a high level, contain valuable features and be extremely reliable. The design of our server and storage solutions is sophisticated and complex, and the process for manufacturing, assembling and testing our server solutions is challenging. Occasionally, our design or manufacturing processes may fail to deliver products of the quality that our customers require. For example, in the past certain vendors have provided us with defective components that failed under certain applications. As a result, our products needed to be repaired and we incurred costs in connection with the recall and diverted resources from other projects.
New flaws or limitations in our server and storage solutions may be detected in the future. Part of our strategy is to bring new products to market quickly, and first-generation products may have a higher likelihood of containing undetected flaws. If our customers discover defects or other performance problems with our products, our customers’ businesses, and our reputation, may be damaged. Customers may elect to delay or withhold payment for defective or underperforming server and storage solutions, request remedial action, terminate contracts for untimely delivery, or elect not to order additional products, which could result in a decrease in revenue, an increase in our provision for doubtful accounts or in collection cycles for accounts receivable or subject us to the expense and risk of litigation. We may incur expense in recalling, refurbishing or repairing defective server and storage solutions sold to our customers or remaining in our inventory. If we do not properly address customer concerns about our products, our reputation and relationships with our customers may be harmed. For all of these reasons, customer dissatisfaction with the quality of our products could substantially impair our ability to grow our business.
Our growth into markets outside the United States exposes us to risks inherent in international business operations.
We market and sell our systems and subsystems and accessories both inside and outside the United States. We intend to expand our international sales efforts, especially into Asia, and we are expanding our business operations in Europe and Asia, particularly in Taiwan, the Netherlands and Japan. In particular, we have made, and continue to make, substantial investments for the purchase of land and the development of new facilities in Taiwan to accommodate our expected growth and the migration of a substantial portion of our contract manufacturing operations from China to Taiwan.
Our international expansion efforts may not be successful. Our international operations expose us to risks and challenges that we would otherwise not face if we conducted our business only in the United States, such as:
•Heightened price sensitivity from customers in emerging markets;
•Our ability to establish local manufacturing, support and service functions, and to form channel relationships with value added resellers in non-United States markets;
•Localization of our systems and components, including translation into foreign languages and the associated expenses;
•Compliance with multiple, conflicting and changing governmental laws and regulations;
•Foreign currency fluctuations;
•Limited visibility into sales of our products by our channel partners;
•Greater concentration of competitors in some foreign markets than in the United States;
•Laws favoring local competitors;
•Weaker legal protections of intellectual property rights and mechanisms for enforcing those rights;
•Market disruptions created by other public health crises in regions outside the United States, such as avian flu, SARS and other diseases;
•Import and export tariffs;
•Difficulties in staffing and the costs of managing foreign operations, including challenges presented by relationships with workers’ councils and labor unions; and
•Changing regional economic and political conditions.
These factors could limit our future international sales or otherwise adversely impact our operations or our results of operations.
Our results of operations may be subject to fluctuations based upon our investment in corporate ventures.
22
We have a 30% minority interest in a China corporate venture that was established to market and sell corporate venture branded systems in China based upon products and technology we supply. We record earnings and losses from the corporate venture using the equity method of accounting. Our loss exposure is limited to the remainder of our equity investment in the corporate venture which as of June 30, 2021 and 2020 was $4.6 million and $2.7 million, respectively. We currently do not intend to make any additional investment in this corporate venture. See Part II, Item 8, Note 8, “Investment in a Corporate Venture” to the consolidated financial statements in this Annual Report. We may make investments in other corporate ventures. We do not control this corporate venture and any fluctuation in the results of operations of the corporate venture or any other similar transaction that we may enter into in the future could adversely impact, or result in fluctuations in, our results of operations.
In June 2020, the third-party parent company that controls our corporate venture was placed on a U.S. government export control list, along with several related entities. In addition, the United States has further prohibitions on conducting business with certain entities in China and continued to impose additional tariffs. If economic conditions or trade disputes, including trade restrictions and tariffs such as those between the United States and China, in the areas in which we market and sell our products and other key potential markets for our products continue to remain uncertain or deteriorate, it may further affect the value of our investment in the corporate venture.
Legal and Regulatory Risks
Because our products and services may store, process and use data, some of which contains personal information, we are subject to complex and evolving federal, state and foreign laws and regulations regarding privacy, data protection and other matters, which are subject to change.
We are subject to a variety of laws and regulations in the United States and other countries that involve matters central to our business, including with respect to user privacy, rights of publicity, data protection, content, protection of minors and consumer protection. These laws can be particularly restrictive in countries outside the United States. Both in the United States and abroad, these laws and regulations constantly evolve and remain subject to significant change. In addition, the application and interpretation of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in which we operate. Because our products and services store, process and use data, some of which contains personal information, we are subject to complex and evolving federal, state and foreign laws and regulations regarding privacy, data protection and other matters. Many of these laws and regulations are subject to change and uncertain interpretation and even our inadvertent failure to comply with such laws and regulations could result in investigations, claims, damages to our reputation, changes to our business practices, increased cost of operations and declines in user growth, retention or engagement, any of which could materially adversely affect our business, results of operations and financial condition. Costs to comply with and implement these privacy-related and data protection measures could be significant.
Global privacy legislation, enforcement, and policy activity for privacy and data protection are rapidly expanding and creating a complex regulatory compliance environment. Costs to comply with and implement these privacy-related and data protection measures could be significant. For example, the EU General Data Protection Regulation 2016/679 (“GDPR”), which came into effect on May 25, 2018, imposes stringent EU data protection requirements on companies established in the European Union or companies that offer goods or services to, or monitor the behavior of, individuals in the European Union. The GDPR establishes a robust framework of data subjects’ rights and imposes onerous accountability obligations on companies, with penalties for noncompliance of up to the greater of 20 million euros or four percent of annual global revenue. In addition, numerous states in the U.S. are also expanding data protection through legislation. For example, in June 2018, California enacted the California Consumer Privacy Act, which took effect on January 1, 2020, and gives California residents expanded privacy rights and protections and provide for civil penalties for violations and a private right of action for data breaches. At the same time, certain developing countries in which we do business have already or are also currently considering adopting privacy and data protection laws and regulations. While we have implemented policies and procedures to address GDPR and other data privacy requirements, failure to comply or concerns about our
practices or compliance with GDPR or other privacy-related laws and regulations could materially adversely affect our business, results of operations and financial condition.
23
We are subject to federal, state and local regulations relating to the growth of our business also requires ususe, handling, storage, disposal and human exposure to successfully manage a substantial increase in our number of employees. We have grown from 1,837 employees on July 1, 2014materials, including hazardous and toxic materials. If we were to 2,996 employees on June 30, 2017. We must continue to hire, trainviolate or become liable under environmental, health and manage new employees as needed. Our failure to timely file our SEC reports and the delisting of our common stock on Nasdaq has adversely impacted, and will likely continue to adversely impact, our ability to attract new employees and retain existing employees. If our new hires perform poorly, or if we are unsuccessful in hiring, training, managing and integrating these new employees, or fail in establishing and maintaining an effective corporate culture, or if we are not successful in retaining our existing employees, our business may be harmed. The additional headcount we have added and may continue to add has increased and will continue to increase our cost base, which will make it more difficult for us to offset any future revenue shortfalls by offsetting expense reductionssafety laws in the short term. If we fail to successfully manage our growth, we will be unable to execute our business plan.
dangerous. We expect that our direct sales forceoperations will continue to grow as larger customers increasingly require a direct sales approach. Competition for direct sales personnel with the advanced sales skillsbe affected by other new environmental laws and technical knowledge we need is intense. Our ability to grow our revenue in the future will depend, in large part,regulations on our success in recruiting, training, retaining and successfully managing sufficient qualified direct sales personnel. We have traditionally experienced much greater turnover in our sales and marketing personnel as compared to other departments and other companies. New hires require significant training and may take six months or longer before they reach full productivity. Our recent hires and planned hires may not become as productive as we would like, and we may be unable to hire sufficient numbers of qualified individuals in the future in the markets where we do business. If we are unable to hire, develop and retain sufficient numbers of productive sales personnel, our customer relationships and resulting sales of our server solutions will suffer.
We rely on a limited numberare also subject to the Section 1502 of suppliers forthe Dodd Frank Act concerning the supply of certain raw materials usedminerals coming from the conflict zones in and around the Democratic Republic of Congo, and adhere to manufacture our products.
As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal controls. Section 404 of the Sarbanes-Oxley Act of 2002, or expandSection 404, requires that we evaluate and determine the effectiveness of our distribution channels or we experience unexpected changes in payment terms, inventory levels or other practices byinternal control over financial reporting and provide a management report and attestation from our distributors,independent registered public accountant on our businessinternal control over financial reporting. Both our evaluation and the external attestation have and will suffer.
In the past, we have had one or more material weaknesses, which we have remediated.If a distributorwe identify one or OEM deems our direct sales efforts to be inappropriate, the distributor or OEM may not effectively market our products, may emphasize alternative products from competitors, or may seek to terminate our business relationship. Disruptionsmore material weaknesses in our distribution channelsinternal control over financial reporting, we will be unable to assert that our internal controls are effective, which could cause our revenuesstock price to decreasedecline. A “material weakness” is a deficiency, or fail to grow as expected. Our failure to implement an effective direct sales strategya combination of deficiencies, in internal control over financial reporting such that maintains and expands our relationships with our distributors and OEMs could lead tothere is a decline in sales, harm relationshipsand adversely affect our business, results of operations and financial condition.
The matters leading to use other suppliers, we may not be able to establish business arrangements that are, individually orthe delay in the aggregate, as favorable as the termsfiling of our 2017 10-K and conditions weadverse publicity and potential concerns from our customers, including from our prior lack of effective internal control over financial reporting, have established with Ablecom. If any of these things should occur, our net sales, marginshad and earnings could significantly decrease, which wouldcontinue to have a materialan adverse effect on our business results of operations and financial condition.
We have a 30% minority interest in a China corporate venturebeen and could continue to be the subject of negative publicity focused on the matters that was established to market and sell corporate venture branded systems in China based upon components and technology we supply. We record earnings and losses from the corporate venture using the equity method of accounting. Our loss exposure is limitedled to the remainderdelay in the filing of our equity investment in2017 10-K. We may be adversely impacted by negative reactions to this publicity from our customers or others with whom we do business. Concerns include the corporate venture which astime and effort required to address our accounting and control environment and our ability to be a long-term provider to our customers. The continued occurrence of June 30, 2017 was $6.1 million. Although we currently do not intend to make any additional investment in the corporate venture, if we were to do so in the future, our exposure to potential losses would increase. We do not control the corporate venture and any fluctuation in the results of operations of the corporate venture or any
24
Failure to comply with the U.S. Foreign Corrupt Practices Act, other applicable anti-corruption and anti-bribery laws, and applicable trade control laws could subject us to penalties and other adverse consequences.
We manufacture and sell our products in several countries outside of the United States, both to direct and OEM customers as well as tothrough our distributors.indirect sales channel. Our operations are subject to the U.S. Foreign Corrupt Practices Act (the “FCPA”) as well as the anti-corruption and anti-bribery laws in the countries where we do business. The FCPA prohibits covered parties from offering, promising, authorizing or giving anything of value, directly or indirectly, to a “foreign government official” with the intent of improperly influencing the official’s act or decision, inducing the official to act or refrain from acting in violation of lawful duty or obtaining or retaining an improper business advantage. The FCPA also requires publicly traded companies to maintain records that accurately and fairly represent their transactions, and to have an adequate system of internal accounting controls. In addition, other applicable anti-corruption laws prohibit bribery of domestic government officials, and some laws that may apply to our operations prohibit commercial bribery, including giving or receiving improper payments to or from non-government parties, as well as so-called “facilitation” payments.
In addition, we are subject to U.S. and other applicable trade control regulations that restrict with whom we may transact business, including the trade sanctions enforced by the U.S. Treasury, Office of Foreign Assets Control (“OFAC”).Control. If we fail to comply with laws and regulations restricting dealings with sanctioned countries or companies and/or persons on restricted lists, we may be subject to civil or criminal penalties. Any future violations could have an adverse impact on our ability to sell our products to United States federal, state and local government and related entities. We have business relationships with companies in China who have been, or may in the future be, added to the restricted party list. We take steps to minimize business disruption when these situations arise; however, we may be required to terminate or modify such relationships if our activities are prohibited by U.S. laws. Further, our association with these parties could subject us to greater scrutiny or reputational harm among current or prospective customers, partners, suppliers, investors, other parties doing business with us or using our products, or the general public. The United States and other countries continually update their lists of export-controlled items and technologies, and may impose new or more-restrictive export requirements on our products in the future. As a result of regulatory changes, we may be required to obtain licenses or other authorizations to continue supporting existing customers or to supply existing products to new customers in China and elsewhere. Further escalations in trade restrictions, particularly between the United States and China, could impede our ability to sell or support our products.
In addition, while we have implemented policies, internal controls and other measures reasonably designed to promote compliance with applicable anti-corruption and anti-bribery laws and regulations, and certain safeguards designed to ensure compliance with U.S. trade control laws, our employees or agents have in the past engaged and may in the future engage in improper conduct for which we could be held responsible. If we, or our employees or agents acting on our behalf, are found to have engaged in practices that violate these laws and regulations, we could suffer severe fines and penalties, profit disgorgement, injunctions on future conduct, securities litigation, bans on transacting government business and other consequences that may have a material adverse effect on our business, results of operations and financial condition. In addition, our brand and reputation, our sales activities or our stock price could be adversely affected if we become the subject of any negative publicity related to actual or potential violations of anti-corruption, anti-bribery or trade control laws and regulations.
Any failure to protect our intellectual property rights, trade secrets and technical know-how could impair our brand and our competitiveness.
Our ability to prevent competitors from gaining access to our technology is essential to our success. If we fail to protect our intellectual property rights adequately, we may lose an important advantage in the markets in which we compete. Trademark, patent, copyright and trade secret laws in the United States and other jurisdictions as well as our internal confidentiality procedures and contractual provisions are the core of our efforts to protect our proprietary technology and our brand. Our patents and other intellectual property rights may be challenged by others or invalidated through administrative process or litigation, and we may initiate claims or litigation against third parties for infringement of our proprietary rights. Such administrative proceedings and litigation are inherently uncertain and divert resources that could be put towards other business priorities. We may not be able to obtain a favorable outcome and may spend considerable resources in our efforts to defend and protect our intellectual property.
Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain. Effective patent, trademark, copyright and trade secret protection may not be available to us in every country in which our products are available. The laws of some foreign countries may not be as protective of intellectual property rights as those in the United States, and mechanisms for enforcement of intellectual property rights may be inadequate.
25
Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property and using our technology for their competitive advantage. Any such infringement or misappropriation could have a material adverse effect on our business, results of operations and financial condition.
Resolution of claims that we have violated or may violate the intellectual property rights of others could require us to indemnify our customers, resellersindirect sales channel partners or vendors, redesign our products, or pay significant royalties to third parties, and materially harm our business.
Our industry is marked by a large number of patents, copyrights, trade secrets and trademarks and by frequent litigation based on allegations of infringement or other violation of intellectual property rights. Our primary competitors have substantially greater numbers of issued patents than we have which may position us less favorably in the event of any claims or litigation with them. Other third parties have in the past sent us correspondence regarding their intellectual property or filed claims that our products infringe or violate third parties’ intellectual property rights. In addition, increasingly non-operating companies are purchasing patents and bringing claims against technology companies. We have been subject to several such claims and may be subject to such claims in the future.
Successful intellectual property claims against us from others could result in significant financial liability or prevent us from operating our business or portions of our business as we currently conduct it or as we may later conduct it. In addition, resolution of claims may require us to redesign our technology to obtain licenses to use intellectual property belonging to third parties, which we may not be able to obtain on reasonable terms, to cease using the technology covered by those rights, and to indemnify our customers, resellersindirect sales channel partners or vendors. Any claim, regardless of its merits, could be expensive and time consuming to defend against, and divert the attention of our technical and management resources.
Our certificate of incorporation and bylaws contain provisions that could discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:
•Establish a classified Board of Directors so that not all members of our Board are generally elected at one time
•Require super-majority voting to amend some provisions in our certificate of incorporation and bylaws;
•Authorize the issuance of “blank check” preferred stock that our Board could issue to increase the number of outstanding shares and to discourage a takeover attempt;
•Limit the ability of our stockholders to call special meetings of stockholders;
•Prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;
•Provide that our Board is expressly authorized to adopt, alter or repeal our bylaws; and
•Establish advance notice requirements for nominations for election to our Board or for proposing matters that can be acted upon by stockholders at stockholder meetings.
In addition, we lose Charles Liang,are subject to Section 203 of the Delaware General Corporation Law, which, subject to some exceptions, prohibits “business combinations” between a Delaware corporation and an “interested stockholder,” which is generally defined as a stockholder who becomes a beneficial owner of 15% or more of a Delaware corporation’s voting stock for a three-year period following the date that the stockholder became an interested stockholder. Section 203 could have the effect of delaying, deferring or preventing a change in control that our President, Chief Executive Officerstockholders might consider to be in their best interests.
These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and Chairman,make it more difficult for stockholders to elect directors of their choosing and cause us to take corporate actions other than those stockholders desire.
Financial Risks
26
We incurred significant expenses related to the matters that led to the delay in the filing of our 2017 10-K and may incur expenses related to any resulting litigation.
We devoted substantial internal and external resources towards investigating, discovering, understanding and remediating the matters that led to the delay in the filing of our 2017 10-K (all as described in the 2017 10-K). As a result of these efforts, we incurred substantial incremental fees and expenses for additional accounting, financial and other consulting and professional services, as well as the implementation and maintenance of systems and processes that will need to be updated, supplemented or any other current key employee or are unablereplaced. Specifically, in connection with these efforts, we incurred professional fees of approximately $0.5 million, $14 million, $67 million and $42 million in fiscal years 2021, 2020, 2019 and 2018, respectively. In addition, as of and for the year ended June 30, 2020, we recorded a liability of $17.5 million for our SEC settlement of the investigation into our Company's financial accounting for fiscal years 2014 to attract additional key employees, we may not2017. We have taken a number of steps in order to strengthen our corporate culture, sales processes, and accounting function so as to allow us to be able to implementprovide timely and accurate financial reporting. To the extent these steps are not successful, we could be required to devote significant additional time and incur significant additional expenses. Even if these steps are successful, we may incur significant legal fees in future periods as we address litigation and regulatory action arising from the matters that led to the delay in the filing our 2017 10-K. The expenses we are incurring in this regard, as well as the substantial time devoted by our management to identify and address internal control deficiencies, could have a material adverse effect on our business, results of operations and financial condition.
Our research and development expenditures, as a percentage of our net sales, are considerably higher than many of our competitors and our earnings will depend upon maintaining revenues and margins that offset these expenditures.
Our strategy is to focus on being consistently first-to-market with flexible and application optimized server and storage systems that take advantage of our own internal development and the latest technologies offered by microprocessor manufacturers and other component vendors. Consistent with this strategy, we spend higher amounts, as a percentage of revenues, on research and development costs than many of our competitors. If we cannot sell our products in a timely manner.sufficient volume and with adequate gross margins to compensate for such investment in research and development, our earnings may be materially and adversely affected.
Our future success dependseffective income tax rates could be affected by changes in large partthe relative mix of our operations and income among different geographic regions and by changes in domestic and foreign income tax laws, which could affect our future operating results, financial condition and cash flows.
On December 22, 2017, the U.S. federal government enacted the Tax Cuts and Jobs Act (“2017 Tax Reform Act”), and in December 2019, we realigned our international business operations and group structure to take advantage of certain international tax planning opportunities and incentives. Our future effective income tax rates could be adversely affected if tax authorities challenge our international tax structure or if the relative mix of our United States and international income changes for any reason, or due to changes in U.S. or international tax laws. In particular, a substantial portion of our revenue is generated from customers located outside the United States.
The effectiveness of our tax planning activities is based upon the continued servicecertain assumptions that we make regarding our future operating performance and tax laws. We continue to optimize our tax structure to align with our business operations and growth strategy. We cannot assure you that we will be able to lower our effective tax rate as a result of our current executive management team and other current key employees. In particular, Charles Liang, our President, Chief Executive Officer and Chairman of the Board, is critical to the overall management of our company as well as to our strategic direction. Mr. Liang co-founded our company and has been our Chief Executive Officer since our inception. His experience in running our business and his personal involvement in key relationships with suppliers, customers and strategic partners are extremely valuable to our company. We currently door future tax planning activities nor that such rate will not have a succession plan for the replacement of Mr. Liang if it were to become necessary. Additionally, we are particularly dependent on the continued service of our existing research and development personnel because of the complexity of our products and technologies. Our employment arrangements with our executives and employees do not require them to provide services to us for any specific length of time, and they can terminate their employment with us at any time, with or without notice, without penalty. The loss of services of any of these executives or of one or more other key members of our team could seriously harm our business.
Backlog does not provide a substantial portion of our net sales in any quarter.
Our net sales are difficult to forecast because we do not have sufficient backlog of unfilled orders or sufficient recurring revenue to meet our quarterly net sales targets at the beginning of a quarter. Rather, a majority of our net sales in any quarter depend upon customer orders that we receive and fulfill in that quarter. Because our expense levels are based in part on our expectations as to future net sales and to a large extent are fixed in the short term, we might be unable to adjust spending in time to compensate for any shortfall in net sales. Accordingly, any significant shortfall of revenues in relation to our expectations would harm our operating results.
Risks Related to Owning Our Stock
27
The trading price of our common stock is likely to be volatile, and you might not be able to sell your shares at or above the price at which you purchased the shares.
The trading prices of technology company securities historically have been highly volatile andvolatile. In addition, the global markets have experienced volatility as a result of the COVID-19 pandemic. The trading price of our common stock has been and is likely to continue to be subject to wide fluctuations. Factors, in addition to those outlined elsewhere in this filing, that may affect the trading price of our common stock include:
•The risk that we are not able to relistimpact of COVID-19 on our common stock on a national securities exchange;business, the global economy and trading markets;
•The outcome of litigation and claims as well as regulatory examinations, investigations, proceedings and orders arising out of our failure to file SEC reports on a timely basis and results of the Investigation, Procedures and Analysis;which we are subject;
•Actual or anticipated variations in our operating results, including failure to achieve previously provided guidance;
•Announcements of technological innovations, new products or product enhancements, strategic alliances or significant agreements by us or by our competitors;
•Changes in recommendations by any securities analysts that elect to follow our common stock;
•The financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
•False or misleading press releases or articles regarding our company or our products;
•The loss of a key customer;
•The loss of key personnel;
•Technological advancements rendering our products less valuable;
•Lawsuits filed against us, including those described in Part I, Item 3, “Legal Proceedings”;
•Changes in operating performance and stock market valuations of other companies that sell similar products;
•Price and volume fluctuations in the overall stock market;
•Market conditions in our industry, the industries of our customers and the economy as a whole; and
•Other events or factors, including those resulting from war, incidents of terrorism, political instability or responses to these events.
Future sales of shares by existing stockholders could cause our stock price to decline.
Attempts by existing stockholders to sell substantial amounts of our common stock in the public market could cause the trading price of our common stock to decline significantly. All of our shares are eligible for sale in the public market, including shares held by directors, executive officers and other affiliates, sales of which are subject to volume limitations and other requirements under Rule 144 under the Securities Act. In addition, shares subject to outstanding options and reserved for future issuance under our stock option plans are eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements. If these additional shares are sold, or if it is perceived that they will be sold in the public market, the trading price of our common stock could decline.
The concentration of our capital stock ownership with insiders will likely limit your ability to influence corporate matters.
As of MarchJuly 31, 2019,2021, our executive officers, directors, current five percent or greater stockholders and affiliated entities together beneficially owned 27.8%42.4% of our common stock, net of treasury stock. As a result, these stockholders, acting together, have significant influence over all matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. Corporate action might be taken even if other stockholders oppose them.
This concentration of ownership might also have the effect of delaying or preventing a change of control of our company that other stockholders may view as beneficial.
We do not expect to pay any cash dividends for the foreseeable future.
We do not anticipate that we will pay any cash dividends to holders of our common stock in the foreseeable future. In addition, under the terms of the credit agreement with Bank of America, dated April 19, 2018, we cannot pay any dividends, with limited exceptions. Accordingly, investors must rely on sales of their common stock after price appreciation, which may
28
never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.
Our products may not be viewed as supporting climate change mitigation in the IT sector.
According to the Journal Nature, the global energy demand of IT equipment is expected to be 20% of global energy demand by 2030. More than 70% of the Scope 3 (lifecycle) emissions of our server products are attributed to their use in data centers. Our ability to create energy saving products is key to climate change mitigation, and business success. In addition, climate change reporting and product certification are increasingly sought by customers and regulators. If we do not satisfy customer requirements for products that help mitigate climate change, and document how they contribute to such change, it could have a material adverse impact on our business, operating results, and financial conditions.
Our business and operations may be impacted by natural disaster events, including those brought on by climate change.
Land, sea and air routes between economic centers are subject to weather events exacerbated by climate change and can disrupt commercial activity. Our most significant business offices, research and development, and manufacturing locations, are in the San Jose, California area and in Taiwan. Each region is subject to climate change events, and known for earthquakes. While we have adopted a business continuity plan, there is no certainty it will be effective for significant natural disasters, which could have a material adverse impact on business, operating results, and financial condition.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of June 30, 2017,2021, we owned approximately 1,408,0002,273,000 square feet and leased approximately 558,000753,000 square feet of office and manufacturing space. Our long-lived assets located outside of the United States represented 34.4%, 23.5% and 21.5% of total value of long-lived assets in fiscal years 2021, 2020 and 2019, respectively. See Part II, Item 8, Note 18, “Segment Reporting” to the consolidated financial statements in this Annual Report for a summary of long-lived assets by geographic region.
Our principal executive offices, research and development center and production operations are located in San Jose, California where we own approximately 1,197,0001,307,000 square feet of office and manufacturing space which is subject to existing term loans and revolving line of credit with $123.2 million outstanding as of June 30, 2017.space. We lease approximately 246,0005,000 square feet of warehouseoffice space in Fremont, CaliforniaJersey City, New Jersey under a lease that expires in July 2020,January 2022, lease approximately 46,000 square feet of office space in San Jose, California under a lease that expires in January 2022, and lease approximately 5,000246,000 square feet of officewarehouse space in Jersey City, New JerseyFremont, California under a lease that expires in July 2020.2025. Our European headquarters for manufacturing and service operations is located in Den Bosch, the Netherlands where we own approximately 12,000 square feet of office and we lease approximately 124,000203,000 square feet of office and manufacturing space under twofive leases, which expire in July 2025 and June 2026. In Asia, our manufacturing facilities are located in Taoyuan County, Taiwan where we own approximately 211,000954,000 square feet of office and manufacturing space on 7.06.96 acres of land. These manufacturing facilities are subject to anpledged as security under the existing term loanloans with $19.7$59.8 million remaining outstanding as of June 30, 2017.2021. Our research and development center, and service operations, and warehouse space in Asia are located in an approximately 131,000106,000 square feet facility in Taipei, Taiwan under eleventwelve leases that expire at various dates ranging from January 2022 through May 2019 through January 2022. We lease2024 and an approximately 3,000134,000 square feet of office spacefacility in Shanghai and Beijing, China for sales and service operationsTaoyuan, Taiwan under twosix leases that expire in April 2020 and August 2020, respectively. In addition, we lease approximately 2,000 square feet of office space in Japan under one lease, which expires in January 2020.from December 2021 through December 2023.
Additionally, we own 36 acres of land in San Jose, California that would allow us to expand our Green Computing Park. We remodeled one warehouse with approximately 310,000 square feet of storage space and completed the construction of a new manufacturing and warehouse building with approximately 182,000 square feet of manufacturing space in August 2015. In fiscal year 2017,years 2019 and 2020, we continued to engage several contractors for the development and construction of improvements on the property. We completed the construction of a second new manufacturing and warehouse building in the first quarter of fiscal year 2018. We financed this development through our operating cash flows and additional borrowings from banks. See Part II, Item 8, Note 9,10, “Short-term and Long-term Obligations”Debt” to the consolidated financial statements in this Annual Report on Form 10-K for a discussion of our company’s short-term and long-term obligations.company's debt.
29
We believe that our existing properties, including both owned and leased, are in good condition and are suitable for the conduct of our business.
Item 3. Legal Proceedings
Due to the inherent uncertainties of legal proceedings, we cannot predict the outcome of these proceedings at this time, and we can give no assurance that they will not have a material adverse effect on our financial position or results of operations.operations
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
| High | Low | ||||||
| Fiscal Year 2016: | |||||||
| First Quarter | $ | 30.25 | $ | 24.24 | |||
| Second Quarter | $ | 31.82 | $ | 22.32 | |||
| Third Quarter | $ | 34.08 | $ | 21.52 | |||
| Fourth Quarter | $ | 34.49 | $ | 23.78 | |||
| High | Low | ||||||
| Fiscal Year 2017: | |||||||
| First Quarter | $ | 26.34 | $ | 19.02 | |||
| Second Quarter | $ | 29.00 | $ | 21.37 | |||
| Third Quarter | $ | 28.85 | $ | 24.60 | |||
| Fourth Quarter | $ | 25.25 | $ | 23.60 | |||
Holders
As of MarchJuly 31, 2019,2021, there were 3123 registered stockholders of record of our common stock. Because most of our shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial stockholders represented by these holders of record.
Dividend Policy
We have never declared or paid cash dividends on our capital stock. We intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Under the terms of the credit agreement with Bank of America, dated April 19, 2018,as amended, we cannotmay not pay any dividends.
Equity Compensation Plan
Please see Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this reportAnnual Report for disclosure relating to our equity compensation plans.
Stock Performance Graph
This performance graph shall not be deemed “soliciting material” or to be "filed" with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Super Micro Computer, Inc. under the Securities Act of 1933, as amended, or the Exchange Act.
The following graph compares our cumulative five-year total stockholder return on our common stock with the cumulative return of the Nasdaq Computer Index and the Nasdaq Composite Index, which both included our common stock, for the comparable period.
Index. The graph reflects an investment of $100 (with reinvestment of all dividends, if any) in our common stock, the Nasdaq Computer Index and the Nasdaq Composite Index on June 30, 20122016 and our relative performance tracked through June 30, 2017.2021. The stockholder return shown on the graph below is not necessarily indicative of future performance, and we do not make or endorse any predictions as to future stockholder returns.
31
| 6/30/2012 | 6/30/2013 | 6/30/2014 | 6/30/2015 | 6/30/2016 | 6/30/2017 | |||||||||||||
| Super Micro Computer, Inc. | 100.00 | 67.09 | 159.33 | 186.51 | 156.68 | 155.42 | ||||||||||||
| Nasdaq Composite Index | 100.00 | 115.95 | 150.19 | 169.91 | 164.99 | 209.21 | ||||||||||||
| Nasdaq Computer Index | 100.00 | 102.24 | 142.18 | 157.55 | 159.77 | 217.77 | ||||||||||||
| 6/30/2016 | 6/30/2017 | 6/30/2018 | 6/30/2019 | 6/30/2020 | 6/30/2021 | |||||||||||||||||||||||||||||||||
| Super Micro Computer, Inc. | 100.00 | 99.20 | 95.17 | 77.87 | 114.25 | 141.57 | ||||||||||||||||||||||||||||||||
| Nasdaq Composite Index | 100.00 | 126.80 | 155.09 | 165.33 | 207.71 | 299.50 | ||||||||||||||||||||||||||||||||
| Nasdaq Computer Index | 100.00 | 136.30 | 176.47 | 190.98 | 273.59 | 411.33 | ||||||||||||||||||||||||||||||||
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
| Period | Total Number of Shares Purchased(1) | Average Price Paid per Share(1) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2) | Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs(2) | |||||||||||||||||||
| Month 1 (April 1, 2021 to April 30, 2021) | 236,171 | $ | 39.56 | 236,171 | $150.0 million | ||||||||||||||||||
| Month 2 (May 1, 2021 to May 31, 2021) | 83,341 | $ | 35.28 | — | $150.0 million | ||||||||||||||||||
| Month 3 (June 1, 2021 to June 30, 2021) | — | $ | — | — | $150.0 million | ||||||||||||||||||
| Total | 319,512 | $ | 38.45 | 236,171 | |||||||||||||||||||
__________________________
(1)Includes shares withheld from delivery to satisfy tax withholding obligations of recipients that occur upon the vesting of restricted stock units granted under our equity incentive plans.
(2)On January 29, 2021, a duly authorized subcommittee of our Board approved a share repurchase program to repurchase up to $200 million of our common stock at prevailing prices in the open market. The share repurchase program is effective until July 31, 2022 or until the maximum amount of common stock is repurchased, whichever occurs first.
32
Item 6. Selected Financial DataReserved
| Fiscal Years Ended June 30, | Fiscal Years Ended June 30, | Fiscal Years Ended June 30, | |||||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||||||||||||||
| (As Revised) (1) | (As Revised) (1) | As Reported | Adjustments (2) | As Adjusted | As Reported | Adjustments (2) | As Adjusted | ||||||||||||||||||||||||
| (in thousands, except per share data) | |||||||||||||||||||||||||||||||
| Consolidated Statements of Operations Data: | |||||||||||||||||||||||||||||||
| Net sales | $ | 2,484,929 | $ | 2,225,022 | $ | 1,954,353 | $ | 1,467,202 | $ | (17,037 | ) | $ | 1,450,165 | $ | 1,162,561 | $ | (15,332 | ) | $ | 1,147,229 | |||||||||||
| Cost of sales | 2,134,971 | 1,894,521 | 1,647,769 | 1,241,657 | (10,610 | ) | 1,231,047 | 1,002,508 | (12,488 | ) | 990,020 | ||||||||||||||||||||
| Gross profit | 349,958 | 330,501 | 306,584 | 225,545 | (6,427 | ) | 219,118 | 160,053 | (2,844 | ) | 157,209 | ||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||
| Research and development | 143,992 | 124,223 | 101,402 | 84,257 | 917 | 85,174 | 75,208 | 60 | 75,268 | ||||||||||||||||||||||
| Sales and marketing | 66,445 | 58,338 | 47,496 | 38,012 | 264 | 38,276 | 33,785 | 108 | 33,893 | ||||||||||||||||||||||
| General and administrative | 44,646 | 40,449 | 25,040 | 23,017 | (192 | ) | 22,825 | 23,902 | 4 | 23,906 | |||||||||||||||||||||
| Total operating expenses | 255,083 | 223,010 | 173,938 | 145,286 | 989 | 146,275 | 132,895 | 172 | 133,067 | ||||||||||||||||||||||
| Income from operations | 94,875 | 107,491 | 132,646 | 80,259 | (7,416 | ) | 72,843 | 27,158 | (3,016 | ) | 24,142 | ||||||||||||||||||||
| Other income (expense), net | (1,287 | ) | 1,507 | 956 | 92 | — | 92 | 48 | — | 48 | |||||||||||||||||||||
| Interest expense | (2,300 | ) | (1,594 | ) | (965 | ) | (757 | ) | — | (757 | ) | (610 | ) | — | (610 | ) | |||||||||||||||
| Income before income tax provision | 91,288 | 107,404 | 132,637 | 79,594 | (7,416 | ) | 72,178 | 26,596 | (3,016 | ) | 23,580 | ||||||||||||||||||||
| Income tax provision | 24,434 | 35,323 | 40,082 | 25,437 | (1,342 | ) | 24,095 | 5,317 | (473 | ) | 4,844 | ||||||||||||||||||||
| Net income | $ | 66,854 | $ | 72,081 | $ | 92,555 | $ | 54,157 | $ | (6,074 | ) | $ | 48,083 | $ | 21,279 | $ | (2,543 | ) | $ | 18,736 | |||||||||||
| Net income per common share: | |||||||||||||||||||||||||||||||
| Basic | $ | 1.38 | $ | 1.50 | $ | 1.99 | $ | 1.24 | $ | 1.10 | $ | 0.50 | $ | 0.45 | |||||||||||||||||
| Diluted | $ | 1.29 | $ | 1.39 | $ | 1.85 | $ | 1.16 | $ | 1.03 | $ | 0.48 | $ | 0.43 | |||||||||||||||||
| Shares used in per share calculation: | |||||||||||||||||||||||||||||||
| Basic | 48,383 | 47,917 | 46,434 | 43,599 | 43,599 | 41,992 | 41,992 | ||||||||||||||||||||||||
| Diluted | 51,679 | 51,836 | 50,094 | 46,512 | 46,512 | 43,907 | 43,907 | ||||||||||||||||||||||||
| Stock-based compensation: | |||||||||||||||||||||||||||||||
| Cost of sales | $ | 1,382 | $ | 1,157 | $ | 962 | $ | 941 | $ | (21 | ) | $ | 920 | $ | 953 | $ | (21 | ) | $ | 932 | |||||||||||
| Research and development | 12,559 | 10,651 | 9,195 | 6,783 | 147 | 6,930 | 6,527 | (144 | ) | 6,383 | |||||||||||||||||||||
| Sales and marketing | 2,144 | 1,934 | 1,601 | 1,260 | (26 | ) | 1,234 | 1,541 | (34 | ) | 1,507 | ||||||||||||||||||||
| General and administrative | 3,580 | 3,188 | 2,678 | 2,078 | (100 | ) | 1,978 | 2,340 | (52 | ) | 2,288 | ||||||||||||||||||||
| Total stock-based compensation | $ | 19,665 | $ | 16,930 | $ | 14,436 | $ | 11,062 | $ | — | $ | 11,062 | $ | 11,361 | $ | (251 | ) | $ | 11,110 | ||||||||||||
33
| As of June 30, | |||||||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||||||||||||||
| (As Revised) (1) | (As Revised) (2) | As Reported | Adjustments (2) | As Adjusted | As Reported | Adjustments (2) | As Adjusted | ||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||
| Consolidated Balance Sheet Data: | |||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 110,606 | $ | 178,820 | $ | 92,920 | $ | 96,872 | $ | (1,390 | ) | $ | 95,482 | $ | 93,038 | $ | (1,306 | ) | $ | 91,732 | |||||||||||
| Working capital | 588,636 | 544,698 | 438,144 | 343,195 | (14,255 | ) | 328,940 | 281,528 | (9,437 | ) | 272,091 | ||||||||||||||||||||
| Total assets | 1,515,130 | 1,191,483 | 1,122,031 | 796,325 | 29,970 | 826,295 | 632,257 | 38,412 | 670,669 | ||||||||||||||||||||||
| Long-term obligations | 68,754 | 85,200 | 26,062 | 16,208 | 4,710 | 20,918 | 16,869 | 2,121 | 18,990 | ||||||||||||||||||||||
| Total stockholders’ equity | 773,846 | 696,653 | 593,585 | 469,231 | (17,072 | ) | 452,158 | 373,724 | (10,999 | ) | 362,725 | ||||||||||||||||||||
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements and related notes which appear elsewhere in this Annual Report on Form 10-K.Report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report, on Form 10-K, particularly under the heading "Risk Factors." The following discussion gives effect to the restatement discussed in Part II, Item 8, Note 19, “Restatement of Previously Issued Consolidated Financial Statements” to the consolidated financial statements of this Annual Report on Form 10-K. See related discussion in the Explanatory Note.
Overview
We are a global leader inand innovator of application-optimized high performance high efficiencyand high-efficiency server technology and innovation. We develop and provide end-to-end green computing solutions to thestorage systems for a variety of markets, including enterprise data centers, cloud computing, data center, enterprise, big data, high performance computing ("HPC"artificial intelligence, 5G and internet of things ("IoT")/embedded markets.edge computing. Our solutions range frominclude complete server,servers, storage systems, modular blade andservers, blades, workstations, to full racks, networking devices, server management software, and technologyserver sub-systems. We also provide global support and services.services to help our customers install, upgrade and maintain their computing infrastructure.
We commenced operations in 1993 and have been profitable every year since inception. For fiscal years 2017, 20162021, 2020 and 2015,2019, our net income was $66.9$111.9 million, $72.1$84.3 million and $92.6$71.9 million, respectively. In order to increase our sales and profits, we believe that we must continue to develop flexible and customizableapplication optimized server and storage solutions and be among the first to market with new features and products. We must also continue to expand our software and customer service and support offerings, particularly as we increasingly focus on larger enterprise sales.customers. Additionally, we must focus on development of our sales partners and distribution channels to further expand our market share. We measure our financial success based on various indicators, including growth in net sales, gross profit margin and operating margin as key measures of profitability, and cash conversion cycle as a key measure of working capital management.margin. Among the key non-financial indicators of our success is our ability to rapidly introduce new products and deliver the latest application optimizedapplication-optimized server and storage solutions. In this regard, we work closely with microprocessor and other key component vendors to take advantage of new technologies as they are introduced. Historically, our ability to introduce new products rapidly has allowed us to benefit from technology transitions such as the introduction of new microprocessors and storage technologies, and as a result, we monitor the introduction cycles of NVIDIA Corporation, Intel Corporation, Advanced Micro Devices, Inc., Samsung Electronics Company Limited, Micron Technology, Inc. and Nvidia Corporationothers closely and carefully. This also impacts our research and development expenditures as we continue to invest more in our current and future product development efforts.
Coronavirus (COVID-19) Pandemic Impact
The global spread of the coronavirus (COVID-19) and the various attempts to contain it have created significant volatility, uncertainty and economic disruption for many businesses worldwide. In an effort to contain COVID-19 or slow its spread, governments around the world have enacted various measures, including orders that govern the operations of businesses, require masks be worn and define shelter in place and social distancing protocols. We are an essential critical infrastructure (information technology) business under the relevant federal, state and county regulations. Accordingly, in late March 2020, we responded to the directives from Santa Clara County and the State of California regarding instructions to combat the spread of COVID-19. Our first priority is the safety of our workforce and we have implemented numerous health precautions and work practices to be in compliance with the law and to operate in a safe manner.
We quickly transitioned certain of our indirect labor forces to work from home at the earlier phase of the pandemic and continued to operate our local assembly in Taiwan and, after an initial period of disruption, in the United States and Europe. We operate in the critical industry of IT infrastructure and we assessed our customer base to identify priority customers who operate in critical industries. We continue to see ongoing demand and do not have significant direct exposure to industries such as retail, oil and gas and hospitality, which have been impacted the greatest. As time passes, we may discover greater indirect exposure to distressed industries through our channel partners and OEM customers.
We have actively managed our supply chain for potential shortage risk by building inventories of critical components required for our motherboards and other system printed circuit boards in response to the early outbreak of COVID-19 in China. Since that time, we have continued to add to our inventories of key components such as CPUs, memory, SSDs and GPUs such that customer orders can be fulfilled as they are received.
Logistics has emerged as a new challenge as globally the transportation industry restricted the frequency of departures and increased logistics costs. We experienced increased costs in freight as well as direct labor costs as we incentivized our employees to continue to work and assist us in serving our customers, many of whom are in critical industries. We expect this trend to continue for the duration of the COVID-19 pandemic.
34
We monitor the credit profile and payment history of our customers to evaluate risk in specific industries or geographic areas where cash flow may be disrupted. While we believe that we are adequately capitalized, we actively manage our liquidity needs. In December 2020, our Taiwan subsidiary entered into a general credit agreement with E.SUN Bank in Taiwan. This general credit agreement provides for the issuance of loans, advances, acceptances, bills, bank guarantees, overdrafts, letters of credit, and other types of drawdown instruments up to a credit limit of $30 million. The term of this general credit agreement was through September 18, 2021. In June 2021, we negotiated an extension of our credit facility with Bank of America to extend the maturity date to June 2026. In July 2021, we replaced our prior credit facility and term loan facility with China Trust and Bank Corp ("CTBC Bank"), with a new facility for omnibus credit lines.
Our management team is focused on guiding our company through the ongoing challenges presented by COVID-19. Currently, there are positive signs with vaccine availability and reductions in infection rates; however, with the possibility of new virus strains and vaccine supply constraints, we are unable to predict the ultimate extent to which the global COVID-19 pandemic may further impact our business operations, financial performance and results of operations within the next 12 months. See also “Business–Employees and Human Capital Resources.”
Financial Highlights
The following is a summary of other financial highlights of fiscal year 2017:years 2021 and 2020:
•Net sales increased by 11.7%6.5% in fiscal year 2021 as compared to fiscal year 20162020.
•Gross margin declined to 15.0% in fiscal year 2021 from 15.8% in fiscal year 2020, primarily due to product and customer mix and increased unit shipments, reflecting the successful execution of our strategy to ship more complete systems, which increasedlogistic costs.
•Operating expenses declined by 13.5%6.8% in fiscal year 2021 as compared to fiscal year 2016.
•Net income increased to $111.9 million in fiscal year 2021 as compared to $84.3 million in fiscal year 2020, which was primarily due to increased component prices for memory and storage relative to our ability to pass cost increases to our customers as well as increasedthe higher net sales where pricing is typically more competitive and lower total capacity utilization while we ramp up use of our new facilities.
•Our cash and cash equivalents were $110.6$232.3 million and $210.5 million at the end of fiscal year 2017, compared with $178.8 million at the end ofyears 2021 and 2020, respectively. In fiscal year 2016. The decrease in our2021, we generated net cash and cash equivalents at the end of fiscal year 2017 was primarily due to $96.2$21.1 million, of cash used in ourwhich $123.0 million was provided by operating activities and $29.4related primarily to the increase in net income. We also invested $58.0 million ofin purchases of property plant and equipment, of which $16.1 million was related to property and equipment in connection with theincluding construction of buildings at our Green Computing Parka new facility in San Jose, California, partiallyand used $44.4 million in financing activities primarily due to the repurchase of $130.0 million of our common stock, which was offset by $66.6 million of borrowings, net of repayments.the proceeds from borrowings.
Critical Accounting Policies and Estimates
General
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenuesnet sales and expenses. We evaluate our estimates on an on-going basis, including those related to allowances for doubtful accounts and sales returns, inventory valuation, useful lives of property, plant and equipment, product warranty accruals, stock-based compensation, impairment of investments and long-lived assets, and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making the judgments we make about the carrying values of assets and liabilities that are not readily apparent from other sources. Because these estimates can vary depending on the situation, actual results may differ from the estimates. Making estimates and judgments about future events is inherently unpredictable and is subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to have been incorrect, it could have a material impact on our results of operations, financial position and statement of cash flows.
A summary of significant accounting policies is included in Part II, Item 8, Note 1, “Organization and Summary of Significant Accounting Policies” in our notes to the consolidated financial statements in this Annual Report on Form 10-K.Report. Management believes the following are the most critical accounting policies and reflect the significant estimates and assumptions used in the preparation of the consolidated financial statements.
35
Revenue Recognition
We generate revenues from the sale of server and storage systems, subsystems, accessories, services, server software management solutions, and support services. Many of our products to customers, unless customer acceptance is uncertain or significant obligations to the customer remain: (i) persuasive evidence of an arrangement exists through customer contracts include multiple performance obligations. Judgment is required in determining whether each performance obligation within a customer contract is distinct. This assessment involves subjective determinations and orders, (ii)requires management to make judgments about the customer takes titleindividual promised goods or services and assumeswhether such goods or services are separable from the risks and rewardsother aspects of ownership, (iii) the salescontractual relationship.
As part of determining the transaction price charged is fixed or determinable as evidenced by customerin contracts and orders and (iv) collectibility is reasonably assured.
with customers, we may be required to estimate variable consideration when determining the amount of revenue to recognize. We estimate reserves for future sales returns based on a review of our history of actual returns. Based upon historical experience, a refund liability is recorded at the time of sale for estimated product returns and an asset is recognized for each majorthe amount expected to be recorded in inventory upon product line.return, less the expected recovery costs. We also reduce revenue forestimate the 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 identifiedderived from the costs cannot be reasonably estimated.
We allocate the transaction price for each customer contract to extended warranty commences uponeach performance obligation based on the expirationrelative SSP for each performance obligation within each contract. We recognize the amount of transaction price allocated to each performance obligation within a customer contract as revenue as each performance obligation is delivered. Determining the standard warranty period andrelative SSP for contracts that contain multiple performance obligations requires significant judgement. We determine standalone selling prices based on the price at which the performance obligation is recognized ratably oversold separately. If the contractual period. Revenue related to on-site services commences upon recognition of the product sale and is recognized ratably over the contractual period. These service contracts are typically one to five years in length. Service revenue has been less than 10% of net sales for all periods presented andstandalone selling price is not observable through past transactions, we apply judgment to estimate the SSP. For substantially all performance obligations, we are able to establish the SSP based on the observable prices of products or services sold separately disclosed.
These estimates on an ongoing basis as a result of new product introductions or changes in unit volumes compared with our historical experience, or if the cost of servicing warranty claims is greater or lesser than expected, and we accountjudgements have not fluctuated significantly for the changes in estimates prospectively.fiscal year ended June 30, 2021 compared to prior fiscal years.
Inventories
Inventories are stated at lower of cost, using weighted average cost subject to lowermethod, or net realizable value. Net realizable value is the estimated selling price of cost or market.our products in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Inventories consist of purchased parts and raw materials (principally electronic components), work in process (principally products being assembled) and finished goods. Market value represents net realizable value for finished goods and work in process and replacement value for purchased parts and raw materials. We evaluate inventory on a quarterly basis for lower of cost or marketnet realizable value and excess and obsolescence and, as necessary, write down the valuation of unitsinventories based upon our inventory aging, forecasted usage and sales, anticipated salesselling price, product obsolescence and other factors. Once a reserveinventory is established, itwritten down, its new value is maintained until the product to which it relates is sold or scrapped.
We receive various rebate incentives from certain suppliers based on our contractual arrangements, including volume-based rebates. The rebates earned are recognized as a reduction of cost of inventories and reducesreduce the cost of sales in the period when the related inventory is sold. We determine the volume-based rebates to be recognized in the cost of sales on a first-in, first-out basis.
Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our taxes in each of the jurisdictions in which we operate. We account for income taxes under an asset and liability approach. Deferred income taxes reflect the impact ofestimate actual current tax exposure together with assessing temporary differences between assetsresulting from differing treatment of items, such as accruals and liabilities recognizedallowances not currently deductible for financial reporting purposes and such amounts recognized for income tax reporting purposes, net of operating loss carry-forwards and other tax credits measured by applying enacted tax laws related to the financial statement periods. Valuation allowances are provided when necessary to reducepurposes. These differences result in deferred tax assets, which are included in our consolidated balance sheets. In general, deferred tax assets
36
represent future tax benefits to an amount thatbe received when certain expenses previously recognized in our consolidated statements of income become deductible expenses under applicable income tax laws, or when loss or credit carryforwards are utilized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We continue to assess the need for a valuation allowance on the deferred tax assets by evaluating both positive and negative evidence that may exist. Any adjustment to the valuation allowance on deferred tax assets would be recorded in the consolidated statements of income for the period that the adjustment is determined to be realized.required.
We recognize tax liabilities for uncertain income tax positions on the income tax return based on the two-step process. The first step is to determine whether it is more likely than not that each income tax position would be sustained upon audit. The second step is to estimate and measure the tax benefit as the amount that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority. Estimating these amounts requires us to determine the probability of various possible outcomes. We evaluate these uncertain tax positions on a quarterly basis. This evaluation is based on the consideration of several factors, including changes in facts or circumstances, changes in applicable tax law, settlement of issues under audit and new exposures. If we later determine that our exposure is lower or that the liability is not sufficient to cover our revised expectations, we adjust the liability and effect a related charge in our tax provision during the period in which we make such a determination.
Stock-Based Compensation
We measure and recognize compensation expense for all share-based awards made to employees consultants and non-employee members of our Board of Directorsnon-employees, including stock options, and restricted stock units ("RSUs") and performance-based restricted stock units (“PRSUs”). We are required to estimaterecognize the grant date fair value of all share-based awards over the requisite service period and account for forfeitures as they occur. Stock option and RSU awards are recognized to expense on a straight-line basis over the requisite service period. PRSU awards are recognized to expense using an accelerated method only when it is probable that a performance condition is met during the vesting period. If it is not probable, no expense is recognized and the previously recognized expense is reversed. We base initial accrual of compensation expense on the dateestimated number of grant. The value of awardsPRSUs that are ultimatelyexpected 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 anin stock-based compensation expense overin the period of the change. Previously recognized compensation expense is not reversed if vested stock options, RSUs or PRSUs for which the requisite service periods. 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 our common stock on the date of grant. We estimatedestimate the fair value of stock options granted using a Black-Scholes option-pricing model and a single option award approach.pricing model. This model requires us to make estimates and assumptions with respect to the expected term of the option and the expected volatility of the price of our common stock. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.
The assumptions used to determine the fair value of the option awards represent management’s best estimates. These estimates involve inherent uncertainties and historical volatility. In addition, forfeituresthe application of share-based awardsmanagement’s judgment. Our use of the Black-Scholes option-pricing model requires the input of highly subjective assumptions. If factors change and different assumptions are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option and restricted stock unit forfeitures and recordused, our stock-based compensation expense only for those awards that are expected to vest.could be materially different in the future.
Variable Interest Entities
We determine at the inception of each arrangement whether an entity in which we hold an investment or in which we have other variable interests in is considered a variable interest entity ("VIE"). We consolidate VIEs when we are the primary beneficiary. The primary beneficiary of a VIE is the party that meets both of the following criteria: (1) has the power to make decisions that most significantly affect the economic performance of the VIE;VIE and (2) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE. Periodically, we assess whether any changes in the interest or relationship with the entity affect the determination of whether the entity is still a VIE and, if so, whether we are the primary beneficiary. If we are not the primary beneficiary in a VIE, we account for the investment under the equity method or cost methodother variable interest in accordance with the applicable GAAP.
We have concluded that Ablecom Technology, Inc. ("Ablecom") and its affiliate, Compuware, Technology, Inc. ("Compuware") are VIEs in accordance with applicable accounting standards and guidance;VIEs; however, we are not the primary beneficiary as we do not have the power to direct the activities that are most significant to the entities and therefore, we do not consolidate these entities. In performing this analysis, our managementwe considered our explicit arrangements with Ablecom and Compuware, including the supplier arrangements.all contractual arrangements with these entities. Also, as a result of the substantial related party relationships between us and
37
these two companies, managementwe considered whether any implicit arrangements exist that would cause us to protect thosethese related parties’ interests from suffering losses. ManagementWe determined that no material implicit arrangements exist with Ablecom, Compuware, or their shareholders.
Results of net income (loss) attributable to Ablecom’s interest was included inOperations
The following table presents certain items of our general and administrative expenses in the consolidated statements of operations respectively.expressed as a percentage of revenue.
| Years Ended June 30, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Net sales | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||
| Cost of sales | 85.0 | % | 84.2 | % | 85.8 | % | |||||||||||
| Gross profit | 15.0 | % | 15.8 | % | 14.2 | % | |||||||||||
| Operating expenses: | |||||||||||||||||
| Research and development | 6.3 | % | 6.6 | % | 5.1 | % | |||||||||||
| Sales and marketing | 2.4 | % | 2.5 | % | 2.2 | % | |||||||||||
| General and administrative | 2.8 | % | 4.1 | % | 4.0 | % | |||||||||||
| Total operating expenses | 11.5 | % | 13.2 | % | 11.3 | % | |||||||||||
| Income from operations | 3.5 | % | 2.6 | % | 2.9 | % | |||||||||||
| Other (expense) income, net | (0.1) | % | — | % | — | % | |||||||||||
| Interest expense | (0.1) | % | (0.1) | % | (0.2) | % | |||||||||||
| Income before income tax provision | 3.3 | % | 2.5 | % | 2.7 | % | |||||||||||
| Income tax provision | (0.2) | % | (0.1) | % | (0.4) | % | |||||||||||
| Share of income (loss) from equity investee, net of taxes | — | % | 0.1 | % | (0.1) | % | |||||||||||
| Net income | 3.1 | % | 2.5 | % | 2.2 | % | |||||||||||
Net Sales
Net sales consist of sales of our server and storage solutions, including server systems and related services and subsystems and accessories. The main factors that impact our net sales of our server and storage systems are the number of compute nodes sold and the average selling prices per node fornode. The main factors that impact net sales of our server system salessubsystems and accessories are units shipped and the average selling price per unit for our subsystem and accessories.unit. The prices for our server and storage systems range widely depending upon the configuration, including the number of compute nodes in a server system as well as the level of integration of key components such as SSDs and thememory. The prices for our subsystems and accessories can also vary widely based on the type. whether a customer is purchasing power supplies, server boards, chassis or other accessories.
A compute node is aan independent hardware configuration within a server system capable of having its own CPU, RAMmemory and storage and that is capable of running its own instance of a non-virtualized operating system. The number of compute nodes sold, which can vary by product, is an important metric we use to track our business. Measuring volume using compute nodes enables more consistent measurement across different server form factors and across different vendors. As with most electronics-based products,product life cycles, average selling prices typically are highest at the time of introduction of new products that utilize the latest technology and tend to decrease over time as such products mature in the market and are replaced by next generation products. Additionally, in order to remain competitive throughout all industry cycles, we actively change our selling price per unit in response to changes in costs for key components such as memory and SSDs.
The following table presents net sales by product type for fiscal years 2017, 20162021, 2020 and 20152019 (dollars in millions):
38
| Years Ended June 30, | 2021 over 2020 Change | 2020 over 2019 Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fiscal Years Ended June 30, | 2017 over 2016 Change | 2016 over 2015 Change | 2021 | 2020 | 2019 | $ | % | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Server systems | $ | 1,740.6 | $ | 1,533.4 | $ | 1,186.3 | $ | 207.2 | 13.5 | % | $ | 347.1 | 29.3 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Server and storage systems | Server and storage systems | $ | 2,790.3 | $ | 2,620.8 | $ | 2,858.7 | $ | 169.5 | 6.5 | % | $ | (237.9) | (8.3) | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Percentage of total net sales | 70.0 | % | 68.9 | % | 60.7 | % | Percentage of total net sales | 78.4 | % | 78.5 | % | 81.7 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Subsystems and accessories | 744.3 | 691.6 | 768.1 | 52.7 | 7.6 | % | (76.5 | ) | (10.0 | )% | Subsystems and accessories | 767.1 | 718.5 | 641.7 | 48.6 | 6.8 | % | 76.8 | 12.0 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| Percentage of total net sales | 30.0 | % | 31.1 | % | 39.3 | % | Percentage of total net sales | 21.6 | % | 21.5 | % | 18.3 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total net sales | $ | 2,484.9 | $ | 2,225.0 | $ | 1,954.4 | $ | 259.9 | 11.7 | % | $ | 270.6 | 13.8 | % | Total net sales | $ | 3,557.4 | $ | 3,339.3 | $ | 3,500.4 | $ | 218.1 | 6.5 | % | $ | (161.1) | (4.6) | % | |||||||||||||||||||||||||||||||||||||
Fiscal Year 2017 compared2021 Compared with Fiscal Year 20162020
large enterprise and datacenter customers. The year-over-year increase in net sales of server system salesand storage systems was primarily due to an increase of average selling priceprices per compute node from $2,902by approximately 17%, offset by a decrease of approximately 9% in fiscal year 2016 to $3,118 in fiscal year 2017.the number of units of compute nodes sold. We typically adjust our selling prices as component costs rise and fall. The increase in average selling prices of our server systems was primarily due to higher sales of our complete server systems that offer higher density computing and more memory and hard drive capacity.significant inventory component price increases resulting from component shortages during fiscal year 2021. The year-over-year increase in net sales of our subsystems and accessories in fiscal year 2017 was primarily due to higher sales of server accessories to our distributors.
Fiscal Year 2020 Compared with Fiscal Year 2019
During fiscal year 2020 we continued to experience a steady demand for server and storage systems, particularly from our server systems was primarily due to higher sales of our complete server
| Years Ended June 30, | 2017 over 2016 | 2016 over 2015 | ||||||||||||
| 2017 | 2016 | 2015 | % | % | ||||||||||
| Distributors | 47.8 | % | 45.8 | % | 49.6 | % | 2 | % | (3.8 | )% | ||||
| OEMs and direct customers | 52.2 | % | 54.2 | % | 50.4 | % | (2 | )% | 3.8 | % | ||||
| Total net sales | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
year. The year-over-year increase in net sales to distributors in fiscal year 2017 as a percentage of total net sales as compared with fiscal year 2016subsystems and accessories was primarily due to an increase of approximately 19% in the highervolume of subsystems and accessories sold, mainly due to increased demand from our indirect sales to our system integrator customers. The year-over-yearchannel offset by an approximately 6% decrease in net salesaverage selling prices due primarily to direct and OEM customers in fiscal year 2017 as a percentage of total net sales as compared with fiscal year 2016 was primarily due to lower demand for our complete server systems from cloud computing and internet data center customers.
The following table presents percentages of net sales by geographic region for fiscal years 2017, 20162021, 2020 and 2015:2019 (dollars in millions):
| Years Ended June 30, | 2021 over 2020 Change | 2020 over 2019 Change | |||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | $ | % | $ | % | |||||||||||||||||||||||||||||||||||
| United States | $ | 2,107.9 | $ | 1,957.3 | $ | 2,032.9 | $ | 150.6 | 7.7 | % | $ | (75.6) | (3.7) | % | |||||||||||||||||||||||||||
| Percentage of total net sales | 59.3 | % | 58.6 | % | 58.1 | % | |||||||||||||||||||||||||||||||||||
| Asia | 699.7 | 650.7 | 712.2 | 49.0 | 7.5 | % | (61.5) | (8.6) | % | ||||||||||||||||||||||||||||||||
| Percentage of total net sales | 19.7 | % | 19.5 | % | 20.3 | % | |||||||||||||||||||||||||||||||||||
| Europe | 614.8 | 598.6 | 611.0 | 16.2 | 2.7 | % | (12.4) | (2.0) | % | ||||||||||||||||||||||||||||||||
| Percentage of total net sales | 17.3 | % | 17.9 | % | 17.5 | % | |||||||||||||||||||||||||||||||||||
| Others | 135.0 | 132.7 | 144.3 | 2.3 | 1.7 | % | (11.6) | (8.0) | % | ||||||||||||||||||||||||||||||||
| Percentage of total net sales | 3.7 | % | 4.0 | % | 4.1 | % | |||||||||||||||||||||||||||||||||||
| Total net sales | $ | 3,557.4 | $ | 3,339.3 | $ | 3,500.4 | $ | 218.1 | 6.5 | % | $ | (161.1) | (4.6) | % | |||||||||||||||||||||||||||
| Years Ended June 30, | 2017 over 2016 | 2016 over 2015 | ||||||||||||
| 2017 | 2016 | 2015 | % | % | ||||||||||
| United States | 57.2 | % | 63.3 | % | 58.8 | % | (6.1 | )% | 4.5 | % | ||||
| Asia | 20.2 | % | 14.4 | % | 16.0 | % | 5.8 | % | (1.6 | )% | ||||
| Europe | 18.3 | % | 17.4 | % | 18.8 | % | 0.9 | % | (1.4 | )% | ||||
| Others | 4.3 | % | 4.9 | % | 6.4 | % | (0.6 | )% | (1.5 | )% | ||||
| Total net sales | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Fiscal Year 2017 compared2021 Compared with Fiscal Year 20162020
The year-over-year increase in net sales in the United States was primarily due to an increase in net sales of our server and storage systems. The year-over-year increase in net sales in Asia was primarily due to an increase in net sales of our server and storage systems in China, Singapore, India and Japan, partially offset by a decrease in the net sales in Taiwan. The year-over-year increase in net sales in Europe was primarily due to an increase in net sales of our server and storage systems in the Germany, UK and France, partially offset by a decrease in net sales in the Netherlands and Russia.
39
Fiscal Year 2020 Compared with Fiscal Year 2019
The year-over-year decrease in net sales in the United States in fiscal year 2017 was primarily due to the lowera decrease in net sales of our server and storage systems to our cloud computingdirect customers and internet data center customers. As a result, our United States sales as a percentage of total net sales decreased in fiscal year 2017 compared with fiscal year 2016. The year-over-year increase in net sales in Asia and Europe in fiscal 2017 as a percentage of total net sales as compared with fiscal year 2016 was due primarily to increased sales to our channel partners in China, Taiwan, Japan and the United Kingdom.
Cost of Sales and Gross Margin
Cost of sales primarily consists of the costs to manufacture our products, including the costs of materials, contract manufacturing, shipping, personnel and related expenses, including salaries, benefits, stock-based compensation and incentive bonuses, equipment and facility expenses, warranty costs and inventory excess and obsolescence provisions. The primary factors that impact our cost of sales are the mix of products sold and cost of materials, which include rawpurchased parts and material costs, shipping costs, and salary and benefits and overhead costs related to production. Cost of sales as a percentage of net sales may increase over time if decreases in average selling prices are not offset by corresponding decreases in our costs. Our cost of sales as a percentage of net sales is also impacted by the extent to which we are able to efficiently utilize our expanding manufacturing capacity. Because we generally do not have long-term fixed supply agreements, our cost of sales is subject to change inbased on the cost of materials based onand market conditions. As a result, our cost of sales as a percentage of net sales in any period can be negatively impacted byincrease due to significant component price increases resulting from component shortages.
We use several suppliers and contract manufacturers to design and manufacture componentssubsystems in accordance with our specifications, with most final assembly and testing predominantly performed at our manufacturing facilityfacilities in San Jose, California.the same region where our products are sold. During the fiscal year 2017,2021, we continued to increaseexpand manufacturing and service operations in Taiwan and the Netherlands primarily to support our Asian and European customers and have continued to work on improving our utilization of our overseas manufacturing capacity. We work with Ablecom, one of our key contract manufacturers and also a related party to optimize modular designs for our chassis and certain of other components. We also outsource to Compuware, also a related party, a portion of our design activities and a significant part of our manufacturing of components, particularly power supplies. Our purchases of products from Ablecom and Compuware combined represented 11.1%7.8%, 12.8%10.1% and 13.8%9.2% of our cost of sales for fiscal years 2017, 20162021, 2020 and 2015,2019, respectively. For further details on our dealings with related parties, see Part II, Item 8, Note 11,13, “Related Party Transactions.”
Cost of sales and gross margin for fiscal years 2017, 20162021, 2020 and 2015,2019, are as follows (dollars in millions):
| Years Ended June 30, | 2021 over 2020 Change | 2020 over 2019 Change | |||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | $ | % | $ | % | |||||||||||||||||||||||||||||||||||
| Cost of sales | $ | 3,022.9 | $ | 2,813.1 | $ | 3,004.8 | $ | 209.8 | 7.5 | % | $ | (191.7) | (6.4) | % | |||||||||||||||||||||||||||
| Gross profit | 534.5 | 526.2 | 495.5 | 8.3 | 1.6 | % | 30.7 | 6.2 | % | ||||||||||||||||||||||||||||||||
| Gross margin | 15.0 | % | 15.8 | % | 14.2 | % | (0.8) | % | 1.6 | % | |||||||||||||||||||||||||||||||
| Years Ended June 30, | 2017 over 2016 Change | 2016 over 2015 Change | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | $ | % | $ | % | |||||||||||||||||||
| Cost of sales | $ | 2,135.0 | $ | 1,894.5 | $ | 1,647.8 | $ | 240.5 | 12.7 | % | $ | 246.7 | 15.0 | % | |||||||||||
| Gross profit | 350.0 | 330.5 | 306.6 | 19.5 | 5.9 | % | 23.9 | 7.8 | % | ||||||||||||||||
| Gross margin | 14.1 | % | 14.9 | % | 15.7 | % | (0.8 | )% | (0.8 | )% | |||||||||||||||
Fiscal Year 2017 compared2021 Compared with Fiscal Year 20162020
The year-over-year increase of $240.5 million in cost of sales in fiscal year 2017 compared with fiscal year 2016 was primarily attributable to an increase of $225.1$244.1 million in product cost ascosts of
materials and contract manufacturing expenses primarily related to the increase in net sales and shortages of memory and SSD components, an increase of $6.3 million in inventory provision primarily due to an increase in aged inventory and an increase in reserves for specific product issues, an increase of $4.4 million in warranty provision due to higher cost of servicing warranty claims from increased net sales in fiscal year 2017,volume and an increase of $4.2$8.9 million of freight. This was offset by a decrease of $29.5 million in compensationoverhead costs attributable primarily to a recovery of costs paid in prior periods, a decrease of $12.4 million in the provision of excess inventory and benefits including stock-based compensationobsolescence and a decrease of $2.6 million in personnel expenses due to a decrease in special performance bonuses in the fiscal year 2021. Warranty and repairs costs also decreased by $3.4 million in the fiscal year 2021 as a result of an increase in annual salaries and an increase of 81 operations personnelcompared to support the growth of our business.fiscal year 2020.
The year-over-yearperiod-over-period decrease in the gross margin percentage in fiscal year 2017 compared with fiscal year 2016 was primarily due to sales prices increasing at a slower rate than the increase in the costs of components and due to the decrease in services and software revenue which have higher costs related to shortagesmargins than product sales. Since the start of memory and SSD components,the COVID-19 pandemic, we have experienced an increase in both logistics costs as well as a higher percentage of sales ofdirect labor costs as we incentivize our server systems being comprised of mature, late life cycle processors that generally are lower margin sales. In addition,employees to continue to work and assist us in fiscal year 2017 as compared with fiscal year 2016, we had higher salesserving our customers. This increase in Asia where pricing is typically more competitive, which had a negative impact oncosts negatively impacts our gross margin percentage.margins, and we expect these higher costs to continue for the duration of the COVID-19 pandemic.
40
Fiscal Year 2016 compared2020 Compared with Fiscal Year 20152019
The year-over-year decrease in cost of sales was primarily attributable to a decrease of $214.3 million in inventory costs related primarily to the decrease in the prices of components and a decrease of $14.6 million in the provision of excess inventory and obsolescence due to fewer excess and obsolescence items identified in the fiscal year 2020. This was offset by an increase of $19.6 million in overhead costs attributable primarily to increased tariffs and an increase of $11.3 million in personnel expenses, which included a special performance bonus of $4.1 million. Warranty and repairs costs also increased by $5.7 million in the fiscal year 2020 as compared to the fiscal year 2019.
The period-over-period increase in the gross margin percentage in fiscal year 2016 compared with fiscal year 2015 was primarily due to significantly lowersales prices declining at a slower rate than the decline in the costs of components and due to the increase in services and software revenue which have higher margins than product sales. Since the start of the COVID-19 pandemic, we have experienced an increase in both logistics costs as well as direct labor costs as we incentivize our employees to continue to work and assist us in serving our customers. This increase in costs negatively impacts our gross margins, from salesand we expect these higher costs to continue for the duration of our subsystem and accessories and lower utilization of manufacturing capacity partially offset by higher sales of our complete server systems such as storage servers which have a higher gross margin.the COVID-19 pandemic.
Operating Expenses
Research and development expenses consist of the personnel expenses, including salaries, benefits, stock-based compensation and incentive bonuses, and related expenses including stock-based compensation offor our research and development teams, andpersonnel, as well as product development costs such 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. We occasionally receive non-recurring engineering (“NRE”) funding from certain suppliers and customers for joint development. Under these programs,arrangements, we are reimbursed for certain research and development costs that we incur as part of the joint development of our products and those ofefforts with our suppliers and customers. These amounts offset a portion of the related research and development expenses and have the effect of reducing our reported research and development expenses.
Sales and marketing expenses consist primarily of personnel expenses, including salaries, benefits, stock-based compensation and incentive bonuses, and related expenses for our sales and marketing personnel, costs for tradeshows, independent sales representative fees and marketing programs. From time to time, we receive cooperative marketing funding from certain suppliers. Under these programs,arrangements, we are reimbursed for certain marketing costs that we incur as part of the joint promotion of our products and those of our suppliers. These amounts offset a portion of the related expenses and have the effect of reducing our reported sales and marketing expenses. The timing, magnitude and estimated usage of these programs can result in significant variations in reported sales and marketing expenses from period to period. Spending on cooperative marketing, reimbursed by our suppliers, typically increases in connection with significantnew product releases by our suppliers.
General and administrative expenses consist primarily of general corporate costs, including personnel expenses such as salaries, benefits, stock-based compensation and incentive bonuses, and related expenses for our general and administrative personnel, financial reporting, information technology, corporate governance and compliance, and outside legal, audit, tax fees, insurance and tax fees.bad debt reserves on accounts receivable.
Operating expenses for fiscal years 2017, 20162021, 2020 and 20152019 are as follows (dollars in millions):
| Years Ended June 30, | 2017 over 2016 Change | 2016 over 2015 Change | Years Ended June 30, | 2021 over 2020 Change | 2020 over 2019 Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | $ | % | $ | % | 2021 | 2020 | 2019 | $ | % | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Research and development | $ | 144.0 | $ | 124.2 | $ | 101.4 | $ | 19.8 | 15.9 | % | $ | 22.8 | 22.5 | % | Research and development | $ | 224.4 | $ | 221.5 | $ | 179.9 | $ | 2.9 | 1.3 | % | $ | 41.6 | 23.1 | % | |||||||||||||||||||||||||||||||||||||
| Percentage of total net sales | 5.8 | % | 5.6 | % | 5.2 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sales and marketing | $ | 66.4 | $ | 58.3 | $ | 47.5 | $ | 8.1 | 13.9 | % | $ | 10.8 | 22.7 | % | Sales and marketing | 85.7 | 85.1 | 77.2 | 0.6 | 0.7 | % | 7.9 | 10.2 | % | ||||||||||||||||||||||||||||||||||||||||||
| Percentage of total net sales | 2.7 | % | 2.6 | % | 2.4 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| General and administrative | $ | 44.7 | $ | 40.5 | $ | 25.0 | $ | 4.2 | 10.4 | % | $ | 15.5 | 62.0 | % | General and administrative | 100.5 | 133.9 | 141.2 | (33.4) | (24.9) | % | (7.3) | (5.2) | % | ||||||||||||||||||||||||||||||||||||||||||
| Percentage of total net sales | 1.8 | % | 1.8 | % | 1.3 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total operating expenses | $ | 255.1 | $ | 223.0 | $ | 173.9 | $ | 32.1 | 14.4 | % | $ | 49.1 | 28.2 | % | Total operating expenses | $ | 410.6 | $ | 440.5 | $ | 398.3 | (29.9) | (6.8) | % | 42.2 | 10.6 | % | |||||||||||||||||||||||||||||||||||||||
| Percentage of total net sales | 10.3 | % | 10.0 | % | 8.9 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fiscal Year 2017 compared2021 Compared with Fiscal Year 20162020
41
Personnel expenses increased $1.7 million as a result of an increase in the number of $1.4 million in productresearch and development expenses for prototype materials. The increase wasemployees, These increases were partially offset by an increase of $3.4$8.8 million reimbursementin research and development credits from certain suppliers and customers towards our development efforts and a $1.5 million decrease in trade shows and business travel as a result in a change in our operations in response to the COVID-19 pandemic.
The year-over-year increase in sales and marketing expenses was primarily due to an increase of $1.2 million in advertising expenses, a $1.0 million increase in other sales and marketing expenses, offset by a $1.7 million decrease in trade shows and business travel as a result in a change in our operations in response to the COVID-19 pandemic.
The year-over-year decrease in general and administrative expenses was due to a decrease of $41.8 million in professional fees incurred to investigate, assess and remediate the causes that led to the delay in filing our periodic reports with the SEC and the associated restatement of certain of our previously issued financial statements, a decrease of $4.1 million in other expenses related to the COVID-19 pandemic, and a $1.1 million decrease in supplies costs. These decreases were partially offset by a $12.9 million increase in personnel expenses due to increased full time personnel and bonuses.
We anticipate the above expenses impacted by the COVID-19 pandemic to normalize if and when the COVID-19 pandemic is over.
Fiscal Year 2020 Compared with Fiscal Year 2019
The year-over-year increase in research and development expenses was primarily due to an increase of $41.3 million in personnel expenses as a result of an increase in the number of research and development employees and a special performance bonus of $17.3 million, a decrease of $0.7 million in reimbursements received for certain research and development costs that we incurincurred as part of joint product development; an increase of $6.7 million in costs mainly related to materials, supplies and equipment used in product development, and an increase of $1.8 million in facilities expenses. During fiscal year 2020, we 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.
The year-over-year increase in sales and marketing expenses was primarily due to an increase of our and our suppliers’ and customers’ products. Our compensation and benefit expense increased primarily$8.1 million in personnel expenses as a result of an increase in annual salariesthe number of sales and marketing personnel and a special performance bonus of $1.8 million.
The year-over-year decrease in general and administrative expenses was due to a decrease of $33.9 million in professional fees that were primarily incurred to investigate, assess and begin remediating the causes that led to the delay in filing our periodic reports with the SEC and the associated restatement of certain of our previously issued financial statements; a decrease of $10.2 million in bad debt provision expenses due to recovery of previously provisioned receivables from certain international customers, offset by an increase of 168research and development personnel$17.5 million related to support our expanded product development initiatives inan expense accrual for the United States and in Taiwan and to supportsettlement with the growth of our business.
Interest and Other Income (Expense),Expense, Net
Other (expense) income, (expense), net consists primarily of interest earned on our investment and cash balances share of loss from equity investee and foreign exchange gains and losses.
Interest expense represents interest expense on our term loans and lines of credit.
Interest and other income (expense),expense, net for fiscal years 2017, 20162021, 2020 and 20152019 are as follows (dollars in millions):
| Years Ended June 30, | 2021 over 2020 Change | 2020 over 2019 Change | |||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | $ | % | $ | % | |||||||||||||||||||||||||||||||||||
| Other (expense) income, net | $ | (2.8) | $ | 1.4 | $ | (1.0) | $ | (4.2) | (300.0) | % | $ | 2.4 | (240.0) | % | |||||||||||||||||||||||||||
| Interest expense | (2.5) | (2.2) | (6.7) | (0.3) | 13.6 | % | 4.5 | (67.2) | % | ||||||||||||||||||||||||||||||||
| Interest and other expense, net | $ | (5.3) | $ | (0.8) | $ | (7.7) | $ | (4.5) | 562.5 | % | $ | 6.9 | (89.6) | % | |||||||||||||||||||||||||||
Fiscal Year 2021 Compared with Fiscal Year 2020
42
| Years Ended June 30, | 2017 over 2016 Change | 2016 over 2015 Change | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | $ | % | $ | % | |||||||||||||||||||
| Other income (expense), net | $ | (1.3 | ) | $ | 1.5 | $ | 1.0 | $ | (2.8 | ) | (186.7 | )% | $ | 0.5 | 50.0 | % | |||||||||
| Interest expense | (2.3 | ) | (1.6 | ) | (1.0 | ) | (0.7 | ) | 43.8 | % | (0.6 | ) | 60.0 | % | |||||||||||
| Interest and other income (expense), net | $ | (3.6 | ) | $ | (0.1 | ) | $ | — | $ | (3.5 | ) | * | $ | (0.1 | ) | * | |||||||||
Fiscal Year 2020 Compared with Fiscal Year 2019
The year-over-year change in interest expense of $4.5 million is primarily a result of lower interest rates and other income (expense), net. Interest and other income (expense), net increased by $3.5 millionreduced levels of borrowings in fiscal year 20172020 as compared withto fiscal year 2016.2019. The increasechange of $2.4 million in other (expense) income, net was primarily dueattributable to an unrealized foreign currency loss related the remeasurementincrease of $1.6 million in interest income on our NTD$700.0interest bearing deposits and a decrease of $0.8 million term loan denominated in NTD. Interest and other expense, net remained consistent in fiscal year 2016 as compared with fiscal year 2015.expenses.
Provision for Income Taxes
Our income tax provision is based on our taxable income generated in the jurisdictions in which we operate, primarily the United States, Taiwan, and the Netherlands. Our effective tax rate differs from the statutory rate primarily due to research and development tax credits, and the domestic production activities deduction which were partially offset by state taxes and unrecognizeduncertain tax positions, tax benefits related to permanent establishment exposures.from foreign derived intangible income and stock based compensation. A reconciliation of the federal statutory income tax rate to our effective tax rate is set forth in Part II, Item 8, Note 13,15, “Income Taxes” to the consolidated financial statements in this Annual Report on Form 10-K.Report.
Provision for income taxes and effective tax rates for fiscal years 2017, 20162021, 2020 and 20152019 are as follows (dollars in millions):
| Years Ended June 30, | 2021 over 2020 Change | 2020 over 2019 Change | |||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | $ | % | $ | % | |||||||||||||||||||||||||||||||||||
| Income tax provision | $ | 6.9 | $ | 2.9 | $ | 14.9 | $ | 4.0 | 137.9 | % | $ | (12.0) | (80.5) | % | |||||||||||||||||||||||||||
| Effective tax rate | 5.8 | % | 3.4 | % | 16.6 | % | |||||||||||||||||||||||||||||||||||
| Years Ended June 30, | 2017 over 2016 Change | 2016 over 2015 Change | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | $ | % | $ | % | |||||||||||||||||||
| Income tax provision | $ | 24.4 | $ | 35.3 | $ | 40.1 | $ | (10.9 | ) | (30.9 | )% | $ | (4.8 | ) | (12.0 | )% | |||||||||
| Percentage of total net sales | 1.0 | % | 1.6 | % | 2.1 | % | |||||||||||||||||||
| Effective tax rate | 26.8 | % | 32.9 | % | 30.2 | % | |||||||||||||||||||
Fiscal Year 2017 compared2021 Compared with Fiscal Year 20162020
Fiscal Year 2020 Compared with Fiscal Year 2019
The year-over-year decrease in the effective tax rate was primarily due to an increase in tax benefits resulting from the completion of U.S. federal income tax audit and an income tax audit in a foreign jurisdiction as well as research and development tax creditcredits, stock based compensation, releases of uncertain tax positions, and domestic production activities deductions.U.S. sales to foreign jurisdictions, partially offset by the tax impact from the non-deductible settlement with the SEC.
Share of (Loss) from Equity Investee, Net of Taxes
| Years Ended June 30, | 2021 over 2020 Change | 2020 over 2019 Change | |||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | $ | % | $ | % | |||||||||||||||||||||||||||||||||||
| Share of income (loss) from equity investee, net of taxes | $ | 0.2 | $ | 2.4 | $ | (2.7) | $ | (2.2) | (91.7) | % | $ | 5.1 | 188.9 | % | |||||||||||||||||||||||||||
Fiscal Year 2016 compared2021 Compared with Fiscal Year 20152020
Fiscal Year 2020 Compared with Fiscal Year 2019
The year-over-year increase of $5.1 million from share of (loss) to income from equity investee, net of taxes was primarily due to net income recognized by the Corporate Venture in federal research and development creditthe fiscal year 2020 as a result ofcompared to net loss in the enactment of the Protecting Americans from Tax Hikes ("PATH") Act of 2015.fiscal year 2019.
Liquidity and Capital Resources
43
We have financed our growth primarily with funds generated from operations, and from the proceeds of our initial public offering. Inin addition we have, from time to time, utilizedutilizing borrowing facilities, particularly in relation to the financing of real property acquisitions.acquisitions as well as an increase in the need for working capital due to longer supply chain manufacturing and delivery times. Our cash and cash equivalents were $110.6$232.3 million and $178.8$210.5 million as of June 30, 20172021 and 2016,2020, respectively. Our cash in foreign locations was $50.8$152.6 million and $46.5$98.0 million as of June 30, 20172021 and 2016,2020, respectively. It
Amounts held outside of the U.S. are generally utilized to support non-U.S. liquidity needs. Repatriations generally will not be taxable from a U.S. federal tax perspective, but may be subject to state income or foreign withholding tax. Where local restrictions prevent an efficient intercompany transfer of funds, our intent is management's intention to reinvestkeep cash balances outside of the undistributed foreign earnings indefinitely in foreignU.S. and to meet liquidity needs through operating cash flows, external borrowings, or both. We do not expect restrictions or potential taxes incurred on repatriation of amounts held outside of the U.S. to have a material effect on our overall liquidity, financial condition or results of operations.
We believe that our current cash, and cash equivalents, are adequateborrowing capacity available from our credit facilities and internally generated cash flows will be sufficient to meetsupport our needs, including anyoperating businesses and maturing debt balances due at maturity,and interest payments for the next twelve months fromfollowing the issuance of these consolidated financial statements. We expect to pay a special performance bonus of approximately $4.0 million to our CEO within the next year. During the fiscal year 2021, the target average closing price of our common stock condition for the bonus was satisfied but no determination has been made if the specified performance condition has been satisfied.
Our key cash flow metrics were as follows (dollars in millions):
| Years Ended June 30, | 2021 over 2020 | 2020 over 2019 | |||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||
| Net cash provided by (used in) operating activities | $ | 123.0 | $ | (30.3) | $ | 262.6 | $ | 153.3 | $ | (292.9) | |||||||||||||||||||||||||
| Net cash used in investing activities | $ | (58.0) | $ | (43.6) | $ | (24.8) | $ | (14.4) | $ | (18.8) | |||||||||||||||||||||||||
| Net cash (used in) provided by financing activities | $ | (44.4) | $ | 23.8 | $ | (95.8) | $ | (68.2) | $ | 119.6 | |||||||||||||||||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 21.1 | $ | (49.8) | $ | 141.8 | $ | 70.9 | $ | (191.6) | |||||||||||||||||||||||||
Operating Activities. Activities
Net cash used inprovided by operating activities was $96.2increased by $153.3 million for fiscal year 2021 as compared to fiscal year 2020. While net income increased by $27.6 million in fiscal year 2017.2021 as compared to fiscal year 2020, the increase in cash flows from operating activities was due primarily to a decrease of cash used for net working capital requirements of $120.3 million. Non-cash charges related to stock-based compensation expense increased by $8.4 million, collection of bad debt previously reserved decreased by $2.3 million, income from equity investee decreased by $2.2 million and $5.4 million decrease in the non-cash charges related to the change in our deferred income tax assets. These increases in the cash flow from operating activities were partially offset by the decrease of $11.6 million in previously reserved excess and obsolete inventory.
Net cash provided by operating activities decreased by $292.9 million for fiscal year 2020 as compared to fiscal year 2019. While net income increased by $12.4 million in fiscal year 2020 as compared to fiscal year 2019, the decrease in cash flows from operating activities was due primarily to an increase of cash used for net working capital requirements of $281.3 million, including a $181.3 million increase in inventories to meet customer demand, support expected business growth and mitigate supply chain risk due to the COVID-19 pandemic environment. Non-cash charges related to excess and obsolete inventory decreased by $14.6 million, related to bad debt reserve decreased by $10.1 million, related to income (loss) from equity investee decreased by $5.1 million, and related to impairment of investments decreased by $2.7 million in fiscal year 2020 compared to fiscal year 2019. These decreases were offset by an increase of $8.9 million in the non-cash charges related to the change in our deferred income tax assets, unrealized losses on our foreign currency-denominated credit facilities, and depreciation and amortization expense resulting from the amortization of operating lease right-of-use assets.
Investing Activities
44
Net cash used in our operating activities for fiscal year 2017 was primarily due to an increase in inventories of $235.6 million and an increase in accounts receivable of $149.5 million, which were partially offset by an increase in accounts payable of $135.3 million, our net income of $66.9 million, an increase in accrued liabilities of $27.6 million, stock-based compensation expense of $19.7 million, an increase in other long term liabilities of $17.9 million, provision for excess and obsolete inventories of $15.7 million, and depreciation and amortization expense of $16.4 million. The increase in accounts receivable was primarily due to higher sales volume in the fourth quarter of fiscal year 2017. The increase in inventories and accounts payable was primarily due to increased sales as well as increased market prices for inventories related to memory and SSD components. In addition, we staged inventory to support new product launches.
Financing activities.Activities
Net cash provided by ourused in financing activities was $57.7increased by $68.2 million for fiscal year 2017. In2021 as compared to fiscal year 2017, we drew down $207.0 million on our revolving credit facility with Bank of America and CTBC Bank and repaid $140.5 million in loans. We received $10.9 million in connection with the exercise of stock options in fiscal year 2017. Further, we used $18.5 million in the repurchase of our outstanding common stock.
Other Factors Affecting Liquidity and Capital Resources
2018 Bank of America Credit Facility
In April 2018, we entered into a revolving line of credit with Bank of America for up to $250.0 million (as amended from time to time, the "2018 Bank of America Credit Facility"). On June 28, 2021, the 2018 Bank of America Credit Facility which replacedwas amended to, among other items, extend the 2016 Bankmaturity to June 28, 2026, reduce the size of America Credit Facility. The 2018 Bank of America Credit Facility provides for a revolving credit line and other financial accommodations of up tothe facility from $250.0 million extended by certain lenders. The 2018 Bank of America Credit Facility expires after 364 days,to $200.0 million, increase the maximum amount that we can request the facility be increased (the accordion feature) from $100.0 million to $150.0 million, and update provisions relating to erroneous payments and LIBOR replacement mechanics. In addition, the amendment reduced both the unused line fee from 0.375% per annum to 0.2% or at our option,0.3% per annum (depending upon amount drawn under the facility) and if certain conditions are satisfied, including being current on all of our delinquent quarterly and annual filings with the SEC, may convert into a 5-year revolving credit facility. If and upon such conversion, the lenders for the
CTBC Bank
2020 CTBC Credit Facility
In April 2016,August 2020, we entered into a credit agreement with CTBC Bank Co., Ltd ("CTBC Bank")in Taiwan that provides for (i) a 12-month NTD$700.0 million or $21.6 million U.S. dollar equivalent term loan facility secured by our land and building located in Bade, Taiwan with an interest rate equal to the lender's established NTD interest rate plus 0.25% per annum which was adjusted monthly, which term loan facility also included a 12-month line of guarantee up to NTD$100.0 million or $3.1 million U.S. dollar equivalent with an annual fee equal to 0.5% per annum, and (ii) a 12-month revolving line of credit up to 80.0% of eligible accounts receivable in an aggregate amountloans of up to $40.0$50.0 million with an interest rate equal to(the "2020 CTBC Credit Facility"), which had a maturity date of August 2021. As of June 30, 2021, the lender's established USD interest rate plus 0.30% per annum which was adjusted monthly (collectively, the “CTBC Credit Facility”). The totaloutstanding borrowings allowed under the CTBC Credit Facility was capped at $40.0 million. We extended the CTBC Credit Facility to mature on May 31, 2017.
annum. The total outstanding borrowings under the CTBC Credit Facility term loan were denominated in Taiwanese dollarsNTD and remeasured into U.S. dollars of $19.7 million and $20.4$25.1 million at June 30, 20172021 and 2016, respectively. At June 30, 2017 and 2016, the total outstanding borrowings under the CTBC Credit Facility revolving line of credit was $19.0 million and $10.1 million, respectively, in U.S. dollars. The interest raterates for these loans ranged from 0.93% and 2.00% at June 30, 2017 and 0.90% and 1.25%were 0.75% per annum at June 30, 2016. At June 30, 2017, theannum. The amount available for future borrowing under the CTBC Credit Facility was $11.3 million. As$6.9 million as of June 30, 2017,2021. The term loans are secured by certain of our assets, including certain property, plant, and land. There are no financial covenants under the net book value of land and building located in Bade, Taiwan collateralizing the2020 CTBC Credit Facility.
2020 CTBC Term Loan Facility term loan was $26.4 million. Under the terms of thedue June 4, 2030
In May 2017 renewed credit agreement, the CTBC Credit Facility was to mature on April 30, 2018 but prior to the maturity2020, we entered into a new credit agreement with CTBC Bank in January 2018.
45
requiring our current ratio, debt service coverage ratio, and financial debt ratio, to January 31, 2019. be maintained at certain levels. As of June 30, 2021, we were in compliance with all financial covenants under the 2020 CTBC Term Loan Facility.
2021 CTBC Credit Lines
On January 31, 2019,July 20, 2021 (the “Effective Date”), we entered into an amendmenta general agreement for omnibus credit lines with CTBC Bank, which replaced the 2020 CTBC Credit Facility and 2020 CTBC Term Loan Facility (the “Prior CTBC Credit Lines”) in their entirety and permits borrowings, from time to time, of the(i) a term loan facility of up to NTD1,550.0 million ($55.4 million in U.S. dollar equivalents) and security agreement with respect(ii) a line of credit facility of up to US$105.0 million (the “2021 CTBC Credit Lines”). Interest rates are to be established according to individual credit arrangements established pursuant to the 20182021 CTBC Credit Lines, which interest rates shall be subject to adjustment depending on the satisfaction of certain conditions. Term loans made pursuant to the 2021 CTBC Credit Lines are secured by certain of our assets, including certain property, land, plant, and equipment located in Bade, Taiwan. We are subject to various financial covenants under the 2021 CTBC Credit Lines, including current ratio, debt service coverage ratio, and financial debt ratio requirements. Amounts outstanding under the Prior CTBC Credit Lines on the Effective Date were assumed by the 2021 CTBC Credit Lines.
E.SUN Credit Facility
In December 2020, Super Micro Computer Inc, Taiwan, our wholly-owned Taiwan subsidiary, entered into a General Credit Agreement (the “E.SUN Credit Facility”) with E.SUN Bank of Americain Taiwan. The E.SUN Credit Facility to, among other matters, (a) extendprovides for the delivery dateissuance of our audited consolidated financial statements, compliance certificatesloans, advances, acceptances, bills, bank guarantees, overdrafts, letters of credit, and other material reportstypes of drawdown instruments up to a credit limit of $30.0 million. Terms for the fiscal year ended June 30, 2018 to June 30, 2019,specific drawdowns are set forth in separate Notification and (b) require the delivery,Confirmation of Credit Conditions by no later than March 31, 2019, of our audited consolidated financial statements for the fiscal year ended June 30, 2017. In April 2019, we paid a fee to extend the delivery of our audited consolidated financial statements for the fiscal year ended June 30, 2017 to June 30, 2019. We intend to negotiate the further extension for delivery of our audited consolidated financial statements, compliance certificates and other material reports for the fiscal year ended June 30, 2018.
between us and E.SUN Bank. The E.SUN Credit Facility expires September 18, 2021. There are no financial covenants associated with the CTBCE.SUN Credit Facility. A Notification and Confirmation Agreement was entered into on December 2, 2020 for a $30.0 million import loan (the “Import Loan”) under the E. SUN Credit Facility or the 2018 CTBC Credit Facility.
| Payments Due by Period | |||||||||||||||||||
Less Than 1 Year | 1 to 3 Years | 3 to 5 Years | More Than 5 Years | Total | |||||||||||||||
| (in thousands) | |||||||||||||||||||
| Operating leases | $ | 4,844 | $ | 8,505 | $ | 3,605 | $ | 3,951 | $ | 20,905 | |||||||||
| Capital leases, including interest | 309 | 433 | 140 | — | 882 | ||||||||||||||
| Debt, including interest (1) | 163,823 | — | — | — | 163,823 | ||||||||||||||
| Purchase commitments (2) | 309,120 | — | — | — | 309,120 | ||||||||||||||
| Total (3) | $ | 478,096 | $ | 8,938 | $ | 3,745 | $ | 3,951 | $ | 494,730 | |||||||||
Capital Expenditure Requirements
We expectanticipate our capital expenditures in fiscal year 2022 will be approximately $21.4 million, relating primarily to fundcosts associated in our remaining contractualmanufacturing capabilities, including tooling for new products, new information technology investments, and facilities upgrades. We will continue to evaluate new business opportunities and new markets. As a result, our future growth within the existing business or new opportunities and markets may dictate the need for additional facilities and capital expenditures to support that growth. We evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and our expected return on investment.
We intend to continue to focus our capital expenditures in fiscal year 2022 to support the growth of our operations. Our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced software and services offerings, the investments in our office facilities and our systems infrastructure, the continuing market acceptance of our offerings and our planned investments, particularly in our product development efforts, applications or technologies.
Contractual Obligations
Our estimated future obligations fromas of June 30, 2021 include both current and long term obligations. For our ongoing operationslong-term debt as noted in Part I, Item 1, Note 10, “Short-term and existing cashLong-term Debt”, we have a current obligation of $63.5 million and cash equivalents on hand.a long-term obligation of $34.7 million. Under our operating leases as noted in Note 12, "Leases", we have a current obligation of $6.3 million and a long-term obligation of $14.5 million. As noted in Note 16, "Commitments and Contingencies", we have current obligations related to noncancelable purchase commitments of $569.8 million.
Recent Accounting Pronouncements
46
For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see Part II, Item 8, Note 1, “Organization and Summary of Significant Accounting Policies” to the consolidated financial statements in this Annual Report on Form 10-K.Report.
47
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Interest Rate Risk
The primary objectives of our investment activities are to preserve principal, provide liquidity and maximize income without significantly increasing the risk. Some of the securities we invest in are subject to market risk. This means that a change in prevailing interest rates may cause the fair value of the investment to fluctuate. To minimize this risk, we maintain our portfolio of cash equivalents and short-term investments in money market funds and certificates of deposit. Our long-term investments includeinvestment in an auction rate securities, which havesecurity has been classified as long-termnon-current due to the lack of a liquid market for these securities. Since our results of operations are not dependent on investments, the risk associated with fluctuating interest rates is limited to our investment portfolio, and we believe that a 10% change in interest rates would not have a significant impact on our results of operations. As of June 30, 2017,2021, our investments were in money market funds, certificates of deposits and auction rate securities.
We are exposed to changes in interest rates as a result of our borrowings under our term loan and revolving lines of credit. The interest rates for the term loans and the revolving lines of credit ranged from 0.93%0.45% to 2.46%1.5% at June 30, 2017 and 0.90% to 1.96% at June 30, 2016.2021. Based on the outstanding principal indebtedness of $161.4$98.2 million under our credit facilities as of June 30, 2017,2021, we believe that a 10% change in interest rates would not have a significant impact on our results of operations.
Foreign Currency Risk
To date, our international customer and supplier agreements have been denominated primarily in U.S. dollars and accordingly, we have limited exposure to foreign currency exchange rate fluctuations from customer agreements, and do not currently engage in foreign currency hedging transactions. The functional currency of our subsidiaries in the Netherlands and Taiwan is the U.S. dollar. However, certain loans and transactions in these entities are denominated in a currency other than the U.S. dollar, and thus we are subject to foreign currency exchange rate fluctuations associated with re-measurement to U.S. dollars. Such fluctuations have not been significant historically. Foreign exchange (loss) gain (loss) for fiscal years 2017, 20162021, 2020 and 20152019 was $(1.3)$(3.2) million, $1.3$(1.4) million and $0.8$0.5 million, respectively.
48
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS*STATEMENTS
| Page | |||||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors and Stockholders of
Super Micro Computer, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Super Micro Computer, Inc. and subsidiaries (the “Company”"Company") as of June 30, 201730,2021 and 2016, and2020, the related consolidated statements of operations, comprehensive income, stockholders’stockholders' equity, and cash flows, for each of the three years in the period ended June 30, 2017. 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated August 27, 2021, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on thesethe Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Inventories - Excess and Obsolescence Reserve — Refer to Notes 1 and 5 to the financial positionstatements
Critical Audit Matter Description
The Company’s inventories are stated at lower of Super Micro Computer, Inc.cost, using weighted average cost method, or net realizable value. The Company evaluates inventory on a quarterly basis for excess and subsidiariesobsolescence and lower of cost or net realizable value and, as necessary, writes down the valuation of June 30, 2017inventory based upon inventory aging, forecasted usage and 2016,sales, anticipated selling price, product obsolescence and other factors.
We identified the resultsexcess and obsolescence reserve as a critical audit matter because of their operationsjudgments made by management in determining the reserve rates applied by inventory aging category to estimate the Company’s excess and their cash flows for eachobsolescence reserve. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of the three yearsCompany’s reserve rates within its estimation of the inventory excess and obsolescence reserve.
How the Critical Audit Matter Was Addressed in the period ended June 30, 2017, in conformity with accounting principles generally accepted in the United States of America.Audit
50
Our audit procedures related to the consolidated financial statements, the accompanying 2016 and 2015 consolidated financial statements have been restated to correct misstatements.
a.We have also audited, in accordance withtested the standardseffectiveness of controls over the review of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting ascalculation of June 30, 2017,excess and obsolescence reserve based on the criteria established in Internal Control -Integrated Framework (2013) issued by the Committee of Sponsoring OrganizationsCompany’s reserve methodology, including management’s evaluation of the Treadway Commissionreserve rates by inventory aging category using historical data.
b.To understand and evaluate the Company’s methodology for determining inventory that is excess or obsolete and the key assumptions and judgments made as part of the process, including the reserve rates, we made inquiries of various personnel in the Company including but not limited to finance and operations personnel about the expected product lifecycles and product development plans.
c.We involved data specialists to assess management’s estimate on reserve rates by recalculating historical reserve rates across multiple fiscal periods. We compared our report dated May 16, 2019 expressed an adverse opinionindependently developed historical reserve rates with the reserve rates used by management.
d.We tested the accuracy and completeness of the underlying data utilized in management’s excess and obsolescence reserve, including the classification of inventory by aging category. Then, selected a sample of inventory products and verified the items were properly included in the correct aging category for determination of the reserve rate.
e.We considered the existence of contradictory evidence based on reading of internal communications to management, Company press releases, and industry reports, as well as our observations and inquires as to changes within the Company's internal control over financial reporting because of material weaknesses.business.
/s/ Deloitte & Touche LLP
San Jose, California
We have served as the Company's auditor since fiscal 2003.
51
SUPER MICRO COMPUTER, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
| June 30, | June 30, | ||||||||||
| 2021 | 2020 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 232,266 | $ | 210,533 | |||||||
| Accounts receivable, net of allowances of $2,591 and $4,586 at June 30, 2021 and 2020, respectively (including amounts receivable from related parties of $8,678 and $8,712 at June 30, 2021 and 2020, respectively) | 463,834 | 403,745 | |||||||||
| Inventories | 1,040,964 | 851,498 | |||||||||
| Prepaid expenses and other current assets (including receivables from related parties of $23,748 and $19,791 at June 30, 2021 and 2020, respectively) | 130,195 | 126,985 | |||||||||
| Total current assets | 1,867,259 | 1,592,761 | |||||||||
| Investment in equity investee | 4,578 | 2,703 | |||||||||
| Property, plant and equipment, net | 274,713 | 233,785 | |||||||||
| Deferred income taxes, net | 63,288 | 54,898 | |||||||||
| Other assets | 32,126 | 34,499 | |||||||||
| Total assets | $ | 2,241,964 | $ | 1,918,646 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable (including amounts due to related parties of $70,096 and $72,368 at June 30, 2021 and 2020, respectively) | $ | 612,336 | $ | 417,673 | |||||||
| Accrued liabilities (including amounts due to related parties of $18,528 and $16,206 at June 30, 2021 and 2020, respectively) | 178,850 | 155,401 | |||||||||
| Income taxes payable | 12,741 | 4,700 | |||||||||
| Short-term debt | 63,490 | 23,704 | |||||||||
| Deferred revenue | 101,479 | 106,157 | |||||||||
| Total current liabilities | 968,896 | 707,635 | |||||||||
| Deferred revenue, non-current | 100,838 | 97,612 | |||||||||
| Long-term debt | 34,700 | 5,697 | |||||||||
| Other long-term liabilities (including related party balance of $0 and $1,699 at June 30, 2021 and 2020, respectively) | 41,132 | 41,995 | |||||||||
| Total liabilities | 1,145,566 | 852,939 | |||||||||
| Commitments and contingencies (Note 16) | 0 | 0 | |||||||||
| Stockholders’ equity: | |||||||||||
| Common stock and additional paid-in capital, $0.001 par value | |||||||||||
| Authorized shares: 100,000,000; Outstanding shares: 50,582,078 and 52,408,703 at June 30, 2021 and 2020, respectively | |||||||||||
| Issued shares: 50,582,078 and 53,741,828 at June 30, 2021 and 2020, respectively | 438,012 | 389,972 | |||||||||
| Treasury stock (at cost), 0 and 1,333,125 shares at June 30, 2021 and 2020, respectively | — | (20,491) | |||||||||
| Accumulated other comprehensive income (loss) | 453 | (152) | |||||||||
| Retained earnings | 657,760 | 696,211 | |||||||||
| Total Super Micro Computer, Inc. stockholders’ equity | 1,096,225 | 1,065,540 | |||||||||
| Noncontrolling interest | 173 | 167 | |||||||||
| Total stockholders’ equity | 1,096,398 | 1,065,707 | |||||||||
| Total liabilities and stockholders’ equity | $ | 2,241,964 | $ | 1,918,646 | |||||||
| June 30, | June 30, | ||||||
| 2017 | 2016 | ||||||
| (As Restated- see Note 19) | |||||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 110,606 | $ | 178,820 | |||
| Accounts receivable, net of allowances of $2,699 and $2,413 at June 30, 2017 and 2016, respectively (including amounts receivable from related parties of $6,877 and $49 at June 30, 2017 and 2016, respectively) | 324,004 | 174,933 | |||||
| Inventories | 736,668 | 516,807 | |||||
| Prepaid income taxes | 675 | 4,341 | |||||
| Prepaid expenses and other current assets (including receivables from related parties of $13,327 and $9,622 at June 30, 2017 and 2016, respectively) | 89,213 | 79,427 | |||||
| Total current assets | 1,261,166 | 954,328 | |||||
| Investment in equity investee | 6,067 | — | |||||
| Long-term investments | 2,625 | 2,643 | |||||
| Property, plant and equipment, net | 195,576 | 187,949 | |||||
| Deferred income taxes, net | 39,119 | 33,678 | |||||
| Other assets | 10,577 | 12,885 | |||||
| Total assets | $ | 1,515,130 | $ | 1,191,483 | |||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
| Current liabilities: | |||||||
| Accounts payable (including amounts due to related parties of $55,928 and $44,941 at June 30, 2017 and 2016, respectively) | $ | 396,895 | $ | 267,391 | |||
| Accrued liabilities (including amounts due to related parties of $8,450 and $5,354 at June 30, 2017 and 2016, respectively) | 112,824 | 83,596 | |||||
| Income taxes payable | 1,364 | 5,054 | |||||
| Short-term debt and current portion of long-term debt, net of debt issuance costs | 161,447 | 53,589 | |||||
| Total current liabilities | 672,530 | 409,630 | |||||
| Long-term debt | — | 40,000 | |||||
| Other long-term liabilities (including related party balance of $4,900 and $0 at June 30, 2017 and 2016, respectively) | 68,754 | 45,200 | |||||
| Total liabilities | 741,284 | 494,830 | |||||
| Commitments and contingencies (Note 14) | |||||||
| Stockholders’ equity: | |||||||
| Common stock and additional paid-in capital, $0.001 par value | |||||||
| Authorized shares: 100,000,000 | |||||||
| Issued shares: 50,273,527 and 48,999,717 at June 30, 2017 and 2016, respectively | 308,271 | 279,465 | |||||
| Treasury stock (at cost), 1,333,125 and 445,028 shares at June 30, 2017 and 2016, respectively | (20,491 | ) | (2,030 | ) | |||
| Accumulated other comprehensive loss | (77 | ) | (85 | ) | |||
| Retained earnings | 485,973 | 419,119 | |||||
| Total Super Micro Computer, Inc. stockholders’ equity | 773,676 | 696,469 | |||||
| Noncontrolling interest | 170 | 184 | |||||
| Total stockholders’ equity | 773,846 | 696,653 | |||||
| Total liabilities and stockholders’ equity | $ | 1,515,130 | $ | 1,191,483 | |||
See accompanying notes to consolidated financial statements.
52
SUPER MICRO COMPUTER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
| Years Ended June 30, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Net sales (including related party sales of $79,018, $85,759, and $69,906 in fiscal years 2021, 2020 and 2019, respectively) | $ | 3,557,422 | $ | 3,339,281 | $ | 3,500,360 | |||||||||||
| Cost of sales (including related party purchases of $239,558, $283,056, and $276,843 in fiscal years 2021, 2020 and 2019, respectively) | 3,022,884 | 2,813,071 | 3,004,838 | ||||||||||||||
| Gross profit | 534,538 | 526,210 | 495,522 | ||||||||||||||
| Operating expenses: | |||||||||||||||||
| Research and development | 224,369 | 221,478 | 179,907 | ||||||||||||||
| Sales and marketing | 85,683 | 85,137 | 77,154 | ||||||||||||||
| General and administrative | 100,539 | 133,941 | 141,228 | ||||||||||||||
| Total operating expenses | 410,591 | 440,556 | 398,289 | ||||||||||||||
| Income from operations | 123,947 | 85,654 | 97,233 | ||||||||||||||
| Other (expense) income, net | (2,834) | 1,410 | (1,020) | ||||||||||||||
| Interest expense | (2,485) | (2,236) | (6,690) | ||||||||||||||
| Income before income tax provision | 118,628 | 84,828 | 89,523 | ||||||||||||||
| Income tax provision | (6,936) | (2,922) | (14,884) | ||||||||||||||
| Share of income (loss) from equity investee, net of taxes | 173 | 2,402 | (2,721) | ||||||||||||||
| Net income | $ | 111,865 | $ | 84,308 | $ | 71,918 | |||||||||||
| Net income per common share: | |||||||||||||||||
| Basic | $ | 2.19 | $ | 1.65 | $ | 1.44 | |||||||||||
| Diluted | $ | 2.09 | $ | 1.60 | $ | 1.39 | |||||||||||
| Weighted-average shares used in calculation of net income per common share: | |||||||||||||||||
| Basic | 51,157 | 50,987 | 49,917 | ||||||||||||||
| Diluted | 53,507 | 52,838 | 51,716 | ||||||||||||||
| Years Ended June 30, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (As Restated- see Note 19) | (As Restated- see Note 19) | ||||||||||
| Net sales (including related party sales of $33,821, $29,110 and $47,684 in fiscal years 2017, 2016 and 2015, respectively) | $ | 2,484,929 | $ | 2,225,022 | $ | 1,954,353 | |||||
| Cost of sales (including related party purchases of $236,062, $242,638 and $227,661 in fiscal years 2017, 2016 and 2015, respectively) | 2,134,971 | 1,894,521 | 1,647,769 | ||||||||
| Gross profit | 349,958 | 330,501 | 306,584 | ||||||||
| Operating expenses: | |||||||||||
| Research and development | 143,992 | 124,223 | 101,402 | ||||||||
| Sales and marketing | 66,445 | 58,338 | 47,496 | ||||||||
| General and administrative | 44,646 | 40,449 | 25,040 | ||||||||
| Total operating expenses | 255,083 | 223,010 | 173,938 | ||||||||
| Income from operations | 94,875 | 107,491 | 132,646 | ||||||||
| Other income (expense), net | (1,287 | ) | 1,507 | 956 | |||||||
| Interest expense | (2,300 | ) | (1,594 | ) | (965 | ) | |||||
| Income before income tax provision | 91,288 | 107,404 | 132,637 | ||||||||
| Income tax provision | 24,434 | 35,323 | 40,082 | ||||||||
| Net income | $ | 66,854 | $ | 72,081 | $ | 92,555 | |||||
| Net income per common share: | |||||||||||
| Basic | $ | 1.38 | $ | 1.50 | $ | 1.99 | |||||
| Diluted | $ | 1.29 | $ | 1.39 | $ | 1.85 | |||||
| Weighted-average shares used in calculation of net income per common share: | |||||||||||
| Basic | 48,383 | 47,917 | 46,434 | ||||||||
| Diluted | 51,679 | 51,836 | 50,094 | ||||||||
See accompanying notes to consolidated financial statements.
53
SUPER MICRO COMPUTER, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
| Years Ended June 30, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Net income | $ | 111,865 | $ | 84,308 | $ | 71,918 | |||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||
| Foreign currency translation gain (loss) | 605 | (72) | (245) | ||||||||||||||
| Total other comprehensive income (loss) | 605 | (72) | (245) | ||||||||||||||
| Total comprehensive income | $ | 112,470 | $ | 84,236 | $ | 71,673 | |||||||||||
| Years Ended June 30, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (As Restated- see Note 19) | (As Restated- see Note 19) | ||||||||||
| Net income | $ | 66,854 | $ | 72,081 | $ | 92,555 | |||||
| Other comprehensive income (loss), net of tax: | |||||||||||
| Foreign currency translation gains (losses) | 19 | (10 | ) | (9 | ) | ||||||
| Unrealized gains (losses) on investments | (11 | ) | 5 | (8 | ) | ||||||
| Total other comprehensive income (loss) | 8 | (5 | ) | (17 | ) | ||||||
| Total comprehensive income | $ | 66,862 | $ | 72,076 | $ | 92,538 | |||||
See accompanying notes to consolidated financial statements.
54
SUPER MICRO COMPUTER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
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, 2014 (As previously reported) | 45,739,936 | $ | 199,062 | (445,028 | ) | $ | (2,030 | ) | $ | (63 | ) | $ | 272,087 | $ | 175 | $ | 469,231 | ||||||||||||
| Cumulative restatement adjustments | — | 531 | — | — | — | (17,604 | ) | — | (17,073 | ) | |||||||||||||||||||
Balance at June 30, 2014 (As Restated- see Note 19) | 45,739,936 | 199,593 | (445,028 | ) | (2,030 | ) | (63 | ) | 254,483 | 175 | 452,158 | ||||||||||||||||||
| Exercise of stock options, net of taxes | 2,124,401 | 23,338 | — | — | — | — | — | 23,338 | |||||||||||||||||||||
| Release of common stock shares upon vesting of restricted stock units | 14,685 | — | — | — | — | — | — | — | |||||||||||||||||||||
| Shares withheld for the withholding on vesting of restricted stock units | (5,278 | ) | (175 | ) | — | — | — | — | — | (175 | ) | ||||||||||||||||||
Stock-based compensation (As Restated- see Note 19) | — | 14,436 | — | — | — | — | — | 14,436 | |||||||||||||||||||||
Tax benefit resulting from stock option and restricted stock unit transactions (As Restated- see Note 19) | — | 11,301 | — | — | — | — | — | 11,301 | |||||||||||||||||||||
| Unrealized loss on investments | — | — | — | — | (8 | ) | — | — | (8 | ) | |||||||||||||||||||
| Foreign currency translation loss | — | — | — | — | (9 | ) | — | — | (9 | ) | |||||||||||||||||||
Net income (loss) (As Restated- see Note 19) | — | — | — | — | — | 92,555 | (11 | ) | 92,544 | ||||||||||||||||||||
Balance at June 30, 2015 (As Restated- see Note 19) | 47,873,744 | 248,493 | (445,028 | ) | (2,030 | ) | (80 | ) | 347,038 | 164 | 593,585 | ||||||||||||||||||
| Exercise of stock options, net of taxes | 1,013,430 | 12,186 | — | — | — | — | — | 12,186 | |||||||||||||||||||||
| Release of common stock shares upon vesting of restricted stock units | 177,707 | — | — | — | — | — | — | — | |||||||||||||||||||||
| Shares withheld for the withholding on vesting of restricted stock units | (65,164 | ) | (1,786 | ) | — | — | — | — | — | (1,786 | ) | ||||||||||||||||||
Stock-based compensation (As Restated- see Note 19) | — | 16,930 | — | — | — | — | — | 16,930 | |||||||||||||||||||||
Tax benefit resulting from stock option and restricted stock unit transactions (As Restated- see Note 19) | — | 3,642 | — | — | — | — | — | 3,642 | |||||||||||||||||||||
| Unrealized gain on investments | — | — | — | — | 5 | — | — | 5 | |||||||||||||||||||||
| Foreign currency translation loss | — | — | — | — | (10 | ) | — | — | (10 | ) | |||||||||||||||||||
Net income (As Restated- see Note 19) | — | — | — | — | — | 72,081 | 20 | 72,101 | |||||||||||||||||||||
Balance at June 30, 2016 (As Restated- see Note 19) | 48,999,717 | 279,465 | (445,028 | ) | (2,030 | ) | (85 | ) | 419,119 | 184 | 696,653 | ||||||||||||||||||
| Exercise of stock options, net of taxes | 1,007,065 | 10,878 | — | — | — | — | — | 10,878 | |||||||||||||||||||||
| Release of common stock shares upon vesting of restricted stock units | 411,739 | — | — | — | — | — | — | — | |||||||||||||||||||||
| Shares withheld for the withholding on vesting of restricted stock units | (144,994 | ) | (3,554 | ) | — | — | — | — | — | (3,554 | ) | ||||||||||||||||||
| Purchase of treasury stock | — | — | (888,097 | ) | (18,461 | ) | — | — | — | (18,461 | ) | ||||||||||||||||||
| Stock-based compensation | — | 19,665 | — | — | — | — | — | 19,665 | |||||||||||||||||||||
| Tax benefit resulting from stock option and restricted stock unit transactions | — | 1,817 | — | — | — | — | — | 1,817 | |||||||||||||||||||||
| Unrealized loss on investments | — | — | — | — | (11 | ) | — | — | (11 | ) | |||||||||||||||||||
| Foreign currency translation gain | — | — | — | — | 19 | — | — | 19 | |||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | 66,854 | (14 | ) | 66,840 | ||||||||||||||||||||
| Balance at June 30, 2017 | 50,273,527 | $ | 308,271 | (1,333,125 | ) | $ | (20,491 | ) | $ | (77 | ) | $ | 485,973 | $ | 170 | $ | 773,846 | ||||||||||||
| Common Stock and Additional Paid-In Capital | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Non-controlling Interest | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2018 | 50,914,571 | $ | 331,550 | (1,333,125) | $ | (20,491) | $ | 165 | $ | 532,271 | $ | 157 | $ | 843,652 | |||||||||||||||||||||||||||||||||
| Cumulative effect of adjustment from adoption of new accounting standard, net of taxes | — | — | — | — | — | 7,714 | — | 7,714 | |||||||||||||||||||||||||||||||||||||||
| Release of common stock shares upon vesting of restricted stock units | 549,886 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Shares withheld for the withholding tax on vesting of restricted stock units | (175,044) | (3,051) | — | — | — | — | — | (3,051) | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | 21,184 | — | — | — | — | — | 21,184 | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation loss | — | — | — | — | (245) | — | — | (245) | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 71,918 | 4 | 71,922 | |||||||||||||||||||||||||||||||||||||||
| 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 taxes | 1,804,789 | 28,343 | 28,343 | ||||||||||||||||||||||||||||||||||||||||||||
| Release of common stock shares upon vesting of restricted stock units | 979,274 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Shares withheld for the withholding tax on vesting of restricted stock units | (331,648) | (8,243) | — | — | — | — | — | (8,243) | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | 20,189 | — | — | — | — | — | 20,189 | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation loss | — | — | — | — | (72) | — | — | (72) | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 84,308 | 6 | 84,314 | |||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | 53,741,828 | $ | 389,972 | (1,333,125) | $ | (20,491) | $ | (152) | $ | 696,211 | $ | 167 | $ | 1,065,707 | |||||||||||||||||||||||||||||||||
| Exercise of stock options, net of taxes | 1,645,800 | 28,387 | — | — | — | — | — | 28,387 | |||||||||||||||||||||||||||||||||||||||
| Release of common stock shares upon vesting of restricted stock units | 1,011,406 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Shares withheld for the withholding tax on vesting of restricted stock units | (274,620) | (8,721) | — | — | — | — | — | (8,721) | |||||||||||||||||||||||||||||||||||||||
| Share repurchase and retirement | (5,542,336) | (175) | 1,333,125 | 20,491 | (150,316) | (130,000) | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | 28,549 | — | — | — | — | — | 28,549 | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation gain | — | — | — | — | 605 | — | — | 605 | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 111,865 | 6 | 111,871 | |||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | 50,582,078 | $ | 438,012 | — | $ | — | $ | 453 | $ | 657,760 | $ | 173 | $ | 1,096,398 | |||||||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
SUPER MICRO COMPUTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Years Ended June 30, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| OPERATING ACTIVITIES: | |||||||||||||||||
| Net income | $ | 111,865 | $ | 84,308 | $ | 71,918 | |||||||||||
| Reconciliation of net income to net cash (used in) provided by operating activities: | |||||||||||||||||
| Depreciation and amortization | 28,185 | 28,472 | 24,202 | ||||||||||||||
| Stock-based compensation expense | 28,549 | 20,189 | 21,184 | ||||||||||||||
| (Recoveries of) Allowance for doubtful accounts | (820) | (3,081) | 7,058 | ||||||||||||||
| Provision for excess and obsolete inventories | 6,805 | 18,373 | 32,946 | ||||||||||||||
| Other | (1,044) | 1,364 | 733 | ||||||||||||||
| Impairment of investments | — | — | 2,661 | ||||||||||||||
| Share of (income) loss from equity investee | (173) | (2,402) | 2,721 | ||||||||||||||
| Foreign currency exchange loss (gain) | 2,482 | 1,008 | (313) | ||||||||||||||
| Deferred income taxes, net | (8,390) | (13,772) | (17,100) | ||||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||||
| Accounts receivable, net (including changes in related party balances of $34, $4,727 and $(10,357) in fiscal years 2021, 2020 and 2019, respectively) | (59,325) | (7,023) | 85,027 | ||||||||||||||
| Inventories | (196,271) | (199,683) | 119,314 | ||||||||||||||
| Prepaid expenses and other assets (including changes in related party balances of $(3,957), $1,511 and $2,714 in fiscal years 2021, 2020 and 2019, respectively) | (5,291) | (29,869) | 8,410 | ||||||||||||||
| Accounts payable (including changes in related party balances of $(2,272), $12,559 and $(18,001) in fiscal years 2021, 2020 and 2019, respectively) | 189,309 | 59,889 | (173,410) | ||||||||||||||
| Income taxes payable | 8,041 | (8,321) | 5,831 | ||||||||||||||
| Accrued liabilities (including changes in related party balances of $2,322, $5,670 and $(7,858) in fiscal years 2021, 2020 and 2019, respectively) | 24,705 | 27,865 | 11,456 | ||||||||||||||
| Deferred revenue | (1,452) | 350 | 59,800 | ||||||||||||||
| Other long-term liabilities (including changes in related party balances of $(1,699), $(1,301) and $(500) in fiscal years 2021, 2020 and 2019, respectively) | (4,220) | (8,001) | 116 | ||||||||||||||
| Net cash provided by (used in) operating activities | 122,955 | (30,334) | 262,554 | ||||||||||||||
| INVESTING ACTIVITIES: | |||||||||||||||||
| Purchases of property, plant and equipment (including payments to related parties of $7,347, $4,386 and $4,472 in fiscal years 2021, 2020 and 2019, respectively) | (58,016) | (44,338) | (24,849) | ||||||||||||||
| Proceeds from sale of investment in a privately-held company | — | 750 | — | ||||||||||||||
| Net cash used in investing activities | (58,016) | (43,588) | (24,849) | ||||||||||||||
| FINANCING ACTIVITIES: | |||||||||||||||||
| Proceeds from borrowings, net of debt issuance costs | 127,059 | 164,791 | 41,760 | ||||||||||||||
| Repayment of debt | (60,629) | (159,191) | (67,700) | ||||||||||||||
| Net repayment on asset-backed revolving line of credit, net of costs | — | (1,116) | (65,945) | ||||||||||||||
| Payment of other fees for debt financing | (561) | (650) | (625) | ||||||||||||||
| Proceeds from exercise of stock options | 28,387 | 28,343 | — | ||||||||||||||
| Changes in obligations under capital leases | 25 | (138) | (267) | ||||||||||||||
| Payment of withholding tax on vesting of restricted stock units | (8,721) | (8,243) | (3,051) | ||||||||||||||
| Stock repurchases | (130,000) | — | — | ||||||||||||||
| Net cash (used in) provided by financing activities | (44,440) | 23,796 | (95,828) | ||||||||||||||
| Effect of exchange rate fluctuations on cash | 560 | 376 | (119) | ||||||||||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | 21,059 | (49,750) | 141,758 | ||||||||||||||
| Cash, cash equivalents and restricted cash at beginning of year | 212,390 | 262,140 | 120,382 | ||||||||||||||
| Cash, cash equivalents and restricted cash at end of year | $ | 233,449 | $ | 212,390 | $ | 262,140 | |||||||||||
| Supplemental disclosure of cash flow information: | |||||||||||||||||
| Cash paid for interest | $ | 1,948 | $ | 2,172 | $ | 3,861 | |||||||||||
| Cash paid for taxes, net of refunds | $ | 2,914 | $ | 43,317 | $ | 23,604 | |||||||||||
| Non-cash investing and financing activities: | |||||||||||||||||
| Unpaid property, plant and equipment purchases (including due to related parties of $400, $2,223 and $1,609 as of June 30, 2021, 2020 and 2019, respectively) | $ | 9,003 | $ | 12,051 | $ | 9,232 | |||||||||||
| Equipment purchased under capital leases | $ | 3,258 | $ | — | $ | — | |||||||||||
| Contribution of certain technology rights to equity investee | $ | — | $ | — | $ | 3,000 | |||||||||||
| Years Ended June 30, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (As Restated- see Note 19) | (As Restated- see Note 19) | ||||||||||
| OPERATING ACTIVITIES: | |||||||||||
| Net income | $ | 66,854 | $ | 72,081 | $ | 92,555 | |||||
| Reconciliation of net income to net cash provided by (used in) operating activities: | |||||||||||
| Depreciation and amortization | 16,357 | 13,282 | 8,094 | ||||||||
| Stock-based compensation expense | 19,665 | 16,930 | 14,436 | ||||||||
| Excess tax benefits from stock-based compensation | (2,310 | ) | (2,812 | ) | (8,046 | ) | |||||
| Allowance for doubtful accounts | 334 | 1,216 | 80 | ||||||||
| Provision for excess and obsolete inventories | 15,729 | 9,384 | 5,930 | ||||||||
| Share of loss from equity investee | 303 | — | — | ||||||||
| Foreign currency exchange loss (gain) | 1,274 | (1,339 | ) | (830 | ) | ||||||
| Deferred income taxes, net | (5,434 | ) | (5,212 | ) | (3,576 | ) | |||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable, net (including changes in related party balances of $(6,828), $80, and $492 in fiscal years 2017, 2016, and 2015, respectively) | (149,455 | ) | 53,575 | (78,186 | ) | ||||||
| Inventories | (235,590 | ) | 7,709 | (177,557 | ) | ||||||
| Prepaid expenses and other assets (including changes in related party balances of $(3,705), $652, and $(10,274) in fiscal years 2017, 2016, and 2015, respectively) | (2,856 | ) | (23,539 | ) | (11,326 | ) | |||||
| Accounts payable (including changes in related party balances of $10,987, $(21,887), and $22,188 in fiscal years 2017, 2016, and 2015, respectively) | 135,320 | (65,835 | ) | 81,701 | |||||||
| Income taxes payable | (1,873 | ) | (386 | ) | 8,979 | ||||||
| Accrued liabilities (including changes in related party balances of $3,096, $(340), and $1,364 in fiscal years 2017, 2016, and 2015, respectively) | 27,555 | 12,911 | 13,893 | ||||||||
| Other long-term liabilities (including changes in related party balances of $4,900, $0, and $0 in fiscal years 2017, 2016, and 2015, respectively) | 17,939 | 20,022 | 7,728 | ||||||||
| Net cash provided by (used in) operating activities | (96,188 | ) | 107,987 | (46,125 | ) | ||||||
| INVESTING ACTIVITIES: | |||||||||||
| Purchases of property, plant and equipment (including payments to related parties of $(4,570), $(4,641), and $(4,070) in fiscal years 2017, 2016, and 2015, respectively) | (29,365 | ) | (34,108 | ) | (35,100 | ) | |||||
| Change in restricted cash | (340 | ) | (1,020 | ) | (416 | ) | |||||
| Investment in a privately held company | — | — | (661 | ) | |||||||
| Net cash used in investing activities | (29,705 | ) | (35,128 | ) | (36,177 | ) | |||||
| FINANCING ACTIVITIES: | |||||||||||
| Proceeds from debt, net of debt issuance costs | 207,029 | 34,200 | 84,900 | ||||||||
| Repayment of debt | (140,452 | ) | (34,100 | ) | (36,000 | ) | |||||
| Payments to acquire treasury stock | (18,461 | ) | — | — | |||||||
| Proceeds from exercise of stock options | 10,878 | 12,186 | 23,338 | ||||||||
| Excess tax benefits from stock-based compensation | 2,310 | 2,812 | 8,046 | ||||||||
| Payments of obligations under capital leases | (253 | ) | (189 | ) | (134 | ) | |||||
| Advances (payments) under receivable financing arrangements | 227 | (21 | ) | 33 | |||||||
Payment of withholding tax on vesting of restricted stock units | (3,554 | ) | (1,786 | ) | (175 | ) | |||||
| Net cash provided by financing activities | 57,724 | 13,102 | 80,008 | ||||||||
| Effect of exchange rate fluctuations on cash | (45 | ) | (61 | ) | (268 | ) | |||||
| Net increase (decrease) in cash and cash equivalents | (68,214 | ) | 85,900 | (2,562 | ) | ||||||
| Cash and cash equivalents at beginning of year | 178,820 | 92,920 | 95,482 | ||||||||
| Cash and cash equivalents at end of year | $ | 110,606 | $ | 178,820 | $ | 92,920 | |||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Cash paid for interest | $ | 2,082 | $ | 1,632 | $ | 933 | |||||
| Cash paid for taxes, net of refunds | $ | 30,809 | $ | 36,951 | $ | 30,671 | |||||
| Non-cash investing and financing activities: | |||||||||||
| Equipment purchased under capital leases | $ | 314 | $ | 299 | $ | 442 | |||||
| Unpaid property, plant and equipment purchases (including due to related parties of $1,168, $2,246 and$724 as of June 30, 2017, 2016 and 2015, respectively) | $ | 5,056 | $ | 10,849 | $ | 7,062 | |||||
| Contribution of certain technology rights to equity investee | $ | 7,000 | $ | — | $ | — | |||||
56
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The 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 consolidated statements of operations, and 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. EquityFor equity investments forover 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 method.
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:to revenue recognition, allowances for doubtful accounts and sales returns, inventory valuation, useful lives of property, plant and equipment, product warranty accruals, stock-based compensation, impairment of investments and long-lived assets, and income taxes. The Company’s estimates are evaluated on an ongoing basis and changes in the estimates are recognized prospectively. Actual results could differ from those estimates. The Company considered estimates of the economic implications of the COVID-19 pandemic on its critical and significant accounting estimates, including an assessment of the collectability of each customer contract as part of the revenue recognition process, assessment of the valuation of accounts receivable, assessment of provision for excess and obsolete inventory and an impairment of long-lived assets.
Fair Value of Financial Instruments
The Company accounts for certain assets and liabilities at fair value, which is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly arms-length transaction between market participants. When measuring fair value, the Company takes into account the characteristics of the asset or liability that a market participant would consider when pricing the asset or liability at the measurement date. The Company considers one or more techniques for measuring fair value: market approach, income approach, and cost approach. The valuation techniques include inputs that are based on three different levels of observability to the market. The Company categorizes each of its fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
•Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
•Level 2 - Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and
•Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
57
Accounts receivable and accounts payable are carried at cost, which approximates fair value due to the short maturity of these instruments. Cash equivalents, certificates of depositsdeposit and long-term investmentsthe investment in an auction rate security are carried at fair value. Short-term and long-term debt is carried at amortized cost, which approximates its fair value based on borrowing rates currently available to the Company for loans with similar terms.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original maturity of three months or less from the date of purchase to be cash equivalents. Cash equivalents consist primarily of money market funds and certificates of depositsdeposit with original maturities of less than three months.
Inventories
Inventories are stated at lower of cost, using weighted average cost subject to lowermethod, or net realizable value. Net realizable value is the estimated selling price of cost or market.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. Market value represents net realizable value for finished goods and work in process and replacement value for purchased parts and raw materials. The Company evaluates inventory on a quarterly basis for excess and obsolescence and lower of cost or market and excess and obsolescencenet realizable value and, as necessary, writes down the valuation of unitsinventories based upon the Company's inventory aging, forecasted usage and sales, anticipated salesselling price, product obsolescence and other factors. Once a reserveinventory is established, itwritten down, its new value is maintained until the product to which it relates 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 reducesreduce the cost of sales in the period when the related inventory is sold.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets as follows:
| 3 to 5 years | |||||
| Machinery and equipment | 3 to 7 years | ||||
| Furniture and fixtures | 5 years | ||||
| Buildings | 39 years | ||||
| Building improvements | Up to 20 years | ||||
| Land improvements | 15 years | ||||
| Leasehold improvements | Shorter of lease term or estimated useful life | ||||
Long-Lived Assets
The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When the sum of the undiscounted future net cash flows
expected to result from the use of the asset and its eventual disposition is less than its carrying amount, an impairment loss would be measured based on the fair value of the asset compared to the carrying amount. No impairment charge for long-lived assets has been recorded in any of the periods presented.
58
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Revenue Recognition
The Company generates revenues from the sale of server and storage systems, subsystems, accessories, services, server software management solutions, and support services.
Product sales. The Company recognizes revenue from sales of products upon meeting allas control is transferred to customers, which generally happens at the point of the following revenue recognition criteria, which is typically met upon shipment or upon delivery, of its products to customers, unless customer acceptance is uncertainuncertain. Products sold by the Company are delivered via shipment from the Company’s facilities or significant obligationsdrop shipment directly to its customers from a Company vendor. The Company may use distributors to sell products to end customers. Revenue from distributors is recognized when the customer remain: (i) persuasive evidencedistributor obtains control of an arrangement exists through customer contracts and orders, (ii) the customer takes title and assumesproduct, which generally happens at the risks and rewardspoint of ownership, (iii) the sales price charged is fixedshipment or determinable as evidenced by customer contracts and orders and (iv) collectibility is reasonably assured.upon delivery.
The Company applies judgment in determining the transaction price as the Company may be required to estimate variable consideration when determining the amount of revenue to recognize. As part of determining the transaction price in contracts with customers, the Company estimates and reserves for future sales returns based on a review of its history of actual returns for each major product line. Based upon historical experience, a refund liability is recorded at the time of sale for estimated product returns and an asset is recognized for the amount expected to be recorded in inventory upon product return, less the expected recovery costs. The Company also reduces revenue for the estimated costs of customer and distributor programs and incentive offerings such as price protection and rebates as well as the estimated costs of cooperative marketing arrangements where the fair value of the benefit identifiedderived from the costs cannot be reasonably estimated.
Services sales. The Company’s sale of services mainly consists of extended warranty and on-site services. These services are sold at the time of the sale of the underlying products. Revenue related to extended warranty commences upon the expiration of the standard warranty period and is recognized ratably over the contractual period.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.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.
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that element.
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 allocates arrangement consideration at the inception of an arrangement to all deliverables, if they represent a separate unit of accounting,determines standalone selling prices based on their relative estimated stand-alonethe price at which the performance obligation is sold separately. If the standalone selling prices. A deliverable qualifiesprice is not observable through past transactions, the Company applies judgment to estimate 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 separate unit of accounting when the delivered element has stand-alone valuecustomer prior to transferring goods or services to the customer. The guidance establishescustomer, the following hierarchy to determine the relative estimated stand-alone selling price to be used for allocating arrangement consideration to deliverables: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”) if VSOE is not available, or (iii) the vendor's best estimated selling price (“BESP”) if neither VSOE nor TPE are available.
Company records a contract liability (deferred revenue). The Company does not have VSOE for deliverables in its arrangements, and TPE is generally not available because its products are highly differentiated, and the Company is unablealso recognizes deferred revenue when it has an unconditional right to obtain reliable information on the products and pricing practicesconsideration (i.e., a receivable) before transfer of the Company’s competitors. BESP reflects the Company’s estimatecontrol of what the selling price ofgoods or services to a deliverable would be if it were sold regularly on a stand-alone basis.customer.
59
Allowances for Doubtful Accounts
Customers are subjected to a credit review process that evaluates each customer’s financial position and ability and intent to pay. On a quarterly basis, the Company makes estimates of its uncollectible accounts receivable by analyzing the aging of accounts receivable, history of bad debts, customer concentrations, customer-credit-worthiness, and current economic trends to evaluate the adequacy of the allowance for doubtful accounts. The Company's (recovery of) provision for bad debt was $0.3$(0.8) million, $1.2$(3.1) million, and $0.1$7.1 million in fiscal years 2017, 20162021, 2020 and 2015,2019, respectively.
Cost of Sales
Cost of sales primarily consists of the costs of materials, contract manufacturing, in-bound shipping, personnel and related expenses including stock-based compensation, equipment and facility expenses, warranty costs and provision for lower of cost or marketnet realizable value and excess and obsolete inventory.
Product Warranties
The Company offers product warranties typically ranging from 15 to 39 months against any defective products. TheThese standard warranties are assurance type warranties and the Company does not offer any services beyond the assurance that the product will continue working as specified. Therefore, these warranties are not considered separate performance obligations in the arrangement. Based on historical experience, the Company accrues for estimated returns of defective products at the time revenue is recognized based on historical warranty experience and recent trends.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 chargedrecorded to cost of sales and included in accrued liabilities and other long-term liabilities. The Company adjusts its changes inWarranty accruals are based on estimates that are updated on an ongoing basis taking into consideration inputs such as a result of new product introductions, or changes in unit volumesthe volume of claims compared with itsthe Company's historical experience, or ifand the changes in the cost of servicing warranty claims is greater or lesser than expected, and theclaims. The Company accounts for the effect of such changes in estimates prospectively. The following table presents for the fiscal years ended June 30, 2017, 20162021, 2020 and 2015,2019, the reconciliation of the changes in accrued warranty costs which is included as a component of accrued liabilities and other long-term liabilities (in thousands):
| Years Ended June 30, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Balance, beginning of the year | $ | 12,379 | $ | 11,034 | $ | 9,884 | |||||||||||
| Provision for warranty | 29,638 | 35,962 | 22,991 | ||||||||||||||
| Costs utilized | (30,575) | (34,502) | (26,281) | ||||||||||||||
| Change in estimated liability for pre-existing warranties | 1,421 | (115) | 4,440 | ||||||||||||||
| Balance, end of the year | $ | 12,863 | $ | 12,379 | $ | 11,034 | |||||||||||
| Current portion | 10,185 | 9,984 | 8,661 | ||||||||||||||
| Non-current portion | $ | 2,678 | $ | 2,395 | $ | 2,373 | |||||||||||
| Years Ended June 30, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Balance, beginning of year | $ | 7,129 | $ | 7,700 | $ | 7,083 | |||||
| Provision for warranty | 21,642 | 19,579 | 15,975 | ||||||||
| Costs utilized | (21,256 | ) | (18,041 | ) | (15,154 | ) | |||||
| Change in estimated liability for pre-existing warranties | 206 | (2,109 | ) | (204 | ) | ||||||
| Balance, end of year | $ | 7,721 | $ | 7,129 | $ | 7,700 | |||||
| Current portion | 5,976 | 5,816 | 6,015 | ||||||||
| Long-term portion | $ | 1,745 | $ | 1,313 | $ | 1,685 | |||||
Research and Development
Research and development expenses consist of personnel expenses including salaries, benefits, stock-based compensation and incentive bonuses, and related expenses for the Company's research and development personnel, as well as materials and supplies, consulting services, third-party testing services and equipment and facility expenses related to the Company's research and development activities. All research and development costs are expensed as incurred and consist primarily of salaries, consulting services, other direct expenses and other engineering expenses.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 $10.3$10.9 million, $6.9$2.1 million, and $6.3$2.8 million for the fiscal years ended June 30, 2017, 20162021, 2020 and 2015,2019, respectively.
60
$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.
Software development costs, recorded as reductionsincluding costs to revenuedevelop software sold, leased, or otherwise marketed, that are incurred subsequent to the establishment of technological feasibility are capitalized if significant. Costs incurred during the application development stage for internal-use software are capitalized if significant. Capitalized software development costs are amortized using the fiscal years ended June 30, 2017, 2016 and 2015, were $8.1 million, $7.7 million and $7.7 million, respectively.straight-line amortization method over the estimated useful life of the applicable software. Such software development costs required to be capitalized have not been material to date.
Advertising Costs
Advertising costs, net of reimbursements received under the cooperative marketing arrangements with the Company's vendors, are expensed as incurred. Total advertising and promotional expenses were $5.4 million, $4.1 million, $3.0 million and $3.0$2.4 million for the fiscal years ended June 30, 2017, 20162021, 2020 and 2015,2019, respectively.
Stock-Based Compensation
The Company measures and recognizes compensation expense for all share-based awards made to employees and non-employee members of the Board of Directors,non-employees, including stock options, and restricted stock units ("RSUs") and performance-based restricted stock units (“PRSUs”). The Company is required to estimaterecognizes the grant date fair value of all share-based awards over the requisite service period and accounts for forfeitures as they occur. Stock option and RSU awards are recognized to expense on a straight-line basis over the requisite service period. PRSU awards are recognized to expense using an accelerated method only when it is probable that a 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 dateestimated number of grant. The value of awardsPRSUs that are ultimatelyexpected 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 anin stock-based compensation expense overin the period of the change. Previously recognized compensation expense is not reversed if vested stock options, RSUs or PRSUs for which the requisite service periods. 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 estimatedestimates the fair value of stock options granted using a Black-Scholes option pricing model and a single option award approach.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
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 end ofconsolidated balance sheet. The Company's lease term includes options to extend or terminate the lease.lease when it is reasonably certain that it will exercise that option. The Company records anelected to apply the short-term lease recognition exemption and does not recognize ROU asset and liabilitylease liabilities for capital leases at present valuewith an initial term of 12 months or less and recognizes as expense the minimum lease payments based on the incremental borrowing rate. Assets are depreciated over the useful life in accordance with the Company’s depreciation policy while rental payments and interest on the liability are accounted for using the effective interest method.
61
Operating lease incentives amortized as a reduction of rent expenseROU 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.
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 recordsaccounts 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, related to shippingsuch as common area maintenance, are expensed as incurred and handlingnot included in salesthe ROU assets and marketing expenses. Shippinglease liabilities.
Finance Leases
Assets under finance leases are recorded in property, plant and handling fees billed to customersequipment, net and lease liabilities are included in net sales.accrued liabilities and other long-term liabilities on the 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.
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 of operating loss carry-forwards and other tax credits measured by applying enacted tax laws related to the financial statement periods. Valuation allowances are provided when necessary to reduce deferred tax assets to an amount that is more likely than not to be realized.
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.
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 in 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;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 under the equity method or cost methodother variable interest in accordance with the 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;VIEs; however, the Company is not the primary beneficiary as it does not have the power to direct the activities that are most significant to the entities and therefore, the Company does not consolidate these entities. In performing its analysis, the Company’s managementCompany considered its explicit arrangements with Ablecom and Compuware, including the supplier arrangements.all contractual arrangements with these entities. Also, as a result of the substantial related party relationships between the Company and these entities, managementthe Company considered whether any implicit arrangements exist that would cause the Company to protect thosethese related parties’
62
interests from suffering losses. ManagementThe Company determined thatit has no material implicit arrangements exist with Ablecom, Compuware or their shareholders.
The Company and Ablecom jointly established Super Micro Asia Science and Technology Park, Inc. (the "Management Company") in Taiwan to manage the common areas shared by the Company and Ablecom for its separately constructed manufacturing facilities. In fiscal year 2012, each companyparty contributed $0.2 million and ownsfor a 50% ownership interest of the Management Company. The Company has concluded that the Management Company is a VIE, and although the operations of the Management Company are independent of the Company through governance rights,is the Companyprimary beneficiary as it has the power to direct the activities that are most significant to the Management Company. Therefore, the Company concluded that it is the primary beneficiary of the Management Company. For the fiscal years ended 2017, 20162021, 2020 and 2015,2019, the accounts of the Management Company have beenwere consolidated with the accounts of Super Micro Computer, and a noncontrolling interest has beenwas recorded for Ablecom's interestsinterest in the net assets and operations of the Management Company. In fiscal years 2017, 2016 and 2015, $(14,000), $20,000 and $(11,000) of netNet income (loss) attributable to Ablecom's interest was not material for the periods presented and was included in the Company’s general and administrative expenses in the Company's consolidated statements of operations, respectively.operations.
Foreign Currency Transactions
The functional currency of the Company’s international subsidiaries is the U.S. dollar, with the exception of Super Micro Asia and Technology Park, Inc., a consolidated variable interest entity. Monetary assets and liabilities of the Company's international subsidiaries that are denominated in the localforeign currency are remeasured into U.S. dollars at period-end exchange rates. Non-monetary assets and liabilities that are denominated in the localforeign currency are remeasured into U.S. dollars at the historical rates. Revenue and expenses that are denominated in the localforeign currency are remeasured into U.S. dollars at the average exchange rates during the period. Remeasurement of foreign currency accounts and resulting foreign exchange transaction gains and losses, which have not been material, are reflected in the consolidated statements of operations in other income (expense),expense, net.
The functional currency of Super Micro Asia and Technology Park, Inc. is New Taiwanese Dollar (“NTD$”NTD”). Assets and liabilities are translated to U.S. dollars at the period-end exchange rate. Revenues and expenses are translated using the average exchange rate for the period. The effects of foreign currency translation are included in stockholders’ equity as a
component of accumulated other comprehensive loss(loss) income in the accompanying consolidated balance sheets and periodic movements are summarized as a line item in the consolidated statements of comprehensive income.
The Company has an investment in a privately-held company that is accounted for under the equity method (the "Corporate Venture"). The functional currency of the Corporate Venture is the Chinese Yuan. Adjustments for the Company's share of the effects of foreign currency translation from local currency to U.S. dollars are recorded as increases or decreases to the carrying value of the investment and included in stockholders’ equity as a component of accumulated other comprehensive (loss) income in the accompanying consolidated balance sheets and periodic movements are summarized as a line item in the consolidated statements of comprehensive income.
Net Income Per Common Share
Basic net income per common share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per common share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options and unvested RSUs.RSUs and PRSUs. Contingently issuable shares are included in computing basic net income per common share as of the date that all necessary conditions, including service vesting conditions have been satisfied. Contingently issuable shares are considered for computing diluted net income per common share as of the beginning of the period in which all necessary conditions have been satisfied and the only remaining vesting condition is a service vesting condition.
Under the treasury stock method, an increase in the fair market value of the Company's common stock results in a greater dilutive effect from outstanding stock options and RSUs.RSUs and PRSUs. Additionally, the exercise of stock options and the vesting of RSUs results in a further dilutive effect on net income per share.
The computation of basic and diluted net income per common share is as follows (in thousands, except per share amounts):
63
| Years Ended June 30, | Years Ended June 30, | |||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2021 | 2020 | 2019 | |||||||||||||||||||||||
| Numerator: | Numerator: | |||||||||||||||||||||||||||
| Net income | $ | 66,854 | $ | 72,081 | $ | 92,555 | Net income | $ | 111,865 | $ | 84,308 | $ | 71,918 | |||||||||||||||
| Denominator: | Denominator: | |||||||||||||||||||||||||||
| Weighted-average shares outstanding | 48,383 | 47,917 | 46,434 | Weighted-average shares outstanding | 51,157 | 50,987 | 49,917 | |||||||||||||||||||||
| Effect of dilutive securities | 3,296 | 3,919 | 3,660 | Effect of dilutive securities | 2,350 | 1,851 | 1,799 | |||||||||||||||||||||
| Weighted-average diluted shares | 51,679 | 51,836 | 50,094 | Weighted-average diluted shares | 53,507 | 52,838 | 51,716 | |||||||||||||||||||||
| Basic net income per common share | $ | 1.38 | $ | 1.50 | $ | 1.99 | Basic net income per common share | $ | 2.19 | $ | 1.65 | $ | 1.44 | |||||||||||||||
| Diluted net income per common share | $ | 1.29 | $ | 1.39 | $ | 1.85 | Diluted net income per common share | $ | 2.09 | $ | 1.60 | $ | 1.39 | |||||||||||||||
For the fiscal years ended June 30, 2017, 20162021, 2020 and 2015,2019, the Company had stock options, RSUs and RSUsPRSUs 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 1,620,000, 1,196,000670,179, 2,208,000, and 3,805,0003,758,000 for the fiscal years ended June 30, 2017, 20162021, 2020 and 2015,2019, respectively.
Concentration of Supplier Risk
Certain raw materials used by the Company in the manufacturemanufacturing of its products are available from a limited number of suppliers. Shortages could occur in these essential materials due to an interruption of supply or increased demand in the industry. One supplier accounted for 31.0%20.3%, 35.2%26.8%, and 28.7%21.8% of total purchases for the fiscal years ended June 30, 2017, 20162021, 2020 and 2015,2019, respectively. Purchases from Ablecom and Compuware, related parties of the Company as noted in Note 11,13, "Related Party Transactions",Transactions," accounted for 11.1%a combined 7.8%, 12.8%10.1%, and 13.8%9.2% of total cost of sales for the fiscal years ended June 30, 2017, 20162021, 2020 and 2015,2019, respectively.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration of credit risk consist primarily of cash and cash equivalents, long-term investmentsrestricted cash, investment in an auction rate security and accounts receivable. No single customer accounted for 10% or more of the net sales in fiscal year 2017. In fiscal years 20162021, 2020 and 2015, one2019. One customer accounted for 11.4%13.5% and 10.4%, respectively, of net sales. No customer accounted for 10% or more10.1% of accounts receivable, net as of June 30, 2017,2021 and one customer accounted2020, respectively.
Treasury Stock
The Company accounts for 10.5%treasury stock under the cost method. Upon the retirement of treasury shares, the Company deducts the par value of the Company's accounts receivablesretired treasury shares from common stock and allocates the excess of cost over par as a deduction to additional paid-in capital based on the pro-rata portion of additional paid-in-capital, and the remaining excess as a deduction to retained earnings. Retired treasury shares revert to the status of authorized but unissued shares.
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 consolidated financial statements as of June 30, 2016.
July 1, 2020.
64
In August 2018, the FASB issued amended guidance, Fair Value Measurement: Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement,Measurement, to modify the disclosure requirements on fair value measurements based on the concepts in the FASB Concepts Statement,Statements, including the consideration of costs and benefits. The new standard is effective for the Company fromadopted this guidance on July 1, 2020. The CompanyAs of June 30, 2021, the Company’s investment in an auction rate security is currently evaluating the effectonly Level 3 investment measured at fair value on a recurring basis. Changes to the guidance will have on itsdisclosures in the consolidated financial statement disclosures.statements were immaterial. See Note 2, "Fair Value Disclosure".
In August 2018, the FASB issued amendedauthoritative 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 (and hosting arrangements that include an internal use software license).software. The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments. Accordingnew 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 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 amendments, the entity shall determine which implementation costsgeneral principles from ASC 740 - Income Taxes, and to capitalize as an asset related to the service contractimprove consistent application of U.S. GAAP for other areas of ASC 740 by clarifying 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.amending existing guidance. The new standardguidance is effective for the Company from July 1, 2020.2021; early adoption is permitted. The Company is currently evaluatingdetermined that the effectadoption of the guidance will not have a material impact on the Company's 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 31, 2022. In January 2021, the FASB issued further guidance on this topic, which clarified the scope and application of the original guidance. LIBOR is used to calculate the interest on borrowings under the Company's 2018 Bank of America Credit Facility and E.SUN Credit Facility. The 2018 Bank of America Credit Facility was amended on June 28, 2021 with a new maturity date of June 28, 2026 and fallback terms related to LIBOR replacement mechanics. As the amendment has changes not related to LIBOR replacement, optional expedients under this guidance cannot be elected. E.SUN Credit Facility will terminate on September 18, 2021 before the phase out of LIBOR. Therefore, the Company does not expect the adoption of the guidance to have an impact on its consolidated financial statement disclosures, results of operationsstatements and financial position.disclosures.
Note 2. Fair Value Disclosure
The financial assetsinstruments of the Company measured at fair value on a recurring basis are included in cash equivalents, other assets and long-term investments.accrued liabilities. The Company classifies its cash equivalents and other assetsfinancial 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.
65
The Company’s long-term investmentsinvestment in an auction rate securities aresecurity is classified within Level 3 of the fair value hierarchy as the determination of theirits fair valuesvalue was not based on observable inputs as of June 30, 20172021 and 2016.June 30, 2020. See Note 1, "Organization and Summary of Significant Accounting Policies",Policies," for a discussion of the Company’s policies regarding the fair value hierarchy. The Company has used ais using the discounted cash flow modelmethod 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 June 30, 20172021.
Financial Assets and 2016. The material factors used in preparing the discounted cashLiabilities Measured on a Recurring Basis
The following table sets forth the Company’s cash equivalents, certificates of deposit, and long-term investmentsfinancial instruments as of June 30, 20172021 and 20162020, 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):
| June 30, 2021 | Level 1 | Level 2 | Level 3 | Asset at Fair Value | |||||||||||||||||||
| Assets | |||||||||||||||||||||||
Money market funds(1) | $ | 151 | $ | — | $ | — | $ | 151 | |||||||||||||||
Certificates of deposit(2) | — | 863 | — | 863 | |||||||||||||||||||
| Auction rate security | — | — | 1,556 | 1,556 | |||||||||||||||||||
| Total assets measured at fair value | $ | 151 | $ | 863 | $ | 1,556 | $ | 2,570 | |||||||||||||||
| June 30, 2020 | Level 1 | Level 2 | Level 3 | Asset 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 | |||||||||||||||
| June 30, 2017 | Level 1 | Level 2 | Level 3 | Asset at Fair Value | |||||||||||
| Money market funds (1) | $ | 1,126 | $ | — | $ | — | $ | 1,126 | |||||||
| Certificates of deposit (2) | — | 1,151 | — | 1,151 | |||||||||||
| Auction rate securities | — | — | 2,625 | 2,625 | |||||||||||
| Total assets measured at fair value | $ | 1,126 | $ | 1,151 | $ | 2,625 | $ | 4,902 | |||||||
| June 30, 2016 | Level 1 | Level 2 | Level 3 | Asset at Fair Value | |||||||||||
| Money market funds (1) | $ | 727 | $ | — | $ | — | $ | 727 | |||||||
| Certificates of deposit (2) | — | 1,316 | — | 1,316 | |||||||||||
| Auction rate securities | — | — | 2,643 | 2,643 | |||||||||||
| Total assets measured at fair value | $ | 727 | $ | 1,316 | $ | 2,643 | $ | 4,686 | |||||||
__________________________
(1) $0.3 million and $0.3 million in money market funds are included within cash and cash equivalents and $0.8$0.0 million and $0.4 million in money market funds are included in cash and cash equivalents and $0.2 million and $0.8 million in money market funds are included in restricted cash, withinnon-current in other assets onin the consolidated balance sheets as of June 30, 20172021 and 2016,2020, respectively.
(2) $0.2 million and $0.3$0.2 million in certificates of deposit are included in cash and cash equivalents, and $1.0$0.3 million and $1.0$0.3 million in certificates of deposit are included in prepaid expenses and other assets, and $0.4 million and $0.3 million in certificates of deposit are included in restricted cash, withinnon-current in other assets onin the consolidated balance sheets as of June 30, 20172021 and 2016,2020, respectively.
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 $0.4 millioncurrent economic conditions. For the fiscal year ended June 30, 2021, the credit losses related to the Company’s investments was not significant.
66
As of June 30, 2020, the Company estimated the fair value of performance awards using the Monte-Carlo simulation model and $0.5 millionclassified them within Level 2 of restricted cash included in other assetsthe fair value hierarchy as estimates are based on the consolidated balance sheets held byobservable inputs. The significant inputs used in estimating the Companyfair value of the awards as of June 30, 20172020 are as follows:
| Stock Price as of Period End | Performance Period | Risk-free Rate | Volatility | Dividend Yield | ||||||||||||||||||||||
| $28.39 | 1.25 - 2.00 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 fiscal years 2021 and 2016, respectively. 2020.
There were no transfers between Level 1, Level 2 or Level 3 securitiesfinancial instruments in fiscal years 20172021 and 2016.2020.
| Years Ended June 30, | |||||||
| 2017 | 2016 | ||||||
| Balance as of the beginning of the fiscal year | $ | 2,643 | $ | 2,633 | |||
| Total unrealized gains (losses) included in other comprehensive income | (18 | ) | 10 | ||||
| Balance as of the end of the fiscal year | $ | 2,625 | $ | 2,643 | |||
The following is a summary of the Company’s long-term investmentsinvestment in an auction rate security as of June 30, 20172021 and 20162020 (in thousands):
| June 30, 2021 | |||||||||||||||||||||||
| Cost Basis | Gross Unrealized Holding Gains | Gross Unrealized Holding Losses | Fair Value | ||||||||||||||||||||
| Auction rate security | $ | 1,750 | $ | — | $ | (194) | $ | 1,556 | |||||||||||||||
| June 30, 2020 | |||||||||||||||||||||||
| Cost Basis | Gross Unrealized Holding Gains | Gross Unrealized Holding Losses | Fair Value | ||||||||||||||||||||
| Auction rate security | $ | 1,750 | $ | — | $ | (179) | $ | 1,571 | |||||||||||||||
| June 30, 2017 | |||||||||||||||
Amortized Cost | Gross Unrealized Holding Gains | Gross Unrealized Holding Losses | Fair Value | ||||||||||||
| Auction rate securities | $ | 2,750 | $ | — | $ | (125 | ) | $ | 2,625 | ||||||
| June 30, 2016 | |||||||||||||||
Amortized Cost | Gross Unrealized Holding Gains | Gross Unrealized Holding Losses | Fair Value | ||||||||||||
| Auction rate securities | $ | 2,750 | $ | — | $ | (107 | ) | $ | 2,643 | ||||||
The Company measures the fair value of outstanding debt for disclosure purposes on a recurring basis. As of June 30, 20172021 and 2016,2020, total debt of $161.4$98.2 million and $93.6$29.4 million, respectively, areis reported at amortized cost. This outstanding debt is classified as Level 2 as it is not actively traded and is valued using a discounted cash flow model that uses observable market inputs. Based on the discounted cash flow model, the fair valuetraded. The amortized cost of the outstanding debt approximates amortized cost.the fair value.
Other Financial Assets - Investments into Non-Marketable Equity Securities
The Company's non-marketable equity securities are investments in privately held companies without readily determinable fair values in the amount of $0.1 million as of June 30, 2021 and 2020, respectively. The Company accounts for these investments at cost minus impairment, if any, plus or minus changes from observable price changes in orderly transactions for the identical or similar investments by the same issuer. During fiscal year 2017the years ended June 30, 2021 and 2016,2020, the Company did not record any other-than-temporary impairmentsupward or downward adjustments to the carrying values of the non-marketable equity securities related to observable price changes. The Company also did not record any impairment to the carrying values of the non-marketable equity securities during fiscal year 2021 and 2020. During fiscal year 2019, the Company recorded impairment charges of $2.7 million for its non-marketable equity securities which had an initial cost basis of $2.7 million as it was determined the carrying value of the investments were not recoverable.
Note 3. Revenue
67
Disaggregation of Revenue
The Company disaggregates revenue by type of product and 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):
| Years Ended June 30, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Server and storage systems | $ | 2,790,305 | $ | 2,620,754 | $ | 2,858,644 | |||||||||||
| Subsystems and accessories | 767,117 | 718,527 | 641,716 | ||||||||||||||
| Total | $ | 3,557,422 | $ | 3,339,281 | $ | 3,500,360 | |||||||||||
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 geographical region to which the products were shipped. The following is a summary of net sales by geographic region (in thousands):
| Years Ended June 30, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| United States | $ | 2,107,910 | $ | 1,957,329 | $ | 2,032,948 | |||||||||||
| Asia | 699,653 | 650,652 | 712,211 | ||||||||||||||
| Europe | 614,826 | 598,558 | 611,014 | ||||||||||||||
| Other | 135,033 | 132,742 | 144,187 | ||||||||||||||
| Total | $ | 3,557,422 | $ | 3,339,281 | $ | 3,500,360 | |||||||||||
Starting July 1, 2020, the Company does not separately disclose 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.
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 consolidated financial assets requiredstatements.
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 fiscal year ended June 30, 2021, which was included in the opening deferred revenue balance as of June 30, 2020 of $203.8 million, was $101.6 million.
Deferred revenue decreased $1.5 million during the fiscal year ended June 30, 2021 as compared to the fiscal year ended June 30, 2020 mainly due to the recognition of revenue from contracts entered into in prior periods exceeding the value of the transaction price allocated for service contract performance obligations during the fiscal year ended June 30, 2021.
Transaction Price Allocated to the Remaining Performance Obligations
68
Remaining performance obligations represent the aggregate the amount of transaction price that is allocated to performance obligations not delivered, or only partially undelivered, as of the end of the reporting period. The Company applies the 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 services, including 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 June 30, 2021 was approximately $202.3 million. The Company expects to recognize approximately 50% 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 measured at fair value on a nonrecurring basis.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.
Note 3.4. Accounts Receivable Allowances
The Company has established an allowance for doubtful accounts and an allowance for sales returns.accounts. The allowance for doubtful accounts is based upon the age of outstanding receivables, credit risk of specific customers, historical trends related to past losses and other relevant factors. The Company also provides its customers with product return rights. A provision for such returns is provided for in the same period that the related sales are recorded based upon contractual return rights and historical trends. Accounts receivable allowances as of June 30, 2017, 20162021, 2020 and 20152019 consisted of the following (in thousands):
| Beginning Balance | Charged to Cost and Expenses (Recovered), net | Write-offs | Ending Balance | ||||||||||||||||||||
| Allowance for doubtful accounts: | |||||||||||||||||||||||
| Year ended June 30, 2021 | $ | 4,586 | $ | (820) | $ | (1,175) | $ | 2,591 | |||||||||||||||
| Year ended June 30, 2020 | 8,906 | (3,081) | (1,239) | 4,586 | |||||||||||||||||||
| Year ended June 30, 2019 | 1,945 | 7,058 | (97) | 8,906 | |||||||||||||||||||
Note 5. Inventories
Inventories as of June 30, 2021 and 2020 consisted of the following (in thousands):
| June 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Finished goods | $ | 761,694 | $ | 656,817 | |||||||
| Work in process | 80,472 | 38,146 | |||||||||
| Purchased parts and raw materials | 198,798 | 156,535 | |||||||||
| Total inventories | $ | 1,040,964 | $ | 851,498 | |||||||
Beginning Balance | Charged to Cost and Expenses | Additions/ (Deductions) | Ending Balance | ||||||||||||
| Allowance for doubtful accounts: | |||||||||||||||
| Year ended June 30, 2017 | $ | 2,033 | $ | 334 | $ | 3 | $ | 2,370 | |||||||
| Year ended June 30, 2016 | 952 | 1,216 | (135 | ) | 2,033 | ||||||||||
| Year ended June 30, 2015 | 1,474 | 80 | (602 | ) | 952 | ||||||||||
| Allowance for sales returns | |||||||||||||||
| Year ended June 30, 2017 | $ | 380 | $ | 1,745 | $ | (1,796 | ) | $ | 329 | ||||||
| Year ended June 30, 2016 | 430 | 2,288 | (2,338 | ) | 380 | ||||||||||
| Year ended June 30, 2015 | 448 | 2,069 | (2,087 | ) | 430 | ||||||||||
69
| June 30, | |||||||
| 2017 | 2016 | ||||||
| Finished goods | $ | 577,345 | $ | 399,776 | |||
| Purchased parts and raw materials | 124,981 | 95,344 | |||||
| Work in process | 34,342 | 21,687 | |||||
| Total inventories | $ | 736,668 | $ | 516,807 | |||
During fiscal years 2017, 20162021, 2020 and 2015,2019, the Company recorded a net provision for excess and obsolete inventory to cost of sales totaling $15.7$6.8 million, $9.4$18.4 million and $5.9$32.9 million, respectively. The Company classifies subsystems and accessories that may be sold separately or incorporated into systems as finished goods.
Note 5.6. Property, Plant, and Equipment
Property, plant and equipment as of June 30, 20172021 and 20162020 consisted of the following (in thousands):
| June 30, | June 30, | |||||||||||||||||
| 2017 | 2016 | 2021 | 2020 | |||||||||||||||
| Buildings | $ | 71,665 | $ | 71,665 | Buildings | $ | 86,930 | $ | 86,930 | |||||||||
| Land | 70,495 | 70,454 | Land | 76,421 | 75,251 | |||||||||||||
| Machinery and equipment | 60,593 | 53,282 | Machinery and equipment | 97,671 | 85,381 | |||||||||||||
| Buildings construction in progress (1) | 24,039 | 15,803 | Buildings construction in progress(1) | 87,438 | 46,311 | |||||||||||||
| Buildings and leasehold improvements | 14,942 | 10,941 | ||||||||||||||||
| Purchased software | 14,576 | 14,452 | ||||||||||||||||
| Building and leasehold improvements | Building and leasehold improvements | 26,640 | 24,517 | |||||||||||||||
| Software | Software | 22,592 | 20,597 | |||||||||||||||
| Furniture and fixtures | 13,353 | 10,364 | Furniture and fixtures | 22,843 | 21,544 | |||||||||||||
| 269,663 | 246,961 | 420,535 | 360,531 | |||||||||||||||
| Accumulated depreciation and amortization | (74,087 | ) | (59,012 | ) | Accumulated depreciation and amortization | (145,822) | (126,746) | |||||||||||
| Property, plant and equipment, net | $ | 195,576 | $ | 187,949 | Property, plant and equipment, net | $ | 274,713 | $ | 233,785 | |||||||||
__________________________
(1) Primarily relates to the development and construction costs associated with the Company’s Green Computing Park located in San Jose, California.California and a new building in Taiwan.
Note 6.7. Prepaid Expenses and Other Assets
Prepaid expenses and other current assets as of June 30, 20172021 and 20162020 consisted of the following (in thousands):
| June 30, | ||||||||||||||||||
| June 30, | 2021 | 2020 | ||||||||||||||||
| 2017 | 2016 | |||||||||||||||||
| Receivables from vendors (1) | $ | 78,656 | $ | 71,470 | ||||||||||||||
Other receivables(1) | Other receivables(1) | $ | 99,921 | $ | 96,669 | |||||||||||||
| Prepaid income tax | Prepaid income tax | 12,288 | 14,323 | |||||||||||||||
| Prepaid expenses | 5,736 | 5,405 | Prepaid expenses | 6,719 | 7,075 | |||||||||||||
| Deferred service costs | 2,910 | 1,451 | Deferred service costs | 4,900 | 4,161 | |||||||||||||
| Restricted cash | Restricted cash | 251 | 250 | |||||||||||||||
| Others | 1,911 | 1,101 | Others | 6,116 | 4,507 | |||||||||||||
| Total prepaid expenses and other current assets | $ | 89,213 | $ | 79,427 | Total prepaid expenses and other current assets | $ | 130,195 | $ | 126,985 | |||||||||
__________________________
(1) Includes other receivables from contract manufacturers based on certain buy-sell arrangements of $73.8$76.2 million and $63.6$83.8 million as of June 30, 20172021 and June 30, 2016,2020, respectively.
70
Other long-term assets as of June 30, 20172021 and 20162020 consisted of the following (in thousands):
| June 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Operating lease right-of-use asset | $ | 20,047 | $ | 23,784 | |||||||
| Deferred service costs, non-current | 5,421 | 4,632 | |||||||||
| Deposits | 1,669 | 1,201 | |||||||||
| Prepaid expense, non-current | 1,973 | 1,576 | |||||||||
| Investment in auction rate security | 1,556 | 1,571 | |||||||||
| Restricted cash, non-current | 932 | 1,607 | |||||||||
| Others | 528 | 128 | |||||||||
| Total other assets | $ | 32,126 | $ | 34,499 | |||||||
| June 30, | |||||||
| 2017 | 2016 | ||||||
| Long-term deferred service costs | $ | 3,253 | $ | 3,497 | |||
| Prepaid software license | 2,593 | 3,870 | |||||
| Restricted cash (1) | 2,191 | 1,851 | |||||
| Cost method investments | 1,529 | 1,881 | |||||
| Prepaid royalty license | 499 | 748 | |||||
| Deposits | 368 | 909 | |||||
| Others | 144 | 129 | |||||
| Total other assets | $ | 10,577 | $ | 12,885 | |||
| June 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash and cash equivalents | $ | 232,266 | $ | 210,533 | |||||||
| Restricted cash included in prepaid expenses and other current assets | 251 | 250 | |||||||||
| Restricted cash included in other assets | 932 | 1,607 | |||||||||
| Total cash, cash equivalents and restricted cash | $ | 233,449 | $ | 212,390 | |||||||
Note 7.8. 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 Chinathe Corporate Venture to expand the Company's presence in China. The Corporate Venture is 30% owned by the Company and 70% owned by another company in China. The transaction was closed in the third fiscal quarter of 2017 and the investment has been accounted for using the equity method. As such, the Corporate Venture is also a related party. As of June 30, 2017, the Company's equity investment in the Corporate Venture was $6.1 million and was recorded under investment in equity investee on the Company's consolidated balance sheet. The Company's share of losses of the Corporate Venture were immaterial for the fiscal year ended June 30, 2017 and were included in other income (expense), net in the Company's consolidated statements of operations.
The Company recorded a deferred gain related to the contribution of certain technology rights of $7.0 million in the third fiscal quarter of 2017. The amortization of the deferred gain is being recognized as a credit to research and development expenses in the Company's consolidated statement of operations over a period of five years which represents the estimated period over which the remaining obligations will be fulfilled.rights. As of June 30, 2017,2021 and 2020, the Company had unamortized deferred gain balance of $1.4$1.0 million and $2.0 million, respectively, in accrued liabilities and $4.9$0.0 million and $1.0 million, respectively, in other long-term liabilities in the Company’s 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 determinedit 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 such third-party parent's related entities and a separate listing for one of its subsidiaries. The Corporate Venture is not itself a restricted party. The Company has concluded that the Corporate Venture is in compliance with the new restrictions. The Company does not believe that the equity investment carrying value is impacted as of June 30, 2021. No impairment charge was recorded for the fiscal yearyears ended June 30, 2017.2021 and 2020.
Note 8.9. Accrued Liabilities
71
| June 30, | |||||||
| 2017 | 2016 | ||||||
| Deferred revenue (1) | $ | 32,957 | $ | 22,731 | |||
| Accrued payroll and related expenses | 19,370 | 15,499 | |||||
| Customer deposits | 14,630 | 8,781 | |||||
| Accrued cooperative marketing expenses | 7,292 | 7,308 | |||||
| Accrued warranty costs | 5,976 | 5,816 | |||||
| Others (2) | 32,599 | 23,461 | |||||
| Total accrued liabilities | $ | 112,824 | $ | 83,596 | |||
| June 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Accrued payroll and related expenses | $ | 45,770 | $ | 33,577 | |||||||
| Contract manufacturers liabilities | 45,319 | 36,249 | |||||||||
| Customer deposits | 32,419 | 9,942 | |||||||||
| Accrued warranty costs | 10,185 | 9,984 | |||||||||
| Operating lease liability | 6,322 | 6,310 | |||||||||
| Accrued cooperative marketing expenses | 5,652 | 5,925 | |||||||||
| Accrued professional fees | 2,737 | 5,661 | |||||||||
| Accrued legal liabilities | — | 18,114 | |||||||||
| Others | 30,446 | 29,639 | |||||||||
| Total accrued liabilities | $ | 178,850 | $ | 155,401 | |||||||
| June 30, | |||||||
| 2017 | 2016 | ||||||
| Line of credit: | |||||||
| Bank of America (1) | $ | 83,199 | $ | 62,199 | |||
| CTBC Bank | 19,000 | 10,100 | |||||
| Total line of credit | 102,199 | 72,299 | |||||
| Term loans: | |||||||
| Bank of America | 40,000 | 933 | |||||
| CTBC Bank | 19,721 | 20,357 | |||||
| Total term loans | 59,721 | 21,290 | |||||
| Total debt | 161,920 | 93,589 | |||||
| Less: debt issuance costs | (473 | ) | — | ||||
| Total debt, net of debt issuance costs | 161,447 | 93,589 | |||||
| Current portion, net of debt issuance costs | (161,447 | ) | (53,589 | ) | |||
| Long-term portion, net of debt issuance costs | $ | — | $ | 40,000 | |||
The Chief Executive Officer’s aggregate cash bonuses of credit was refinancedup to a five-year term loan$8.1 million are earned in 2 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. 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. During the fiscal year ended June 30, 2021, the target average closing prices for both tranches were met but no determination has been made if there has been adequate progress in remediating the Company’s internal weaknesses in its internal control over financial reporting. The cash payment under the new credit agreement with Bank of America and $40.0 million was reclassified to long-term debtsecond tranche has been made as of June 30, 2016.2021, but no cash payment had been made for the first tranche as the Board has to approve this payment.
72
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
cash payment value. As of June 30, 20172021, the full cash value of the bonuses were paid, except the Chief Executive Officer's first tranche performance bonus which was recorded as an accrued liability on the Company's consolidated balance sheet. The Company has completed the remediation of its material weaknesses in its internal control over financial reporting, and 2016,anticipates that the total outstanding borrowings underBoard will conclude that there has been adequate progress in remediating the 2016 Bank of America Credit Facility term loans was $40.0 million and $0.9 million, respectively. The total outstanding borrowings under the 2016 Bank of America Credit Facility revolving lines of credit was $83.2 million and $62.2 millionCompany's material weaknesses in its internal control over financial reporting by October 31, 2021. Therefore, as of June 30, 20172021, the Company trued up the accrued liability for the Chief Executive Officer’s first tranche award to the expected payable amount vested through the period end and 2016, respectively. The interest rates forthe unrecognized cash value will be recorded over the remaining service period.
Based on the cash payment value and estimated fair value of these loans ranged from 1.61% to 2.46% per annumperformance bonuses as of June 30, 20172021 and from 1.02% to 1.96% per annumJune 30, 2020, the Company recorded a $3.6 million and $2.1 million liability, respectively, of which $3.6 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 $0.5 million will be recorded over the remaining service periods of 0.18 years. The expense recognized during fiscal years 2021 and 2020 was $5.8 million and $2.1 million, respectively.
Note 10. Short-term and Long-term Debt
Short-term and long-term debt obligations as of June 30, 2016, respectively. As of June 30, 2017, the amount2021 and 2020 consisted of the unused revolving linesfollowing (in thousands):
| June 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Line of credit: | |||||||||||
| CTBC Bank | $ | 18,000 | $ | — | |||||||
| E.SUN Bank | 20,400 | — | |||||||||
| Total line of credit | 38,400 | — | |||||||||
| Term loans: | |||||||||||
| CTBC Bank, due August 31, 2021 | 25,090 | 23,704 | |||||||||
| CTBC Bank, due June 4, 2030 | 34,700 | 5,697 | |||||||||
| Total term loans | 59,790 | 29,401 | |||||||||
| Total debt | 98,190 | 29,401 | |||||||||
| Short-term debt and current portion of long-term debt | 63,490 | 23,704 | |||||||||
| Debt, Non-current | $ | 34,700 | $ | 5,697 | |||||||
Activities under Revolving Lines of credit with Credit and Term Loans
Bank of America under the credit agreements was $21.8 million. As of June 30, 2017, assets amounting to $1,168.6 million collateralized the line of credit with Bank of America under the credit agreement, which represent the total assets of the United States headquarters of the Company, except for seven buildings located in San Jose, California and property, plant and equipment and inventory in those buildings. As of June 30, 2017, total assets collateralizing the term loan with Bank of America under the credit agreement were $67.9 million.
2018 Bank of America Credit Facility
In April 2018, the Company entered into a revolving line of credit with Bank of America for up to $250.0 million (as amended from time to time, the "2018 Bank of America Credit Facility"). On June 28, 2021, the 2018 Bank of America Credit Facility which replacedwas amended to, among other items, extend the 2016 Bankmaturity to June 28, 2026, reduce the size of America Credit Facility. The 2018 Bank of America Credit Facility provides for a revolving credit line and other financial accommodations of up tothe facility from $250.0 million extended by certain lenders. The 2018 Bank of America Credit Facility expires after 364 days, or atto $200.0 million, increase the option ofmaximum amount that the Company can request the facility be increased (the accordion feature) from $100.0 million to $150.0 million, and if certain conditions are satisfied, includingupdate provisions relating to erroneous payments and LIBOR replacement mechanics. In addition, the Company being current on all of its delinquent quarterlyamendment reduced both the unused line fee from 0.375% per annum to 0.2% or 0.3% per annum (depending upon amount drawn under the facility) and annual filings with the SEC, may convert into a 5-year revolving credit facility. If and upon such conversion, the lenders for the 2018 Bank of America Credit Facility shall extend, in aggregate, a principal amount of up to $400.0 million. Priorinterest rate applicable to the 2018 Bankfacility from LIBOR plus 2.00% or 3.00% per annum (depending upon amount drawn under the facility) to LIBOR plus 1.375% or 1.625% per annum.
73
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The amendment was accounted for as a modification and the impact was immaterial to the 5-year revolving credit facility, interest shall be at the LIBOR rate plus 2.75% per annum. Upon the 2018 Bank of America Credit Facility converting to the 5-year revolving credit facility, interest shall accrue at the LIBOR rate plus an amount between 1.50% and 2.00% for loans to both Super Micro Computer and Super Micro Computer B.V..consolidated financial statements. Interest accrued on any loans under the 2018 Bank of America Credit Facility is due on the first day of each month, and the loans are due and payable in full on the termination date of the 2018 Bank of America Credit Facility, unless payment is required earlier.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. Upon conversion to the 5-year revolving credit facility Super Micro Computer’s assets, and at the Company's option, Super Micro Computer B.V.'s assets will be used as collateral.other than real property assets. Under the terms of the 2018 Bank of America Credit Facility, the Company cannotis not permitted to pay any dividends.
As of June 30, 2021 and entered into an amendment2020, 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 that resulted in the extensionas of the maturity dateJune 30, 2021 and 2020 were 1.50% and 3.00%, respectively. In October 2018, a $3.2 million letter of credit was issued under the 2018 Bank of America Credit Facility from April 19,and in October 2019, the letter of credit amount was increased to $6.4 million. No amount was drawn under the standby letter of credit. In May 2021, the letter of credit was cancelled. The balance of debt issuance costs outstanding were $0.5 million and $0.6 million as of June 30, 2019.2021 and 2020, respectively. The Company has been in compliance with all the covenants under the 2018 Bank of America Credit Facility, and as of June 30, 2021, the Company's available borrowing capacity was $200.0 million, subject to the borrowing base limitation and compliance with other applicable terms.
CTBC Bank
CTBC Credit Facility
In April 2016,June 2019, the Company entered into a credit agreement with CTBC Bank, Co., Ltd ("CTBC Bank") that provides for (i) a 12-month NTD$700.0 million or $21.6 million U.S. dollar equivalent term loan facility secured by the land and building located in Bade, Taiwan with an interest rate equal to the lender's established NTD interest rate plus 0.25% per annum which was adjusted monthly, which term loan facility also included a 12-month line of guarantee up to NTD$100.0 million or $3.1 million U.S. dollar equivalent with an annual fee equal to 0.5% per annum, and (ii) a 12-month revolving line of credit up to 80.0% of eligible accounts receivableamended in an aggregate amount of up to $40.0 million with an interest rate equal to the lender's established USD interest rate plus 0.30% per annum which was adjusted monthlyAugust 2020, (collectively, the “CTBC"CTBC Credit Facility”Facility"). The total borrowings allowed under the CTBC Credit Facility was capped at $40.0 million. The Company extended the CTBC Credit Facility to mature on May 31, 2017.
The total outstanding borrowings under the maturity of 2018 CTBC Credit Facility toterm loan were denominated in NTD and remeasured into U.S. dollars of $25.1 million and $23.7 million at June30, 2019.
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 2016 Bankprogress of America Creditthe renovations. Borrowings under the 2020 CTBC Term Loan Facility contained customary representationsare available through June 2022. The Company is required to pay against total outstanding principal and warrantiesinterest in equal monthly installments starting June 2023 and customary affirmative and negative covenants applicable tocontinuing through the Company and its subsidiaries. The credit agreement contained certain financial covenants, includingmaturity date of June 2030. Interest under the following:2020 CTBC Term Loan Facility is the two-year term
74
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 Consolidated Leverage Ratio,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, as ofto be maintained at certain levels under the end of any fiscal quarter, measured for the most recently completed twelve (12) months of the Company, shall not be greater than 2.00; and2020 CTBC Term Loan Facility.
As of June 30, 2017,2021 and 2020, the amounts outstanding under the 2020 CTBC Term Loan Facility were $34.7 million and $5.7 million, respectively. The interest rates for these loans were 0.45% per annum as of June 30, 2021 and June 30, 2020. The net book value of the property serving as collateral as of June 30, 2021 was $45.9 million. As of June 30, 2021, the Company was in compliance with the above statedall financial covenants associated with the term loan and lines of credit with Bank of America under the credit agreement.2020 CTBC Term Loan Facility.
2021 CTBC Credit Lines
On October 28, 2017, Bank of America issued an extension letter to the Company that extended the date by which the Company was obligated to deliver its audited consolidated financial statements and compliance certificate for the fiscal year ended June 30, 2017 from October 28, 2017 to January 15, 2018. On January 12, 2018, Bank of America issued another extension letter to the Company that extended the date by which the Company was obligated to deliver (i) its audited consolidated financial statements and compliance certificate for the fiscal year ended June 30, 2017 from January 15, 2018 to March 13, 2018 and (ii) its unaudited condensed consolidated financial statements and compliance certificate for the fiscal quarters ended September 30, 2017 and December 31, 2017 to March 13, 2018.
E.SUN Bank Credit Facility
In December 2020, Super Micro Computer Inc, Taiwan, a wholly-owned Taiwan subsidiary of the Company, entered into a General Credit Agreement (the “E.SUN Credit Facility”) with E.SUN Bank in Taiwan. The E.SUN Credit Facility provides for the issuance of loans, advances, acceptances, bills, bank guarantees, overdrafts, letters of credit, and other types of drawdown instruments up to a credit limit of $30.0 million. The E.SUN Credit Facility expires on September 18, 2021.
Generally, the interest for base rate loans made under the E.SUN Credit Facility is based upon an amendmentaverage interbank overnight call loan rate in the finance industry (such as LIBOR or TAIFX) plus a fixed margin, and is subject to occasional adjustment.Interest for adjustable loan rate loans made under the E.SUN Credit Facility is based upon an average one-year fixed rate time saving deposit rate of a selected reference bank which shall be a well-known domestic bank in Taiwan, and is subject to occasional adjustment. The E.SUN Credit Facility has customary default provisions permitting E.SUN Bank to terminate or reduce the credit limit, shorten the credit period, or deem all liabilities due and payable, including in the event such Taiwan subsidiary of the loan and security agreement with respect to the 2018 Bank of America Credit Facility to, among other matters, (a) extend the delivery date of the Company’s audited consolidatedCompany has an overdue liability at another financial statements, compliance certificates and other material reports for the fiscal year ended June 30, 2018 to June 30, 2019, and (b) require the delivery, by no later than March 31, 2019 of the Company’s audited consolidated financial statements for the fiscal year ended June 30, 2017. In April 2019, the Company paid a fee to extend the delivery of its audited consolidated financial statements for the fiscal year ended June 30, 2017 to June 30, 2019. The Company intends to negotiate the further extension for delivery of the Company’s audited consolidated financial statements, compliance certificates and other material reports for the fiscal year ended June 30, 2018.
organization. There are no financial covenants associated with the CTBCE.SUN Credit Facility.
Terms for specific drawdown instruments issued under the E.SUN Credit Facility, such as credit amount, term of use, mode of drawdown, specific lending rate, and other relevant terms, are to be set forth in Notifications and Confirmation of Credit Conditions by and between the Company and E.SUN Bank. A Notification and Confirmation of Credit Conditions agreement under the E.SUN Credit Facility was entered into on December 2, 2020 for a $30.0 million import loan (the “Import Loan”) with a tenor of 120 days. In June 2021, the Import Loan was amended to, among other items, bearing interest at a rate based on the higher of LIBOR plus 1.00% then divided by 0.946 or TAIFX plus 0.80% then divided by 0.946. As of June 30, 2021, the 2018 CTBCamounts outstanding under the E.SUN Credit Facility.Facility was $20.4 million and the interest rates for these loans ranged from approximately 1.0% to 1.29% per annum. As of June 30, 2021, the amount available for future borrowing under the E.SUN Credit Facility was $9.6 million.
Principal payments on short-term and long-term debt obligations are due as follows (in thousands):
75
| Fiscal Year: | Principal Payments | ||||
| 2022 | $ | 63,490 | |||
| 2023 | 413 | ||||
| 2024 | 4,957 | ||||
| 2025 | 4,957 | ||||
| 2026 | 4,957 | ||||
| 2027 and thereafter | 19,416 | ||||
| Total short-term and long-term debt | $ | 98,190 | |||
Note 10. 11. Other Long-term Liabilities
Other long-term liabilities as of June 30, 20172021 and 20162020 consisted of the following (in thousands):
| June 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Accrued unrecognized tax benefits including related interest and penalties | $ | 17,841 | $ | 15,496 | |||||||
| Operating lease liability, non-current | 14,539 | 18,102 | |||||||||
| Accrued warranty costs, non-current | 2,678 | 2,395 | |||||||||
| Others | 6,074 | 6,002 | |||||||||
| Total other long-term liabilities | $ | 41,132 | $ | 41,995 | |||||||
Note 12. 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 years ended June 30, 2021 and 2020 were as follows (in thousands):
| Years Ended June 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Operating lease expense (including expense for lease agreements with related parties of $1,319 and $1,421 for the years ended June 30, 2021 and 2020, respectively) | $ | 7,827 | $ | 6,993 | |||||||
| Cash payments for operating leases (including payments to related parties of $1,351 and $1,443 for the years ended June 30, 2021 and 2020, respectively) | 7,966 | 6,411 | |||||||||
| New operating lease assets obtained in exchange for operating lease liabilities | 3,538 | 15,229 | |||||||||
During the years ended June 30, 2021 and 2020, the Company's costs related to short-term lease arrangements for real estate and non-real estate assets were immaterial. Non-lease variable payments expensed in the years ended June 30, 2021, 2020 and 2019 were $1.8 million, $1.3 million and $0.0 million, respectively.
As of June 30, 2021, the weighted average remaining lease term for operating leases was 3.8 years and the weighted average discount rate was 3.4%. Maturities of operating lease liabilities under noncancelable operating lease arrangements as of June 30, 2021 were as follows (in thousands):
76
| Fiscal Year: | Maturities of operating leases | |||||||
| 2022 | $ | 6,932 | ||||||
| 2023 | 5,430 | |||||||
| 2024 | 4,538 | |||||||
| 2025 | 4,382 | |||||||
| 2026 and beyond | 1,017 | |||||||
| Total future lease payments | $ | 22,299 | ||||||
| Less: Imputed interest | (1,438) | |||||||
| Present value of operating lease liabilities | $ | 20,861 | ||||||
| June 30, | |||||||
| 2017 | 2016 | ||||||
| Deferred revenue, non-current (1) | $ | 47,548 | $ | 26,538 | |||
| Accrued unrecognized tax benefits including related interest and penalties, non-current | 13,285 | 16,056 | |||||
| Accrued warranty, non-current | 1,745 | 1,313 | |||||
| Others (2) | 6,176 | 1,293 | |||||
| Total other long-term liabilities | $ | 68,754 | $ | 45,200 | |||
Note 11.13. 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 of Directors. As of June 30, 2017, AblecomBoard. Steve Liang and his family members owned approximately 0.4%28.8% of the Company’s common stock. As of June 30, 2017,Ablecom’s stock and Charles Liang and his spouse, Sara Liu, who is also an officer and director of the Company, togethercollectively owned approximately 10.5% of Ablecom’s capital stock. Certain family members of Yih-Shyan (Wally) Liaw, who until January 2018 was the Senior Vice President of International Sales and a director of the Company, owned approximately 11.7% of Ablecom’s capital stock as of June 30, 2017. The Company does not own, nor has it ever owned, any of Ablecom’s capital stock. Steve Liang and other Liang family members, including other brothers of Charles Liang, own approximately 36.0% of Ablecom’s stock.2021. Bill Liang, a brother of both Charles Liang and Steve Liang, also is a member of the Board of Directors of Ablecom.
Bill Liang is also the Chief Executive Officer of Compuware, a member of Compuware’s Board of Directors and a holder of a significant equity interest in Compuware. Steve Liang is also a member of Compuware’s Board of Directors and is an equity holder of Compuware. None of the Company, Charles Liang or Sara Liu do not own any capital stock of Compuware.Compuware and the Company does not own any of Ablecom or Compuware's capital stock.
Dealings with Ablecom
The Company has entered into a series of agreements with Ablecom, including multiple product development, production and service agreements, product manufacturing agreements, manufacturing services agreements and lease agreements for warehouse space.
Under these agreements, the Company outsources to Ablecom a portion of its design activities and a significant part of its server chassis manufacturing as well as an immaterial portion of components, particularly server chassis.other components. Ablecom manufactured approximately 95%91.8%, 95.5% and 96%96.3% of the chassis included in the products sold by the Company during fiscal years 20172021, 2020 and 2016,2019, respectively. With respect to design activities, Ablecom generally agrees to design certain agreed-upon products according to the Company’s specifications, and further agrees to build the tools needed to manufacture the products. The Company pays Ablecom for the design and engineering services, and further agrees to pay Ablecom for the tooling. The Company retains full ownership of any intellectual property resulting from the design of these products and tooling.
With respect to the manufacturing aspects of the relationship, Ablecom purchases most of materials needed to manufacture the chassis from outside marketsthird parties and the Company provides certain components used in the manufacturing process (such as power supplies) to Ablecom through consignment or sales transactions. Ablecom uses these materials and components to manufacture the completed chassis and then sell them back to the Company. For the components purchased from the Company, Ablecom sells the components back to the Company at a price equal to the price at which the Company sold the components to Ablecom. The Company and Ablecom frequently review and negotiate the prices of the chassis the Company purchases from Ablecom. In addition to inventory purchases, the Company also incurs other costs associated with design services, tooling and other miscellaneous costs from Ablecom.
77
The Company’s exposure to financial loss as a result of its involvement with Ablecom is limited to potential losses on its purchase orders in the event of an unforeseen decline in the market price and/or demand of the Company’s products such that the Company incurs a loss on the sale or cannot sell the products. Outstanding purchase orders from the Company to Ablecom were $23.5$40.2 million and $22.8$23.2 million at June 30, 20172021 and 2016,2020, respectively, representing the maximum exposure to financial loss. The Company does not directly or indirectly guarantee any obligations of Ablecom, or any losses that the equity holders of Ablecom may suffer. Since Ablecom manufactures substantially all the chassis that the Company incorporates into its products, if Ablecom were to suddenly be unable to manufacture chassis for the Company, the Company’s business could suffer if the Company is unable to quickly qualify substitute suppliers who can supply high-quality chassis to the Company in volume and at acceptable prices.
Dealings with Compuware
The Company has entered into a distribution agreement with Compuware, under which the Company appointed Compuware as a non-exclusive distributor of the Company’s products in Taiwan, China and Australia. Compuware assumes the responsibility to install the Company's products at the site of the end customer, if required, and administers customer support in exchange for a discount from the Company's standard price for its purchases.
The Company also has entered into a series of agreements with Compuware, including a multiple product development, production and service agreements, product manufacturing agreements, and lease agreements for office space.
Under these agreements, the Company outsources to Compuware a portion of its design activities and a significant part of its power supplies manufacturing as well as an immaterial portion of components, particularly power supplies.other components. With respect to design activities, Compuware generally agrees to design certain agreed-upon products according to the Company’s specifications, and further agrees to build the tools needed to manufacture the products. The Company pays Compuware for the design and engineering services, and further agrees to pay Compuware for the tooling. The Company retains full ownership of any intellectual property resulting from the design of these products and tooling. With respect to the manufacturing aspects of the relationship, Compuware purchases most of materials needed to manufacture the power supplies from outside markets and uses these materials to manufacture the products and then sell those products to the Company. The Company and Compuware frequently review and negotiate the prices of the power supplies the Company purchases from Compuware.
Compuware also manufactures motherboards, backplanes and other components used on printed circuit boards for the Company. The Company sells to Compuware most of the components needed to manufacture the above products. Compuware uses the components to manufacture the products and then sells the products back to the Company at a purchase price equal to the price at which the Company sold the components to Compuware, plus a “manufacturing value added” fee and other miscellaneous material charges and costs. The Company and Compuware frequently review and negotiate the amount of the “manufacturing value added” fee that will be included in the price of the products the Company purchases from Compuware. In addition to the inventory purchases, the Company also incurs costs associated with design services, tooling assets, and miscellaneous costs.
The Company’s exposure to financial loss as a result of its involvement with Compuware is limited to potential losses on its purchase orders in the event of an unforeseen decline in the market price and/or demand of the Company’s products such that the Company incurs a loss on the sale or cannot sell the products. Outstanding purchase orders from the Company to Compuware were $56.4$71.0 million and $40.0$45.7 million at June 30, 20172021 and 2016,2020, respectively, representing the maximum exposure to financial loss. The Company does not directly or indirectly guarantee any obligations of Compuware, or any losses that the equity holders of Compuware may suffer.
The Company’s results from transactions with Ablecom and Compuware for each of the fiscal years ended June 30, 2017, 2016,2021, 2020 and 20152019 are as follows (in thousands):
78
| Years Ended June 30, | Years Ended June 30, | |||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2021 | 2020 | 2019 | |||||||||||||||||||||||
| Ablecom | Ablecom | |||||||||||||||||||||||||||
| Net sales | $ | 7 | $ | 57 | $ | 60 | ||||||||||||||||||||||
| Purchases (1) | 123,734 | 125,537 | 127,967 | Purchases(1) | $ | 130,852 | $ | 160,084 | $ | 145,273 | ||||||||||||||||||
| Compuware | Compuware | |||||||||||||||||||||||||||
| Net sales | 22,959 | 29,053 | 47,624 | Net sales | $ | 27,865 | $ | 23,867 | $ | 17,651 | ||||||||||||||||||
| Purchases (1) | 118,912 | 126,051 | 105,362 | Purchases(1) | 115,213 | 131,763 | 139,579 | |||||||||||||||||||||
__________________________
(1) Includes principally purchases of inventory and other miscellaneous items.
The Company's net sales to Ablecom were not material for the fiscal years ended June 30, 2021, 2020 and 2019.
The Company had the following balances related to transactions with Ablecom and Compuware as of June 30, 20172021 and 20162020 (in thousands):
| June 30, | |||||||
| 2017 | 2016 | ||||||
| Ablecom | |||||||
| Accounts receivable and other receivables | $ | 5,556 | $ | 6,017 | |||
| Accounts payable and accrued liabilities | 30,762 | 29,788 | |||||
| Compuware | |||||||
| Accounts receivable and other receivables | 7,908 | 3,654 | |||||
| Accounts payable and accrued liabilities | 32,216 | 20,507 | |||||
| June 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Ablecom | |||||||||||
Accounts receivable and other receivables(1) | $ | 5,577 | $ | 6,379 | |||||||
Accounts payable and accrued liabilities(2) | 41,194 | 40,056 | |||||||||
Other long-term liabilities(3) | — | 513 | |||||||||
| Compuware | |||||||||||
Accounts receivable and other receivables(1) | 18,371 | 14,323 | |||||||||
Accounts payable and accrued liabilities(2) | 46,430 | 46,518 | |||||||||
Other long-term liabilities(3) | — | 186 | |||||||||
__________________________
(2) Includes current portion of operating lease liabilities included in other current liabilities.
(3) Represents non-current portion of operating lease liabilities.
The Company procures certain semiconductor products from Monolithic Power Systems, Inc. (“MPS”), a fabless manufacturer of high-performance analog and mixed-signal semiconductors, for use in its products. Saria Tseng, who serves as a member on the Board of Directors, also serves as Vice President of Strategic Corporate Development, General Counsel and Secretary of MPS. The Company entered into agreements pursuantpurchased $3.9 million, $5.2 million and $3.7 million of semiconductor products from MPS for use in its manufacturing process during the years ended June 30, 2021, 2020 and 2019, respectively. The amounts due to which the Company contributed certain technology rights in connection with an investment in the Corporate Venture, which is accounted for using the equity method. MPS as of June 30, 2021 and 2020 were not material.
See Note 7,8, "Investment in a Corporate Venture" for a discussion of the investment and the transactions that took place duringand balances in the fiscal year 2017.Company's Corporate Venture.
Note 12.14. Stock-based Compensation and Stockholders’ Equity
Equity Incentive Plan
79
Under the 2020 Plan, the Company can grant stock options, stock appreciation rights, restricted stock, RSUsrestricted stock units, performance shares, performance units, dividend equivalents, and certain other equity-based awards.awards, including those denominated or payable in, or otherwise based on, the Company’s common stock. The 2016 Plan was approved by the stockholders of the Company and became effective on March 8, 2016. As of the date the 2016 Plan became effective, 8,696,444 shares of common stock were reserved for outstanding awards under the Company's 2006 Equity Incentive Plan (the "2006 Plan"). Such awards remained outstanding under the 2006 Plan following the adoption of the 2016 Plan, although no further awards will be granted under the 2006 Plan. Up to 2,800,000 shares subject to awards that remained outstanding under the 2006 Plan but that are forfeited in the future will become available for use under the 2016 Plan. In addition, 1,153,412 shares of common stock originally reserved for issuance under the 2006 Plan were cancelled upon the adoption of the 2016 Plan. Under the 2016 Plan, the exercise price per share for incentive stock options granted to employees owning shares representing more than 10% of the CompanyCompany's outstanding voting stock at the time of grant cannot be less than 110% of the fair value of the underlying shareshares on the grant date. Nonqualified stock options and incentive stock options granted to all other persons shall beare granted at a price not less than 100% of the fair value. Options generally expire ten years
after the date of grant. Stock options and RSUs generally vest over four years; 25% at the end of one year and one sixteenth per quarter thereafter.
As of June 30, 2017,2021, the Company had 2,785,7922,730,277 authorized shares available for future issuance under the 20162020 Plan.
Common Stock Repurchase and Retirement
On August 9, 2020, the Board approved a share repurchase program to repurchase up to an aggregate of $30.0 million of the Company's common stock at market prices. The program was effective until December 31, 2020 or if earlier, until the maximum amount of common stock is repurchased. During the three months ended September 30, 2020, 1,142,294 shares of common stock were repurchased for $30.0 million and the program ended. Repurchased shares were recorded as treasury shares in the Company's condensed consolidated balance sheet as of September 30, 2020.
On December 11, 2020, the Company retired 2,475,419 shares of common stock, which were recorded as treasury stock in the Company's condensed consolidated balance sheet as of September 30, 2020.
On October 31, 2020, the Board approved a share repurchase program to repurchase up to an aggregate of $50.0 million of the Company's common stock at market prices. The program was effective until October 31, 2021 or if earlier, until the maximum amount of common stock was repurchased. As of March 31, 2021, 1,675,746 shares of common stock were repurchased and retired for an aggregate $50.0 million and the program ended.
On January 29, 2021, a duly authorized subcommittee of the Board approved a share repurchase program to repurchase up to an aggregate of $200.0 million of the Company's common stock at market prices. The program is effective until July 31, 2022 or if earlier, until the maximum amount of common stock is repurchased. 1,391,171 shares of common stock were repurchased and retired for an aggregate $50.0 million as of June 30, 2021.
During the fiscal year ended June 30, 2021, the Company repurchased and retired 4,209,211 shares of common stock for an aggregated $130.0 million. Additionally, the Company retired 1,333,125 shares of common stock repurchased in prior years.
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 formula and a single option award approach.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 a combination of the Company's peer group and the Company's historical experience.
Expected Volatility—Expected volatility is based on a combination of the Company's implied and historical volatility.
Expected Dividend—The Black-Scholes valuation model calls for a single expected dividend yield as an input and the Company has no plans to pay dividends.
Risk-Free Interest Rate—The risk-free interest rate used in the Black-Scholes valuation method is based on the United States Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of option.
The fair value of stock option grants for the fiscal years ended June 30, 2017, 20162021, 2020 and 20152019 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
80
| Years Ended June 30, | Years Ended June 30, | |||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2021 | 2020 | 2019 | |||||||||||||||||||||||
| Risk-free interest rate | 1.12% - 2.03% | 1.37% - 1.57% | 1.35% - 1.76% | Risk-free interest rate | 0.27% - 1.09% | 0.47% - 1.72% | 2.32% - 2.97% | |||||||||||||||||||||
| Expected term | 5.31 - 5.38 years | 5.31 - 5.33 years | 5.40 - 5.44 years | Expected term | 5.98 years | 6.27 years | 6.05 years | |||||||||||||||||||||
| Dividend yield | — | % | — | % | — | % | Dividend yield | — | % | — | % | — | % | |||||||||||||||
| Volatility | 43.36% - 49.64% | 46.65% - 50.89% | 46.93% - 49.31% | Volatility | 50.03% - 50.43% | 49.61% - 50.46% | 47.34% - 50.28% | |||||||||||||||||||||
| Weighted-average fair value | $ | 10.71 | $ | 12.07 | $ | 12.72 | Weighted-average fair value | $ | 14.92 | $ | 9.59 | $ | 9.25 | |||||||||||||||
The following table shows total stock-based compensation expense included in the consolidated statements of operations for the fiscal years ended June 30, 2017, 20162021, 2020 and 20152019 (in thousands):
| Years Ended June 30, | Years Ended June 30, | |||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2021 | 2020 | 2019 | |||||||||||||||||||||||
| Cost of sales | $ | 1,382 | $ | 1,157 | $ | 962 | Cost of sales | $ | 1,762 | $ | 1,504 | $ | 1,663 | |||||||||||||||
| Research and development | 12,559 | 10,651 | 9,195 | Research and development | 14,030 | 12,202 | 12,981 | |||||||||||||||||||||
| Sales and marketing | 2,144 | 1,934 | 1,601 | Sales and marketing | 2,022 | 1,680 | 1,805 | |||||||||||||||||||||
| General and administrative | 3,580 | 3,188 | 2,678 | General and administrative | 10,735 | 4,803 | 4,735 | |||||||||||||||||||||
| Stock-based compensation expense before taxes | 19,665 | 16,930 | 14,436 | Stock-based compensation expense before taxes | 28,549 | 20,189 | 21,184 | |||||||||||||||||||||
| Income tax impact | (5,946 | ) | (4,767 | ) | (4,247 | ) | Income tax impact | (8,574) | (6,814) | (4,349) | ||||||||||||||||||
| Stock-based compensation expense, net | $ | 13,719 | $ | 12,163 | $ | 10,189 | Stock-based compensation expense, net | $ | 19,975 | $ | 13,375 | $ | 16,835 | |||||||||||||||
As of June 30, 2017, $9.82021, $8.4 million of unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 2.214 years, and $27.2$45.1 million of unrecognized compensation cost related to unvested RSUs is expected to be recognized over a weighted-average period of 2.722.73 years and $0.1 million of unrecognized compensation cost related to unvested PRSUs is expected to be recognized over a period of 0.36 year. Additionally, as described below, $10.5 million of unrecognized compensation cost related to the 2021 CEO Performance Stock Option is expected to be recognized over a period of 5 years.
Stock Option Activity
In March 2021, the Company’s Compensation Committee of the Board of Directors (the “Compensation Committee”) approved the grant of a stock option award for 1,000,000 shares of common stock to the Company’s CEO (the “2021 CEO Performance Stock Option”). The 2021 CEO Performance Stock Option has 5 vesting tranches with a vesting schedule based entirely on the attainment of operational milestones (performance conditions) and market conditions, assuming (1) continued employment either as the CEO or in such capacity as agreed upon between the Company’s CEO and the Board and (2) service through each vesting date. Each of the 5 vesting tranches of the 2021 CEO Performance Stock Option will vest upon certification by the Compensation Committee that both (i) the market price milestone for such tranche, which begins at $45.00 per share for the first tranche and increases up to $120.00 per share thereafter (based on a 60 calendar day average, counting only trading days), has been achieved, and (ii) any one of 5 operational milestones focused on total revenue, as reported under U.S. GAAP, have been achieved for the previous 4 consecutive fiscal quarters. Upon vesting and exercise, including the payment of the exercise price of $45.00 per share, prior to March 2, 2024, the Company’s CEO must hold shares that he acquires until March 2, 2024, other than those shares sold pursuant to a cashless exercise where shares are simultaneously sold to pay for the exercise price and any required tax withholding.
The achievement status of the operational and stock price milestones as of June 30, 2021 was as follows:
| Annualized Revenue Milestone | Achievement Status | Stock Price Milestone | Achievement Status | ||||||||||||||
| (in billions) | |||||||||||||||||
81
| $4.0 | Probable | $45 | Not met | ||||||||||||||
| $4.8 | Probable | $60 | Not met | ||||||||||||||
| $5.8 | Probable | $75 | Not met | ||||||||||||||
| $6.8 | Probable | $95 | Not met | ||||||||||||||
| $8.0 | — | $120 | Not met | ||||||||||||||
On the grant date, a Monte Carlo simulation was used to determine for each tranche (i) a fixed expense amount for such tranche and (ii) the future time when the market price milestone for such tranche was expected to be achieved, or its “expected market price milestone achievement time.” Separately, based on a subjective assessment of the Company’s future financial performance, each quarter, the Company will determine whether achievement is probable for each operational milestone that has not previously been achieved or deemed probable of achievement, and, if so, the future time when the Company expects to achieve that operational milestone, or its “expected operational milestone achievement time.” When the Company first determines that an operational milestone has become probable of being achieved, the Company will allocate the entire expense for the related tranche over the number of quarters between the grant date and the then-applicable “expected vesting time.” The “expected vesting time” at any given time is the later of (i) the expected operational milestone achievement time (if the related operational milestone has not yet been achieved) and (ii) the expected market price milestone achievement time (if the related market price milestone has not yet been achieved). The Company will immediately recognize a catch-up expense for all accumulated expenses from the grant date through the quarter in which the operational milestone was first deemed probable of being achieved. Each quarter thereafter, the Company will recognize the prorated portion of the then-remaining expense for the tranche based on the number of quarters between such quarter and the then-applicable expected vesting time, except that upon vesting of a tranche, all remaining expenses for that tranche will be immediately recognized.
During the fiscal year ended June 30, 2021, the Company recognized compensation expense related to the 2021 CEO Performance Stock Option of $1.1 million. As of June 30, 2021, $10.5 million in unrecognized compensation cost related to the 2021 CEO Performance Stock Option is expected to be recognized over a period of 5 years.
The following table summarizes stock option activity during the fiscal years ended June 30, 2017, 20162021, 2020 and 20152019 under all plans:
| Options Outstanding | Weighted Average Exercise Price per Share | Weighted Average Remaining Contractual Term (in Years) | Aggregate Intrinsic Value (in thousands) | |||||||||||||||||||||||
| Balance as of June 30, 2018 | 8,301,138 | $ | 16.50 | |||||||||||||||||||||||
| Granted | 434,320 | $ | 18.58 | |||||||||||||||||||||||
| Forfeited/Cancelled | (1,360,823) | $ | 8.94 | |||||||||||||||||||||||
| Balance as of June 30, 2019 | 7,374,635 | $ | 18.02 | |||||||||||||||||||||||
| Granted | 273,260 | $ | 19.61 | |||||||||||||||||||||||
| Exercised | (1,812,000) | $ | 15.74 | |||||||||||||||||||||||
| Forfeited/Cancelled | (456,127) | $ | 11.97 | |||||||||||||||||||||||
| Balance as of June 30, 2020 | 5,379,768 | $ | 19.38 | |||||||||||||||||||||||
| Granted | 1,517,110 | $ | 40.49 | |||||||||||||||||||||||
| Exercised | (1,645,800) | $ | 17.25 | |||||||||||||||||||||||
| Forfeited/Cancelled | (75,524) | $ | 24.43 | |||||||||||||||||||||||
| Balance as of June 30, 2021 | 5,175,554 | $ | 26.17 | 5.36 | $ | 57,099 | ||||||||||||||||||||
| Options vested and exercisable at June 30, 2021 | 3,448,888 | $ | 20.47 | 3.41 | $ | 50,887 | ||||||||||||||||||||
82
Options Outstanding | Weighted Average Exercise Price per Share | Weighted Average Remaining Contractual Term (in Years) | Aggregate Intrinsic Value (in thousands) | ||||||||||
| Balance as of June 30, 2014 (7,558,631 shares exercisable at weighted average exercise price of $11.05 per share) | 10,905,602 | $ | 12.24 | ||||||||||
| Granted (weighted average fair value of $12.72) | 1,093,920 | 28.28 | |||||||||||
| Exercised | (2,124,401 | ) | 10.99 | ||||||||||
| Forfeited | (172,278 | ) | 18.68 | ||||||||||
| Balance as of June 30, 2015 (7,208,475 shares exercisable at weighted average exercise price of $12.24 per share) | 9,702,843 | 14.21 | |||||||||||
| Granted (weighted average fair value of $12.07) | 316,580 | 26.86 | |||||||||||
| Exercised | (1,013,430 | ) | 12.03 | ||||||||||
| Forfeited | (45,126 | ) | 19.45 | ||||||||||
| Balance as of June 30, 2016 (7,495,131 shares exercisable at weighted average exercise price of $13.35 per share) | 8,960,867 | 14.88 | |||||||||||
| Granted (weighted average fair value of $10.71) | 473,000 | 24.27 | |||||||||||
| Exercised | (1,007,065 | ) | 10.80 | ||||||||||
| Forfeited | (51,143 | ) | 17.96 | ||||||||||
| Balance as of June 30, 2017 (7,348,320 shares exercisable at weighted average exercise price of $14.58 per share) | 8,375,659 | $ | 15.88 | 4.37 | $ | 78,501 | |||||||
| Options vested and expected to vest at June 30, 2017 | 8,298,251 | $ | 15.79 | 4.34 | $ | 78,434 | |||||||
| Options vested and exercisable at June 30, 2017 | 7,348,320 | $ | 14.58 | 3.99 | $ | 76,932 | |||||||
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The total pretax intrinsic value of options exercised during the fiscal yearsyear ended June 30, 2017, 20162021, 2020 and 20152019 was $14.0$24.3 million, $18.0$19.3 million and $48.1 million,$0, respectively. Additional information regarding options outstanding as of June 30, 2017,2021, is as follows:
| Options Outstanding | Options Vested and Exercisable | |||||||||||||||||||||||||||||||
| Range of Exercise Prices | Number Outstanding | Weighted- Average Remaining Contractual Term (Years) | Weighted- Average Exercise Price Per Share | Number Exercisable | Weighted- Average Exercise Price Per Share | |||||||||||||||||||||||||||
| $9.24 - $12.50 | 521,886 | 1.54 | $ | 10.81 | 521,886 | $ | 10.81 | |||||||||||||||||||||||||
| $13.00 - $15.22 | 540,699 | 2.68 | $ | 14.33 | 490,794 | $ | 14.40 | |||||||||||||||||||||||||
| $17.09 - $18.93 | 714,906 | 3.17 | $ | 17.94 | 648,411 | $ | 17.97 | |||||||||||||||||||||||||
| $20.37 - $22.10 | 619,745 | 4.90 | $ | 21.13 | 547,375 | $ | 21.10 | |||||||||||||||||||||||||
| $22.15 - $25.44 | 614,906 | 5.81 | $ | 24.26 | 436,968 | $ | 24.67 | |||||||||||||||||||||||||
| $26.60 - $28.71 | 536,681 | 4.69 | $ | 27.08 | 529,181 | $ | 27.06 | |||||||||||||||||||||||||
| $30.33 - $38.50 | 590,341 | 7.26 | $ | 34.31 | 246,273 | $ | 34.48 | |||||||||||||||||||||||||
| $39.19 - $39.19 | 28,000 | 3.62 | $ | 39.19 | 28,000 | $ | 39.19 | |||||||||||||||||||||||||
| $42.35 - $42.35 | 8,390 | 4.82 | $ | 42.35 | — | $ | — | |||||||||||||||||||||||||
| $45.00 - $45.00 | 1,000,000 | 9.67 | $ | 45.00 | — | $ | — | |||||||||||||||||||||||||
| $9.24 - $45.00 | 5,175,554 | 5.36 | $ | 26.17 | 3,448,888 | $ | 20.47 | |||||||||||||||||||||||||
| Options Outstanding | Options Vested and Exercisable | |||||||||||||||
Range of Exercise Prices | Number Outstanding | Weighted- Average Remaining Contractual Term (Years) | Weighted- Average Exercise Price Per Share | Number Exercisable | Weighted- Average Exercise Price Per Share | |||||||||||
| $4.63 - 8.36 | 1,109,538 | 1.65 | $ | 6.92 | 1,109,538 | $ | 6.92 | |||||||||
| 8.47 - 10.66 | 1,435,967 | 2.98 | 10.18 | 1,435,967 | 10.18 | |||||||||||
| 10.68 - 12.68 | 837,728 | 3.95 | 11.80 | 837,728 | 11.80 | |||||||||||
| 12.92 - 14.23 | 1,089,103 | 4.26 | 13.75 | 1,058,336 | 13.74 | |||||||||||
| 15.22 - 17.29 | 883,555 | 4.24 | 16.34 | 883,555 | 16.34 | |||||||||||
| 17.69 - 18.93 | 1,055,904 | 5.15 | 18.55 | 947,204 | 18.55 | |||||||||||
| 20.54 - 25.44 | 1,065,708 | 6.51 | 23.48 | 587,336 | 23.29 | |||||||||||
| 26.60 - 35.07 | 827,496 | 7.20 | 29.16 | 441,261 | 29.30 | |||||||||||
| 37.06 | 35,160 | 5.62 | 37.06 | 19,770 | 37.06 | |||||||||||
| 39.19 | 35,500 | 7.62 | 39.19 | 27,625 | 39.19 | |||||||||||
| $4.63 - $39.19 | 8,375,659 | 4.37 | $ | 15.88 | 7,348,320 | $ | 14.58 | |||||||||
RSU and PRSU Activity
In January 2015, the Company began to grant RSUs to employees. The Company grants RSUs to certain employees as part of its regular employee equity compensation review program as well as to selected new hires. RSUs are typically service based share awards that entitle the holder to receive freely tradable shares of the Company's common stock upon vesting.
In August 2017, the Compensation Committee granted 2 PRSU awards to the Company's Chief Executive Officer, both of which have both performance and service conditions. 50% of the PRSUs vested at June 30, 2018 when performance conditions were achieved, while the remainder vest in equal amounts over the following ten quarters subject to the continued employment of the CEO. As of June 30, 2021, the remaining 50% of the PRSUs had vested in accordance with the terms of the grant.
In March 2020, the Compensation Committee granted a PRSU award to one of the Company's senior executives. The award vests in 2 tranches and includes service and performance conditions. Each tranche has 15,000 RSUs that vest in May 2021 and November 2021 based on service conditions only. Additional units can be earned based on revenue growth percentage in fiscal year 2020 compared to fiscal year 2019, which units would vest in May 2021, and based on revenue growth percentage in fiscal year 2021 compared to fiscal year 2020, which units would vest in November 2021. No additional units were earned for fiscal year 2020 as revenue decreased from fiscal year 2019.
The following table summarizes restricted stock unitRSUs and PRSUs activity during the fiscal years ended June 30, 20172021 and 20162020 under all plans:
83
RSUs Outstanding | Weighted Average Grant-Date Fair Value per Share | Aggregate Intrinsic Value (in thousands) | |||||||||
| Balance as of June 30, 2014 | — | $ | — | ||||||||
| Granted | 374,720 | 35.82 | |||||||||
| Released | (14,685 | ) | 35.23 | ||||||||
| Forfeited | (56,711 | ) | 34.90 | ||||||||
| Balance as of June 30, 2015 | 303,324 | 36.02 | |||||||||
| Granted | 845,870 | 28.45 | |||||||||
| Released | (177,707 | ) | 31.80 | ||||||||
| Forfeited | (44,504 | ) | 29.72 | ||||||||
| Balance as of June 30, 2016 | 926,983 | 30.23 | |||||||||
| Granted | 808,020 | 23.73 | |||||||||
| Released | (411,739 | ) | 27.41 | ||||||||
| Forfeited | (96,907 | ) | 26.40 | ||||||||
| Balance as of June 30, 2017 | 1,226,357 | $ | 26.11 | $ | 30,230 | ||||||
| Time-based RSUs Outstanding | Weighted Average Grant-Date Fair Value per Share | PRSUs Outstanding | Weighted Average Grant-Date Fair Value per Share | ||||||||||||||||||||||||||
| Balance as of June 30, 2018 | 1,480,605 | $ | 23.34 | 120,000 | $ | 27.10 | |||||||||||||||||||||||
| Granted | 1,086,911 | $ | 18.37 | — | |||||||||||||||||||||||||
Released(1) | (549,886) | $ | 24.87 | — | |||||||||||||||||||||||||
| Forfeited | (144,528) | $ | 20.25 | — | |||||||||||||||||||||||||
| Balance as of June 30, 2019 | 1,873,102 | $ | 20.25 | 120,000 | $ | 27.10 | |||||||||||||||||||||||
| Granted | 943,650 | $ | 20.45 | 30,000 | $ | 20.37 | |||||||||||||||||||||||
Released(1) | (871,274) | $ | 20.97 | (108,000) | $ | 27.10 | |||||||||||||||||||||||
| Forfeited | (177,451) | $ | 19.49 | — | |||||||||||||||||||||||||
| Balance as of June 30, 2020 | 1,768,027 | $ | 20.08 | 42,000 | $ | 22.29 | |||||||||||||||||||||||
| Granted | 1,334,418 | $ | 31.54 | 30,000 | $ | 34.27 | |||||||||||||||||||||||
Released(1) | (984,406) | $ | 21.63 | (27,000) | $ | 23.36 | |||||||||||||||||||||||
| Forfeited | (263,083) | $ | 25.01 | (30,000) | $ | 20.37 | |||||||||||||||||||||||
| Balance as of June 30, 2021 | 1,854,956 | $ | 26.79 | 15,000 | $ | 34.27 | |||||||||||||||||||||||
_________________
(1) The number of shares released excludes 172,857 RSUs that were vested but not released in fiscal year 2019. The number of vested but not released RSUs for fiscal years 2021 and 2020 was not material. The number of shares released also excludes 24,000 PRSUs that were vested but not released in fiscal year 2019. These vested RSUs and PRSUs were primarily released in fiscal year 2020 and included in fiscal year 2020 number upon the effectiveness of the Company's registration statement on Form S-8.
The total pretax intrinsic value of RSUs and PRSUs vested was $11.3$32.6 million, $4.9$18.9 million and $0.5$14.3 million for the fiscal years ended June 30, 2017, 20162021, 2020 and 2015,2019, respectively. In fiscal years 2017, 20162021, 2020 and 2015, upon vesting, 411,739, 177,707 and 14,685 shares of RSUs were partially net share-settled such that2019, the Company withheld 144,994, 65,164274,620, 331,648 and 5,278175,044 shares respectively, with value equivalent to the employees' minimum statutory obligation for the applicable income and other employment taxes from the vesting and release of 1,011,406, 979,274 and 549,886 RSUs and PRSUs, respectively, and remitted the cash to the appropriate taxing authorities. The total shares withheld were based on the value of the RSUs on their respective vesting dates as determined by the Company's closing stock price. Total payments for the employees' tax obligations to taxingtax authorities were $3.6$8.7 million, $1.8$8.2 million and $0.2$3.1 million for the fiscal years ended June 30, 2017, 20162021, 2020 and 2015,2019, respectively, and are reflected as a financing activity within the consolidated statements of cash
flows. These net-share settlements had the effect of share repurchases by the Company as they reduced and retired the number of shares that would have otherwise been issued as a result of the vesting and did not represent an expense to the Company. Pursuant to the terms of the 2020 and 2016 Plan, shares withheld in connection with net-share settlements are returned to the 2016 Plan and are available for future grants under the 2020 and 2016 Plan.
Note 13.15. Income Taxes
The components of income before income tax provision for the fiscal years ended June 30, 2017, 20162021, 2020 and 20152019 are as follows (in thousands):
| Years Ended June 30, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| United States | $ | 80,922 | $ | 35,701 | $ | 45,126 | |||||||||||
| Foreign | 37,706 | 49,127 | 44,397 | ||||||||||||||
| Income before income tax provision | $ | 118,628 | $ | 84,828 | $ | 89,523 | |||||||||||
| Years Ended June 30, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| United States | $ | 82,078 | $ | 97,921 | $ | 108,437 | |||||
| Foreign | 9,210 | 9,483 | 24,200 | ||||||||
| Income before income tax provision | $ | 91,288 | $ | 107,404 | $ | 132,637 | |||||
The income tax provision for the fiscal years ended June 30, 2017, 20162021, 2020 and 2015,2019, consists of the following (in thousands):
| Years Ended June 30, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Current: | |||||||||||
| Federal | $ | 26,033 | $ | 29,647 | $ | 33,765 | |||||
| State | 695 | 638 | (633 | ) | |||||||
| Foreign | 4,001 | 10,741 | 10,953 | ||||||||
| 30,729 | 41,026 | 44,085 | |||||||||
| Deferred: | |||||||||||
| Federal | (6,782 | ) | (5,976 | ) | (5,492 | ) | |||||
| State | 353 | 12 | 2,406 | ||||||||
| Foreign | 134 | 261 | (917 | ) | |||||||
| (6,295 | ) | (5,703 | ) | (4,003 | ) | ||||||
| Income tax provision | $ | 24,434 | $ | 35,323 | $ | 40,082 | |||||
84
| Years Ended June 30, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | 3,406 | $ | 4,568 | $ | 12,308 | |||||||||||
| State | 1,077 | 1,727 | 2,917 | ||||||||||||||
| Foreign | 10,843 | 10,399 | 16,531 | ||||||||||||||
| 15,326 | 16,694 | 31,756 | |||||||||||||||
| Deferred: | |||||||||||||||||
| Federal | (5,489) | (10,108) | (13,078) | ||||||||||||||
| State | (409) | (1,621) | (2,888) | ||||||||||||||
| Foreign | (2,492) | (2,043) | (906) | ||||||||||||||
| (8,390) | (13,772) | (16,872) | |||||||||||||||
| Income tax provision | $ | 6,936 | $ | 2,922 | $ | 14,884 | |||||||||||
The Company’s net deferred tax assets as of June 30, 20172021 and 20162020 consist of the following (in thousands):
| June 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Research and development credits | $ | 30,540 | $ | 24,304 | |||||||
| Deferred revenue | 18,584 | 20,354 | |||||||||
| Inventory valuation | 13,831 | 13,946 | |||||||||
| Capitalized research and development costs | 15,206 | 7,509 | |||||||||
| Stock-based compensation | 3,868 | 4,075 | |||||||||
| Lease obligations | 2,861 | 3,632 | |||||||||
| Accrued vacation and bonus | 5,098 | 3,281 | |||||||||
| Prepaid and accrued expenses | 1,179 | 2,560 | |||||||||
| Warranty accrual | 2,154 | 2,051 | |||||||||
| Bad debt and other reserves | 1,668 | 1,917 | |||||||||
| Marketing fund accrual | 720 | 548 | |||||||||
| Other | 4,460 | 3,652 | |||||||||
| Total deferred income tax assets | 100,169 | 87,829 | |||||||||
| Deferred tax liabilities-depreciation and other | (4,137) | (4,428) | |||||||||
| Right of use asset | (2,831) | (3,612) | |||||||||
| Valuation allowance | (29,913) | (24,891) | |||||||||
| Deferred income tax assets, net | $ | 63,288 | $ | 54,898 | |||||||
| June 30, | |||||||
| 2017 | 2016 | ||||||
| Inventory valuation | $ | 15,240 | $ | 12,329 | |||
| Stock-based compensation | 6,277 | 5,610 | |||||
| Deferred revenue | 6,241 | 6,802 | |||||
Payables to foreign subsidiaries | 3,912 | 1,824 | |||||
| R&D credit | 3,167 | 10 | |||||
Accrued vacation and bonus | 2,635 | 2,616 | |||||
| Warranty accrual | 1,952 | 2,213 | |||||
| Foreign exchange unrealized gains and losses | 1,884 | 710 | |||||
| Marketing fund accrual | 1,605 | 1,791 | |||||
| Other | 2,836 | 2,821 | |||||
| Total deferred income tax assets | 45,749 | 36,726 | |||||
| Deferred tax liabilities-depreciation and other | (3,617 | ) | (3,048 | ) | |||
| Valuation allowance | (3,013 | ) | — | ||||
| Deferred income tax assets, net | $ | 39,119 | $ | 33,678 | |||
The Company assesses its deferred tax assets for recoverability on a regular basis, and where applicable, a valuation allowance is recorded to reduce the total deferred tax asset to an amount that will, more likely than not, be realized in the future. As of June 30, 2017,2021, the Company believes that most of its deferred tax assets are “more-likely-than not” to be realized with the exception of California R&Dstate research and development tax credits that have not met the “more-likely than not” realization threshold criteria. Starting from fiscal year 2016 California tax return which was filed in the fourth quarter of fiscal year 2017, on an annual basis and pursuant to current law, the Company generates more California credits than California tax. As a result, at June 30, 2017,2021, the gross excess credits of $4.6$37.1 million, or net of federal tax benefit of $3.0$29.3 million, are subject to a full valuation allowance. At June 30, 2020, the gross excess credits of $30.8 million, or net of federal tax benefit of $24.3 million, are subject to a full valuation allowance.The change in valuation allowance is $5.0 million and $3.9 million for the fiscal years ended June 30, 2021 and 2020, respectively. The Company will continue to review its deferred tax assets in accordance with the applicable accounting standards. The net deferred tax assets balance as of June 30, 20172021 and 20162020 was $39.1$63.3 million and $33.7$54.9 million, respectively.
85
The 2017 Tax Reform Act also creates a new requirement that Global Intangible Low-Taxed Income (“GILTI”) earned by controlled foreign corporations (“CFCs”) that must be included currently in the gross income of a CFC’s U.S. stockholder starting in the tax year that begins after 2017. GILTI does not have material impact on the Company's income tax provision.
Under the 2017 Tax Reform Act, starting on July 1, 2018, the Company is no longer subject to federal income tax on earnings remitted from our foreign subsidiaries. The Company previously asserted that all of its foreign undistributed earnings were indefinitely reinvested. As a result of the 2017 Tax Reform Act, and the Company considershas determined that assessmentits foreign undistributed earnings are indefinitely reinvested except for Netherlands. The Company may repatriate foreign earnings from Netherlands which are previously taxed income as a result of the 2017 Tax Reform Act. The tax impact of such repatriation is estimated to be incompleteimmaterial.
As a result of the 2017 Tax Reform Act, in December 2019, the Company realigned its international business operations and group structure. As a part of this restructuring, the Company moved certain intellectual property back to the United States. As a result of this restructuring, the Company estimated approximately $3.0 million and $1.9 million additional tax benefit from foreign derived intangible income in fiscal years 2021 and 2020 as the financial statements forcompared to fiscal year 20182019.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted. The CARES Act provides temporary relief from certain aspects of the 2017 Tax Reform Act that imposed limitations on the utilization of certain losses, interest expense deductions, alternative minimum tax credits and made a technical correction to the 2017 Tax Reform Act related to the depreciable life of qualified improvement property. The CARES Act did not have not been finalized.a material impact on the Company.
The following is a reconciliation for the fiscal years ended June 30, 2017, 20162021, 2020 and 2015,2019, of the statutory rate to the Company’s effective federal tax rate:
| Years Ended June 30, | |||||||||
| 2017 | 2016 | 2015 | |||||||
| Tax at statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | |||
| State income tax, net of federal tax benefit | 4.6 | 3.2 | 3.3 | ||||||
| Stock-based compensation | 2.5 | 2.3 | 2.6 | ||||||
| Settlement with tax authority | 2.0 | — | — | ||||||
| Foreign withholding tax | 1.1 | 3.2 | 3.3 | ||||||
| Foreign tax rate differences | 0.8 | 1.2 | (2.7 | ) | |||||
| Subpart F income inclusion | — | (2.9 | ) | (3.2 | ) | ||||
| Qualified production activity deduction | (3.0 | ) | (2.8 | ) | (1.4 | ) | |||
| Uncertain tax positions | (7.6 | ) | (1.6 | ) | (0.8 | ) | |||
| Research and development tax credit | (9.4 | ) | (7.0 | ) | (3.8 | ) | |||
| Other | 0.8 | 2.3 | (2.1 | ) | |||||
| Effective tax rate | 26.8 | % | 32.9 | % | 30.2 | % | |||
| Years Ended June 30, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Income tax provision at statutory rate | 21.0 | % | 21.0 | % | 21.0 | % | ||||||||||||||
| State income tax, net of federal tax benefit | 0.3 | — | 0.5 | |||||||||||||||||
| Foreign rate differential | (0.5) | — | 1.1 | |||||||||||||||||
| Research and development tax credit | (10.5) | (13.1) | (9.5) | |||||||||||||||||
| Uncertain tax positions, net of (settlement) with Tax Authorities | 2.0 | (2.3) | 4.1 | |||||||||||||||||
| Foreign derived intangible / Subpart F income inclusion | (2.5) | (3.8) | (2.1) | |||||||||||||||||
| Stock-based compensation | (3.3) | (2.8) | 2.1 | |||||||||||||||||
| Non deductible penalty on SEC matter | — | 4.4 | — | |||||||||||||||||
| Provision to return true-up | (1.9) | (1.1) | (1.6) | |||||||||||||||||
| Other, net | 1.2 | 1.1 | 1.0 | |||||||||||||||||
| Effective tax rate | 5.8 | % | 3.4 | % | 16.6 | % | ||||||||||||||
As of June 30, 2017,2021, the Company had state research and development tax credit carryforwards of $16.6$50.2 million. The state research and development tax credits will carryforward indefinitely to offset future state income taxes. $6.7 million of the state research and development tax credit carryforwards were attributable to excess tax deductions from stock option exercises, and were not included in the deferred tax assets shown above. The benefit of these carryforwards will be credited to equity when realized.
The following table summarizes the activity related to the unrecognized tax benefits (in thousands):
Gross* Unrecognized Income Tax Benefits | |||
| Balance at June 30, 2014 | $ | 9,615 | |
| Gross increases: | |||
| For current year’s tax positions | 3,855 | ||
| For prior years’ tax positions | 793 | ||
| Gross decreases: | |||
| Settlements and releases due to the lapse of statutes of limitations | (971 | ) | |
| Balance at June 30, 2015 | 13,292 | ||
| Gross increases: | |||
| For current year’s tax positions | 6,167 | ||
| For prior years’ tax positions | 2,074 | ||
| Gross decreases: | |||
| Settlements and releases due to the lapse of statutes of limitations | (2,138 | ) | |
| Balance at June 30, 2016 | 19,395 | ||
| Gross increases: | |||
| For current year’s tax positions | 5,732 | ||
| For prior years’ tax positions | 1,119 | ||
| Gross decreases: | |||
| Settlements and releases due to the lapse of statutes of limitations | (7,029 | ) | |
| Balance at June 30, 2017 | $ | 19,217 | |
86
| Gross* Unrecognized Income Tax Benefits | |||||
| Balance at June 30, 2018 | $ | 25,117 | |||
| Gross increases: | |||||
| For current year’s tax positions | 7,789 | ||||
| For prior years’ tax positions | — | ||||
| Gross decreases: | |||||
| Decreases due to settlements with taxing authority | (1,504) | ||||
| Decreases due to lapse of statute of limitations | (3,354) | ||||
| Balance at June 30, 2019 | 28,048 | ||||
| Gross increases: | |||||
| For current year’s tax positions | 8,769 | ||||
| For prior years’ tax positions | 505 | ||||
| Gross decreases: | |||||
| Decreases due to settlements with taxing authority | (7,632) | ||||
| Decreases due to lapse of statute of limitations | (2,484) | ||||
| Balance at June 30, 2020 | 27,206 | ||||
| Gross increases: | |||||
| For current year’s tax positions | 13,333 | ||||
| For prior years’ tax positions | 1,439 | ||||
| Gross decreases: | |||||
| Decreases due to lapse of statute of limitations | (1,243) | ||||
| Balance at June 30, 2021 | $ | 40,735 | |||
________________________
*excludes interest, penalties, federal benefit of state reserves
The total amount of unrecognized tax benefits that would affect the effective tax rate, if recognized, was $15.6$27.1 million and $16.7$13.4 million as of June 30, 20172021 and 2016,2020, respectively.
The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the income tax provision for taxes in the consolidated statements of operations. As of June 30, 20172021 and 2016,2020, the Company had accrued $1.0$2.5 million and $1.0$2.1 million for the payment of interest and penalties relating to unrecognized tax benefits, respectively. During fiscal years 2017, 2016 and 2015, there was no material change
In October 2019, the Taiwan tax authority completed its audit in the total amount of the liabilityTaiwan for accrued interest and penalties related to the unrecognized tax benefits.
additional tax liability of $1.5$1.0 million. The Company accepted the proposed adjustment and paid the $1.5$1.0 million tax liability in January 2019.February 2020. The impact of this one-time adjustmentthese adjustments on the income statement was predominantly offset by the recognitionrelease of previously unrecognized tax benefits related to the fiscal years audited.audited in the periods in which the proposed adjustments were accepted.
The Company believes that it has adequately provided reserves for all uncertain tax positions,positions; however, amounts asserted by tax authorities could be greater or less than the Company’s current position. Accordingly, the Company’s provision on federal, state and foreign tax related matters to be recorded in the future may change as revised estimates are made or as the underlying matters are settled or otherwise resolved.
The federal statute of limitations remains open in general for tax years ended June 30, 20162018 through 2018. The state2021. Various states statute of limitations remains open in general for tax years ended June 30, 20152017 through 2018. The2021. Certain statutes of limitations in major foreign jurisdictions remain open for examination in general for the tax years ended June 30, 20132016 through 2018. The Company does not expect its2021. It is reasonably possible that our gross unrecognized tax benefits to change materially overwill decrease by approximately $1.0 million, in the next 12 months.
87
months, due to the lapse of the statute of limitations. These adjustments, if recognized, would positively impact our effective tax rate, and would be recognized as additional tax benefits.
Note 14.16. Commitments and Contingencies
Litigation and Claims— InClaims— On February 8, 2018, 2 putative class action complaints were filed against the Company, became a party to legal proceedings whereby complainants have allegedthe Company's Chief Executive Officer, and the Company's former Chief Financial Officer in the U.S. District Court for the Northern District of California (Hessefort v. Super Micro Computer, Inc., et al., No. 18-cv-00838 and United Union of Roofers v. Super Micro Computer, Inc., et al., No. 18-cv-00850). The complaints contain similar allegations, claiming that it hasthe defendants violated Section 10(b) of the Securities Exchange Act due to alleged misrepresentations and/or omissions. See Note 18, "Subsequent Events"omissions in public statements regarding recognition of revenue. The court subsequently appointed New York Hotel Trades Council & Hotel Association of New York City, Inc. Pension Fund as lead plaintiff. The lead plaintiff then filed an amended complaint naming the Company's Senior Vice President of Investor Relations as an additional defendant. On June 21, 2019, the lead plaintiff filed a further amended complaint naming the Company's former Senior Vice President of International Sales, Corporate Secretary, and Director as an additional defendant. On July 26, 2019, the Company filed a motion to dismiss the complaint. On March 23, 2020, the Court granted the Company’s motion to dismiss the complaint, with leave for lead plaintiff to file an amended complaint within 30 days. On April 22, 2020, lead plaintiff filed a further details. amended complaint. On June 5, 2020, the Company filed a motion to dismiss the further amended complaint, the hearing for which was calendared for September 23, 2020; however, the Court held a conference on September 15 to discuss how the Court could efficiently address the recent SEC settlement agreement. The parties stipulated to allow plaintiffs to further amend the complaint solely to add allegations relating to the SEC settlement. On October 14, 2020, plaintiffs filed a Fourth Amended Complaint. On October 28, 2020, defendants filed a supplemental motion to dismiss. On March 29, 2021, the Court granted in part and denied in part defendants’ motions to dismiss. Plaintiffs’ claims under Sections 10(b) and 20 of the Exchange Act were dismissed with prejudice as against the Company’s former head of Investor Relations, Perry Hayes. Plaintiffs’ Section 10(b) claim, but not the Section 20 claim, was likewise dismissed as to Wally Liaw, a founder, former director, and former SVP of International Sales. The Court denied the motions to dismiss the Section 10(b) and Section 20 claims against the Company, Charles Liang, and Howard Hideshima, the Company’s former CFO. Discovery has commenced, and the Court has calendared a hearing on class certification for January 20, 2022. The Company intends to defend the lawsuit vigorously.
On October 27, 2020, certain current and former directors and officers of the Company were named as defendants in a putative derivative lawsuit filed in the Superior Court of the State of California, County of Santa Clara (the “Court”), captioned Barry v. Liang, et al., 20-CV-372190. The Company was also named as a nominal defendant. The complaint purports to allege claims for breaches of fiduciary duties, waste of corporate assets, and unjust enrichment arising out of allegations that the Company’s officers and directors caused the Company to issue false and misleading statements about recognition of revenue and the effectiveness of its internal controls, failed to adopt and implement effective internal controls, and failed to timely file various reports with the Securities and Exchange Commission. The plaintiff seeks unspecified compensatory damages and other equitable relief. Defendants filed demurrers, which were set for hearing on August 4, 2021, but which were continued to September 15, 2021. Following this continuance, on July 21, 2021, Plaintiffs' counsel filed an amended complaint in lieu of responding to the demurrer. The amended complaint added no new claims; primarily, the amendment added allegations describing the March 29, 2021 motion to dismiss decision in the Hessefort class action. Defendants demurred to the amended complaint on August 24, 2021, and the Court has calendared the hearing for November 24, 2021. The case is otherwise currently stayed. The Company intends to defend the lawsuit vigorously.
On May 5, 2021, certain current and former directors and officers of the Company were named as defendants in a putative derivative lawsuit filed in the U.S. District Court for the Northern District of California, captioned Stein v. Liang, et al., Case No. 3:21-cv-03357-KAW (the “Stein Derivative Action”). The Company was also named as a nominal defendant. The complaint purports to allege claims for breaches of fiduciary duties, waste of corporate assets, unjust enrichment, and contribution for violations of federal securities laws arising out of allegations that the Company’s officers and directors caused the Company to issue false and misleading statements about recognition of revenue and the effectiveness of its internal controls, failed to adopt and implement effective internal controls, and failed to timely file various reports with the Securities and Exchange Commission. The plaintiff seeks unspecified compensatory damages and other equitable relief. Defendants filed motions to dismiss the complaint on August 6, 2021, and the Court has calendared the hearing for November 4, 2021. The Company intends to defend the lawsuit vigorously.
88
SEC Matter— The Company cooperated with the SEC in its investigation of marketing expenses that contained certain irregularities discovered by Company management, which irregularities were disclosed on August 31, 2015, and the Company cooperated with the SEC in its further investigation of the matters underlying the Company’s inability to timely file its Form 10-K for the fiscal year ended June 30, 2017 and concerning the publication of a false and widely discredited news article in October 2018 concerning the Company’s products. On August 25, 2020, to fully resolve all matters under investigation, the Company consented to entry of an Order Instituting Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order (“Order”), as announced by the SEC. The Company admitted the SEC’s jurisdiction over the Company and the subject matter of the proceedings, but otherwise neither admitted nor denied the SEC’s findings, as described in the Order. The Company agreed to cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) and (3) of the Securities Act and Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B), of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. The Company agreed and paid a civil money penalty of $17,500,000 during the three months ended September 30, 2020, which was recorded to general and administrative expense in the Company's consolidated statement of operations. In addition, the Company’s Chief Executive Officer concluded a settlement with the SEC on August 25, 2020, as announced by the SEC. The Company’s Chief Executive Officer paid the Company the sum of $2,122,000 as reimbursement of profits from certain stock sales during the relevant period, pursuant to Section 304 of the Sarbanes-Oxley Act of 2002. The settlement amount was paid during the first quarter of fiscal 2021 and the Company recorded the payment as a credit to general and administrative expense.
Other legal proceedings and indemnifications
From time to time, the Company has been involved in various legal proceedings arising from the normal course of business activities. In management’s opinion, theThe resolution of any such matters willhave not havehad a material adverse effectimpact on the Company’s consolidated financial condition, results of operations or liquidity.liquidity as of June 30, 2021 and any prior periods.
The Company has entered into indemnification agreements with its current and former directors and executive officers.
Under these agreements, the Company has agreed to indemnify such individuals to the fullest extent permitted by law against liabilities that arise by reason of their status as directors or officers and to advance expenses incurred by such individuals in connection with related legal proceedings. It is not possible to determine the maximum potential amount of payments the Company could be required to make under these agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each claim. However, the Company maintains directors and officers liability insurance coverage to reduce its exposure to such obligations.
Purchase Commitments— - The Company has agreements to purchase certain units of inventory and non-inventory items primarily through the next 12 months. As of June 30, 2017,2021, these remaining noncancelable commitments were $309.1$569.8 million, including $79.9$111.2 million for related parties.
Standby Letter of Credit - In October 2019, Bank of America increased the value of a previously issued standby letter of credit to a beneficiary from $3.2 million to $6.4 million to facilitate ongoing operations of the Company. The standby letter of credit is cancellable upon written notice from the issuer. No amounts have been drawn under the standby letter of credit. In May 2021, the standby letter of credit was cancelled.
Lease Commitments—The Company leases offices - See Note 12, "Leases," for a discussion of the Company's operating lease and equipment under noncancelable operating leases which expire at various dates through 2026. In addition, the Company leases certain of its equipment under capital leases. The future minimumfinancing lease commitments under all leases are as follows (in thousands):commitments.
| Year ending: | Capital Leases | Operating Leases | |||||
| June 30, 2018 | $ | 309 | $ | 4,844 | |||
| June 30, 2019 | 271 | 4,399 | |||||
| June 30, 2020 | 162 | 4,106 | |||||
| June 30, 2021 | 101 | 2,033 | |||||
| June 30, 2022 | 39 | 1,572 | |||||
| Thereafter | — | 3,951 | |||||
| Total minimum lease payments | 882 | $ | 20,905 | ||||
| Less: Amounts representing interest | 70 | ||||||
| Present value of minimum lease payments | 812 | ||||||
| Less: Long-term portion | 539 | ||||||
| Current portion | $ | 273 | |||||
Note 15.17. Retirement Plans
The Company sponsors a 401(k) savings plan for eligible United States employees and their beneficiaries. Contributions by the Company are discretionary, and no contributions have been made by the Company for the fiscal years ended June 30, 2017, 20162021, 2020 and 2015.2019.
Beginning in March 2003, employees of Super Micro Computer, B.V. have the optionare required to deduct a portion of their gross wages based on a defined age-dependent premium and invest the amount in a defined contribution plan. The Company has agreedis required to match10% of the amount that is deducted monthly from employees’ wages. Similar to contributions into a 401(k) plan, the Company's obligation is limited to the contributions made to the contribution plan. Investment risk and investment rewards are
89
assumed by the employees and not by the Company. For the fiscal years ended June 30, 2017, 20162021, 2020 and 2015,2019, the Company’s matching contribution was $0.4$0.7 million, $0.3$0.6 million, and $0.2$0.5 million, respectively.
The Company contributes to a defined contribution pension plan administered by the government of Taiwan that covers all eligible employees within Taiwan. Pension plan benefits are based primarily on participants’ compensation and years of service credited as specified under the terms of Taiwan’s plan. The funding policy is consistent with the local requirements of Taiwan. The Company's obligation is limited to the contributions made to the pension plan. The Company has no control over the investment strategy of the assets of the government administered pension plan. For the fiscal years ended June 30, 2017, 20162021, 2020 and 2015,2019, the Company’s contribution was $2.5 million, $1.9 million $1.0 million and $0.9$1.6 million, respectively.
The Company has a defined benefit pension plan under the R.O.C. Labor Standards Law for certain employees of Super Micro Computer, Inc. Taiwan that provides benefits based on an employee’s length of service and average monthly salary for the six-month period prior to retirement. The Company contributes an amount equal to 2% of salaries paid each month to the pension fund (the “Fund”), which is administered by the Labor Pension Fund Supervisory Committee (the “Committee”) and deposited in the Committee’s name in the Bank of Taiwan. Before the end of each year, the Company assesses the balance in the Fund. If the amount of the balance in the Fund is inadequate to pay retirement benefits for eligible employees in the next year, the Company is required to fund the difference in one appropriation that should be made before the end of March 31 of the next year. The Fund is operated and managed by the government’s designated authorities. As such, the Company does not have any right to intervene in the investments of the Fund. For the fiscal year ended June 30, 2021, the Company recorded a pension expense of $1.0 million. For the fiscal years ended June 30, 2020 and 2019, the Company’s pension expense was immaterial.
Note 16.18. Segment Reporting
The Company operates in one1 operating segment that develops and provides high performance server solutions based upon an innovative, modular and open-standard architecture. The Company’s chief operating decision maker is the Chief Executive Officer.
The following is a summary of property, plant and equipment, (in thousands):
| June 30, | |||||||
| 2017 | 2016 | ||||||
| United States | $ | 152,310 | $ | 142,764 | |||
| Asia | 40,854 | 42,052 | |||||
| Europe | 2,412 | 3,133 | |||||
| $ | 195,576 | $ | 187,949 | ||||
| June 30, | |||||||||||||||||
| 2021 | 2020 | ||||||||||||||||
| Long-lived assets: | |||||||||||||||||
| United States | $ | 180,143 | $ | 178,812 | |||||||||||||
| Asia | 91,640 | 51,605 | |||||||||||||||
| Europe | 2,930 | 3,368 | |||||||||||||||
| $ | 274,713 | $ | 233,785 | ||||||||||||||
| Years Ended June 30, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| United States | $ | 1,422,667 | $ | 1,409,601 | $ | 1,148,135 | |||||
| Asia | 500,956 | 319,581 | 313,550 | ||||||||
| Europe | 453,798 | 387,711 | 367,538 | ||||||||
| Other | 107,508 | 108,129 | 125,130 | ||||||||
| $ | 2,484,929 | $ | 2,225,022 | $ | 1,954,353 | ||||||
The followingCompany’s revenue is a summary of net sales by product type (in thousands):
| Years Ended June 30, | ||||||||||||||||||||
| 2017 | 2016 | 2015 | ||||||||||||||||||
| Amount | Percent of Net Sales | Amount | Percent of Net Sales | Amount | Percent of Net Sales | |||||||||||||||
| Server systems | $ | 1,740,633 | 70.0 | % | $ | 1,533,382 | 68.9 | % | $ | 1,186,258 | 60.7 | % | ||||||||
| Subsystems and accessories | 744,296 | 30.0 | % | 691,640 | 31.1 | % | 768,095 | 39.3 | % | |||||||||||
| Total | $ | 2,484,929 | 100.0 | % | $ | 2,225,022 | 100.0 | % | $ | 1,954,353 | 100.0 | % | ||||||||
| Three Months Ended | |||||||||||||||||||||||||||||||
| Sep. 30, 2015 | Dec. 31, 2015 | Mar. 31, 2016 | Jun. 30, 2016 (1) | Sep. 30, 2016 | Dec. 31, 2016 | Mar. 31, 2017 | Jun. 30, 2017 | ||||||||||||||||||||||||
| (As Restated) | |||||||||||||||||||||||||||||||
| (In thousands, except per share data) | |||||||||||||||||||||||||||||||
| Net sales | $ | 539,104 | $ | 641,235 | $ | 513,468 | $ | 531,215 | $ | 528,763 | $ | 663,200 | $ | 614,798 | $ | 678,168 | |||||||||||||||
| Gross profit | $ | 77,475 | $ | 103,187 | $ | 78,983 | $ | 70,856 | $ | 82,552 | $ | 96,136 | $ | 85,337 | $ | 85,933 | |||||||||||||||
| Net income | $ | 17,351 | $ | 33,204 | $ | 16,046 | $ | 5,480 | $ | 15,373 | $ | 22,876 | $ | 15,350 | $ | 13,255 | |||||||||||||||
| Net income per common share: | |||||||||||||||||||||||||||||||
| Basic | $ | 0.37 | $ | 0.70 | $ | 0.33 | $ | 0.10 | $ | 0.32 | $ | 0.48 | $ | 0.32 | $ | 0.26 | |||||||||||||||
| Diluted | $ | 0.34 | $ | 0.64 | $ | 0.31 | $ | 0.10 | $ | 0.30 | $ | 0.44 | $ | 0.30 | $ | 0.25 | |||||||||||||||
90
| For the Year Ended June 30, 2016 | |||||||||||||||||||||||||||
| As Previously Reported | Product Revenue | Services Revenue | Inventories | Other | Income Taxes | As Restated | |||||||||||||||||||||
| Net sales (1) | $ | 2,215,573 | $ | 5,582 | $ | 3,867 | $ | — | $ | — | $ | — | $ | 2,225,022 | |||||||||||||
| Cost of sales (1) | 1,884,048 | 11,410 | — | (926 | ) | (11 | ) | — | 1,894,521 | ||||||||||||||||||
| Gross profit | 331,525 | (5,828 | ) | 3,867 | 926 | 11 | — | 330,501 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||
| Research and development | 123,994 | — | — | (367 | ) | 596 | — | 124,223 | |||||||||||||||||||
| Sales and marketing | 62,841 | (4,255 | ) | — | (364 | ) | 116 | — | 58,338 | ||||||||||||||||||
| General and administrative | 37,840 | — | — | — | 2,609 | — | 40,449 | ||||||||||||||||||||
| Total operating expenses | 224,675 | (4,255 | ) | — | (731 | ) | 3,321 | — | 223,010 | ||||||||||||||||||
| Income from operations | 106,850 | (1,573 | ) | 3,867 | 1,657 | (3,310 | ) | — | 107,491 | ||||||||||||||||||
| Other income (expense), net | 171 | — | — | — | 1,336 | — | 1,507 | ||||||||||||||||||||
| Interest expense | (1,594 | ) | — | — | — | — | — | (1,594 | ) | ||||||||||||||||||
| Income before income tax provision | 105,427 | (1,573 | ) | 3,867 | 1,657 | (1,974 | ) | — | 107,404 | ||||||||||||||||||
| Income tax provision | 33,406 | — | — | — | — | 1,917 | 35,323 | ||||||||||||||||||||
| Net income | $ | 72,021 | $ | (1,573 | ) | $ | 3,867 | $ | 1,657 | $ | (1,974 | ) | $ | (1,917 | ) | $ | 72,081 | ||||||||||
| Net income per common share: | |||||||||||||||||||||||||||
| Basic | $ | 1.50 | $ | 1.50 | |||||||||||||||||||||||
| Diluted | $ | 1.39 | $ | 1.39 | |||||||||||||||||||||||
| Weighted-average shares used in calculation of net income per common share: | |||||||||||||||||||||||||||
| Basic | 47,917 | 47,917 | |||||||||||||||||||||||||
| Diluted | 51,836 | 51,836 | |||||||||||||||||||||||||
| Year Ended June 30, | |||||||||||
| 2016 | 2016 | ||||||||||
| As Previously Reported | Adjustments | As Restated | |||||||||
| Net sales | $ | 19,453 | $ | 9,657 | $ | 29,110 | |||||
| Cost of sales* | 241,836 | 802 | 242,638 | ||||||||
| For the Year Ended June 30, 2015 | |||||||||||||||||||||||||||
| As Previously Reported | Product Revenue | Services Revenue | Inventories | Other | Income Taxes | As Restated | |||||||||||||||||||||
| Net sales (1) | $ | 1,991,155 | $ | (25,542 | ) | $ | (11,260 | ) | $ | — | $ | — | $ | — | $ | 1,954,353 | |||||||||||
| Cost of sales (1) | 1,670,924 | (23,229 | ) | — | (13 | ) | 87 | — | 1,647,769 | ||||||||||||||||||
| Gross profit | 320,231 | (2,313 | ) | (11,260 | ) | 13 | (87 | ) | — | 306,584 | |||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||
| Research and development | 100,257 | — | — | 501 | 644 | — | 101,402 | ||||||||||||||||||||
| Sales and marketing | 48,851 | (1,814 | ) | — | 386 | 73 | — | 47,496 | |||||||||||||||||||
| General and administrative | 24,377 | — | — | — | 663 | — | 25,040 | ||||||||||||||||||||
| Total operating expenses | 173,485 | (1,814 | ) | — | 887 | 1,380 | — | 173,938 | |||||||||||||||||||
| Income from operations | 146,746 | (499 | ) | (11,260 | ) | (874 | ) | (1,467 | ) | — | 132,646 | ||||||||||||||||
| Other income (expense), net | 115 | — | — | — | 841 | — | 956 | ||||||||||||||||||||
| Interest expense | (965 | ) | — | — | — | — | — | (965 | ) | ||||||||||||||||||
| Income before income tax provision | 145,896 | (499 | ) | (11,260 | ) | (874 | ) | (626 | ) | — | 132,637 | ||||||||||||||||
| Income tax provision | 44,033 | — | — | — | — | (3,951 | ) | 40,082 | |||||||||||||||||||
| Net income | $ | 101,863 | $ | (499 | ) | $ | (11,260 | ) | $ | (874 | ) | $ | (626 | ) | $ | 3,951 | $ | 92,555 | |||||||||
| Net income per common share: | |||||||||||||||||||||||||||
| Basic | $ | 2.19 | $ | 1.99 | |||||||||||||||||||||||
| Diluted | $ | 2.03 | $ | 1.85 | |||||||||||||||||||||||
| Weighted-average shares used in calculation of net income per common share: | |||||||||||||||||||||||||||
| Basic | 46,434 | 46,434 | |||||||||||||||||||||||||
| Diluted | 50,094 | 50,094 | |||||||||||||||||||||||||
| Year Ended June 30, | |||||||||||
| 2015 | 2015 | ||||||||||
| As Previously Reported | Adjustments | As Restated | |||||||||
| Net sales | $ | 58,013 | $ | (10,329 | ) | $ | 47,684 | ||||
| Cost of sales* | 227,562 | 99 | 227,661 | ||||||||
| As of June 30, 2016 | |||||||||||||||||||||||||||
| As Previously Reported | Product Revenue | Services Revenue | Inventories | Other | Income Taxes | As Restated | |||||||||||||||||||||
| ASSETS | |||||||||||||||||||||||||||
| Current assets: | |||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 180,964 | $ | — | $ | — | $ | — | $ | (2,144 | ) | $ | — | $ | 178,820 | ||||||||||||
| Accounts receivable, net (1)* | 288,941 | (60,590 | ) | — | — | (53,418 | ) | — | 174,933 | ||||||||||||||||||
| Inventories | 448,980 | 48,714 | — | 18,205 | 908 | — | 516,807 | ||||||||||||||||||||
| Prepaid income taxes | 5,682 | — | — | — | — | (1,341 | ) | 4,341 | |||||||||||||||||||
Prepaid expenses and other current assets (1) | 13,435 | — | — | — | 65,992 | — | 79,427 | ||||||||||||||||||||
| Total current assets | 938,002 | (11,876 | ) | — | 18,205 | 11,338 | (1,341 | ) | 954,328 | ||||||||||||||||||
| Long-term investments | 2,643 | — | — | — | — | — | 2,643 | ||||||||||||||||||||
| Property, plant, and equipment, net | 187,949 | — | — | — | — | — | 187,949 | ||||||||||||||||||||
| Deferred income taxes, net | 28,460 | — | — | — | — | 5,218 | 33,678 | ||||||||||||||||||||
| Other assets | 8,546 | — | — | — | 4,339 | — | 12,885 | ||||||||||||||||||||
| Total assets | $ | 1,165,600 | $ | (11,876 | ) | $ | — | $ | 18,205 | $ | 15,677 | $ | 3,877 | $ | 1,191,483 | ||||||||||||
| Liabilities and Stockholders' Equity | |||||||||||||||||||||||||||
| Current liabilities: | |||||||||||||||||||||||||||
| Accounts payable (1) | $ | 249,239 | $ | 5 | $ | — | $ | 2,981 | $ | 15,166 | $ | — | $ | 267,391 | |||||||||||||
| Accrued liabilities (1) | 55,618 | (128 | ) | 9,313 | 16,251 | 2,542 | — | 83,596 | |||||||||||||||||||
| Income taxes payable | 5,172 | — | — | — | — | (118 | ) | 5,054 | |||||||||||||||||||
Short-term debt and current portion of long-term debt | 53,589 | — | — | — | — | — | 53,589 | ||||||||||||||||||||
| Total current liabilities | 363,618 | (123 | ) | 9,313 | 19,232 | 17,708 | (118 | ) | 409,630 | ||||||||||||||||||
| Long-term debt | 40,000 | — | — | — | — | — | 40,000 | ||||||||||||||||||||
| Other long-term liabilities | 40,603 | — | 4,597 | — | — | — | 45,200 | ||||||||||||||||||||
| Total liabilities | 444,221 | (123 | ) | 13,910 | 19,232 | 17,708 | (118 | ) | 494,830 | ||||||||||||||||||
| Stockholders' equity: | — | ||||||||||||||||||||||||||
| Common stock and additional paid-in capital | 277,339 | — | — | — | 2,067 | 59 | 279,465 | ||||||||||||||||||||
| Treasury stock | (2,030 | ) | — | — | — | — | — | (2,030 | ) | ||||||||||||||||||
| Accumulated other comprehensive loss | (85 | ) | — | — | — | — | — | (85 | ) | ||||||||||||||||||
| Retained earnings | 445,971 | (11,753 | ) | (13,910 | ) | (1,027 | ) | (4,098 | ) | 3,936 | 419,119 | ||||||||||||||||
Total Super Micro Computer, Inc. stockholders' equity | 721,195 | (11,753 | ) | (13,910 | ) | (1,027 | ) | (2,031 | ) | 3,995 | 696,469 | ||||||||||||||||
| Noncontrolling interest | 184 | — | — | — | — | — | 184 | ||||||||||||||||||||
| Total stockholders’ equity | 721,379 | (11,753 | ) | (13,910 | ) | (1,027 | ) | (2,031 | ) | 3,995 | 696,653 | ||||||||||||||||
| Total liabilities and stockholders' equity | $ | 1,165,600 | $ | (11,876 | ) | $ | — | $ | 18,205 | $ | 15,677 | $ | 3,877 | $ | 1,191,483 | ||||||||||||
| As of June 30, 2016 | |||||||||||
| As Reported | Adjustments | As Restated | |||||||||
| Accounts receivable, net | $ | 4,678 | $ | (4,629 | ) | $ | 49 | ||||
| Prepaid expenses and other current assets | — | 9,622 | 9,622 | ||||||||
| Accounts payable | 39,152 | 5,789 | 44,941 | ||||||||
| Accrued liabilities | — | 5,354 | 5,354 | ||||||||
| Common Stock and Additional Paid-in Capital | Treasury Stock | Accumulated Other Comprehensive Loss | Retained Earnings | Total Super Micro Computer Stockholders’ Equity | Non-controlling interest | Total Stockholders’ Equity | |||||||||||||||||||||
| Balance, June 30, 2014 (As previously reported) | $ | 199,062 | $ | (2,030 | ) | $ | (63 | ) | $ | 272,087 | $ | 469,056 | $ | 175 | $ | 469,231 | |||||||||||
| Adjustments: | |||||||||||||||||||||||||||
| Product revenue recognition | — | — | — | (9,681 | ) | (9,681 | ) | — | (9,681 | ) | |||||||||||||||||
| Service revenue | — | — | — | (6,518 | ) | (6,518 | ) | — | (6,518 | ) | |||||||||||||||||
| Inventory | — | — | — | (1,809 | ) | (1,809 | ) | — | (1,809 | ) | |||||||||||||||||
| Other | 531 | — | — | (1,498 | ) | (967 | ) | — | (967 | ) | |||||||||||||||||
| Restatement tax impacts | — | — | — | 1,902 | 1,902 | — | 1,902 | ||||||||||||||||||||
| Cumulative restatement adjustments | 531 | — | — | (17,604 | ) | (17,073 | ) | — | (17,073 | ) | |||||||||||||||||
| Balance, June 30, 2014 (As Restated) | $ | 199,593 | $ | (2,030 | ) | $ | (63 | ) | $ | 254,483 | $ | 451,983 | $ | 175 | $ | 452,158 | |||||||||||
| Year Ended June 30, 2016 | |||||||||||||
| As Previously Reported | Restatement Adjustments | As Restated | |||||||||||
| OPERATING ACTIVITIES: | |||||||||||||
| Net income | $ | 72,021 | $ | 60 | $ | 72,081 | |||||||
| Reconciliation of net income to net cash provided by operating activities: | |||||||||||||
| Depreciation and amortization | 13,282 | — | 13,282 | ||||||||||
| Stock-based compensation expense | 16,131 | 799 | 16,930 | ||||||||||
| Excess tax benefits from stock-based compensation | (2,855 | ) | 43 | (2,812 | ) | ||||||||
| Allowance for doubtful accounts | 1,278 | (62 | ) | 1,216 | |||||||||
| Provision for excess and obsolete inventories | 9,313 | 71 | 9,384 | ||||||||||
| Foreign currency exchange gain | (1,233 | ) | (106 | ) | (1,339 | ) | |||||||
| Deferred income taxes, net | (6,133 | ) | 921 | (5,212 | ) | ||||||||
| Changes in operating assets and liabilities: | |||||||||||||
| Accounts receivable, net (1) | 32,375 | 21,200 | 53,575 | ||||||||||
| Inventories | 5,200 | 2,509 | 7,709 | ||||||||||
| Prepaid expenses and other assets (1) | (8,210 | ) | (15,329 | ) | (23,539 | ) | |||||||
| Accounts payable (1) | (54,301 | ) | (11,534 | ) | (65,835 | ) | |||||||
| Income taxes payable | (3,260 | ) | 2,874 | (386 | ) | ||||||||
| Accrued liabilities (1) | 9,027 | 3,884 | 12,911 | ||||||||||
| Other long-term liabilities | 24,874 | (4,852 | ) | 20,022 | |||||||||
| Net cash provided by operating activities | 107,509 | 478 | 107,987 | ||||||||||
| INVESTING ACTIVITIES: | |||||||||||||
| Purchases of property, plant and equipment (1) | (34,108 | ) | — | (34,108 | ) | ||||||||
| Change in restricted cash | (1,020 | ) | — | (1,020 | ) | ||||||||
| Net cash used in investing activities | (35,128 | ) | — | (35,128 | ) | ||||||||
| FINANCING ACTIVITIES: | |||||||||||||
| Proceeds from debt, net of issuance costs | 34,200 | — | 34,200 | ||||||||||
| Repayment of debt | (34,100 | ) | — | (34,100 | ) | ||||||||
| Proceeds from exercise of stock options | 12,186 | — | 12,186 | ||||||||||
| Excess tax benefits from stock-based compensation | 2,855 | (43 | ) | 2,812 | |||||||||
| Payments of obligations under capital leases | (189 | ) | — | (189 | ) | ||||||||
| Payments under receivable financing arrangements | (21 | ) | — | (21 | ) | ||||||||
| Payment of withholding tax on vesting of restricted stock units | (1,786 | ) | — | (1,786 | ) | ||||||||
| Net cash provided by financing activities | 13,145 | (43 | ) | 13,102 | |||||||||
| Effect of exchange rate fluctuations on cash | (4 | ) | (57 | ) | (61 | ) | |||||||
| Net increase in cash and cash equivalents | 85,522 | 378 | 85,900 | ||||||||||
| Cash and cash equivalents at beginning of year | 95,442 | (2,522 | ) | 92,920 | |||||||||
| Cash and cash equivalents at end of year | $ | 180,964 | $ | (2,144 | ) | $ | 178,820 | ||||||
| Supplemental disclosure of cash flow information: | |||||||||||||
| Cash paid for interest | $ | 1,632 | $ | — | $ | 1,632 | |||||||
| Cash paid for taxes, net of refunds | $ | 36,951 | $ | — | $ | 36,951 | |||||||
| Non-cash investing and financing activities: | |||||||||||||
| Equipment purchased under capital leases | $ | 299 | $ | — | $ | 299 | |||||||
| Unpaid property, plant and equipment purchases (1) | $ | 10,888 | $ | (39 | ) | $ | 10,849 | ||||||
| Years Ended June 30, | |||||||||||
| 2016 | 2016 | ||||||||||
| As Reported | Adjustments | As Restated | |||||||||
| OPERATING ACTIVITIES: | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable, net | $ | 8,508 | $ | (8,428 | ) | $ | 80 | ||||
| Prepaid expenses and other assets | — | 652 | 652 | ||||||||
| Accounts payable | (19,863 | ) | (2,024 | ) | (21,887 | ) | |||||
| Accrued liabilities | — | (340 | ) | (340 | ) | ||||||
| INVESTING ACTIVITIES: | |||||||||||
| Purchases of property, plant and equipment | — | (4,641 | ) | (4,641 | ) | ||||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | |||||||||||
| Unpaid property, plant and equipment purchases | — | 2,246 | 2,246 | ||||||||
| Year Ended June 30, 2015 | ||||||||||||
| As Previously Reported | Restatement Adjustments | As Restated | ||||||||||
| OPERATING ACTIVITIES: | ||||||||||||
| Net income | $ | 101,863 | $ | (9,308 | ) | $ | 92,555 | |||||
| Reconciliation of net income to net cash used in operating activities: | ||||||||||||
| Depreciation and amortization | 8,133 | (39 | ) | 8,094 | ||||||||
| Stock-based compensation expense | 13,699 | 737 | 14,436 | |||||||||
| Excess tax benefits from stock-based compensation | (8,089 | ) | 43 | (8,046 | ) | |||||||
| Allowance for doubtful accounts | 326 | (246 | ) | 80 | ||||||||
| Provision for excess and obsolete inventories | 5,928 | 2 | 5,930 | |||||||||
| Foreign currency exchange gain | (675 | ) | (155 | ) | (830 | ) | ||||||
| Deferred income taxes, net | 632 | (4,208 | ) | (3,576 | ) | |||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts receivable, net (1) | (110,182 | ) | 31,996 | (78,186 | ) | |||||||
| Inventories | (153,584 | ) | (23,973 | ) | (177,557 | ) | ||||||
| Prepaid expenses and other assets (1) | (2,741 | ) | (8,585 | ) | (11,326 | ) | ||||||
| Accounts payable (1) | 75,520 | 6,181 | 81,701 | |||||||||
| Income taxes payable | 11,951 | (2,972 | ) | 8,979 | ||||||||
| Accrued liabilities (1) | 9,551 | 4,342 | 13,893 | |||||||||
| Other long-term liabilities | 3,032 | 4,696 | 7,728 | |||||||||
| Net cash used in operating activities | (44,636 | ) | (1,489 | ) | (46,125 | ) | ||||||
| INVESTING ACTIVITIES: | ||||||||||||
| Purchases of property, plant and equipment (1) | (35,100 | ) | — | (35,100 | ) | |||||||
| Change in restricted cash | (416 | ) | — | (416 | ) | |||||||
| Investment in a privately held company | (661 | ) | — | (661 | ) | |||||||
| Net cash used in investing activities | (36,177 | ) | — | (36,177 | ) | |||||||
| FINANCING ACTIVITIES: | ||||||||||||
| Proceeds from debt, net of issuance costs | 84,900 | — | 84,900 | |||||||||
| Repayments of debt | (36,000 | ) | — | (36,000 | ) | |||||||
| Proceeds from exercise of stock options | 23,338 | — | 23,338 | |||||||||
| Excess tax benefits from stock-based compensation | 8,089 | (43 | ) | 8,046 | ||||||||
| Payment of obligations under capital leases | (134 | ) | — | (134 | ) | |||||||
| Advances under receivable financing arrangements | 33 | — | 33 | |||||||||
| Payment of withholding tax on vesting of restricted stock units | (175 | ) | — | (175 | ) | |||||||
| Net cash provided by financing activities | 80,051 | (43 | ) | 80,008 | ||||||||
| Effect of exchange rate fluctuations on cash | (668 | ) | 400 | (268 | ) | |||||||
| Net decrease in cash and cash equivalents | (1,430 | ) | (1,132 | ) | (2,562 | ) | ||||||
| Cash and cash equivalents at beginning of year | 96,872 | (1,390 | ) | 95,482 | ||||||||
| Cash and cash equivalents at end of year | $ | 95,442 | $ | (2,522 | ) | $ | 92,920 | |||||
| Supplemental disclosure of cash flow information: | ||||||||||||
| Cash paid for interest | $ | 933 | $ | — | $ | 933 | ||||||
| Cash paid for taxes, net of refunds | $ | 30,671 | $ | — | $ | 30,671 | ||||||
| Non-cash investing and financing activities: | ||||||||||||
| Equipment purchased under capital leases | $ | 442 | $ | — | $ | 442 | ||||||
| Unpaid property, plant and equipment purchases (1) | $ | 6,826 | $ | 236 | $ | 7,062 | ||||||
| Years Ended June 30, | |||||||||||
| 2015 | 2015 | ||||||||||
| As Reported | Adjustments | As Restated | |||||||||
| OPERATING ACTIVITIES: | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable, net | $ | (12,565 | ) | $ | 13,057 | $ | 492 | ||||
| Prepaid expenses and other assets | — | (10,274 | ) | (10,274 | ) | ||||||
| Accounts payable | 10,046 | 12,142 | 22,188 | ||||||||
| Accrued liabilities | — | 1,364 | 1,364 | ||||||||
| INVESTING ACTIVITIES: | |||||||||||
| Purchases of property, plant and equipment | — | (4,070 | ) | (4,070 | ) | ||||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | |||||||||||
| Unpaid property, plant and equipment purchases | — | 724 | 724 | ||||||||
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision, and with the participation, of our current management, including our CEOChief Executive Officer (“CEO”) and CFO,Chief Financial Officer (“CFO”), we evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of June 30, 2017.2021. Based on this evaluation, of our disclosure controls and procedures, our CEO and CFO have concluded that our disclosure controls and procedures were not effective at a reasonable assurance level as of June 30, 2017 because of certain material weaknesses in our internal control over financial reporting, as further described below.2021.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f).
Internal control over financial reporting is a process designed by, or under the supervision of, our CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external purposes in accordance with U.S. GAAP. Management’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, (ii) provide reasonable assurance that transactions are appropriately recorded to permit preparation of financial statements in accordance with U.S. GAAP and that our receipts and expenditures are made only in accordance with authorizations of management, acting under authority delegated to them by the Board, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Management, including our CEO and CFO, assessed our internal control over financial reporting as of June 30, 2017.2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in its Internal Control - Integrated Framework (2013) (the “COSO Framework”). Based on this assessment, management has determinedconcluded that we did not maintain effective internal control over financial reporting as of June 30, 2017 because of the material weaknesses described below.
U.S. GAAP. The effectiveness of our internal control over financial reporting as of June 30, 20172021 has been audited by Deloitte & Touche LLP, ouran independent registered public accounting firm, asand their opinion is stated in itstheir report thatwhich is included herein.in this Annual Report on Form 10-K.
Remediation Plan and Statusof Prior Year Material Weakness
•Re-designed the logical access roles associated with our primary ERP application and re-provisioned those roles to enforce segregation of duties and align user access commensurate with their business process role and job responsibilities;
•Implemented a third-party application to facilitate improved processes and controls related to provisioning privileged access roles and the monitoring of those roles;
•For our boundary applications relevant to financial reporting, implemented new program change management control;
•Strengthened access and monitoring controls related to boundary systems;
•For our primary ERP application, strengthened provisioning of privileged access roles; and
•Monitored instances in which individuals were granted broad access.
We believe the foregoing efforts have effectively remediated the material weakness as these procedures
91
have been implemented for a sufficient period of time during the fiscal year and we have identifiedcompleted our testing of the design and strengthen our internal control over financial reporting. We are committed to improving our internal control processes and intend to continue to review and improve our financial reporting controls and procedures.operating effectiveness of these above procedures as of June 30, 2021. As we continue to evaluate and work to improve our internal control over financial reporting, we may takeexecute additional measures to address control deficiencies withenhance the overall objective to design and operate internal controls that mitigate identified risks and enable an effective system of internal control over external financial reporting.
Changes in Internal Control Overover Financial Reporting
92
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors and Stockholders of
Super Micro Computer, Inc.
We have audited the internal control over financial reporting of Super Micro Computer, Inc. and subsidiaries (the “Company”) as of June 30, 2017,2021, based on criteria established in Internal Control -— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”)(COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended June 30, 2021, of the Company and our report dated August 27, 2021, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of theits inherent limitations, of internal control over financial reporting including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be preventedprevent or detected on a timely basis.detect misstatements. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
San Jose, California
Item 9B. Other Information
None.
93
PART III
Item 10.Directors, Executive Officers, and Corporate Governance
Executive Officers and Directors
The following table sets forth information regarding our current directors and executive officers and their ages as of MarchJuly 31, 2019:
2021:
| Name | Age | Position(s) | ||||||||||||
| Charles Liang | President, Chief Executive Officer and Chairman of the Board | |||||||||||||
| Senior Vice President, Chief Financial Officer and Chief Compliance Officer | ||||||||||||||
| Don Clegg | Senior Vice President of Worldwide Sales | |||||||||||||
| George Kao | Senior Vice President of Operations | |||||||||||||
| Sara Liu | Co-Founder, Senior Vice President and Director | |||||||||||||
| Director | ||||||||||||||
| Director | ||||||||||||||
| Director | ||||||||||||||
| Director | ||||||||||||||
| Director | ||||||||||||||
__________________________
(1)Member of the Audit Committee
(2)Member of the Compensation Committee
(3)Member of the Nominating and Corporate Governance Committee (the “Governance Committee”)
(4)Determined by the Board of Directors to be “independent”
Executive Officers and Management Directors
Charles Liang founded Super Micro and has served as our President, Chief Executive Officer and Chairman of the Board since our inception in September 1993. Mr. Liang has been developing server and storage system architectures and technologies for the past twothree decades. From July 1991 to August 1993, Mr. Liang was President and Chief Design Engineer of Micro Center Computer Inc., a high-end motherboard design and manufacturing company. From January 1988 to April 1991, Mr. Liang was Senior Design Engineer and Project Leader for Chips & Technologies, Inc., a chipset technology company, and Suntek Information International Group, a system and software development company. Mr. Liang has been granted many server technology patents. Mr. Liang holds an M.S. in Electrical Engineering from the University of Texas at Arlington and a B.S. in Electrical Engineering from National Taiwan University of Science & Technology in Taiwan. Our Nominating and Corporate Governance Committee (“Governance Committee”)concluded that Mr. Liang should serve on the Board based on his skills, experience and qualifications in managing technology businesses, his technical expertise, and his long familiarity with our company’s business.
Don Clegg serves as our Senior Vice President of Worldwide Sales. He previously served as our Vice President of Marketing and Worldwide Business Development. Mr. Clegg has been an employee since April 2006 and has held various senior sales and marketing roles with the Company during that time. Mr. Clegg started his career as a Design Engineer and evolved from Engineer to Vice President of Sales and Marketing working at several established and startup Silicon Valley system and semiconductor companies. Mr. Clegg graduated with high honors from Brigham Young University, where he earned a B.S. in Electrical Engineering.
94
George Kao serves as our Senior Vice President of Operations and previously served as our Vice President of Operations. Mr. Kao joined the Company in October 2016. Mr. Kao was Vice President of Operations of Pericom Semiconductor Corp. from October 2006 to September 2016. Mr. Kao served as a Chief Operating Officer of Orient Semiconductor Electronics Philippines, Inc., a subsidiary of Orient Semiconductor Electronics Ltd., from July 2003 to March 2006. Mr. Kao joined Orient Semiconductor Electronics Philippines, Inc. from Santa Clara-based Foveon after a 20-year career in technology in the United States that began at National Semiconductor. Mr. Kao holds a B.S. in Electrical Engineering from California State Polytechnic University in San Luis Obispo.
Sara Liu co-founded Super Micro in September 1993, has been a member of our Board of Directors since March 2007 and currently serves as our Co-Founder, Senior Vice President, and a director. She has held a variety of positions with the Company, including Treasurer from inception to May 2019, Senior Vice President of Operations from May 2014 to February 2018, and Chief Administrative Officer from October 1993 to May 2019. From 1985 to 1993, Ms. Liu held accounting and operational positions for several companies, including Micro Center Computer Inc. Ms. Liu holds a B.S. in Accounting from Providence University in Taiwan. Ms. Liu is married to Mr. Charles Liang, our Chairman, President and Chief Executive Officer. Our Governance Committee concluded that Ms. Liu should serve on the Board based on her skills, experience, her general expertise in business and operations and her long familiarity with our company’s business.
Non-Management Directors
Saria Tseng has been a member of our Board of Directors since November 2016. Ms. Tseng has served as Vice President of Strategic Corporate Development, General Counsel and Secretary of Monolithic Power Systems, Inc. (“MPS”), a fabless manufacturer of high-performance analog and mixed-signal semiconductors since 2004. From 2001 to 2004, Ms. Tseng served as Vice President, General Counsel and Corporate Secretary of MaXXan Systems, an enterprise class storage network system. Previously, Ms. Tseng was an attorney at Gray Cary (now DLA Piper) and Jones Day. Ms. Tseng is a member of the state bar in both California and New York and is a member of the bar association of the Republic of China, Taiwan. She holds Master of Law degrees from the University of California at Berkeley and the Chinese Culture University in Taipei. Our Governance Committee concluded that Ms. Tseng should serve on the Board based on her skills, experience and qualifications in business and corporate law, her legal expertise and her familiarity with technology business.
Sherman Tuan has been a member of our Board of Directors since February 2007. Mr. Tuan is founder of PurpleComm, Inc. (doing business as 9x9.tv), a platform for connected TV, where he has served as Chief Executive Officer since January 2005 and Chairman of the Board since June 2003. From September 1999 to May 2002, he was director of Metromedia Fiber Network, Inc., a fiber optical networking infrastructure provider. Mr. Tuan was co-founder of AboveNet Communications, Inc., an internet connectivity solutions provider, where he served as President from March 1996 to January 1998, Chief Executive Officer from March 1996 to May 2002 and director from March 1996 to September 1999. Mr. Tuan holds a degree in Electrical Engineering from Feng-Chia University in Taiwan. Our Governance Committee concluded that Mr. Tuan should serve on the Board based on his skills, experience and qualifications in managing technology businesses, his technical expertise, and his familiarity with our company’s business.
Shiu Leung (Fred) Chan has been a member of our Board of Directors since October 2020. Mr. Chan is the founder and president of KCR Development, Inc. which has developed real estate projects in excess of $1 billion in California and Hawaii specializing in high-density residential and retail projects. Mr. Chan also has more than three decades of experience in the high technology sector and as an entrepreneur. He most recently served as chairman of ESS Technology, Inc., a privately held semiconductor company which he founded, from 2015 to 2019. ESS Technology was previously a public company listed on Nasdaq from 1995 until 2008, where he had held a variety of senior executive roles, including as chairman, president and
95
chief executive officer, and served as a director. Mr. Chan has also previously served as chairman of a privately-held consumer electronic company, founder and an executive officer of a VLSI chip design center providing computer aided design, engineering and other design services, and co-founder and an executive officer of a company in the business of computer aided engineering systems development. Mr. Chan holds B.S.E.E. and M.S.C. degrees from the University of Hawaii. Our Governance Committee concluded that Mr. Chan should serve on the Board based on his skills and experience in growing companies and familiarity with technology businesses.
Tally Liu was appointed to our Board of Directors and our Audit Committee on January 30, 2019, and was appointed as the chair of the Audit Committee on June 30, 2019. Mr. Liu has been retired since 2015. Prior to his retirement, Mr. Liu was Chief Executive Officer of Wintec Industries, a supply chain solutions company for high-tech manufacturers, from 2012 to 2015. Prior to Wintec, Mr. Liu served as Chairman of the Board and Chief Executive Officer of Newegg, Inc., an internet consumer technology retailer, from 2008 to 2010, and as President of Newegg in 2008. Prior to Newegg, Mr. Liu held various positions with Knight Ridder Inc., including Vice President, Finance & AdvanceAdvanced Technology and Vice President of Internal Audit. Mr. Liu served as President of the International Newspapers Financial Executives (INFE) for one year before it merged with other media associations. A Certified Public Accountant from 1982-2007, Mr. Liu is a member of the American Institute of Certified Public Accountants (AICPA) with retired status, and was previously a member of the Florida Institute of Certified Public Accountants (FICPA). Mr. Liu is also a Certified Information System Auditor (CISA) and Certified Information Security Manager (CISM), with non-practice status, with the Information Systems Audit and Control Association (ISACA) and has also been certified in Control Self-assessment (CCSA) by the Institute of Internal Auditors (IIA). After earning his BA of Commerce from National Chengchi University, Taipei, Taiwan, and MBA from Florida Atlantic University, Mr. Liu received executive leadership training at the Stanford Advanced Finance Program in 1986 and at Harvard Business School in the Advanced Management Program (AMP) in 1998. Mr. Liu is not related to any member of our Board of Directors or any of our officers. Our Governance Committee concluded that Mr. Liu should serve on the Board based on his skills, experience, his financial literacy and his familiarity with technology businesses.
Except for Mr. Charles Liang and Ms. Sara Liu who are married, there are no other family relationships among any of our directors or executive officers.
Composition of the Board
Our authorized number of directors is eight.currently seven. There are currently eightseven directors. Our amendedAmended and restated certificateRestated Certificate of incorporationIncorporation provides for a classified Board of Directors divided into three classes. The members of each class are elected
to serve a three-year term expiring atwith the third succeeding annual meetingterm of stockholders after such election.office for each class ending in consecutive years. Vacancies may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. Alternatively, the Board of Directors, at its option, may reduce the number of directors, provided that no decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Directors chosen to fill newly created directorships hold office for a term expiring at the next annual meeting of stockholders to which the term of the office of the class to which they have been elected expires.
The current composition of the Board of Directors is:
| Class I Directors | Charles Liang Sherman Tuan Tally Liu | ||||
| Class II | |||||
| Class III Directors | Daniel W. Fairfax Saria Tseng Shiu Leung (Fred) Chan | ||||
__________________________
(1) Because we did not, prior to the filingThe term of this Annual Report on Form 10-K, file our Annual Reports on Form 10-K for fiscal years 2017 and 2018, we were unable to hold our 2017 and 2018 annual meetings. We are not able to hold anClass I directors expires at the annual meeting until such time as we have filed all delinquent Annual Reports on Form 10-K and our Annual Report on Form 10-K for the most recently completedof stockholders following fiscal year. As such, whileyear 2022.
(2)The term of the Class II Directors’ terms were originally to expiredirector expires at the 2017 annual meeting and theof stockholders following fiscal year 2023.
(3)The term of Class III Directors’ terms were originally to expiredirectors expires at the 2018 annual meeting we expect that the Class II Directors and Class III Directors will not come up for election until the 2019 annual meeting.of stockholders following fiscal year 2021.
CORPORATE GOVERNANCE
Corporate Governance Guidelines
We have adopted “Corporate Governance Guidelines” to help ensure that the Board of Directors is independent from management, appropriately performs its function as the overseer of management, and that the interests of the Board of Directors
96
and management align with the interests of theour stockholders. The “Corporate Governance Guidelines” are available at www.Supermicro.com by first clicking on “About Us” and then “Investor Relations” and then “Corporate Governance.”https://ir.supermicro.com/governance/governance-documents/default.aspx.
Code of Ethics
We have adopted a “Code of Business Conduct and Ethics” that is applicable to all directors, executive officers and employees and embodies our principles and practices relating to the ethical conduct of our business and our long-standing commitment to honesty, fair dealing and full compliance with all laws affecting our business. TheOur “Code of Business Conduct and Ethics” is available at www.Supermicro.com by first clicking on “About Us” and then “Investor Relations” and then “Corporate Governance.”https://ir.supermicro.com/governance/governance-documents/default.aspx. Any substantive amendment or waiver of the Code relating to executive officers or directors will be made only after approval by our Board of Directors and will be promptly disclosed on our website within four business days.
Director Independence
The Board affirmatively determines the independence of each director and nominee for election as a director in accordance with the listing requirements of The Nasdaq listing standards.Stock Market.
Based on these standards, our Board of Directors has determined that five of its current eightseven members, Laura Black, Michael S. McAndrews, Hwei-Ming (Fred) Tsai,Daniel W. Fairfax, Saria Tseng, Sherman Tuan Shiu Leung (Fred) Chan and Tally Liu, are "independent directors" under the applicable rules and regulations of the SEC and the listing requirements and rules of The Nasdaq Stock Market.
Executive Sessions
Non-management directors meet in executive session without management present each time the Board holds its regularly scheduled meetings.
Communications with the Board of Directors
The Board of Directors welcomes the submission of any comments or concerns from stockholders or other interested parties. If you wish to send any communications to the Board of Directors, you may use one of the following methods:
•Write to the Board at the following address:
Board of Directors
Super Micro Computer, Inc.
c/o General Counsel
980 Rock Avenue
San Jose, California 95131
•E-mail the Board of Directors at BODInquiries@supermicro.com
Communications that are intended specifically for the independent directors or non-management directors should be sent to the e-mail address or street address noted above, to the attention of the "Independent Directors."
MEETINGS AND COMMITTEES OF THE BOARD
Board Meetings
Each director is expected to devote sufficient time, energy and attention to ensure diligent performance of his or her duties and to attend all Board and committee meetings. We encourage, but do not require, each Board member to attend our annual meeting of stockholders. Four of our directors attended ourWe held an annual meeting of stockholders on May 28, 2021 for our fiscal year 2020. The
97
Board held during fiscal 2017. The Board of Directors held fournine meetings during fiscal year 2017, each2021, four of which were regularly scheduled meetings. The Boardmeetings and five of Directors also acted by written consent one time during fiscal year 2017.which were special meetings. All directors attended at least 75% of the meetings of the Board of Directors and of the committees on which they served during the time they served as a director inwere members of the Board or such committees during fiscal year 2017.2021.
Board Leadership Structure
Our Chairman, Charles Liang, is also our Chief Executive Officer. The Board and our Nominating and Corporate Governance Committee (the "Governance Committee") believe that it is appropriate for Mr. Liang to serve as both the Chief Executive Officer and Chairman due to the relatively small size of our Board, and the fact that Mr. Liang is the founder of our company with extensive experience in our industry. We do not currently have a lead independent director.
Board Role in the Oversight of Risk
Our management, with oversight from our Compensation Committee, has reviewed itsour compensation policies and practices with respect to risk-taking incentives and risk management and does not believe that potential risks arising from itsour compensation polices or practices are reasonably likely to have a material adverse effect on our company.company
Committees of the Board of Directors
The Board has three standing committees to facilitate and assist the Board of Directors in discharging its responsibilities: the Audit Committee, the Compensation Committee and the Governance Committee. In accordance with applicable listing requirements of The Nasdaq listing standards,Stock Market, each of these committees is comprised solely of non-employee, independent directors. The charter for each committee is available at www.Supermicro.com by first clicking on “About Us” and then “Investor Relations” and then “Corporate Governance.”https://ir.supermicro.com/governance/governance-documents/default.aspx. In January 2019,October 2020, the Board of Directors approved amendments to the charters for each of the Audit Committee and the Compensation Committee, and, in January 2021, the Board of Directors approved amendments to the Governance Committee charter, which amendments are all reflected in the descriptions contained herein. The charter of each committee also is available in print to any stockholder who requests it. The following table sets forth the current members of each of the standing Board committees:committees.
| Audit Committee | Compensation Committee | |||||||||||||
| Sherman Tuan (1) | ||||||||||||||
__________________________
(1)Committee Chairperson
(2)The Governance Committee does not currently have a designated chairperson.
Audit Committee
The Audit Committee has four members.three members currently. The Audit Committee met nine21 times in fiscal year 2017,2021, four of which were regularly scheduled meetings and five17 of which were special meetings. OurThe Board has determined that each member of our Audit Committee meets the requirements for independence under the applicable listing standardsrequirements of The Nasdaq Stock Market and the rules of the SEC. OurThe Board of Directors has also determined that each member of our Audit Committee is anhas the required number of “audit committee financial expert”experts” as defined under applicable SEC rules.
As outlined more specifically in the Audit Committee charter, the Audit Committee has, among other duties, the following responsibilities:
•Oversees the independent auditors’ audit work and reviews and pre-approves all audit and non-audit services that may be performed by them;
98
•Reviews and discusses with the independent auditorauditors any audit problems, or difficulties and management’s response;response to them, and all matters that the Public Company Accounting Oversight Board and the SEC require to be discussed with the committee;
•Reviews and discusses with management press releases regarding our financial results, as well as financial information and earnings guidance provided to securities analysts and rating agencies;
•Reviews and approves the planned scope of our annual audit;
•Monitors the rotation of partners of the independent auditors on ourtheir engagement team as required by law;
•Reviews our financial statements and discusses with management and the independent auditors the results of the annual audit and the review of our quarterly financial statements;
•Reviews our critical accounting policies and estimates;
•Oversees the adequacy of our financial controls;
•Periodically reviews and discusses with management and the independent auditors our disclosure controls and procedures and our internal control over financial reporting;
•Reviews, discusses and approves the internal audit function’s (i) internal audit plan, (ii) all major changes to the internal audit plan, (iii) the scope, progress and results of executing the internal audit plan, and (iv) the annual performance of the internal audit function
•Reviews, approves and approvesoversees all related party transactions;
•Establishes and oversees procedures for the receipt, retention and treatment of complaints regarding accounting, internal controls or auditing matters and oversees enforcement, compliance and remedial measures under our Code of Business Conduct and Ethics;
•Periodically reviews and discusses with management our major financial risk exposures and steps management has taken to monitor and control the exposures, including our risk assessment and risk management guidelines and policies; and
•Reviews and evaluates, at least annually, the adequacy of the Audit Committee charter and recommends any proposed changes to the Board of Directors for approval.
Compensation Committee
The Compensation Committee has threetwo members andcurrently. The Compensation Committee charter provides that the Compensation Committee shall be comprised of no fewer than two members. The Compensation Committee met foureight times in fiscal year 2017.2021, four of which were regularly scheduled meetings and four of which were special meetings. The Compensation Committee is comprised solely of non-employee directors. OurThe Board has determined that each member of our Compensation Committee meets the requirements for independence under the applicable listing requirements of The Nasdaq listing standards.Stock Market.
As outlined more specifically in the Compensation Committee charter, the Compensation Committee has, among other duties, the following responsibilities:
•Periodically reviews and advises ourthe Board concerning our overall compensation philosophy, policies and plans, including a review and approval of a group of companies for general executive compensation competitive comparisons, approval of target pay and performance objectives against this group (and broader industry reference), and monitoring of our executive compensation levels and their performance relative to this group;
•Reviews and approves corporate goals and objectives relevant to compensation of the Chief Executive Officer and other executive officers;
•Evaluates the performance of the Chief Executive Officer and other executive officers in light of those goals and objectives, including generally against the overall performance of executive officers at comparable companies, all while taking into account our risk management policies and practices;practices, and any other factors the Compensation Committee deems appropriate;
•Reviews and approves the compensation of the Chief Executive Officer and other executive officers;officers and other key employees;
•Reviews and approves the establishment and terms of our incentive compensation plans and equity compensation plans;
•Monitors and assesses risks associated with our compensation policies, including whether such policies could lead to unnecessary risk-taking behavior, and consults with management regarding such risks;
•Administers the issuance of restricted stock grants, stock options and other equity awards to executive officers, directors and other eligible individuals under our stock plans;equity compensation plans , provided that the Compensation Committee may delegate the approval of grants of options and equity awards to participants other than certain individuals subject to Section 16 of the Exchange Act as provided in the applicable plan; and
99
•Reviews and evaluates, at least annually, the performance of the compensation committee and its members,Compensation Committee, including compliance of the compensation committeeCompensation Committee with its charter and the adequacy of the Compensation Committee charter.
In general, the Compensation Committee discharges the Board's responsibilities regarding the determination of executive compensation, committee charter.and reviews and makes recommendations to the full Board in the determination of non-employee director compensation. The Compensation Committee also makes recommendations to the full Board regarding non-ordinary course executive compensation matters, including with respect to new or amended employment contracts, severance or change-in-control plans or arrangements, and may adopt, amend and terminate such agreements, arrangements or plans. The Compensation Committee may delegate its responsibilities, along with the authority to take action in relation to such responsibilities, to subcommittees comprised of one or more Compensation Committee members, subject to requirements of our bylaws and applicable laws, regulations and the terms of our executive compensation plans. Additional information about the Compensation Committee's processes for determining executive and non-employee director compensation, including the role of the Compensation Committee's compensation consultant and our executive officers, can be found in the "Executive Compensation" and "2021 Director Compensation" sections of this Annual Report.
Nominating and Corporate Governance Committee
The Governance Committee has threetwo members andcurrently. The Governance Committee charter provides that the Governance Committee shall be comprised of no fewer than two members. The Governance Committee met fourseven times in fiscal year 2017.2021, four of which were regularly scheduled meetings and three of which were special meetings. The Governance Committee is comprised solely of non-employee directors. OurThe Board has determined that each member of our Governance Committee meets the requirements for independence under the applicable listing requirements of The Nasdaq listing standards.Stock Market.
As outlined more specifically in the Governance Committee charter, the Governance Committee has, among other duties, the following responsibilities:
•Reviews and makes recommendations to the Board regarding the size of the Board;
•Identifies individuals qualified to become directors;
•Evaluates and selects, or recommends to ourthe Board, of Directors, director nominees for each election of directors;
•Develops and recommends to ourthe Board of Directors criteria any other factors that the Governance Committee deems relevant, including those that promote diversity, for selecting qualified director candidates in the context of the current make-up of the Board of Directors;Board;
•Considers any nominations of director candidates validly made by our stockholders;
•Conducts an annual evaluation of director independence according to Nasdaq rules, applicable law and our Corporate Governance Guidelines to enable the Board to make a determination of each director’s independence;
•Reviews committees’committee structures and compositions and recommends to ourthe Board of Directors concerning qualifications, appointment and removal of committee members;
•Develops, recommends for approval by the Board of Directors and reviews on an ongoing basis the adequacy of the corporate governance principles applicable to us;
•Reviews, on a periodic basis, the adequacy of our Corporate Governance Guidelines and recommends any proposed changes to our Board of Directors;the Board;
•Oversees compliance with our Corporate Governance Guidelines and reports on such compliance to our Board of Directors;the Board;
•Assists the Board of Directors in the evaluation of ourthe Board of Directors and each committee;
•Periodically reviews and discusses with management our practices with respect to environmental, social and corporate governance issues; and
•Periodically reviews the scope of responsibilities of the Governance Committee and the committee's performance of its duties.
The Governance Committee may delegate its responsibilities, along with the authority to take action in relation to such responsibilities, to subcommittees comprised of one or more Governance Committee members, subject to requirements of our bylaws, applicable laws and regulations.
In accordance with our bylaws, our Board establishes additional committees for specific delegated purposes, roles and responsibilities that are temporary in nature.
Delinquent Section 16(a) Beneficial Ownership Reporting ComplianceReports
100
Section 16(a) of the Exchange Act, which require them to file reports with respect to their ownershiprequires our directors, executive officers, and holders of more than 10% of our common stock to file reports regarding their ownership and their transactionschanges in ownership of our common stock. Based upon (i)securities with the SEC, and to furnish us with copies of all Section 16(a) reports that we received from such persons for their fiscal year 2017 transactions in our common stockthey file.
Based solely upon a review of Forms 3 and their common stock holdings4 and (ii) theamendments thereto furnished to us and certain written representations received from one or more of such persons that no annual Form 5 reports were requiredprovided to be filed by them for fiscal year 2017,us, we believe that all reporting requirements under Section 16(a) were met in a timely manner byduring the persons who werefiscal year ended June 30, 2021, our directors, executive officers, members of the Board of Directors orand greater than 10% stockholders during such fiscal year, other thancomplied with all applicable Section 16(a) filing requirements, except that one late report made byForm 4 was filed on September 15, 2020 for each of Howard Hideshima, Phidias Chou, Sherman Tuan and Yih-Shyan (Wally) Liaw in each case with respect to one transaction except for Phidias Chou who had two transactions, and two late reports made byMs. Sara Liu, Mr. Charles Liang (as the spouse of Ms. Sara Liu), Mr. David Weigand, and SaraMr. Don Clegg to reflect equity awards made to Ms. Liu, in each case with respect to one transaction.Mr. Weigand, and Mr. Clegg on August 4, 2020.
101
Item 11.Executive Compensation
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis(“CD&A”)
In this section we provide an explanation and analysis of the material elements of the compensation provided to our Chief Executive Officer, persons who served as Chief Financial Officer during fiscal year 2021, and our other three most highly compensated executive officers who were serving as executive officers at the end of our fiscal year 20172021 (collectively referred to as our “named executive officers”). Those
Our named executive officers and their positions duringat the end of fiscal year 20172021 were:
| Charles Liang | President, Chief Executive Officer (“CEO”) and Chairman of the Board | ||||
David Weigand(1) | Senior Vice President, Chief Financial Officerand Chief Compliance Officer | ||||
| Don Clegg | Senior Vice President, Worldwide Sales | ||||
| George Kao | Senior Vice President, Operations | ||||
Alex Hsu(2) | Senior Chief Executive, Strategic Business | ||||
Kevin Bauer(1) | Former Senior Vice President, Chief Financial Officer | ||||
__________________________
(2)Mr. Hsu served as Senior Vice President, Chief Operating Officer until March 2021. In March 2021, Mr. Hsu transitioned to the role of Senior Chief Executive, Strategic Business.
Overview of Compensation
_____________________________
(1) The chart presents the percentage compensation by compensation component received by the five presented non-CEO named executive officers together (aggregate compensation) as a group, as well as the split between cash and equity compensation for all such persons received in aggregate as a group.
Compensation Philosophy and Objectives—Our Move Toward Performance-Based Compensation Arrangements
Our executive compensation philosophy is to link compensation to corporate performance, particularly the compensation of Mr. Liang, our CEO. Starting in fiscal year 2018 (beginning July 1, 2017), we have moved toward an explicit linking of Mr. Liang’s compensation to performance goals. This movement began in August 2017, when approximately half of Mr. Liang’s equity awards for fiscal year 2018 were in the form of performance-based restricted stock units (“PRSUs”). This
102
trend was interrupted during the time when we were not receive any severance orcurrent in filing our periodic reports with the SEC (September 2017 to January 2020). See our Annual Reports on Form 10-K for fiscal years 2019 and 2020 on file with the SEC for a description of the circumstances that led to us not being able to file our periodic reports during that time.
After we returned to being current in our SEC filings in December 2019, we continued to link more of Mr. Liang’s compensation to corporate performance, through granting him a special cash award opportunity in March 2020 tied to stock price and other enhanced benefitsmetrics, and a short-term incentive award opportunity in May 2020 tied to corporate performance metrics for fiscal year 2020. This movement culminated in March 2021, when we changed Mr. Liang’s compensation to be almost completely performance-based. As discussed in more detail below, in March 2021, we converted nearly 100% of Mr. Liang’s compensation to performance-based compensation through the issuance of options (the “2021 CEO Performance Award”) to purchase 1,000,000 shares of our common stock at an exercise price of $45.00 per share, which was 32% higher than the market price of our common stock on the date of the award ($34.08). The option is comprised of five tranches, which vest only if the market price of our common stock reaches various prices (ranging from $45.00 to $120.00 per share) and we achieve certain specified revenue goals, all as described in greater detail below. In connection with their terminationsthe 2021 CEO Performance Award, Mr. Liang’s base salary was reduced to $1.00 per year (or, if required by law, the statutory minimum wage applicable in San Jose, California) and Mr. Liang agreed that he would not be eligible for any increase in base salary, or any other cash compensation, until June 30, 2026.
In summary, as of employment.the end of fiscal year 2021, almost all of Mr. Liang’s compensation for the next five years is based upon us achieving the revenue goals described below and the market price of our common stock meeting the price targets described below. To fully achieve those goals and targets, our revenue must increase from $3.6 billion for fiscal year 2021 to $8 billion, and the market price of our common stock must reach $120, an increase of 252% from the market price on the day the stock options were awarded. See below for more details about the 2021 CEO Performance Award.
Through fiscal year 2021, we have utilized explicit linking of compensation to performance metrics less with our other NEOs than we have with Mr. Liang. The extent of such linking is described in greater detail below. During fiscal year 2022, the Compensation Committee intends to continue exploring (with Mr. Liang) the appropriate balance between performance-based equity awards like PRSUs and our traditional use of stock options and restricted stock units (“RSUs”) with time-based vesting for future long-term equity programs for other named executive officers. While PRSUs provide the recipient the opportunity to earn a defined number of shares of our common stock if we and/or the recipient achieve pre-set performance goals over time and have become increasingly common in compensation arrangements in the technology industry generally, we believe that our traditional approach to equity awards has served us well, both historically and in fiscal year 2021.
Process Overview
The Compensation Committee of the Board of Directors discharges the Board of Directors’Board’s responsibilities relating to compensation of all of our executive officers. TheDuring fiscal year 2021, the Compensation Committee iswas comprised of three non-employee directors allthrough May 28, 2021 and two non-employee directors for the remainder of whom arethe fiscal year through June 30, 2021 following the expiration of the term of office of Mr. Hwei-Ming (Fred) Chan as a director. All of the non-employee directors who served on the Compensation Committee during fiscal year 2021 were independent pursuant to the applicable listing rules of NASDAQ and Rule 16b-3 under the Exchange Act, and Section 162(m) of the Internal Revenue Code (“Code”).Act.
The agenda for meetings is determined by the Chair of the Compensation Committee with the assistance of our Chief Financial Officer.Officer and General Counsel. Committee meetings are regularly attended by our Chief Financial Officer and our General Counsel. However, neither our Chief Financial Officer does not attendnor our General Counsel attends the portion of meetings during which his own performance or compensation is being discussed. Our Chief Financial Officer and General Counsel support the Compensation Committee in its work by providing information relating to our financial plans performance assessments of our executive officers and othercertain personnel-related data. In addition, the Compensation Committee has the authority under its charter to hire, terminate and approve fees for advisors, consultants and agents as it deems necessary to assist in the fulfillment of its responsibilities. In August 2016, asAs part of making an overall assessment of each individual’snamed executive officer’s role and performance, and structuring our compensation programs for fiscal year 2017,2021, the Compensation Committee reviewed recommendations of managementour Chief Executive Officer, as well as publicly available peer group compensation data.data and data compiled by our independent compensation consultant.
103
For the 2021 CEO Performance Award, the Compensation Committee considered similar awards issued by technology companies consisting of Tesla, Axon Enterprise, RH Technologies, Dish Networks, Oracle, and Sorento Therapeutics. The Compensation Committee engaged Radford in designing, modeling, drafting and reviewing the 2021 CEO Performance Award.
In addition, for other fiscal year 20172021 compensation decisions, the sample of companies consisted of the following whichcompanies(1):
| Ciena Corporation | Infinera Corporation | ||||
Cray Inc.(2) | Juniper Networks, Inc. | ||||
| Diebold Nixdorf, Incorporated | NetApp, Inc. | ||||
| Extreme Networks, Inc. | NETGEAR, Inc. | ||||
| F5 Networks, Inc. | Plexus Corp. | ||||
__________________________
(1)The same sample companies were the same companies in our peer groupused for fiscal year 2016 compensation decisions:
2019, 2020 and 2021. In selecting the companies for inclusion in the sample, the following factors were considered: industry, net revenues, operating income andwe considered whether the company may compete against us for executive talent. These companies ranged
(2)Although Cray Inc. was acquired by Hewlett Packard Enterprise Company in annual revenue from approximately $528.4 million to $5.5 billion. For fiscal years 2017 and 2016, our net sales were $2.5 billion and $2.2 billion, respectively.
Other than with respect to the 2021 CEO Performance Award for which the independent consultant prepared a report in March 2021 at the request of the Compensation Committee, employ any other formulaic process in making compensation decisions. Rather, the Compensation Committee uses its subjective judgment based upon a reviewutilized for fiscal year 2021 the independent consultant report developed for fiscal year 2019 as it believed the report continued to be relevant. Recognizing that over-reliance on external comparisons can be of all information, including an annual reviewconcern, the Compensation Committee used external comparisons as only one point of reference and is mindful of the value and limitations of comparative data.
Key Fiscal Year 2021 Executive Compensation Decisions and Actions
During fiscal years 2019 and 2020, the Compensation Committee generally refrained from compensation adjustments for each officer of his or her level of responsibility, contributions tonamed executive officers until after such time as we became current in our financial resultsfilings with the SEC (which occurred in December 2019) and our overall performance. Thestock was re-listed on the Nasdaq Global Select Market (which occurred in January 2020), except in connection with out of the ordinary circumstances, such as a transition in executive officers. At the beginning of fiscal year 2021 (which began July 1, 2020), the Compensation Committee makes a generalized assessmentdecided that, in light of these factors and this information is not weighted(1) the recent increase during the fourth quarter of fiscal year 2020 in anythe base salaries of named executive officers, (2) the fiscal year 2020 incentive cash program tied to specific manner.
In order to further incentivize Mr. Liang’s continued long-term performance as Chief Executive Officer, the Compensation Committee designed the 2021 CEO Performance Award to be a challenging long-term incentive for future performance. In connection with the issuance of such award in March 2021, the Compensation Committee noted in particular that the performance thresholds adopted were significantly below median compensation levelschallenging and could take years to achieve. In addition, the Compensation Committee sought to help ensure that the 2021 CEO Performance Award would further align Mr. Liang’s interests with those of the Company’s stockholders over the long-term. In connection with the grant of the 2021 CEO Performance Award, it was also determined that Mr. Liang would receive a de minimis salary of $1 per annum (or such other non-waivable minimum wage requirement, if deemed advisable) and no cash bonuses through June 30, 2026. Mr. Liang must also remain as the Company’s Chief Executive Officer (or such other position with the Company as Mr. Liang and the Board may agree) at the time each goal set forth in the 2021 CEO Performance Award is met in order for similar positions at comparable companies.the corresponding tranche to vest. This is principally due tohelps ensure Mr. Liang’s active leadership of the high level of stock ownership held by such persons. InCompany over the future, we may need to increase our recruiting of new executives from outsidelong-term.
As a result of our company. Thisbecoming current in turn may require usour filings with the SEC in December 2019 and stockholder approval of the 2020 Equity and Incentive Compensation Plan at the annual meeting of stockholders held on June 5, 2020, we were in position to pay higher compensation closeralso re-commence the grant of equity incentives to or in excess of that typically paid by comparable companies.
Additional Information on the Compensation Committee's Compensation Consultant
104
For fiscal year 2021, the Compensation Committee utilized information from Radford in making certain named executive officer compensation decisions. Previously, in fiscal year 2019, Radford had advised the Compensation Committee regarding executive officer compensation decisions and our management had commissioned Radford to provide additional services to management for similar compensation studies to evaluate components of total compensation for our employees generally. In making the adjustments to base salary, quarterly bonusessalaries for our named executive officers in the fourth quarter of fiscal year 2020, the Compensation Committee relied on information that Radford had provided in both fiscal year 2020 and long-term equity incentivein fiscal year 2019. In addition, in connection with evaluating the 2021 CEO Performance Award in fiscal year 2021, the Compensation Committee considered information Radford had provided in March 2021 related to peer group chief executive officer compensation and pay-for-performance analyses, as described above.
In fiscal year 2019, before receiving Radford’s information and assistance, the Compensation Committee assessed the independence of Radford in the light of all relevant factors, including the additional services and other factors required by the SEC, that could give rise to a considerable numberpotential conflict of our domestic employeesinterest with respect to Radford. Based on these reviews and international employees,assessments, the Compensation Committee did not identify any conflicts of interest raised by the work performed by Radford. In each of fiscal years 2020 and 2021, the Compensation Committee updated its assessment of Radford’s independence and did not identify any conflicts of interest raised by additional work performed by Radford in addition to our executive officers.such fiscal years.
The Role of the Most Recent Stockholder Say-on-Pay VotesVote
Our last annual meeting of stockholders was held on March 1, 2017May 28, 2021 (the "2016"Fiscal Year 2020 Annual Meeting"), and we provided our stockholders the annual opportunity to vote to approve, on an advisory basis, the compensation of our named executive officers as disclosed in the proxy statement for our 2016 Annual Meeting.such meeting. At the meeting, 40,503,998 shares orstockholders representing approximately 99.2%78% of the stockholders who werestock present and entitled to vote on this “say-on-pay” proposal approved the compensation of our named executive officers, while only 41,966 or approximately 0.1% voted against (with approximately 280,370 shares or approximately 0.7% abstaining). 5,961,842 shares held by brokers were not entitled to vote with respect to this proposal.officers. Although the advisory stockholderFiscal Year 2020 Annual Meeting was held during the latter part of fiscal year 2021 when significant decisions affecting compensation matters for fiscal year 2021 for the named executives had already been made by the Compensation Committee and the say-on-pay vote on named executive officer compensation iswas non-binding, the Compensation Committee has considered and expects to continue to consider the outcome of the vote when making future compensation decisions for our named executive officers. In determining executive compensation for fiscal year 2017, our Compensation Committee took into account the results of the 2016 Annual Meeting stockholder advisory vote to approve executive compensation, particularly the strong support expressed by our stockholders, as one of the many factors considered in deciding that our compensation policies and procedures for 2017 should largely remain consistent with our policies and procedures in prior years. 40.5 million shares for 0.3 million abstention 6.0 million non-votes.
Role of Executive Officers in the Compensation Process
Following stockholder approval of the 2020 Equity and Incentive Compensation Plan in June 2020 that had (among other things) refreshed the pool of equity awards available for grant, our Chief Executive Officer and Chief Financial Officer provided the Compensation Committee with their views on non-CEO named executive officer equity grants based on their view of investor expectations and our operating plans and financial goals. At the end of fiscal year 2021, our Chief Executive Officer provided the Compensation Committee with his views of the nature and extent of our performance against expectations. Finally, our Chief Executive Officer also had accessprovided the Compensation Committee with regular performance evaluations of the other named executive officers, including his views as to competitive data collected by management.their impact on strategic initiatives and organizational goals, as well as their functional expertise and leadership. While the Compensation Committee carefully considers all recommendations made by members of management, ultimate authority for all compensation decisions regarding our named executive officers rests with the Compensation Committee and the Board.
2021 CEO Performance Award Granted in March 2021
105
Terms of the 2021 CEO Performance Award
On March 2, 2021, the Compensation Committed granted to our Chief Executive Officer, Mr. Liang, a long-term performance-based option award to purchase up to 1,000,000 shares of the Company’s common stock which may vest in five equal tranches. Each of the five tranches vests if a specified revenue goal (each, a “Revenue Goal”) and a specified stock price goal (each, a “Stock Price Goal”) is achieved. Revenue Goals must be achieved by June 30, 2026 (the “Revenue Performance Period”) and Stock Price Goals must be achieved by September 30, 2026 (the “Stock Price Performance Period”). The 2021 CEO Performance Award was granted with an exercise price equal to $45.00 (the “Exercise Price”), representing a premium of approximately 32% to the closing stock price of $34.08 reported on NASDAQ on March 2, 2021. The 2021 CEO Performance Award will generally expire on March 2, 2031 and includes, among other terms and conditions, a restriction on the sale of any shares issued upon exercise of the 2021 CEO Performance Award until March 2, 2024, the third anniversary of the date of grant.
The Compensation Committee designed the 2021 CEO Performance Award to be a challenging long-term incentive for future performance, and the Compensation Committee noted in particular that the performance thresholds could take many years to achieve, if they can be achieved at all. In addition, the Compensation Committee intended that the 2021 CEO Performance Award would further align Mr. Liang’s interests with those of the Company’s stockholders over the long term. In connection with the grant of the 2021 CEO Performance Award, Mr. Liang will receive a de minimis salary of $1 per annum (or such other non-waivable minimum wage requirement, if deemed advisable) and no cash bonuses through June 30, 2026. Mr. Liang must also remain as the Company’s CEO (or such other position with the Company as Mr. Liang and the Board may agree) at the time each goal is met in order for the corresponding tranche to vest. This helps ensure Mr. Liang’s active leadership of the Company over the long term.
The following table sets forth the Revenue Goals which must be achieved by the end of the Revenue Performance Period of June 30, 2026:
Revenue Goals(1) | Absolute Change From Revenue Reported for the Fiscal Year Ended June 30, 2020(2) | ||||
| $4.0 billion | 20% | ||||
| $4.8 billion | 44% | ||||
| $5.8 billion | 74% | ||||
| $6.8 billion | 104% | ||||
| $8.0 billion | 140% | ||||
__________________________
(1)Revenue means the Company’s total revenues, as reported by the Company in its financial statements on Forms 10-Q and 10-K filed with the SEC (but without giving effect to any rounding used in reporting the amounts in Form 10-Q and Form 10-K), for the previous four consecutive fiscal quarters of the Company.
(2)Revenue reported in the Company’s Form 10-K for the fiscal year ended June 30, 2020 was $3,339.3 million. Revenue reported in this report for the fiscal year ended June 30, 2021 was $3,557.4 million.
The following table sets forth the Stock Price Goals which must be achieved by September 30, 2026:
Stock Price Goals(1) | Absolute Change in Stock Price from Grant Date Stock Price(2) | Absolute Change in Stock Price From $45 Exercise Price | ||||||
| $45 | 32% | 0% | ||||||
| $60 | 76% | 33% | ||||||
| $75 | 120% | 67% | ||||||
| $95 | 179% | 111% | ||||||
| $120 | 252% | 167% | ||||||
__________________________
(1)Sustained stock price performance is required for each Stock Price Goal to be met, other than in connection with a change in control. For each Stock Price Goal to be met, the sixty trading day average stock price must equal or exceed the Stock Price Goal.
(2)Utilizes closing stock price on March 2, 2021 of $34.08 per share. The June 30, 2021 closing stock price was $35.18 per share.
106
Each of the five tranches vests only when both the applicable Revenue Goal and Stock Price Goal for such tranche are certified by the Compensation Committee as having been met.
A Revenue Goal and a Stock Price Goal that are matched together can be achieved at different points in time and vesting will occur at the later of the achievement certification dates for such Revenue Goal and Stock Price Goal. Subject to any applicable clawback provisions, policies or other forfeiture terms described in the 2021 CEO Performance Award, once a goal is achieved, it is forever deemed achieved for determining the vesting of a tranche.
There is no automatic acceleration of vesting of the 2021 CEO Performance Award upon a future “change in control”, but any tranches that are unvested as of the date of the change in control will vest upon the change in control if the Stock Price Goal related to that tranche is achieved (the Revenue Goals will be disregarded). For purposes of determining whether any Stock Price Goal has been achieved, the stock price shall equal the greater of (1) the most recent closing price per share immediately prior to the effective time of such change in control, or (2) the per share common stock price (plus the per share of common stock value of any other consideration) received by our stockholders in the change in control. To the extent any tranche of the 2021 CEO Performance Award has not vested prior to the change in control, and does not vest in connection with the change of control based on attainment of the relevant Stock Price Goal, as described above, such tranche under the 2021 CEO Performance Award will terminate as of the effective date of the change in control.
Reasons for the 2021 CEO Performance Award
The Compensation Committee’s primary objective in designing the 2021 CEO Performance Award was to help the Company continue to grow and achieve its mission, which would facilitate the creation of significant stockholder value.
Mr. Liang has been critical to fulfilling the Company’s mission to be the leading innovator in high-performance, high-efficiency server and storage technology while being committed to protect the environment through, and provide customers with, the most energy-efficient, environmentally-friendly solutions available on the market. Mr. Liang co-founded the Company, has been our Chief Executive Officer and Chairman since our inception, leads the overall management of the Company, and sets our strategic direction. His experience in running our business, and his continued personal involvement in key relationships with suppliers, customers and strategic partners and directing product innovations, will be extremely valuable to the Company as the Company looks to re-accelerate its growth and meet its bold vision to achieve the Revenue Goals and Stock Price Goals embedded in the 2021 CEO Performance Award.
Mr. Liang remains the Company's largest stockholder, and the Compensation Committee believes the 2021 CEO Performance Award helps ensure his commitment and focus on delivering on a long-term vision that can increase stockholder value.
107
Fiscal Year 20172021 Named Executive Officer Compensation Components, Other than the 2021 CEO Performance Award
For fiscal year 2017,2021, the principal components of compensation for our named executive officers were:(including for the Chief Executive Officer during fiscal year 2021 prior to the grant of the 2021 CEO Performance Award in March 2021) were some or all of the following:
•Base salary;
•Equity-based incentive compensation.compensation consisting of grants of stock options and/or RSUs.
Base Salary. We pay base salaries to our named executive officers to provide them with a base level of fixed income for services rendered to us. Base salariessalary rates for our named executive officers other than the Chief Executive Officer are determined annually by the Compensation Committee based upon recommendations by our Chief Executive Officer, typically taking into account factors such factors as salary norms in comparable companies and publicly available data regarding compensation increases in theour industry, a subjective assessmentassessments of the nature of the positionofficers' positions and an annual review of the contribution and experience of each named executive officer. For the Chief Executive Officer, prior to the grant of the 2021 CEO Performance Award in March 2021, the Compensation Committee considershad considered substantially the same type of information, as well as our overall size in terms of annual revenue, scale and number of employees and the Chief Executive Officer’s overall stock ownership. In connection with the grant of the 2021 CEO Performance Award, Mr. Liang will receive a de minimis salary of $1 per annum (or such other non-waivable minimum wage requirement, if deemed advisable) and no cash bonuses through June 30, 2026.
In determining base salaries for fiscal year 2017,addition, following the assumption of the role of Senior Vice President, Chief Financial Officer and Chief Compliance Officer in February 2021 by Mr. Weigand, the Compensation Committee decidedapproved an adjustment to provide nohis base salary adjustments for our named executive officers.
| Principal Position During Fiscal Year 2017 | Fiscal 2016 Base Salary Rate | Fiscal 2017 Base Salary Rate | Base Salary % Change | |||||||||
| Charles Liang | President, Chief Executive Officer and Chairman of the Board | $ | 365,160 | $ | 365,160 | — | % | |||||
| Howard Hideshima | Former Senior Vice President and Chief Financial Officer | $ | 322,023 | $ | 322,023 | — | % | |||||
| Phidias Chou | Former Senior Vice President, Worldwide Sales | $ | 287,317 | $ | 287,317 | — | % | |||||
| Yih-Shyan (Wally) Liaw | Former Senior Vice President, International Sales, Corporate Secretary and Director | $ | 233,327 | $ | 233,327 | — | % | |||||
| Sara Liu | Senior Vice President of Operations, Chief Administrative Officer, Treasurer and Director | $ | 238,156 | $ | 238,156 | — | % | |||||
| Principal Position During Fiscal Year 2021 | Fiscal Year 2020 Base Salary Rate | Fiscal Year 2021 Base Salary Rate(1) | Base Salary % Change | |||||||||||||||||||||||
| Charles Liang | President, Chief Executive Officer and Chairman of the Board | $ | 522,236 | $ | 1 | (100) | % | |||||||||||||||||||
| David Weigand | Senior Vice President, Chief Financial Officer and Chief Compliance Officer | $ | 337,716 | $ | 380,000 | 13 | % | |||||||||||||||||||
| Don Clegg | Senior Vice President, Worldwide Sales | $ | 352,000 | $ | 352,000 | — | % | |||||||||||||||||||
| George Kao | Senior Vice President, Operations | $ | 325,728 | $ | 325,728 | — | % | |||||||||||||||||||
| Alex Hsu | Senior Chief Executive, Strategic Business | $ | 378,000 | $ | 160,000 | (58) | % | |||||||||||||||||||
| Kevin Bauer | Former Senior Vice President, Chief Financial Officer | $ | 379,040 | $ | 379,040 | — | % | |||||||||||||||||||
(1)The base salary amounts actually paid to each named executive officer underfor fiscal year 2020 and 2021 are disclosed in the Summary Compensation Table. The fiscal year 2020 salary amounts disclosed in the Summary Compensation Table for each named executive officer are less than the amounts disclosed in the table above because each named executive officer was receiving his fiscal year 2019 base salary rate for a company-wideportion of fiscal year 2020. In addition:
•For Mr. Liang, the fiscal year 2021 salary amount disclosed in the Summary Compensation Table is higher than the amount disclosed in the table above because Mr. Liang commenced receiving his $1 de minimis base salary following the grant of the 2021 CEO Performance Award in March 2021;
•For Mr. Weigand, the fiscal year 2021 salary amount disclosed in the Summary Compensation Table is lower than the amount disclosed in the table above because Mr. Weigand only commenced receiving the amount set forth in the table following his appointment in February 2021 as Senior Vice President, Chief Financial Officer and Chief Compliance Officer;
108
•For Mr. Hsu, the fiscal year 2021 salary amount disclosed in the Summary Compensation Table is higher than the amount disclosed in the table above because for most of fiscal year 2021 Mr. Hsu served in the role of Chief Operating Officer at his fiscal year 2020 base salary rate. In March 2021, Mr. Hsu transitioned to the role of Senior Chief Executive, Strategic Business, a part-time position, from his prior role as Senior Vice President, Chief Operating Officer and ceased being an executive officer, and his base salary rate was adjusted to the fiscal year 2021 base salary rate in the table above. Such amount was determined primarily through discussions with the Chief Executive Officer; and
•For Mr. Bauer, the fiscal year 2021 salary amount disclosed in the Summary Compensation Table is lower than the amount disclosed in the table above because Mr. Bauer resigned as Senior Vice President, Chief Financial Officer in January 2021.
Short-Term Incentive Cash Compensation. In fiscal year 2021, the Compensation Committee did not utilize a uniform short-term incentive cash compensation program for the named executive officers. As discussed in the Prior Year CD&A, in the fourth quarter of fiscal year 2020 the Compensation Committee had implemented a short-term incentive cash compensation program for fiscal year 2020 with performance goals as part of its review of executive compensation following the re-listing of our common stock on the Nasdaq Global Select Market (which had occurred in January 2020) in order to support our overall business objectives by aligning short-term Company performance with the interests of investors and focusing attention on key measures of success. Following the completion of such short-term incentive cash program, the Compensation Committee did not believe it was necessary to renew a similar program for fiscal year 2021.
Other Short-Term Bonuses. During fiscal year 2021, we instead utilized individualized short-term cash bonus arrangements with various officers of the Company, including all of our named executive officers. In some cases these arrangements pre-date the time that all employees participated in.these individuals became executive officers, in other cases the arrangements were negotiated at the time the individual was hired or was designated as an executive officer, and in still other cases the arrangements were new short-term bonus opportunities implemented for fiscal year 2021. These arrangements provide for fixed bonus payments, variable bonus payments, or a hybrid program. We award these short-term bonuses to the named executive officers for their continued achievements and contributions to the Company, as further described below. The table below summarizes the fiscal year 2021 arrangements for the named executive officers.
| Charles Liang | For a portion of fiscal year 2021, and spurred by the COVID-19 pandemic, we provided employees additional per day compensation for coming into the workplace.In the United States, both exempt and non-exempt employees were generally eligible for this program based upon the number of days on which they worked on-site, based on a standard rate for each of the exempt and non-exempt employees (the “Workplace Incentive”).Under the Workplace Incentive, Mr. Liang received $3,360. | ||||
| David Weigand | In connection with his appointment as Senior Vice President, Chief Financial Officer and Chief Compliance Officer in February 2021, Mr. Weigand received a fixed bonus, paid quarterly, at a rate of $80,000 per year.Due to the commencement of the award in February 2021, Mr. Weigand received only half of the annual amount for fiscal year 2021 ($40,000).This bonus amount is similar in both structure and amount to what was provided to Mr. Weigand’s predecessor upon his initial appointment to the position.Under the Workplace Incentive, Mr. Weigand received $3,360. | ||||
| Don Clegg | Mr. Clegg received a fixed bonus, paid monthly, at a rate of $84,000 per year.Due to the termination of this program after July 2020, however, Mr. Clegg received only 1/12th of the annual amount for fiscal year 2021 ($7,000).Under the Workplace Incentive, Mr. Clegg received $2,990. | ||||
| George Kao | Under the Workplace Incentive, Mr. Kao received $3,168. | ||||
| Alex Hsu | Under the Workplace Incentive, Mr. Hsu received $768. | ||||
| Kevin Bauer | Mr. Bauer received a fixed bonus, paid monthly, initially at a rate of $80,000 per year, then increased to a rate of $120,000 per year in September 2019.Due to the termination of this program after July 2020, however, Mr. Bauer received only 1/12th of the annual amount for fiscal year 2021 ($10,000).Under the Workplace Incentive, Mr. Bauer received $3,408. | ||||
Equity-Based Incentive Compensation.Compensation. Stock options and other equity-based awards are also an important component of the total compensation of our named executive officers. We believe that equity-based awards also align the interests of each named executive officer with those of our stockholders. They also provide named executive officers a significant, long-term interest in our success and help retain key named executive officers in a competitive market for executive talent. Our 2016The 2020 Equity and Incentive Compensation Plan authorizesauthorized the Compensation Committee to grant stock options and other equity-based awards to eligible named executive officers. The number of shares owned by, or subject to equity-based awards held by, each
109
named executive officer is periodically reviewed and additional awards are considered based upon a generalized assessment of past performance, of the executiveexpected future performance and the relative holdings of other executive officers. The stock options and restricted stock unit awards granted to executive officers by the Compensation Committee generally vest over periods of four years subject to continued service with our company, and stock options expire no later than ten years from the date of
The Compensation Committee has historically granted equity awards to employees on a two-year cycle.
Due to the fact that we failed to file our 2017 Form 10-K by its due date, the effectiveness of our registration statement on Form S-8 covering equity awards under our prior 2016 Equity Incentive Plan was suspended. It remained suspended until December 20, 2019, the date on which we had completed filing all of our delinquent quarterly and annual reports with the SEC. The effectiveness of our registration statement on Form S-8 for the prior 2016 Equity Incentive Plan was then revived. The Compensation Committee did not make equity awards to our named executive officers during the period of time when our registration statement on Form S-8 for the 2016 Equity Incentive Plan was not effective, except to persons who became named executive officers during this period. With the adoption of the 2020 Equity and Incentive Compensation Plan, and the effectiveness of a Form S-8 registration statement for that plan and awards granted under it on June 16, 2020, our Compensation Committee has granted, and expects that it will continue to grant, additional equity awards to our named executive officers that will reflect the lack of equity awards for the period of time during which the effectiveness of our registration statement on Form S-8 for our prior 2016 Equity Incentive Plan was suspended. We expect to make all future equity awards out of the 2020 Equity and Incentive Compensation Plan.
For fiscal year 2021, which commenced July 1, 2020, the Compensation Committee determined to provide the awards of performance-based stock options, service-based stock options and RSUs to named executive officers as outlined in the table below.
| Type of Award | Quantity (at Target) of Award | Rationale for Providing the Award | |||||||||||||||
| Charles Liang | Performance options | 1,000,000 | Long-term incentive(1) | ||||||||||||||
David Weigand(2) | Stock options | 8,000 | Refresh grant | ||||||||||||||
| RSUs | 3,600 | Refresh grant | |||||||||||||||
| Don Clegg | Stock options | 7,500 | Refresh grant | ||||||||||||||
| RSUs | 3,380 | Refresh grant | |||||||||||||||
| George Kao | Stock options | 5,410 | Refresh grant | ||||||||||||||
| RSUs | 2,430 | Refresh grant | |||||||||||||||
Alex Hsu(3) | N/A | N/A | N/A | ||||||||||||||
__________________________
(1)See “2021 CEO Performance Award Granted in March 2021” above for additional information.
(2)Mr. Weigand assumed the role of Senior Vice President, Chief Financial Officer and Chief Compliance Officer following the resignation of Mr. Bauer in January 2021.
(3)Mr. Hsu served as Senior Vice President, Chief Operating Officer until March 2021. In March 2021, Mr. Hsu transitioned to the role of Senior Chief Executive, Strategic Business. Although Mr. Hsu did not receive any new grants of equity awards during fiscal year 2021, the original vesting schedules for his awards outstanding as of February 28, 2021 were continued despite his reduction in responsibilities effective March 1, 2021, and his awards were deemed modified for accounting purposes. For more information about modification fair value for Mr. Hsu’s awards relating to his transition, please see the “Fiscal Year 2021 Summary Compensation Table” and “Fiscal Year 2021 Grants of Plan-Based Awards Table” below.
Stock Options. In general, the Compensation Committee uses stock options to directly align the compensation interests of participating named executive officers with the investment interests of our stockholders. See “2021 CEO Performance Award Granted in March 2021” for additional information regarding the grant of the long-term performance-based option award to Mr. Liang. The stock options described above for each of Messrs. Weigand and Clegg were granted on August 2016,4, 2020 with a 10-year term and an exercise price equal to the closing market price of our common stock on the grant date ($30.33 per share). Subject to the continued service of such named executive officers, these stock options vest and become exercisable at the rate of 25% of the shares on May 1, 2021, and 1/16th at the end of each successive calendar quarter thereafter. The Compensation Committee had approved utilizing May 1, 2021 as the first vesting date because (if not for the delay in the Company’s ability to issue equity incentive awards because it did not have an effective registration statement on Form S-8 covering equity awards under its equity incentive plans) such awards otherwise would have been made for these named executive officers on or prior to May 1, 2020 as part of their two-year award cycle. The stock options described above for Mr. Kao were granted on October 27, 2020 with a 10-year term and an exercise price equal to the closing market price of our common stock on the grant date ($23.74 per share). Subject to the continued service of such named executive officer, the grant is generally exercisable at the rate of 25% of the options granted on October 27, 2021, and then 1/16th at the end of each successive calendar quarter thereafter. The particular size of the stock option grants to each of these named executive officers was determined based upon the recommendation of Mr. Liang which was reviewed and approved by the Compensation Committee.
110
RSUs. In general, RSUs represent the right to receive a defined number of shares of our common stock subject to the continued employment through the vesting date. The RSUs described above for each of Messrs. Weigand and Clegg were granted on August 4, 2020. Subject to the continued service of such named executive officers, these RSUs vest at the rate of 25% of the total number of units on May 10, 2021, and 1/16th at the end of each successive calendar quarter thereafter. The Compensation Committee had approved utilizing May 10, 2021 as the first vesting date because (if not for the delay in the Company’s ability to issue equity incentive awards because it did not have an effective registration statement on Form S-8 covering equity awards under its equity incentive plans) such awards otherwise would have been made for these named executive officers on or prior to May 10, 2020 as part of their two-year award cycle. The RSUs described above for Mr. Kao were granted on October 27, 2020. Subject to the continued service of such named executive officer, these RSUs vest at the rate of 25% of the total number of units on November 10, 2021, and 1/16th at the end of each successive calendar quarter thereafter. The particular size of the RSU grants to each of these named executive officers was determined based upon the recommendation of Mr. Liang which was reviewed and approved by the Compensation Committee.
PRSUs. PRSUs represent the right to receive a defined number of shares of our common stock subject to the achievement of pre-established goals. Mr. Hsu received a grant of 30,000 in target PRSUs on March 27, 2020. In general, a total of 30,000 units were to vest based on service conditions only, with the first tranche of 15,000 vesting in May 2021 and 15,000 vesting in November 2021. Additional units could have been earned for each tranche if the Company’s revenue increased year-over-year (fiscal year 2020 compared to fiscal year 2019 for the first tranche and fiscal year 2021 compared to fiscal year 2020 for the second tranche).
With respect to the first tranche, the Company’s revenue for fiscal year 2020 ($3,339 million) did not exceed revenue for fiscal 2019 ($3,500 million), so no additional units were earned for the first tranche.With respect to the second tranche, if the Company’s revenue for fiscal year 2021 exceeded its revenue for fiscal year 2020, then a number of additional units would have been earned for the second tranche. The number of additional units was to be determined by multiplying the percentage growth in revenue by three, which amount would have then been a multiplier of the base number of 15,000 units.Based upon the Company’s revenue for fiscal year 2021 ($3,557 million) increased from revenue for fiscal year 2020, management has calculated that for the second tranche, approximately 2,939 additional units were earned, such that a total of 17,939 units will vest in November 2021. Such amount remains subject to final certification by the Compensation Committee.
Update on Special Performance-Based Cash Incentive Award Granted in March 2020
As discussed in the Prior Year CD&A, in March 2020, the Board, upon the recommendation of the Compensation Committee, approved special performance-based cash incentive award opportunities to certain long-term employees, including Mr. Liang, our Chief Executive Officer.This incentive for Mr. Liang was specifically linked to Company stock price performance. Mr. Liang’s award, for a grantcash incentive opportunity of 12,500up to $8,076,701 (the “Maximum Value”), was subject to the following conditions:
•50% of the Maximum Value will be paid to Mr. Liang only if the average closing price for the Company’s common stock equals or exceeds $31.61 (representing a 15% premium over the average closing price of the Company’s common stock for the 20 consecutive trading days preceding the Board’s decision) for any period of 20 consecutive trading days prior to September 30, 2021 (the “First Price Target”), provided that Mr. Liang remains employed with the Company through the date that such common stock price goal is achieved; provided further that this payment shall be subject to reduction (including possibly a reduction to zero) at the sole discretion of the Board to the extent the Company has not made, in the Board’s determination, adequate progress in remediating its internal weaknesses in its internal control over financial reporting; and
•50% of the Maximum Value will be paid to Mr. Liang only if the average closing price for the Company’s common stock equals or exceeds $32.99 (representing a 20% premium over the average closing price of the Company’s common stock for the 20 consecutive trading days preceding the Board’s decision) (the “Second Price Target”) for any period of 20 consecutive trading days prior to June 30, 2022, provided that Mr. Liang remains employed with the Company through the date that such common stock price goal is achieved.
The relevant stock price goals under Mr. Liang’s award were not met during fiscal year 2020, and no portion of these amounts were paid to Mr. Liang during fiscal year 2020. During fiscal year 2021, the First Price Target was achieved based upon stock price performance from December 22, 2020 through January 21, 2021.As of August 27, 2021, the Board has not yet determined whether to exercise any negative discretion with respect to the first 50% of the Maximum Value earned by Mr. Liang (as described in the first bullet point above), and no portion of the first 50% of the Maximum Value has yet been paid to Mr. Liang through such date. The Board is expected to make a final determination whether to exercise any negative discretion by October 31, 2021. However, due to the fact that we currently expect that the Board will determine that the Company has made adequate progress in remediating the Company’s material weaknesses in its internal control over financial reporting, we have chosen to disclose the first 50% of the Maximum Value as having been earned by Mr. Liang for fiscal year 2021, and are
111
disclosing it as an earned amount in the Summary Compensation Table below, all in advance of formal Board determination. Also during fiscal year 2021, the Second Price Target was achieved based upon stock price performance from February 8, 2021 through March 8, 2021.Payment of the 50% of the Maximum Value relating to the Second Price Target was made to Mr. Liang during the fourth quarter of fiscal year 2021.As a result of these activities and achievements, we currently consider 100% of the Maximum Value to have been earned by Mr. Liang for fiscal year 2021.
Former CFO Consulting Arrangement
Prior to ceasing employment with the Company as Chief Financial Officer, in February 2021 Mr. Bauer entered into a consulting arrangement with the Company related to reinforcing a smooth transition of his prior duties, and providing general consultation and advice services.The term of the arrangement is for one year with a monthly fee of $13,334 for services.As a result of the consulting service provided for in the consulting arrangement, Mr. Bauer's outstanding equity awards generally will continue to vest during the consulting period in accordance with their terms and the period Mr. Bauer was permitted to exercise his awards was extended until May 25, 2022.Assuming a stock price equal to $32.50 (our closing stock price on February 25, 2021, Mr. Bauer’s last day of employment), the intrinsic value of the unvested awards subject to such continued vesting was approximately $40,500 in stock options and 5,630 RSUs$0 in RSUs.
On April 27, 2021, Mr. Bauer was also granted 10,000 stock options to Mr. Hideshima, basedcompensate his consulting efforts in a smooth transition of his prior duties, and his provision of general consultation and advice services.Such stock options have a 10-year term and an exercise price equal to the closing market price of our common stock on the Compensation Committee’s reviewgrant date ($38.50 per share). Subject to the continued provision of all employee grant levelsconsulting services, these stock options vest and become exercisable at the rate of 100% of the shares on the recommendationFebruary 25, 2022. The number of shares subject to these stock options was determined primarily through discussions with the Chief Executive Officer. No equity grants were made to any other named executive officer in fiscal year 2017 as none of the other named executive officers were eligible for a two-year refresh grant in fiscal year 2017.
Stock Ownership Guidelines
Other than as discussed below under “Stock Retention Policy,” we currently do not require our directors or executive officers to own a particular amount of our common stock. The Compensation Committee is satisfied that stock and option holdings among our directors and named executive officers arehave historically been sufficient at this time to provide motivation and to align this group’s interests with those of our stockholders. Our insider trading policy prohibits any of our directors, executive officers, employees or contractors from engaging in any transactions in publicly-traded options, such as puts and calls, and other derivative securities, including any hedging or similar transaction, with respect to our common stock.
Stock Retention Policy
We have adopted a stock retention policy which requires that our Chief Executive Officer hold a significant portion of the shares of our common stock acquired under our equity incentive planplans for at least 36 months. UnderGenerally, under the policy, the Chief Executive Officer must retain at least 50% of all “net” shares received (“net” shares meanmeans those shares remaining after the sale or withholding of shares in payment of the exercise price, if applicable, and withholding taxes) for at least 36 months following the date on which an equity award is vested, settled or exercised.exercised, as applicable. In addition, in connection with the 2021 CEO Performance Award granted to our Chief Executive Officer in March 2021, the Board required a restriction on the sale of any shares issued upon the exercise of the options associated with such award until March 2, 2024, the third anniversary of the grant date. See “2021 CEO Performance Award Granted in March 2021.”
Recoupment Policy
We established a Recoupment Policyrecoupment policy that is applicable to our named executive officers.officers (the “Recoupment Policy”). Under the policy,Recoupment Policy, if we are required to prepare an accounting restatement due to material noncompliance with the financial reporting requirements under United States securities laws, the Compensation Committee shall be entitled to recover from any current or former executive officer any excess incentive-based compensation received by such person during the three-year period prior to the date on which we are required to prepare the restatement. This policyRecoupment Policy applies to both equity-based and cash-based incentive compensation awards. The “excess incentive-based compensation” is the difference between the actual amount that was paid, and the amount that would have been paid under the restated financial results.
Other Benefits
112
Health and Welfare Benefits
Benefits. Our named executive officers receive the same health and welfare benefits as are offered to our other employees, including medical, dental, vision, life, accidental death and dismemberment and disability insurance coverage, flexible spending accountsaccount participation and holiday pay. The same contribution amounts, percentages and plan design provisions are applicable to all employees. We offer these health and welfare benefits generally to help provide a competitive compensation package to employees to assist with the attraction, hiring and retention of employees.
Retirement Program
Program. Our named executive officers may participate in the same tax-qualified, employee-funded 401(k) plan that is offered to all our other employees. We do not maintain a supplemental executive retirement plan, nor do we offer any defined benefit retirement plans or other defined contribution plans to our named executive officers. We offer these retirement program benefits generally to help provide a competitive compensation package to employees to assist with the attraction, hiring and retention of employees.
Perquisites. We do not provide specialperquisites or personal benefits or other perquisites to any of our named executive officers.
Employment Arrangements, Severance and Change of Control Benefits
Benefits. We have not entered into employment agreements with any of our named executive officers.officers (we have entered into a consulting agreement with Mr. Bauer, which is further described above under “- Former CFO Consulting Arrangement”).Each of Messrs. Hideshima, ChouClegg, Hsu, Kao and Liaw had, and Ms. LiuWeigand currently has a signed offer letter which provides for at-will employment. TheEach such offer letter provides for an initial base salary rate, an initial stock optionsoption grant and rightrights to participate in our employee benefit plans.plans as described above. Prior to his departure in February 2021, Mr. Bauer had a substantially similar offer letter. We do not have any written employment arrangements with Mr. Liang. WeOther than as described in the following sentence, we do not have any arrangements with any of our named executive officers that provide for any severance or other benefits in the event of termination or change of control of our company.Company.See also “- Fiscal Year 2021 Potential Payments Upon Termination or Change of Control.” The 2021 CEO Performance Award has certain provisions related to the treatment of such award in the event of a change of control of our Company. See “2021 CEO Performance Award Granted in March 2021.”
Tax and Accounting Treatment of Compensation
Considerations.In our review and establishment of named executive officer compensation programs and payments, we consider, but do not place greatsubstantial emphasis on, the anticipated accounting and tax treatment of our compensation programs to us and our named executive officers. While we may consider accounting and tax treatment, these factors alone are not dispositive. Among other factors that receive greater consideration are the net costs to us and our ability to effectively administer executive compensation in the short and long-term interests of stockholders.
Section 162(m) of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), generally limits a company’sCompany’s ability to deduct for tax purposes compensation in excess of $1.0 million paid in any single tax year to certain executive officers (and, beginning in 2018, certain former executive officers). PriorWe expect to what is referred to as the 2017 Tax Reform Act, compensation deemed to be performance-based in accordance with Section 162(m) could be exempt from this $1.0 million limitation, and compensation paid to the chief financial officer was not subject to the deductibility limitation of Section 162(m). We continue to evaluate the impact of the 2017 Tax Reform Act for its potential impact on our company. Regardless of that impact, however, we will continue to design and maintain executive compensation arrangements that we believe will attract and retain the executive talent that we need to compete successfully, even if in certain cases such compensation is not deductible for federal income tax purposes. In addition, because of the uncertainties associated with the application and interpretation of Section 162(m) and the regulations issued thereunder, there can be no assurance that compensation intended to satisfy the requirements for deductibility under Section 162(m), as in effect prior to 2018, will in fact be deductible.
We account for equity compensation paid to our employees in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, Stock-Compensation (“ASC Topic 718”), which requires us to estimate and record expenses for each award of equity compensation over the service period of the award.
We intend that our plans, arrangements and agreements will be structured and administered in a manner that complies with (or is exempt from) the requirements of Section 409A of the Code. Participation in, and compensation paid under, our plans, arrangements and agreements may, in certain instances, result in the deferral of compensation that is subject to the requirements of Section 409A. If our plans, arrangements and agreements as administered fail to meet certain requirements under or exemptions from Section 409A, compensation earned thereunder may be subject to immediate taxation and tax penalties.
Summary
The Compensation Committee believes that our compensation philosophy and programs are designed to foster a performance-oriented culture that aligns our named executive officers’ interests with those of our stockholders. The Compensation Committee also believes that the compensation of our named executive officers is both appropriate and responsive to the goal of building stockholder value.
Compensation Committee Report
113
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis (“CD&A”) with our management. Based on this review and these discussions, the Compensation Committee recommended to the Board of Directors that the CD&A be included in this Annual Report on Form 10-K.Report.
This report has been furnished by the Compensation Committee.
Sherman Tuan, Chair
Saria Tseng
114
Fiscal Year 20172021 Summary Compensation Table
The following table sets forth information concerning the reportable compensation earned duringfor our named executive officers for the fiscal years ended 2017, 20162021, 2020 and 20152019, as applicable.
FISCAL YEAR 2021 SUMMARY COMPENSATION TABLE
| Name and Principal Position | Year | Salary ($)(1) | Bonus ($)(2) | Stock Awards ($)(3) | Option Awards ($)(4) | Non-Equity Incentive Plan Compensation ($)(5) | All Other Compensation ($) | Total ($) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Charles Liang | 2021 | 421,785 | 3,360 | — | 11,616,000 | 8,076,701 | — | 20,117,846 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| President, Chief Executive Officer and Chairman of the Board | 2020 | 423,346 | — | — | — | 875,635 | — | 1,298,981 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 386,212 | — | — | — | — | — | 386,212 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| David Weigand | 2021 | 367,709 | 43,360 | 109,188 | 113,280 | — | — | 633,537 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Senior Vice President, Chief Financial Officer and Chief Compliance Officer | 2020 | 300,347 | 222,107 | — | — | 78,970 | — | 601,424 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 270,000 | 48,921 | 221,000 | 215,600 | — | — | 755,521 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Don Clegg | 2021 | 362,140 | 9,990 | 102,515 | 106,200 | — | — | 580,845 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Senior Vice President, Worldwide Sales | 2020 | 348,459 | 108,970 | — | — | 290,581 | — | 748,010 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 336,910 | 146,419 | 132,600 | 215,600 | — | — | 831,529 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| George Kao | 2021 | 333,858 | 6,273 | 57,688 | 60,213 | — | — | 458,032 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Senior Vice President, Operations | 2020 | 324,807 | 4,524 | 68,851 | 15,288 | 152,333 | — | 565,803 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 305,060 | 4,262 | — | 39,323 | — | — | 348,645 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Alex Hsu(6) | 2021 | 305,333 | 768 | 452,964 | 475,592 | — | — | 1,234,657 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Senior Chief Executive, Strategic Business | 2020 | 374,845 | 5,048 | 611,100 | 372,400 | 189,624 | — | 1,553,017 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 206,340 | 2,623 | 60,112 | 172,480 | — | — | 441,555 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Kevin Bauer(7) | 2021 | 294,575 | 13,408 | — | 426,500 | — | 53,336 | 787,819 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Former Senior Vice President, Chief Financial Officer | 2020 | 363,954 | 460,967 | — | — | 164,441 | — | 989,362 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 340,356 | 80,004 | — | — | — | — | 420,360 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
__________________________
(1)Amounts disclosed under "Salary" for fiscal year 2021 include leave pay earned by the named executive officers.
(2)Amounts disclosed under “Bonus” for fiscal year 2021 reflect short-term bonuses earned by each of each person who was athe named executive officers. See discussion under “Compensation Discussion and Analysis” for more information about these individualized programs.
(3)The amount disclosed for fiscal year 2021 represents the grant date fair value of the RSU award granted during the fiscal year to the named executive officer duringcalculated in accordance with ASC Topic 718 (plus, for Mr. Hsu, the modification fair value for the continuation of the original vesting schedules for his awards outstanding as of February 28, 2021 despite his reduction in responsibilities effective March 1, 2021 (based on a deemed modification for accounting purposes)), in each case as further described in the Fiscal Year 2021 Grants of Plan-Based Awards table below. Assumptions used in the calculation of this amount are included in Part II, Item 8, “Financial Statement and Supplementary Data”, and Part II, Item 8, Note 14 “Stock-based Compensation and Stockholders’ Equity”, to our consolidated financial statements for fiscal year 2017.2021 included in this Annual Report on Form 10-K.
(4)The amount disclosed for fiscal year 2021 represents the grant date fair value of the stock option award for each named executive officer calculated in accordance with ASC Topic 718, using the Black Scholes option-pricing model (plus (A) for Mr. Bauer, the modification fair value for a modification of the post-employment termination exercise period for 70,000 in vested stock options held by Mr. Bauer as of February 25, 2021, and (B) for Mr. Hsu the modification fair value for the continuation of the original vesting schedules for his awards outstanding as of February 28, 2021 despite his reduction in responsibilities effective March 1, 2021 (based on a deemed modification for accounting purposes)), in each case as further described in the Fiscal Year 2021 Grants of Plan-Based Awards table below. The amount set forth in the table above with respect to Mr. Liang’s award represents our determination of probable outcome of the performance conditions embedded in the 2021 CEO Performance Award as of the date of
Name and Principal Position During Fiscal Year 2017 | Year | Salary ($)(1) | Bonus ($)(2) | Stock Awards ($)(3) | Option Awards ($)(4) | Non-Equity Incentive Plan Compensation ($) | Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($)(5) | Total ($) | |||||||||||||||||||||||||
| Charles Liang | 2017 | 386,212 | $ | 650 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 386,862 | ||||||||||||||||||
President, Chief Executive Officer and Chairman of the Board | 2016 | 363,776 | — | — | — | — | — | — | 363,776 | |||||||||||||||||||||||||
| 2015 | 367,528 | 7,607 | — | 2,607,616 | — | — | — | 2,982,751 | ||||||||||||||||||||||||||
| Howard Hideshima | 2017 | 330,681 | 650 | 115,640 | 116,092 | — | — | 1,500 | 564,563 | |||||||||||||||||||||||||
Senior Vice President and Chief Financial Officer | 2016 | 322,646 | — | — | — | — | — | — | — | 322,646 | ||||||||||||||||||||||||
| 2015 | 315,816 | 6,990 | — | 403,580 | — | — | — | 726,386 | ||||||||||||||||||||||||||
| Phidias Chou | 2017 | 299,461 | 10,650 | — | — | — | — | — | 310,111 | |||||||||||||||||||||||||
| Senior Vice President, Worldwide Sales | 2016 | 286,747 | 3,416 | 137,160 | 138,000 | — | — | — | 565,323 | |||||||||||||||||||||||||
| 2015 | 300,278 | 6,446 | — | — | — | — | — | 306,724 | ||||||||||||||||||||||||||
| Yih-Shyan (Wally) Liaw | 2017 | 246,105 | 650 | — | — | — | — | — | 246,755 | |||||||||||||||||||||||||
Senior Vice President, International Sales, Corporate Secretary and Director | 2016 | 232,864 | — | 109,959 | 105,089 | — | — | — | 447,912 | |||||||||||||||||||||||||
| 2015 | 247,271 | 5,422 | — | — | — | — | — | 252,693 | ||||||||||||||||||||||||||
| Sara Liu | 2017 | 244,558 | 650 | — | — | — | — | — | 245,208 | |||||||||||||||||||||||||
Senior Vice President and Chief Administrative Officer, Treasurer and Director | 2016 | 237,253 | — | 110,484 | 113,961 | — | — | — | 461,698 | |||||||||||||||||||||||||
| 2015 | 230,546 | 5,309 | — | — | — | — | — | 235,855 | ||||||||||||||||||||||||||
115
grant. If the maximum level of performance is achieved with respect to this award (in other words, if we achieve the $8.0 billion revenue target and our common stock reaches the $120.00 per share price target, the grant date fair value of the award will be $13,882,000. These amounts do not necessarily correspond to the actual values that may be realized by the named executive officers, which depend, among other things, on the market value of our common stock appreciating from that on the grant dates of the options. This award was designed to be entirely an incentive for future performance that could take many years, if at all, to be achieved. Further, each of the stock price targets (starting at $45.00 and rising to $120.00) and revenue targets (starting at $4.0 billion and rising to $8.0 billion) was selected to be very difficult to achieve. If any options have not vested by the end of the term of the option award, they will be forfeited and Mr. Liang will not realize any value from such options. As of the date of this filing, none of the revenue or stock price goals has been achieved. Furthermore, the exercise price of $45.00 per share is 32% higher than the closing price of our common stock on the date the 2021 CEO Performance Award was granted AND exceeds the highest price at which our common stock has ever traded as of the date of this filing. Even if we achieve the first revenue goal of $4.0 billion and the first stock price goal of $45.00 is also met, so that the first tranche of the 2021 CEO Performance Award vests, Mr. Liang will realize no gain on the shares covered by the first tranche unless he exercises the option for the first tranche of shares and thereafter our common stock trades at a price higher than $45.00 per share. Assumptions used in the calculation of these amounts are included in Part II, Item 8, "Financial Statements and Supplementary Data", and Part II, Item 8, Note 14 “Stock-based Compensation and Stockholders’ Equity”, to our consolidated financial statements for fiscal year 2021 included in this Annual Report on Form 10-K.
(5)The amount disclosed in this column for fiscal year 2021 represents for Mr. Liang $8,076,701 in Maximum Value deemed earned under a special performance-based cash incentive award opportunity granted to Mr. Liang in March 2020. See “Update on Special Performance-Based Cash Incentive Award Granted in March 2020” above for more information about this award.
(6)Mr. Hsu served as Senior Vice President, Chief Operating Officer until March 2021. In March 2021, Mr. Hsu transitioned to the role of Senior Chief Executive, Strategic Business.
(7)Mr. Bauer resigned as our Chief Financial Officer in January 2021, and Mr. Weigand has assumed such role. Mr. Bauer served as consultant after his resignation from the Company and earned $53,336 in consulting fees for fiscal year 2021.
Fiscal Year 20172021 Grants of Plan-Based Awards
The following table provides information concerning all plan-based awards granted during fiscal year 20172021 to each person who was aof our named executive officerofficers, which grants were made under the 2020 Equity and Incentive Compensation Plan.
FISCAL YEAR 2021 GRANTS OF PLAN-BASED AWARDS TABLE
| Estimated Future Payouts Under Equity Incentive Plan Awards | All Other Stock Awards: Number of Shares of Stock or Units (#) | All Other Option Awards: Number of Securities Underlying Options (#) | Exercise or Base Price of Option Awards ($/Sh) | Grant Date Fair Value of Stock and Option Awards ($)(1) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Name | Grant Date | Threshold (#) | Target (#) | Maximum (#) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Charles Liang(2) | 3/2/2021 | 200,000 | 1,000,000 | 1,000,000 | — | — | $ | 45.00 | $ | 11,616,000 | (6) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| David Weigand | 8/4/2020 | — | — | — | — | 8,000 | 30.33 | 113,280 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 8/4/2020 | — | — | — | 3,600 | — | — | 109,188 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Don Clegg | 8/4/2020 | — | — | — | — | 7,500 | 30.33 | 106,200 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 8/4/2020 | — | — | — | 3,380 | — | — | 102,515 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| George Kao | 10/27/2020 | — | — | — | — | 5,410 | 23.74 | 60,213 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 10/27/2020 | — | — | — | 2,430 | — | — | 57,688 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Alex Hsu | 3/1/2021 | — | (3) | — | (3) | — | — | 452,964 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 3/1/2021 | — | — | — | — | (4) | (4) | 475,592 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Kevin Bauer | 4/27/2021 | — | — | — | — | 10,000 | 38.50 | 183,600 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2/25/2021 | — | — | — | — | (5) | (5) | 242,900 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
_________________________
(1) Amounts disclosed in this column represent the fair value of the RSU and stock option awards as of the date of grant (for Mr. Liang’s stock option award, based upon the probable outcome of the performance conditions), computed in accordance with ASC Topic 718, excluding the effect of estimated forfeitures.
(2) These stock options are performance-based and shall vest and become exercisable depending upon the degree of satisfaction of both the Stock Price Goals and Revenue Goals discussed above in CD&A. The Stock Price Goals must be achieved on or prior to September 30, 2026 and the Revenue Goals must be achieved on or prior to June 30, 2026. The options may vest in tranches of 200,000 shares each only when coordinating Stock Price Goals and Revenue Goals, respectively, of $45.00 sixty-trading-day-average stock price and $4.0 billion in four-consecutive-fiscal-quarter revenue, $60.00 sixty-trading-day-average stock price and $4.8 billion four-consecutive-fiscal-quarter revenue, $75.00 sixty-trading-day-average stock price and $5.8 billion four-consecutive-fiscal-quarter revenue, $95.00 sixty-trading-day-average stock price and $6.8 billion four-consecutive-fiscal-quarter revenue, and $120.00 sixty-trading-day-average stock price and $8.0 billion four-consecutive-fiscal-quarter revenue, are achieved. The smallest
116
amount of these stock options (threshold) that can be earned based on performance is vested stock options for 200,000 shares for achieving a Stock Price Goal of $45.00 sixty-trading-day-average stock price and a Revenue Goal of $4.0 billion in four-consecutive-fiscal-quarter revenue. However, even if those goals are achieved, if the Company’s stock price remained at $45.00 per share, based on the $45.00 exercise price for these stock options, there would be no appreciation value in those stock options for Mr. Liang. For more information about the operation of this award, see “2021 CEO Performance Award Granted in March 2021” above.
(3) In connection with his change in role with us effective March 1, 2021, the remaining PRSUs and unvested RSUs held by Mr. Hsu as of March 1, 2021 were deemed modified for accounting purposes. The value disclosed in this row reflects the modification fair value for the modification of Mr. Hsu’s remaining PRSUs and unvested RSUs.
(4) In connection with his change in role with us effective March 1, 2021, the unvested stock options held by Mr. Hsu as of March 1, 2021 were deemed modified for accounting purposes. The value disclosed in this row reflects the modification fair value for the modification of Mr. Hsu’s unvested stock options.
(5) In connection with his termination of employment and consulting arrangement with us, the post-employment termination exercise period for 70,000 in vested stock options held by Mr. Bauer as of February 25, 2021 was extended to expire within three months of the end of his consulting period (which is currently expected to occur on February 25, 2022). These vested stock options consisted of 8,030 stock options, 21,970 stock options, 6,400 stock options and 33,600 stock options, each at an exercise price of $28.45 per share to expire on January 25, 2027. The value disclosed in this row reflects the modification fair value for the modification of the post-employment termination exercise period for Mr. Bauer’s stock options.
(6) Reflects the grant date fair value of the 2021 CEO Performance Award, calculated in accordance with ASC Topic 718, as described in footnote one. This amount does not necessarily correspond to the actual value that may be realized by Mr. Liang. The 2021 CEO Performance Award is intended to compensate Mr. Liang over its 10-year maximum term and will become vested as to all shares subject to it only if the market price of our common stock increases to $120.00 per share (determined on a sixty-trading-day average) and our revenue increases to $8.0 billion over four consecutive fiscal quarters, in each case during the applicable performance period. This award was designed to be entirely an incentive for future performance that could take many years, if at all, to be achieved. Further, each of the stock price targets (starting at $45.00 and rising to $120.00) and revenue targets (starting at $4.0 billion and rising to $8.0 billion) was selected to be very difficult to achieve. If any options have not vested by the end of the term of the option award, they will be forfeited and Mr. Liang will not realize any value from such options. As of the date of this filing, none of the revenue or stock price goals has been achieved. Furthermore, the exercise price of $45.00 per share is 32% higher than the closing price of our common stock on the date the 2021 CEO Performance Award was granted AND exceeds the highest price at which our common stock has ever traded as of the date of this filing. Even if we achieve the first revenue goal of $4.0 billion and the first stock price goal of $45.00 is also met, so that the first tranche of the 2021 CEO Performance Award vests, Mr. Liang will realize no gain on the shares covered by the first tranche unless he exercises the option for the first tranche of shares and thereafter our common stock trades at a price higher than $45.00 per share. See “Executive Compensation—Compensation Discussion and Analysis (“CD&A”)—Compensation Philosophy and Objectives—Our Move Toward Performance-Based Compensation Arrangements” and “Executive Compensation—Compensation Discussion and Analysis (“CD&A”)—2021 CEO Performance Award Granted in March 2021” above and Part II, Item 8, Note 14 “Stock-based Compensation and Stockholders’ Equity”, to our consolidated financial statements for fiscal year 2021 included in this Annual Report on Form 10-K.
Grants made in fiscal year 2021 are described more fully in the "Compensation Discussion and Analysis" section of this Annual Report. More information concerning the terms of the employment or consulting arrangements, if applicable, in effect with our named executive officers during fiscal year 2017. Except for Mr. Hideshima, no other named executive officer received a plan-based award during fiscal year 2017.2021 is provided under the "Employment Arrangements, Severance and Change of Control Benefits" under the “Compensation Discussion and Analysis”.
| Name | Grant Date | All Other Stock Awards: Number of Shares of Stock or Units (#) | All Other Option Awards: Number of Securities Underlying Options (#) | Exercise or Base Price of Option Awards ($/Sh) | Grant Date Fair Value of Stock and Option Awards ($)(1) | |||||||||||
| Charles Liang | — | — | — | $ | — | $ | — | |||||||||
| Howard Hideshima | 8/3/2016 | 5,630 | (2) | — | $ | — | $ | 115,640 | ||||||||
| 8/3/2016 | — | 12,500 | (3) | 20.54 | 116,092 | |||||||||||
| Phidias Chou | — | — | — | $ | — | — | ||||||||||
| Yih-Shyan (Wally) Liaw | — | — | — | $ | — | — | ||||||||||
| Sara Liu | — | — | — | $ | — | — | ||||||||||
Outstanding Equity Awards at 2021 Fiscal Year-End 2017
The following table provides information concerning the outstanding equity-based awards as of June 30, 2017,2021, held by each person who was aour named executive officerofficers.
OUTSTANDING EQUITY AWARDS AT 2021 FISCAL YEAR-END TABLE
| Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units of Stock That Have Not Vested ($)(1) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Charles Liang | 231,260 | 20.70 | 1/21/2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
117
| 166,750 | 35.07 | 1/19/2025 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 130,000 | 26.95 | 8/2/2027 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| — | — | 1,000,000 | (2) | 45.00 | 3/2/2031 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| David Weigand | 11,310 | 4,762 | (3) | 22.10 | 7/31/2028 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 3,690 | 238 | (3) | 22.10 | 7/31/2028 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| — | 4,475 | (4) | 30.33 | 8/4/2030 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2,000 | 1,525 | (4) | 30.33 | 8/4/2030 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2,500 | (5) | 87,950 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2,700 | (6) | 94,986 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Don Clegg | 6,800 | — | 12.50 | 8/6/2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 6,000 | — | 26.75 | 8/4/2024 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 4,000 | — | 20.54 | 8/3/2026 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 9,917 | 4,762 | (7) | 22.10 | 7/31/2028 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 5,083 | 238 | (7) | 22.10 | 7/31/2028 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| — | 4,288 | (4) | 30.33 | 8/4/2030 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 1,875 | 1,337 | (4) | 30.33 | 8/4/2030 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 1,500 | (5) | 52,770 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2,535 | (6) | 89,181 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| George Kao | 14,840 | — | 26.95 | 8/2/2027 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 5,160 | — | 26.95 | 8/2/2027 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 744 | 2,228 | (8) | 13.00 | 10/30/2028 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2,968 | — | 13.00 | 10/30/2028 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 974 | 586 | (9) | 20.37 | 3/27/2030 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| — | 5,410 | (10) | 23.74 | 10/27/2030 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 1,268 | (11) | 44,608 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2,430 | (12) | 85,487 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Alex Hsu | 3,500 | — | 17.96 | 1/20/2024 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2,500 | — | 27.28 | 1/27/2026 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2,082 | 298 | (13) | 22.80 | 1/24/2028 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 9,005 | 3,956 | (7) | 22.10 | 7/31/2028 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2,995 | 44 | (7) | 22.10 | 7/31/2028 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 38,000 | — | 20.37 | 3/27/2030 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 134 | (14) | 4,714 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 680 | (15) | 23,922 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 17,939 | (16) | 631,094 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Kevin Bauer | 400 | 1,200 | (17) | 28.45 | 1/25/2027 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2,100 | 6,300 | (17) | 28.45 | 1/25/2027 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| — | 10,000 | (18) | 38.50 | 4/27/2031 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
__________________________
(1)Represents the closing stock price per share of our common stock as of June 30, 2021 ($35.18) multiplied by the number of shares underlying RSUs that had not vested as of June 30, 2021 (or, for Mr. Hsu, PRSUs that had been earned based on performance through June 30, 2021 but that had not vested as of June 30, 2021).
(2) These stock options are performance-based and shall vest and become exercisable depending upon the degree of satisfaction of both the Stock Price Goals and Revenue Goals discussed above in CD&A. The Stock Price Goals must be achieved on or prior to September 30, 2026 and the Revenue Goals must be achieved on or prior to June 30, 2026. The options may vest in tranches of 200,000 shares each only when coordinating Stock Price Goals and Revenue Goals, respectively, of $45.00 sixty-trading-day-average stock price and $4.0 billion in four-consecutive-fiscal-quarter revenue, $60.00 sixty-trading-day-average stock price and $4.8 billion four-consecutive-fiscal-quarter revenue, $75.00 sixty-trading-day-average stock price and $5.8 billion four-consecutive-fiscal-quarter revenue, $95.00 sixty-trading-day-average stock price and $6.8 billion four-consecutive-fiscal-quarter revenue, and $120.00 sixty-trading-day-average stock price and $8.0 billion four-consecutive-fiscal-quarter revenue, are achieved. The smallest amount of these stock options (threshold) that can be earned based on performance is vested stock options for 200,000 shares for achieving a Stock Price Goal of $45.00 sixty-trading-day-average stock price and a Revenue Goal of $4.0 billion in four-consecutive-fiscal-quarter revenue. However, even if those goals are achieved, if the Company’s stock price remained at $45.00 per
118
share, based on the $45.00 exercise price for these stock options, there would be no appreciation value in those stock options for Mr. Liang. For more information about the operation of this award, see “2021 CEO Performance Award Granted in March 2021” above.
(3) These incentive and nonqualified stock options vested at the rate of 25% on April 30, 2019 and vested (or generally will vest) at a rate of 1/16th per quarter thereafter, such that the granted options will be fully vested on April 30, 2022.
(4) These incentive and nonqualified stock options vested at the rate of 25% on May 1, 2021 and vested (or generally will vest) at a rate of 1/16th per quarter thereafter, such that the granted options will be fully vested on May 1, 2024.
(5) These RSUs vested at the rate of 25% on May 16, 2019 and vested (or generally will vest) at a rate of 1/16th per quarter thereafter, such that the RSUs will be fully vested on May 16, 2022.
(6) These RSUs vested at the rate of 25% on May 10, 2021 and vested (or generally will vest) at a rate of 1/16th per quarter thereafter, such that the RSUs will be fully vested on May 10, 2024.
(7) These incentive and nonqualified stock options vested at the rate of 25% on May 1, 2019 and vested (or generally will vest) at a rate of 1/16th per quarter thereafter, such that the granted options will be fully vested on May 1, 2022.
(8) These incentive and nonqualified stock options vested at the rate of 25% on October 30, 2019 and vested (or generally will vest) at a rate of 1/16th per quarter thereafter, such that the granted options will be fully vested on October 30, 2022.
(9) These nonqualified stock options vested at the rate of 56% on March 27, 2021 and vested (or generally will vest) at a rate of 6% per quarter thereafter, such that the granted options will be fully vested on December 27, 2022.
(10) These incentive stock options shall vest at the rate of 25% on October 27, 2021 and generally will vest at a rate of 1/16th per quarter thereafter, such that the granted options will be fully vested on October 27, 2024.
(11) These RSUs vested at the rate of 63% on May 10, 2021 and vested (or generally will vest) at a rate of 6% per quarter thereafter, such that the RSUs will be fully vested on November 10, 2022.
(12) These RSUs shall vest at the rate of 25% on November 10, 2021 and generally will vest at a rate of 1/16th per quarter thereafter, such that the RSUs will be fully vested on November 10, 2024.
(13) These incentive stock options vested at the rate of 25% on October 22, 2018 and vested (or generally will vest) at a rate of 1/16th per quarter thereafter, such that the granted options will be fully vested on October 22, 2021.
(14) These RSUs vested at the rate of 25% on November 16, 2018 and vested (or generally will vest) at a rate of 1/16th per quarter thereafter, such that the RSUs will be fully vested on November 16, 2021.
(15) These RSUs vested at the rate of 25% on May 10, 2019 and vested (or generally will vest) at a rate of 1/16th per quarter thereafter, such that the RSUs will be fully vested on May 10, 2022.
(16) This amount reflects the service-based portion of the March 2020 PRSU grant to Mr. Hsu (15,000 units). In addition to the 15,000 units, based upon the Company’s revenue for fiscal year 2017, including with respect2021 ($3,557 million), which increased from revenue for fiscal year 2020, management has calculated that 2,939additional units were earned, such that a total of 17,939 units will vest in November 2021. Such amount remains subject to final certification by the Compensation Committee.
(17) These nonqualified stock options vested at the option exercise pricerate of 20% on January 11, 2018 and expiration dates for each award.vested (or generally will vest) at a rate of 1/20th per quarter thereafter, such that the granted options will be fully vested on January 11, 2022.
(18) These nonqualified stock options shall vest at the rate of 100% on February 25, 2022.
| Option Awards | Stock Awards | |||||||||||||||
| Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units of Stock That Have Not Vested ($)(1) | ||||||||||
| Charles Liang | 720,000 | — | $ | 10.66 | 3/4/2019 | |||||||||||
| 132,000 | — | $ | 18.59 | 4/25/2021 | ||||||||||||
| 231,260 | — | $ | 20.70 | 1/21/2023 | ||||||||||||
| 104,218 | (2) | 62,532 | (2) | $ | 35.07 | 1/19/2025 | ||||||||||
| Howard Hideshima | 10,886 | — | $ | 13.61 | 8/2/2020 | |||||||||||
| 56,614 | — | $ | 13.61 | 8/2/2020 | ||||||||||||
| 8,690 | — | $ | 12.50 | 8/6/2022 | ||||||||||||
| 37,810 | — | $ | 12.50 | 8/6/2022 | ||||||||||||
| 5,445 | (3) | 1,815 | (3) | $ | 26.75 | 8/4/2024 | ||||||||||
| 20,055 | (4) | 6,685 | (4) | $ | 26.75 | 8/4/2024 | ||||||||||
| 1,669 | (5) | 5,010 | (5) | $ | 20.54 | 8/3/2026 | ||||||||||
| 1,455 | (6) | 4,366 | (6) | $ | 20.54 | 8/3/2026 | ||||||||||
| 4,223 | (7) | 104,097 | ||||||||||||||
| Phidias Chou | 6,500 | — | $ | 5.53 | 4/29/2019 | |||||||||||
| 18,970 | — | $ | 8.36 | 10/26/2019 | ||||||||||||
| 31,030 | — | $ | 8.36 | 10/26/2019 | ||||||||||||
| 6,150 | — | $ | 15.22 | 10/24/2021 | ||||||||||||
| 32,850 | — | $ | 15.22 | 10/24/2021 | ||||||||||||
| 16,150 | (8) | 1,077 | (8) | $ | 14.23 | 10/21/2023 | ||||||||||
| 15,724 | (9) | 1,049 | (9) | $ | 14.23 | 10/21/2023 | ||||||||||
| 2,129 | (10) | 2,741 | (10) | $ | 25.40 | 10/21/2025 | ||||||||||
| 3,118 | (11) | 4,012 | (11) | $ | 25.40 | 10/21/2025 | ||||||||||
| 3,375 | (12) | 83,194 | ||||||||||||||
| Yih-Shyan (Wally) Liaw | 10,635 | — | $ | 7.46 | 4/28/2018 | |||||||||||
| 10,275 | — | $ | 7.46 | 4/28/2018 | ||||||||||||
| 10,079 | — | $ | 13.61 | 8/2/2020 | ||||||||||||
| 7,671 | — | $ | 13.61 | 8/2/2020 | ||||||||||||
| 8,687 | — | $ | 17.29 | 4/23/2022 | ||||||||||||
| 18,313 | — | $ | 17.29 | 4/23/2022 | ||||||||||||
| 6,127 | (13) | 1,415 | (13) | $ | 18.93 | 4/21/2024 | ||||||||||
| 12,559 | (14) | 2,899 | (14) | $ | 18.93 | 4/21/2024 | ||||||||||
| 1,596 | (15) | 3,514 | (15) | $ | 28.71 | 4/27/2026 | ||||||||||
| 1,058 | (16) | 2,332 | (16) | $ | 28.71 | 4/27/2026 | ||||||||||
| 2,873 | (17) | 70,819 | ||||||||||||||
| Sara Liu | 19,615 | — | $ | 11.81 | 1/25/2020 | |||||||||||
| 16,285 | — | $ | 11.81 | 1/25/2020 | ||||||||||||
| 29,000 | — | $ | 17.09 | 1/23/2022 | ||||||||||||
| 20,125 | (18) | 2,875 | (18) | $ | 17.96 | 1/20/2024 | ||||||||||
| 3,375 | (19) | 5,625 | (19) | $ | 27.28 | 1/27/2026 | ||||||||||
| 2,785 | (20) | 68,650 | ||||||||||||||
Fiscal Year 2021 Option Exercises and Stock Vested During Fiscal Year 2017
The following table sets forth the dollar amounts realized by each person who was aof our named executive officer during fiscal year 2017officers pursuant to the exercise or vesting of equity-based awards during fiscal year 2017.2021.
| Option Awards | Stock Awards | ||||||||||||
| Name | Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($)(1) | Number of Shares Acquired on Vesting (#) | Value Realized on Vesting ($)(2) | |||||||||
| Charles Liang | — | $ | — | — | $ | — | |||||||
| Howard Hideshima | 63,126 | $ | 749,544 | 1,407 | $ | 34,260 | |||||||
| Phidias Chou | 11,000 | $ | 212,554 | 2,025 | $ | 49,392 | |||||||
| Sara Liu | 25,000 | $ | 500,871 | 1,265 | $ | 33,029 | |||||||
| Yih-Shyan (Wally) Liaw | 20,000 | $ | 281,000 | 957 | $ | 23,112 | |||||||
| Option Awards | Stock Awards | |||||||||||||||||||||||||
| Name | Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($)(1) | Number of Shares Acquired on Vesting (#) | Value Realized on Vesting ($)(2) | ||||||||||||||||||||||
| Charles Liang | 132,000 | $ | 2,601,009 | 12,000 | 348,360 | |||||||||||||||||||||
| David Weigand | — | — | 3,400 | 109,016 | ||||||||||||||||||||||
| Don Clegg | — | — | 2,345 | 76,136 | ||||||||||||||||||||||
| George Kao | — | — | 2,862 | 95,125 | ||||||||||||||||||||||
| Alex Hsu | — | — | 15,948 | 557,412 | ||||||||||||||||||||||
| Kevin Bauer | 70,000 | 640,821 | 2,813 | 82,064 | ||||||||||||||||||||||
__________________________
(1)The value disclosed in this column is based on the difference between the price of our common stock at the time of exercise and the exercise price.
(2)The values disclosed in this column are based on the closing price of our common stock on the date of vesting, multiplied by the gross number of shares vested.
Fiscal Year 2021 Pension Benefits and Nonqualified Deferred Compensation
119
We do not provide any nonqualified deferred compensation arrangements or pension plans. As such, the Pension Benefits disclosure and Nonqualified Deferred Compensation disclosure for fiscal year 2021 are omitted from this Annual Report on Form 10-K.Report.
Fiscal Year 2021 Potential Payments Upon Termination or Change of Control
Prior to ceasing employment with the Company as Chief Financial Officer, in February 2021 Mr. Bauer entered into a consulting arrangement with the Company, and the Company provided certain informationprovisions with respect to his equity awards following the termination of his employment relationship with the Company. See “- Former CFO Consulting Arrangement.”
Fiscal Year 2021 Chief Executive Officer Pay Ratio
For fiscal year 2021, the ratio of the annual total compensation of Mr. Liang, our Chief Executive Officer (“2021 CEO Compensation”), to the median of the annual total compensation of all of our non-employee directors who servedemployees and those of our consolidated subsidiaries other than Mr. Liang (“2021 Median Annual Compensation”), was 268 to 1. For purposes of this pay ratio disclosure, 2021 CEO Compensation was determined to be $20,127,913, which represents the total compensation reported for Mr. Liang under the “Fiscal Year 2021 Summary Compensation Table,” plus the Company’s contribution to certain non-discriminatory group health and welfare benefits provided to Mr. Liang. 2021 Median Annual Compensation for the identified median employee was determined to be $75,171, also including the Company’s contribution to the same non-discriminatory group health and welfare benefits provided to the median employee.
Due to our permitted use of reasonable estimates and assumptions in such capacity duringpreparing this pay ratio disclosure, the fiscal year ended June 30, 2017:disclosure may involve a degree of imprecision, and thus this pay ratio disclosure is a reasonable estimate.
| Name | Fees Earned or Paid in Cash ($)(1) | Stock Awards ($) | Option Awards ($)(2) | Total ($) | ||||||||||
| Laura Black | $ | 65,000 | — | $ | 83,700 | $ | 148,700 | |||||||
| Michael McAndrews | $ | 42,500 | — | $ | 50,220 | $ | 92,720 | |||||||
| Hwei-Ming (Fred) Tsai | $ | 50,000 | — | $ | 55,800 | $ | 105,800 | |||||||
| Saria Tseng | $ | 33,750 | — | $ | 229,049 | $ | 262,799 | |||||||
| Sherman Tuan | $ | 47,500 | — | $ | 55,800 | $ | 103,300 | |||||||
To determine the median of the Compensation Committee is a currentannual total compensation of all of such employees, other than Mr. Liang, we generally reviewed compensation for the period beginning on July 1, 2020 and ending on the Determination Date. We totaled, for each included employee other than Mr. Liang, base earnings (salary, hourly wages and overtime, as applicable) and cash bonuses paid during the measurement period, plus the Company’s contribution to group health and welfare benefits. We did not use any statistical sampling or former officer or employeecost-of-living adjustments for those purposes. A portion of our company or had any relationship with our company requiring disclosure. In addition, duringemployee workforce (full-time and part-time) worked for less than the full fiscal year 2017, none(due to mid-measurement period start dates, disability status or similar factors, etc.). In determining the median employee, we generally annualized the total compensation for such individuals other than temporary or seasonal employees (but avoided creating full-time equivalencies) based on reasonable assumptions and estimates relating to our employee compensation program.
120
Table of our executive officers served as a member of the Board of Directors or Compensation Committee of any other entity that has one or more executive officers who served on our Board of Directors or Compensation Committee. Saria Tseng, Hwei-Ming (Fred) Tsai and Sherman Tuan served on the Compensation Committee in fiscal year 2017.Contents
Compensation Program Risk Assessment
We have assessed our compensation programs for fiscal year 2021 and have concluded that risks arising from our compensation policies and practices are not reasonably likely to have a material adverse effect on us. We concluded that our compensation policies and practices do not encourage excessive or inappropriate risk-taking. We believe our programs are appropriately designed to encourage our employees to make decisions that result in positive short-term and long-term results for our business and our shareholders.stockholders.
DIRECTOR COMPENSATION
2021 Director Compensation
Under our director compensation policy, we reimburse non-employee directors for reasonable expenses in connection with attendance at Board and committee meetings. Charles Liang and Sara Liu, who are employees and also serve as directors, do not receive any additional compensation from us specifically for their service as directors.
For their service during fiscal year 2021, our non-employee directors received an annual retainer of $60,000, payable quarterly in cash. In addition, the Chairperson of our Audit Committee received an additional annual retainer of $30,000 and the Chairperson of each of our Compensation Committee and our Governance Committee received an additional annual retainer of $20,000 and $15,000, respectively, in each case payable quarterly in cash. Each director serving in a non-chairperson capacity on our Audit Committee received an additional annual retainer of $15,000, each director serving in a non-chairperson capacity on our Compensation Committee received an additional annual retainer of $10,000 and each director serving in a non-chairperson capacity on our Governance Committee received an additional annual retainer of $7,500, in each case payable quarterly in cash. Finally, non-employee directors were entitled to $2,000 per meeting for each meeting attended in excess of (1) the regular meetings of the Board and (2) up to 10 additional meetings beyond such regular meetings, provided that notice of the meeting was properly given, a quorum was present and the meeting was recorded (“Excess Meetings”). During fiscal year 2021, Mr. Fairfax attended 14 Excess Meetings, Mr. Tsai attended 14 Excess Meetings, Mr. McAndrews attended 11 Excess Meetings, Ms. Tseng attended three Excess Meetings, and Mr. Liu attended 15 Excess Meetings. Mr. Tuan and Mr. Chan did not attend any Excess Meetings during fiscal year 2021.
As disclosed in our prior Annual Report on Form 10-K for the fiscal year ended June 30, 2020, in March 2020, the Board provided special performance-based cash incentive award opportunities to two non-employee directors, Mr. Sherman Tuan and Mr. Fred Tsai. These awards provided a cash incentive opportunity of up to $194,150 and $103,095, respectively, subject to the following conditions: (1) 50% of the opportunity will be earned if the average closing price for the Company’s common stock equals or exceeds $31.61 (representing a 15% premium over the average closing price of the Company’s common stock for the 20 consecutive trading days preceding March 4, 2020) for any period of 20 consecutive trading days prior to September 30, 2021 (the “First Price Target”); and (2) an additional 50% of the opportunity will be earned if the average closing price for the Company’s common stock equals or exceeds $32.99 (representing a 20% premium over the average closing price of the Company’s common stock for the 20 consecutive trading days preceding March 4, 2020) for any period of 20 consecutive trading days prior to June 30, 2022 (the “Second Price Target”). The relevant stock price goals were not met during fiscal year 2020, and no portion of these amounts were paid to Mr. Tuan or Mr. Tsai during fiscal year 2020, However, during fiscal year 2021, the First Price Target was achieved based upon stock price performance from December 22, 2020 through January 21, 2021, and the Second Price Target was achieved based upon stock price performance from February 8, 2021 through March 8, 2021.As a result, payment of the full amount of the cash incentive opportunities were made to each of Mr. Tuan and Mr. Tsai during fiscal year 2021.
Our director compensation policy also provides for annual RSU grants to the non-employee directors with a value equal to $220,000, with the ultimate number of RSUs granted based on our closing stock price on the date of grant. For fiscal year 2021, we made such grants for non-employee director service under our 2020 Equity and Incentive Compensation Plan on August 21, 2020 to such persons serving on such date, which grants had a vesting date of June 30, 2021. Two non-employee directors, Mr. Michael McAndrews and Mr. Fred Tsai, who served during fiscal year 2021 and received such grants, were not nominated for re-election at our annual general meeting of stockholders held on May 28, 2021 and ceased being directors on such date. Prior to the end of their service, the Compensation Committee exercised discretion to accelerate the vesting date of the awards granted to Mr. McAndrews and Mr. Tsai to May 28, 2021. Awards granted to the other non-employee directors vested on June 30, 2021.
Mr. Shiu Leung (Fred) Chan was appointed as a non-employee director on October 28, 2020.In connection with his appointment, Mr. Chan received during fiscal year 2021 a pro-rated portion of the annual non-employee director retainer and, on November 5, 2020, an RSU grant with a value equal to a pro-rated portion of $220,000 with a vesting date of June 30, 2021.
121
The following table shows for fiscal year 2021 certain information with respect to the compensation of all of our non-employee directors who served in such capacities during fiscal year 2021:
FISCAL YEAR 2021 DIRECTOR COMPENSATION
| Name | Fees Earned or Paid in Cash ($)(3) | Stock Awards ($)(4)(5) | Non-Equity Incentive Plan Compensation ($)(6) | Total ($) | |||||||||||||||||||
| Daniel Fairfax | $ | 103,000 | $ | 219,990 | $ | — | $ | 322,990 | |||||||||||||||
Hwei-Ming (Fred) Tsai(1) | 118,934 | 287,960 | 103,095 | 509,989 | |||||||||||||||||||
Michael McAndrews(1) | 90,201 | 287,960 | — | 378,161 | |||||||||||||||||||
| Saria Tseng | 83,500 | 219,990 | — | 303,490 | |||||||||||||||||||
| Sherman Tuan | 87,500 | 219,990 | 194,150 | 501,640 | |||||||||||||||||||
Shiu Leung (Fred) Chan(2) | 40,435 | 148,270 | — | 188,705 | |||||||||||||||||||
| Tally Liu | 120,000 | 219,990 | — | 339,990 | |||||||||||||||||||
__________________________
(1)Each of Mr. Hwei-Ming (Fred) Tsai and Mr. Michael McAndrews served as a director until May 28, 2021.
(2) Mr. Shiu Leung (Fred) Chan was appointed to the Board in October 2020.
(3) This column consists of annual director fees, non-employee committee chairman fees, and other committee member fees, in each case earned for fiscal year 2021.
(4) The dollar amounts in this column represent the aggregate grant date fair values of the RSU awards granted during fiscal year 2021 calculated in accordance with ASC Topic 718. Assumptions used in the calculation of the grant date fair value amounts are included in Part II, Item 8, "Financial Statements and Supplementary Data", and Item II, Part 8, Note 14, “Stock-based Compensation and Stockholders’ Equity” to our consolidated financial statements for fiscal year 2021 included in this Annual Report on Form 10-K. Each grant of 8,289 RSUs to each of the directors other than Mr. Chan had a grant date fair value of $26.54 per share, and Mr. Chan’s grant of 5,168 RSUs had a grant date fair value of $28.69 per share.
(5) The value disclosed in this row under the “Stock Awards” column also reflects, for each of Messrs. Tsai and McAndrews, the modification fair value ($67,970) for the acceleration of the vesting date of his fiscal year 2021 RSU grant from June 30, 2021 to May 28, 2021. This acceleration was approved because each of these non-employee directors was not nominated for re-election at our annual general meeting of stockholders held on May 28, 2021 and ceased being directors on such date, as further described above.
(6) This column consists of, for Mr. Tsai and Mr. Tuan, amounts earned during fiscal year 2021 from special performance-based cash incentive award opportunities granted in March 2020 following the achievement of the performance conditions.Please see the discussion above for more information about these awards.
The table below sets forth the aggregate number of shares underlying stock and option awards held by our non-employee directors as of June 30, 2021.
| Name | Stock Awards | Option Awards | ||||||
| Daniel Fairfax | 8,289 | — | ||||||
| Saria Tseng | 8,289 | — | ||||||
| Sherman Tuan | 8,289 | — | ||||||
| Shiu Leung (Fred) Chan | 5,168 | — | ||||||
| Tally Liu | 8,289 | — | ||||||
Compensation Committee Interlocks and Insider Participation
None of the members of the Compensation Committee is a current or former officer or employee of our Company or had any relationship with our Company requiring disclosure, except for Saria Tseng, who serves as Vice President of Strategic Corporate Development, General Counsel and Secretary of MPS, with which we have engaged in certain transactions. See “Part III. Item 13. Certain Relationships and Related Transactions and Director Independence-Transactions with Monolithic Power Systems.” In addition, during fiscal year 2021, none of our executive officers served as a member of the compensation committee of the board of directors of any other entity that has one or more executive officers who served on our Compensation Committee of the Board. Hwei-Ming (Fred) Tsai, Saria Tseng and Sherman Tuan served on the Compensation Committee during fiscal year 2021, with Mr. Tsai’s service on such committee ending on May 28, 2021.
122
123
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information known to us regarding beneficial ownership of our common stock as of MarchJuly 31, 20192021 by:
•Each of the named executive officers during Fiscal Year 2017;fiscal year 2021;
•Each of our directors;
•All directors and executive officers as a group; and
•All personpersons known to us who beneficially own 5% or more of our outstanding common stock.
| Name and Address of Beneficial Owner(1) | Amount and Nature of Beneficial Ownership(2) | Percent of Common Stock Outstanding(3) | |||
| Executive Officers and Directors: | |||||
| Charles Liang(4) | 8,330,684 | 16.5 | % | ||
| Howard Hideshima(5) | 149,655 | * | |||
| Phidias Chou(6) | 136,247 | * | |||
| Sara Liu(7) | 8,330,684 | 16.5 | % | ||
| Yih-Shyan (Wally) Liaw(8) | 1,721,895 | 3.4 | % | ||
| Laura Black(9) | 31,500 | * | |||
| Michael S. McAndrews(10) | 27,000 | * | |||
| Hwei-Ming (Fred) Tsai(11) | 290,000 | * | |||
| Saria Tseng(12) | 15,750 | * | |||
| Sherman Tuan(13) | 47,650 | * | |||
| All directors and executive officers as a group (13 persons)(14) | 10,802,799 | 21.1 | % | ||
| 5% Holders Not Listed Above: | |||||
| Dimensional Fund Advisors (15) | 3,355,723 | 6.7 | % | ||
Name and Address of Beneficial Owner(1) | Amount and Nature of Beneficial Ownership(2) | Percent of Common Stock Outstanding(3) | |||||||||
| Executive Officers and Directors: | |||||||||||
Charles Liang(4) | 7,441,827 | 14.5 | % | ||||||||
Don Clegg(5) | 43,999 | * | |||||||||
George Kao(6) | 32,445 | * | |||||||||
Alex Hsu(7) | 66,137 | * | |||||||||
David Weigand(8) | 25,022 | * | |||||||||
Saria Tseng(9) | 56,889 | * | |||||||||
Sherman Tuan(10) | 57,586 | * | |||||||||
Sara Liu(11) | 7,441,827 | 14.5 | % | ||||||||
| Tally Liu | 23,589 | * | |||||||||
| Daniel Fairfax | 11,263 | * | |||||||||
| Shiu Leung (Fred) Chan | 5,168 | * | |||||||||
Kevin Bauer(12) | 14,397 | * | |||||||||
All directors and executive officers as a group (12 persons)(13) | 7,778,322 | 15.1 | % | ||||||||
| 5% Holders Not Listed Above: | |||||||||||
Empyrean Capital Overseas Master Fund, Ltd.(14) | 3,000,459 | 5.9 | % | ||||||||
Disciplined Growth Investors Inc.(15) | 3,645,912 | 7.2 | % | ||||||||
BlackRock Inc.(16) | 3,146,769 | 6.2 | % | ||||||||
The Vanguard Group(17) | 3,999,148 | 7.9 | % | ||||||||
| Total executives, directors & 5% or more stockholders | 42.4 | % | |||||||||
__________________________
*Represents beneficial ownership of less than one percent of the outstanding shares of common stock
(1)Except as otherwise indicated, to our knowledge the persons named in this table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to community property laws applicable and to the information contained in the footnotes to this table. Except as otherwise provided, the address of each stockholder listed in the table is 980 Rock Avenue, San Jose, CA 95131.
(2)Under the SEC rules, a person is deemed to be the beneficial owner of shares that can be acquired by such person within 60 days upon the exercise of options or RSUs subject to vesting.
(3)Calculated on the basis of 50,590,466 shares of common stock outstanding as of July 31, 2021, provided that any additional shares of common stock that a stockholder has the right to acquire within 60 days after July 31, 2021 are deemed to be outstanding for the purposes of calculating that stockholder’s percentage of beneficial ownership.
(4)Includes 528,010 shares issuable upon the exercise of options exercisable within 60 days after July 31, 2021. Also includes 2,663,752 shares jointly held by Mr. Liang and Sara Liu, his spouse, 144,412 shares held directly by Ms. Liu and 63,625 options exercisable and 197 RSU shares issuable within 60 days after July 31, 2021. See footnote 11.
(5)Includes 35,393 options exercisable and 586 RSU shares issuable within 60 days after July 31,2021.
(6)Includes 25,155 options exercisable and 211 RSU shares issuable within 60 days after July 31, 2021.
(7)Includes 59,231 options exercisable and 237 RSU shares issuable within 60 days after July 31, 2021. Mr. Hsu served as Senior Vice President, Chief Operating Officer until March 2021. In March 2021, Mr. Hsu transitioned to the role of Senior Chief Executive, Strategic Business.
(8)Includes 18,750 options exercisable and 850 RSU share issuable within 60 days after July 31, 2021.
124
(9)Includes 27,000 shares issuable upon the exercise of options exercisable within 60 days after July 31, 2021.
(10)Includes 25,000 shares issuable upon the exercise of options exercisable within 60 days after July 31, 2021.
(11)Includes 63,625 options exercisable and 197 RSU shares issuable within 60 days after July 31, 2021. Also includes 2,663,752 shares jointly held by Ms. Liu and Mr. Liang, her spouse, 4,035,177 shares held by Charles Liang, and 528,010 shares issuable upon the exercise of options exercisable within 60 days after July 31, 2021. See footnote 4.
(12)Mr. Bauer resigned as our Chief Financial Officer in January 2021, and Mr. Weigand has assumed such role.
(13)Includes 789,245 shares issuable upon the exercise of options exercisable within 60 days after July 31, 2021.
(14)The information is based solely on the Schedule 13G filed on February 8, 201911, 2021 by Dimensional(i) Empyrean Capital Overseas Master Fund, Advisors. Dimensional Fund AdvisorsLtd. (“ECOMF”), which has shared voting power and dispositive power over 3,000,459 shares of common stock, (ii) Empyrean Capital Partners, LP (“ECP”), which has shared voting power and dispositive power over 3,000,459 shares of common stock, and (iii) Amos Meron, who has shared voting power and dispositive power over 3,000,459 shares of common stock. ECP serves as investment manager to ECOMF with respect to the common stock directly held by ECOMF. Mr. Amos serves as the managing member of Empyrean Capital, LLC, the general partner of ECP, with respect to the common stock directly held by ECOMF. The address of the business office of each of the reporting persons is c/o Empyrean Capital Partners, LP, 10250 Constellation Boulevard, Suite 2950, Los Angeles, CA 90067.
(17)The information is based solely on the Schedule 13G filed on February 10, 2021. The Vanguard Group has shared voting power over 64,744 shares of common stock, sole dispositive power over 3,900,105 shares of common stock and shared dispositive power over 99,043 shares of common stock. The address for the reporting person is 100 Vanguard Blvd., Malvern, Pennsylvania 19355.
Equity Compensation Plan Information
We currently maintain twothree compensation plans that provide for the issuance of our Common Stock to officers and other employees, directors and consultants. These consist of the 2006 Equity Incentive Plan, and the 2016 Equity Incentive Plan bothand the 2020 Plan. All three of whichthese plans have been approved by our stockholders. We no longer grant any equity-based awards under the 2006 Equity Incentive Plan or the 2016 Equity Incentive Plan. The following table sets forth information regarding outstanding options, RSUs, and RSUsPRSUs and shares reserved and remaining available for future issuance under the foregoing plans as of June 30, 2017:2021:
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)(1) | Weighted-average exercise price of outstanding options, warrants and rights (b)(2)(3) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)(1) | Weighted-average exercise price of outstanding options, warrants and rights (b)(2)(3) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)(c) | |||||||||||||||||||
| Equity compensation plans approved by security holders | 9,602,016 | $ | 17.19 | 2,785,792 | Equity compensation plans approved by security holders | 7,045,510 | $ | 26.17 | 2,730,277 | |||||||||||||||||
| Equity compensation plans not approved by security holders | — | — | — | Equity compensation plans not approved by security holders | — | — | ||||||||||||||||||||
| Total | 9,602,016 | $ | 17.19 | 2,785,792 | Total | 7,045,510 | 2,730,277 | |||||||||||||||||||
__________________________
(1)This number includes 5,175,554 shares subject to outstanding options, 1,854,956 shares subject to outstanding RSU awards, and 15,000 shares subject to outstanding PRSU awards.
(2)The weighted average exercise price is calculated based solely on the exercise prices of the outstanding options and does not reflect the shares that will be issued upon the vesting of outstanding awards of RSUs and PRSUs, which have no exercise price.
Item 13.Certain Relationships and Related Transactions and Director Independence
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Procedures for Approval of Related Person Transactions
Pursuant to our Audit Committee charter, the Audit Committee has the responsibility for the review and approval of any related person transactions; provided that if the matter or transaction involves employment or compensation terms for services to our company, including retention or payment provisions relating to expert services, then it is presented to the Compensation Committee. In approving or rejecting a proposed transaction, or a relationship that encompasses many similar
125
transactions, our Audit Committee will consider the relevant facts and circumstances available and deemed relevant, including but not limited to the risks, costs and benefits to us, the terms of the transaction, the availability of other sources for comparable services or products, and, if applicable, the impact on a director’s independence. Our Audit Committee approves only those transactions that, in light of known circumstances are not inconsistent with our best interests, as the Audit Committee determines in the good faith exercise of its discretion. In addition, we annually require each of our directors and executive officers to complete a directors’ and officers’ questionnaire that elicits information about related party transactions as such term is defined by SEC rules and regulations. These procedures are intended to determine whether any such related party transaction impairs the independence of a director or presents a conflict of interest on the part of a director, employee or officer.
Transactions with Related Parties, Promoters and Certain Control Persons
Director and Officer Indemnification
We have entered into agreements to indemnify our directors and executive officers to the fullest extent permitted under Delaware law. In addition, our certificate of incorporation contains provisions limiting the liability of our directors and our bylaws contain provisions requiring us to indemnify our officers and directors.
Equity-Based Awards
Please see the “Grants of Plan-Based Awards” table and the “Director Compensation” table above for information on stock option and restricted stock unit grants to our directors and named executive officers in fiscal year 2017.2021.
Employment Relationships
Hung-Fan (Albert) Liu, who is a brother of Sara Liu, our Co-Founder and Senior Vice President and a director, wasis employed in our operations organization in San Jose, California. Mr. Liu received a total compensation of approximately $262,000$426,054 in fiscal year 2017.2021. The total compensation includes salary, bonus and equity awards. Mr. Albert Liu reports to Mr. Kao, our Senior Vice President of Operations. Mr. Liu also received options and RSU awards in fiscal year 2021 totaling $148,776.
Shao Fen (Carly) Kao, who is a sister-in-law of Sara Liu, our Co-Founder and Senior Vice President and a director, wasis employed in our finance and accounting organization in San Jose, California. Ms. Kao received total compensation of approximately $122,000$140,315 in fiscal year 2017.2021. The total compensation includes salary, bonus and equity awards. Ms. Kao reports through the finance and accounting organization, which reports to Mr. Weigand, our Chief Financial Officer.
Sara Liu, who is Charles Liang's spouse and is related to Mr. Liu and Ms. Kao as outlined above, is a Co-Founder, Senior Vice President, and director of the Company, and received total compensation of approximately $415,110 in fiscal year 2021.
Transactions with Ablecom and Compuware
We have entered into a series of agreements with Ablecom Technology Inc. ("Ablecom"), a Taiwan corporation, and one of its affiliates, Compuware Technology, Inc ("Compuware"). Ablecom’s ownership of Compuware is below 50% but Compuware remains a related party as Ablecom still has significant influence over the operations. Ablecom’s Chief Executive Officer, Steve Liang, is the brother of Charles Liang, our President, Chief Executive Officer and Chairman of the BoardBoard. Steve Liang and his family members owned approximately 28.8% of Directors,Ablecom’s stock and owns approximately 0.4% of our common stock. Charles Liang served as a Director of Ablecom during our fiscal 2006, but is no longer serving in such capacity. In addition, Charles Liang and his spouse, Sara Liu, his spouse, who is also an officer and director of ours,our company, collectively ownowned approximately 10.5% of Ablecom’s capital stock while Steve Liang and other family members owned approximately 36.0% and 36.0%as of Ablecom at June 30, 2017 and 2016, respectively.2021. Bill Liang, a brother of both Charles Liang and Steve Liang, also is a member of the Board of Directors of Ablecom. Bill Liang is also the Chief Executive Officer of Compuware, a member of Compuware’s Board of Directors and a holder of a significant equity interest in Compuware. Steve Liang is also a member of Compuware’s Board of Directors and is an equity holder of Compuware. None of the Company,Neither Charles Liang ornor Sara Liu own any capital stock of Compuware.Compuware and the Company does not own any of Ablecom or Compuware's capital stock.
We have entered into a series of agreements with Ablecom, including multiple product development, production and service agreements, product manufacturing agreements, manufacturing services agreements and lease agreements for warehouse space.
Under these agreements, we outsource a portion of our design activities and a significant part of our server chassis manufacturing of components such as server chassis to Ablecom. Ablecom agrees to design products according to our
126
specifications. Additionally, Ablecom agrees to build the tools needed to manufacture the products. We have agreed to pay for the cost of chassis and related product tooling and engineering services and will pay for those items when the work has been completed.
We entered into a distribution agreement with Compuware, under which we appointed Compuware as a non-exclusive distributor of our products in Taiwan, China and Australia. We believe that the pricing and terms under the distribution agreement are similar to the pricing and terms of distribution arrangements we have with similar third-party distributors.
We have also entered into a series of agreements with Compuware, including a multiple product development, production and service agreements, product manufacturing agreements, and lease agreements for office space. Under these agreements, we outsource to Compuware a portion of our design activities and a significant part of our manufacturing of components, particularly power supplies. With respect to design activities, Compuware generally agrees to design certain agreed-upon products according to our specifications, and further agrees to build the tools needed to manufacture the products. We pay Compuware for the design and engineering services, and further agree to pay Compuware for the tooling.
We retain full ownership of any intellectual property resulting from the design of these products and tooling. With respect to the manufacturing aspects of the relationship, Compuware purchases most of materials needed to manufacture the power supplies from outside markets and uses these materials to manufacture the products and then sell to us. We review and frequently negotiate with Compuware the prices of the power supplies thethat we purchase from Compuware. Compuware also manufactures motherboards, backplanes and other components used on our printed circuit boards. We sell to Compuware most of the components needed to manufacture the above products. Compuware uses these components to manufacture and then sells back the products to us at a purchase price equal to the price at which we sold the components to Compuware, plus a “manufacturing value added” fee and other miscellaneous material charges and costs. We frequently review and negotiate with Compuware the amount of the “manufacturing value added” fee that will be included in the price of the products we purchase from Compuware.
Ablecom’s sales to us comprise a substantial majority of Ablecom’s net sales. For fiscal years ended June 30, 2017, 20162021, 2020 and 2015,2019, we purchased products from Ablecom totaling $118.5$122.2 million, $117.6$152.5 million and $123.1$137.9 million, respectively. Amounts owed to Ablecom by us as of June 30, 20172021 and 2016,2020, were $30.8$41.2 million and $29.8$40.1 million, respectively. For the fiscal years ended June 30, 2017, 20162021, 2020 and 2015,2019, we paid Ablecom $5.2$8.6 million, $7.8$7.6 million and $4.9$7.4 million, respectively, for design services, tooling assets and miscellaneous costs.
Compuware’s sales of our products to others comprise a majority of Compuware’s net sales. For fiscal years ended June 30, 2017, 20162021, 2020 and 2015,2019, we sold products to Compuware totaling $23.0$27.9 million, $29.1$23.9 million and $47.6$17.7 million, respectively. Amounts owed to us by Compuware as of June 30, 20172021 and 2016,2020, were $7.9$18.4 million and $3.7$14.3 million, respectively. The price at which Compuware purchases the products from us is at a discount from our standard price for purchasers who purchase specified volumes from us. In exchange for this discount, Compuware assumes the responsibility to install our products at the site of the end customer and administers first-level customer support. For the fiscal years ended June 30, 2017, 20162021, 2020 and 2015,2019, we purchased products from Compuware totaling $117.5$113.4 million, $125.0$130.6 million and $104.6$138.9 million, respectively. Amounts we owed to Compuware as of June 30, 20172021 and 2016,2020, were $32.2$46.4 million and $20.5$46.5 million, respectively. For the fiscal years ended June 30, 2017, 20162021, 2020 and 2015,2019, we paid Compuware $1.4$1.8 million, $1.1$1.2 million and $0.8$0.7 million, respectively, for design services, tooling assets and miscellaneous costs.
Our exposure to financial loss as a result of our involvement with Ablecom is limited to potential losses on our purchase orders in the event of an unforeseen decline in the market price and/or demand for our products such that we incur a loss on the sale or cannot sell the products. Our outstanding purchase orders to Ablecom were $23.5$40.2 million and $22.8$23.2 million at June 30, 20172021 and 2016,2020, respectively, representing the maximum exposure to financial loss. We do not directly or indirectly guarantee any obligations of Ablecom, or any losses that the equity holders of Ablecom may suffer.
Our exposure to financial loss as a result of our involvement with Compuware is limited to potential losses on our purchase orders in the event of an unforeseen decline in the market price and/or demand for our products such that we incur a loss on the sale or cannot sell the products. Our outstanding purchase orders to Compuware were $56.4$71.0 million and $40.0$45.7 million at June 30, 20172021 and 2016,2020, respectively, representing the maximum exposure to financial loss. We do not directly or indirectly guarantee any obligations of Compuware, or any losses that the equity holders of Compuware may suffer.
Loans
In October 2018, our Chief Executive Officer, Charles Liang, personally borrowed approximately $12.9 million from Chien-Tsun Chang, the spouse of Steve Liang. The loan is unsecured, has no maturity date and bore interest at 0.8% per month for the first six months, increased to 0.85% per month through February 28, 2020, and reduced to 0.25% effective March 1,
127
2020. The loan was originally made at Mr. Liang's request to provide funds to repay margin loans to two financial institutions, which loans had been secured by shares of our common stock that he held. The lenders called the loans in October 2018, following the suspension of our common stock from trading on NASDAQ in August 2018 and the decline in the market price of our common stock in October 2018. As of June 30, 2021, the amount due on the unsecured loan (including principal and accrued interest) was approximately $15.3 million.
Transactions with Monolithic Power Systems
MPS is a supplier that provides high-performance analog and mixed signal semiconductors for use in our products. Saria Tseng, who serves as a member on the Board of Directors, also serves as Vice President of Strategic Corporate Development, General Counsel and Secretary of MPS. We purchased $3.9 million, $5.2 million and $3.7 million of semiconductor products from MPS for use in our manufacturing process during the years ended June 30, 2021, 2020 and 2019, respectively. The amounts due to MPS as of June 30, 2021 and 2020 were not material.
128
Item 14.Principal Accounting Fees and Services
The Audit Committee appointed Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year 2017.2021.
Independent Registered Public Accounting Firm Fees and Services
The following table sets forth the aggregate audit fees billed to us by our independent registered public accounting firm, Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates (collectively, “Deloitte”), and fees paid to Deloitte for services in the fee categories indicated below for the fiscal years 20172021 and 2016.2020. The Audit Committee has considered the scope and fee arrangements for all services provided by Deloitte, taking into account whether the provision of non-audit services is compatible with maintaining Deloitte’s independence, and has pre-approved the services described below.
| Years Ended | ||||||||||||||||||
| Fiscal Year Ended | ||||||||||||||||||
| June 30, 2017 | June 30, 2016 | |||||||||||||||||
| Audit Fees(1) | $ | 22,259,000 | $ | 2,427,000 | ||||||||||||||
| Amounts in '000s | Amounts in '000s | June 30, 2021 | June 30, 2020 | |||||||||||||||
Audit Fees(1) | Audit Fees(1) | $ | 4,405 | $ | 8,633 | |||||||||||||
| Audit-Related Fees | — | — | Audit-Related Fees | — | — | |||||||||||||
| Tax Fees | — | — | Tax Fees | 225 | 383 | |||||||||||||
| All Other Fees | 2,000 | — | All Other Fees | 2 | 2 | |||||||||||||
| Total | $ | 22,261,000 | $ | 2,427,000 | Total | $ | 4,632 | $ | 9,018 | |||||||||
__________________________
(1)Audit fees consist of the aggregate fees for professional services rendered for the audit of our consolidated financial statements, review of interim condensed consolidated financial statements and certain statutory audits.
Audit Committee Pre-Approval Policies and Procedures
The Audit Committee has determined that all services performed by Deloitte & Touche LLP are compatible with maintaining the independence of Deloitte & Touche LLP. The Audit Committee’s policy on approval of services performed by the independent registered public accounting firm is to pre-approve all audit and permissible non-audit services to be provided by the independent registered public accounting firm during the fiscal year. The Audit Committee reviews each non-audit service to be provided and assesses the impact of the service on the firm’s independence.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) 1. Financial Statements
See Index to consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K, which is incorporated herein by reference.
2. Financial Statement Schedules
All financial statement schedules have been omitted because they are either not applicable or the required information is shown in the consolidated financial statements or notes thereto.
3. Exhibits
See the Exhibit Index which precedes the signature page of this Annual Report, on Form 10-K, which is incorporated herein by reference.
(b) Exhibits
See Item 15(a)(3) above.
(c) Financial Statement Schedules
129
See Item 15(a)(2) above.
EXHIBIT INDEX
Exhibit Number | Description | ||||||||||
| 3.3 | |||||||||||
| 3.4 | |||||||||||
| 4.1 | |||||||||||
| 10.1* | |||||||||||
| 10.11* | |||||||||||
| 10.18 | |||||||||||
10.19*‡ | |||||||||||
10.20*‡ | |||||||||||
10.21*‡ | |||||||||||
10.22*‡ | |||||||||||
| 10.23 | |||||||||||
| 10.24* | |||||||||||
| 10.25 | |||||||||||
| 10.26 | |||||||||||
| 10.27* | |||||||||||
| 10.28* | |||||||||||
| 10.29* | |||||||||||
| 10.30* | |||||||||||
| 10.31* | |||||||||||
| 10.32 | |||||||||||
| 10.33 | |||||||||||
| 10.34* | |||||||||||
130
| 10.35* | |||||||||||
| 10.36 | |||||||||||
| 10.37 | |||||||||||
| 10.38+ | |||||||||||
| 10.39 | |||||||||||
| 24.1+ | Power of Attorney (included in signature pages) | ||||||||||
| 31.1+ | |||||||||||
| 31.2+ | |||||||||||
| 32.1+ | |||||||||||
| 32.2+ | |||||||||||
| 101.INS+ | XBRL Instance Document | ||||||||||
| 101.SCH+ | XBRL Taxonomy Extension Schema Document | ||||||||||
| 101.CAL+ | XBRL Taxonomy Extension Calculation Linkbase Document | ||||||||||
| 101.DEF+ | XBRL Taxonomy Extension Definition Linkbase Document | ||||||||||
| 101.LAB+ | XBRL Taxonomy Extension Label Linkbase Document | ||||||||||
| 101.PRE+ | XBRL Taxonomy Extension Presentation Linkbase Document | ||||||||||
__________________________
+ Filed herewith
(1)Incorporated by reference to the same number exhibit filed with the Registrant’s Registration Statement on Form S-1 (Registration No. 333-138370), declared effective by the Securities and Exchange Commission on March 28, 2007.
(2)Incorporated by reference to the Company’s registration statement on Form S-8 (Commission File No. 333-142404) filed with the Securities and Exchange Commission on April 27, 2007.
(3)Incorporated by reference to Appendix A from the Company’s Definitive Proxy Statement on Schedule 14A (Commission File No. 001-33383) filed with the Securities and Exchange Commission on January 18, 2011.
(4)Incorporated by reference to the Company's Current Report on Form 8-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on March 14, 2016.
(5)Incorporated by reference to the Company's registration statement on Form S-8 (Commission File No.333-210881) filed with the Securities and Exchange Commission on April 22, 2016.
(6)Incorporated by reference to Exhibit 10.51 from the Company's Annual Report on Form 10-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on May 17, 2019.
(7)Incorporated by reference to Exhibit 10.1 from the Company’s Current Report on 8-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on September 12, 2018.
(8)The certifications attached as Exhibit 32.1 and 32.2 accompany the Annual Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by Super Micro Computer, Inc. for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
(9)Incorporated by reference to Exhibit 10.1 from the Company's Current report on 8-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on July 2, 2019.
(10)Incorporated by reference to Exhibit 4.5 from the Company’s Annual Report on Form 10-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on December 19, 2019.
(11)Incorporated by reference to Exhibit 10.55 from the Company’s Annual Report on Form 10-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on December 19, 2019.
(12)Incorporated by reference to Exhibit 10.56 from the Company’s Annual Report on Form 10-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on December 19, 2019.
(13)Incorporated by reference to Exhibit 10.57 from the Company’s Annual Report on Form 10-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on December 19, 2019.
(14)Incorporated by reference to Exhibit 10.58 from the Company’s Annual Report on Form 10-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on December 19, 2019.
(15)Incorporated by reference to Exhibit 10.59 from the Company’s Annual Report on Form 10-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on December 19, 2019.
(16)Incorporated by reference to Appendix A in the Company’s Definitive Proxy Statement on Schedule 14A (Commission File No. 001-33383) filed with the Securities and Exchange Commission on April 21, 2020.
(17)Incorporated by reference to Exhibit 10.1 from the Company’s Current Report on Form 8-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on May 13, 2020.
(18)Incorporated by reference to Exhibit 10.7 from the Company’s Registration Statement on Form S-1 (Registration No. 333-138370), declared effective by the Securities and Exchange Commission on March 28, 2007.
(19)Incorporated by reference to Exhibit 10.8 from the Company’s Registration Statement on Form S-1 (Registration No. 333-138370), declared effective by the Securities and Exchange Commission on March 28, 2007.
(20)Incorporated by reference to Exhibit 10.9 from the Company’s Registration Statement on Form S-1 (Registration No. 333-138370), declared effective by the Securities and Exchange Commission on March 28, 2007.
(21)Incorporated by reference to Exhibit 10.20 from the Company’s Registration Statement on Form S-1 (Registration No. 333-138370), declared effective by the Securities and Exchange Commission on March 28, 2007.
(22)Incorporated by reference to Exhibit 10.21 from the Company’s Registration Statement on Form S-1 (Registration No. 333-138370), declared effective by the Securities and Exchange Commission on March 28, 2007.
(23)Incorporated by reference to Exhibit 10.24 from the Company’s Registration Statement on Form S-1 (Registration No. 333-138370), declared effective by the Securities and Exchange Commission on March 28, 2007.
(24)Incorporated by reference to Exhibit 10.41 from the Company’s Current Report on 8-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on December 4, 2020.
(25)Incorporated by reference to Exhibit 10.2 from the Company’s Current Report on 8-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on December 4, 2020
(26)Incorporated by reference to Exhibit 10.1 from the Company’s Current Report on 8-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on March 1, 2021
(27)Incorporated by reference to Exhibit 10.2 from the Company’s Current Report on 8-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on March 1, 2021
(28)Incorporated by reference to Exhibit 10.1 from the Company’s Current Report on 8-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on June 29, 2021
(29)Incorporated by reference to Exhibit 10.1 from the Company’s Current Report on 8-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on July 26, 2021
(30)Incorporated by reference to Exhibit 10.3 from the Company’s Current Report on 8-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on July 26, 2021
(31)Incorporated by reference to Exhibit 10.28 from the Company’s Annual Report on Form 10-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on August 31, 2020
(32)Incorporated by reference to Exhibit 10.31 from the Company’s Annual Report on Form 10-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on August 31, 2020
(33)Incorporated by reference to Exhibit 10.32 from the Company’s Annual Report on Form 10-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on August 31, 2020
(34)Incorporated by reference to Exhibit 10.33 from the Company’s Annual Report on Form 10-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on August 31, 2020
(35)Incorporated by reference to Exhibit 10.34 from the Company’s Annual Report on Form 10-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on August 31, 2020
(36)Incorporated by reference to Exhibit 10.35 from the Company’s Annual Report on Form 10-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on August 31, 2020
* Management contract, or compensatory plan or arrangement
‡ Certain portions of this document, the disclosure of which would constitute a clearly unwarranted invasion of personal privacy, have been redacted in accordance with Regulation S-K Item 606(a)(6).
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SUPER MICRO COMPUTER, INC.
| Date: | /s/ CHARLES LIANG | ||||||||||
Charles Liang President, Chief Executive Officer and Chairman of the Board (Principal Executive Officer) | |||||||||||
133
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Charles Liang and Kevin Bauer,David Weigand, jointly and severally, his or her attorney-in-fact, each with the full power of substitution, for such person, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might do or could do in person hereby ratifying and confirming all that each of said attorneys-in-fact and agents, or his or her substitute, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on the dates indicated.
| Signature | Title | Date | ||||||||||||
| /s/ CHARLES LIANG | President, Chief Executive Officer and Chairman of the Board (Principal Executive Officer) | |||||||||||||
| Charles Liang | ||||||||||||||
| /s/ | Senior Vice President, Chief Financial Officer (Principal Financial and Accounting Officer) | |||||||||||||
| /s/ SARA LIU | Director | |||||||||||||
| Sara Liu | ||||||||||||||
| /s/ | Director | |||||||||||||
| /s/ SARIA TSENG | Director | |||||||||||||
| Saria Tseng | ||||||||||||||
| /s/ SHERMAN TUAN | Director | |||||||||||||
| Sherman Tuan | ||||||||||||||
| /s/ SHIU LEUNG (FRED) CHAN | Director | August 27, 2021 | ||||||||||||
| Shiu Leung (Fred) Chan | ||||||||||||||
| /s/ TALLY LIU | Director | |||||||||||||
| Tally Liu | ||||||||||||||
134