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.
We must work closely with our suppliers to make timely new product introductions.
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.development, which may be exacerbated due to the uncertainty of the current global economic environment. 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.
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We rely on a limited number of suppliers for certain raw materialscomponents used to manufacture our products.
Certain raw materialscomponents 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, the global economic downturn or recent events in eastern Europe, or increased demand in the industry. Two of our suppliers accounted for 18.1% and 11.4% of total purchases for the fiscal year ended June 30, 2022. Two of our suppliers accounted for 20.3% and 11.8% of total purchases for the fiscal years ended June 30, 2021. One of our suppliers accounted for 26.8%, 21.8% and 26.0% of total purchases of raw materials for the fiscal years ended June 30, 2020, 2019 and 2018, respectively.2020. Ablecom and Compuware, related parties, accounted for 10.1%8.2%, 9.2%7.8% and 9.0%10.1% of our total cost of sales for the fiscal years ended June 30, 2020, 20192022, 2021 and 2018,2020, 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 for a significant percentage of our revenue and any disruption in these channels could adversely affect our sales.
Sales of our products through our indirect sales channel accounted for 53.1%, 39.3% and 41.5% of our net sales in fiscal years 2020, 2019 and 2018, respectively. We depend on our indirect sales channel partners to assist us in promoting market acceptance of our products and anticipate that a significant portion of our revenues will continue to result from sales through indirect channels.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 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.
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 sufficient volume and with adequate gross margins to compensate for such investment in research and development, our earnings may be materially and adversely affected.
Our failure to deliver high quality server and storage solutions could damage our reputation and diminish demand for our products.
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.
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 10.1%, 9.2%, and 9.0% of our cost of sales for fiscal years 2020, 2019 and 2018, 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, 2020, 2019 or 2018. 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, 2020. 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 the company's common stock that he held. The lenders called the loans in October 2018, following the suspension of the company's common stock from trading on NASDAQ in August 2018 and the decline in the market price of the company's common stock in October 2018. As of June 30, 2020, the amount due on the unsecured loan (including principal and accrued interest) was approximately $14.9 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 and 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 Ms. Sara Liu as stockholders of Ablecom and Mr. Charles
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Liang's personal relationship with Ablecom’s Chief Executive Officer. We may not negotiate or enforce contractual terms as aggressively with Ablecom or Compuware as we might with an unrelated party, and the commercial terms of our agreements may be less favorable than we might obtain in negotiations with third parties. If our business dealings with Ablecom or Compuware are not as favorable to us as arms-length transactions, our results of operations may be harmed.
If Ablecom or Compuware are acquired or sold, new ownership could reassess the business and strategy of Ablecom or Compuware, and as a result, our supply chain could be disrupted or the terms and conditions of our agreements with Ablecom or Compuware may change. As a result, our operations could be negatively impacted or costs could increase, either of which could adversely affect our margins and results of operations.
Our reliance on Ablecom could be subject to risks associated with our reliance on a limited source of contract manufacturing services and inventory warehousing.
We plan to continue to maintain our manufacturing relationship with Ablecom in Asia. In order to provide a larger volume of contract manufacturing services for us, we anticipate that Ablecom will continue to warehouse for us an increasing number of components and subassemblies manufactured by multiple suppliers prior to shipment to our facilities in the United States and Europe. We also anticipate that we will continue to lease office space from Ablecom in Taiwan to support our research and development efforts. We operate a joint management company with Ablecom to manage the common areas shared by us and Ablecom for our separately constructed manufacturing facilities in Taiwan.
If our commercial relationship with Ablecom deteriorates, we may experience delays in our ability to fulfill customer orders. Similarly, if Ablecom’s facility in Asia is subject to damage, destruction or other disruptions, our inventory may be damaged or destroyed, and we may be unable to find adequate alternative providers of contract manufacturing services in the time that we or our customers require. We could lose orders and be unable to develop or sell some products cost-effectively or on a timely basis, if at all.
Currently, we purchase contract manufacturing services primarily for our chassis products from Ablecom. If our commercial relationship with Ablecom were to deteriorate or terminate, establishing direct relationships with those entities supplying Ablecom with key materials for our products or identifying and negotiating agreements with alternative providers of warehouse and contract manufacturing services might take a considerable amount of time and require a significant investment of resources. Pursuant to our agreements with Ablecom and subject to certain exceptions, Ablecom has the exclusive right to be our supplier of the specific products developed under such agreements. As a result, if we are unable to obtain such products from Ablecom on terms acceptable to us, we may need to discontinue a product or develop substitute products, identify a new supplier, change our design and acquire new tooling, all of which could result in delays in our product availability and increased costs. If we need to use other suppliers, we may not be able to establish business arrangements that are, individually or in the aggregate, as favorable as the terms and conditions we have established with Ablecom. If any of these things should occur, our net sales, margins and earnings could significantly decrease, which would have a material adverse effect on our business, results of operations and financial condition.
Our growth into markets outside the United States exposes us to risks inherent in international business operations.
We market and sell our systems and 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. While effects of the COVID-19 pandemic have been less severe in Taiwan than other geographic regions to date, no assurances can be given that significant adverse effects will not emerge that could substantially affect our efforts in Taiwan. See also “—The effects of the COVID-19 pandemic has, and will continue to an increasing degree, adversely affect our business operations, financial condition and results of operations, the severity of which remains uncertain.”
Beyond risks associated with the COVID-19 pandemic, 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.
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, 20202022, and 20192021 was $2.7$5.3 million and $1.7$4.6 million, respectively. 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. 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”12, “Related Party Transactions” 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.
Despite following previously issued SEC Staff guidance,In June 2020, the filingthird-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 Annual Reportinvestment 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 domestic and international laws and regulations regarding privacy, data protection and other matters, which are subject to change.
Because our products and services store, process and use data, some of which contains personal information, we are subject to complex and evolving domestic and international laws and regulations regarding privacy, data protection, rights of publicity, content, protection of minors and consumer protection. Many of these laws and regulations, which can be particularly restrictive outside of the U.S., are subject to change and uncertain interpretation. 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”), and further amendments and interpretations thereof, impose 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, including certain data transfer and security mechanisms. Noncompliance with the GDPR can trigger steep fines of up to the greater of 20 million euros or four percent of annual global revenue.
Jurisdictions outside of the European Union are also considering and/or enacting comprehensive data protection legislation. For example, on July 8, 2019, Brazil enacted the General Data Protection Law, or the LGPD, and on June 5, 2020, Japan passed amendments to its Act on the Protection of Personal Information, or the APPI. Both laws broadly regulate the processing of personal information in a manner comparable to the GDPR, and violators of the LGPD and APPI face substantial penalties. We also continue to see jurisdictions, such as Russia, imposing data localization laws, which under Russian laws require personal information of Russian citizens to be, among other data processing operations, initially collected, stored, and modified in Russia. Similarly, on November 1, 2021, China’s Personal Information Protection law came into effect, which places restrictions on the transfer of personal information to third parties within China or overseas. These regulations may deter customers from using services such as ours, and may inhibit our ability to expand into those markets or prohibit us from continuing to offer services in those markets without significant financial burden.
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In addition, numerous states in the U.S. are also expanding data protection through legislation. For example, California’s Consumer Privacy Act (“CCPA”) gives California residents expanded privacy rights and protections and provides for our fiscal year ended June 30, 2019 (the “2019 10-K”civil penalties for violations and a private right of action for data breaches. Further, California voters approved the ballot initiative known as the California Privacy Rights Act of 2020 (“CPRA”) may not make, enforcement of which begins on July 1, 2023. The CPRA significantly expands privacy rights for California consumers and creates additional obligations on businesses, which could subject us “current” in our Exchange Act filing obligations,to additional compliance costs as well as potential fines, individual claims and commercial liabilities. The CPRA also establishes the California Privacy Protection Agency (“CPPA”), which means we may not be eligiblehas the power to use certain forms or rely on certain rulesimplement and enforce the CCPA and CPRA through administrative actions, including administrative fines. The effects of the SEC.
On December 19, 2019, we filed the 2019 10-K, which constituted a “comprehensive” Annual Report on Form 10-K, or “Super 10-K,” and which contained our audited consolidated balance sheets as of June 30, 2019 and 2018CCPA and the related audited consolidated statementsCPRA are potentially significant and may require us to modify our data collection or processing practices and policies and to incur substantial costs and expenses in an effort to comply and increase our potential exposure to regulatory enforcement and/or litigation.
Certain other state laws, including Virginia, Colorado, Connecticut and Utah data privacy laws, impose similar privacy obligations and will take effect beginning in 2023. We anticipate that more states may enact legislation similar to the CCPA, by providing consumers with new privacy rights and increasing the privacy and security obligations of operations loss, stockholders’ equityentities handling certain personal information of such consumers. The CCPA has prompted a number of proposals for new federal and cash flows forstate-level privacy legislation. Such proposed legislation, if enacted, may add additional complexity, variation in requirements, restrictions and potential legal risk, require additional investment of resources in compliance programs, impact strategies and the years ended June 30, 2019, 2018availability of previously useful data and 2017, along with selected unaudited condensed consolidated financial data for the years ended June 30, 2017could result in increased compliance costs and/or changes in business practices and 2016 Concurrently with filing our 2019 10-K, we filed unaudited quarterly and year to date condensed consolidated financial statements and Quarterly Reports on Form 10-Q for the quarterly periods ended September 30, 2018, December 31, 2018, and March 31, 2019. On December 20, 2019, we filed our Quarterly report on Form 10-Q for the quarterly period ended September 30, 2019 (the “Q1 2020 10-Q”). We followed previously issued guidance from the staff of the SEC's Division of Corporation Finance (the “Staff”) with respect to filing a comprehensive annual report on Form 10-K where issuers have been delinquent in meeting their periodic reporting requirements with the SEC. In accordance with such guidance, our filing of the 2019 10-K does not necessarily mean that the Staff will conclude that we have complied with all applicable financial statement requirements or complied with all reporting requirements of the Securities Exchange Act of 1934 (“Exchange Act”), nor does it foreclose any enforcement action by the SEC with respect to our disclosure, filings or failures to file reports under the Exchange Act. We do not intend to file a separate Annual Report on Form 10-K for the fiscal year ended June 30, 2018 or Quarterly Reports on Form 10-Q for the quarterly periods ended September 30, 2017, December 31, 2017 and March 31, 2018. Without the missing reports, investors may not be able to review certain financial and other disclosures that would have been contained in those reports.policies.
We have identifieddeveloped and implemented policies and procedures to address applicable data privacy and protection law requirements. However, because the interpretation and application of many privacy and data protection laws, commercial frameworks, and standards are uncertain, it is possible that these laws, frameworks, and standards may be interpreted and applied in a manner that is inconsistent with our existing data protection practices. If so, we and our customers are at risk of enforcement actions taken by data protection authorities or litigation from consumer advocacy groups acting on behalf of data subjects. In addition to the possibility of fines, lawsuits, breach of contract claims, and other claims and penalties, we could be required to fundamentally change our business activities and practices or modify our solutions, which could materially adversely affect our business, results of operations and financial condition.
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, and may affect our business, results of operations and financial condition.
We are subject to federal, state and local regulations relating to the use, handling, storage, disposal and human exposure to materials, including hazardous and toxic materials. If we were to violate or become liable under environmental, health and safety laws in the future as a result of our inability to obtain permits, human error, accident, equipment failure or other causes, we could be subject to fines, costs or civil or criminal sanctions, face third-party property damage or personal injury claims or be required to incur substantial investigation or remediation costs, any of which could have a material weaknessadverse effect on business, results of operations and financial condition.
We also face increasing complexity in our product design as we adjust to new requirements relating to the materials composition, energy efficiency and recyclability of our products, including EU eco-design requirements for servers and data storage products (Commission Regulation (EU) 2019/424). We are also subject to laws and regulations providing consumer warnings, such as California’s “Proposition 65” which requires warnings for certain chemicals deemed by the State of California to be dangerous. We expect that our operations will be affected by other new environmental laws and regulations on an ongoing basis that will likely result in additional costs and could require that we change the design and/or manufacturing of products, and could have a material adverse effect on business, results of operations or financial condition.
We are also subject to the Section 1502 of the Dodd Frank Act concerning the supply of certain minerals coming from the conflict zones in and around the Democratic Republic of Congo and adhere to broader industry best practices to source minerals responsibly from all Conflict-Affected and High-Risk Areas (CAHRA). These requirements and best practices can affect the cost and ease of sourcing minerals used in the manufacture of electronics.
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If we are unable to maintain effective internal control over financial reporting, which could, if not remediated, adversely affectinvestors may lose confidence in the accuracy and completeness of our abilityfinancial reports and the market price of our common stock may decrease.
As a public company, we are required to maintain internal control over financial reporting and to report our financial condition and results of operationsany material weaknesses in a timely and accurate manner.
Pursuant tosuch internal controls. Section 404 of the Sarbanes-Oxley Act of 2002, our management is required to report onor Section 404, requires that we evaluate and determine the effectiveness of our internal control over financial reporting in our annual reports, and annuallyprovide a management report and attestation from our independent auditors must attest to and reportregistered public accountant on the effectiveness of our internal control over financial reporting. It is necessary for usBoth our evaluation and the external attestation have and will continue to maintain effective internalincrease our and our independent public accountant costs and expenses.
control over financial reporting to prevent fraud and errors and to maintain effective disclosure controls and procedures so that we can provide timely and reliable financial and other information. A failure to maintain adequate internal controls may adversely affect our ability to provide financial statements that accurately reflect our financial condition and report information on a timely basis.
We have concluded that our internal control over financial reporting was not effective as of June 30, 2020 due toIn the existence of a material weakness in such controls, andpast, we have also concluded that our disclosure controls and procedures were not effective as of June 30, 2020 due to ahad one or more material weakness in our internal control over financial reporting, all as described in Part II, Item 9A, “Controls and Procedures” of this Annual Report. Whileweaknesses, which we have initiated remediation measures to address the identified material weakness,remediated. If we cannot provide assurance that our remediation efforts will be adequate to allow us to conclude that such controls will be effective in the future. We also cannot assure you that additionalidentify one or more material weaknesses in our internal control over financial reporting, will not arise or be identified in the future. We intend to continue our control remediation activities and to continue to improve our overall control environment and our operational, information technology, financial systems, and infrastructure procedures and controls, as well as to continue to train, retain and manage our personnel who are essential to effective internal controls. In doing so, we will continue to incur expenses and expend management time on compliance-related issues. If we arebe unable to successfully completeassert that our remediation effortsinternal controls are effective, which could cause our stock price to decline. A “material weakness” is a deficiency, or a combination of deficiencies, in a timely manner and are, therefore, not able to favorably assess the effectiveness of our internal control over financial reporting this could further cause investors to lose confidence, andsuch that there is a reasonable possibility that a material misstatement of our operating results,annual or interim financial position, ability to accurately report our financial results and timely file our SEC reports, and stock price could be adversely affected.
Moreover, because of the inherent limitations of any control system, material misstatements due to error or fraud maystatements will not be prevented or detected on a timely basis, or at all. basis.
If we are unable to provide reliable and timely financial reports in the future, our business and reputation may be further harmed. Restated financial statements and failures in internal controls may also cause us to fail to meet reporting obligations, negatively affect investor and customer confidence in our management or result in adverse publicity and concerns from investors and customers, any of which could have a negative effect on the price of our common stock, subject us to further regulatory investigations, potential penalties or stockholder litigation, and have a material adverse impact on our business and financial condition.
The outcome of litigation arising out of the matters that led to the delay in the filing of our 2017 10-K and our other SEC reports are unpredictable, and any orders, actions or rulings not in our favor could have a material adverse effect on our business, results of operations and financial condition.
Our company and certain of our current and former executive officers are defendants in certain legal proceedings and putative class actions.Please see Part I, Item 3, “Legal Proceedings.” These proceedings have resulted in significant expenses and the diversion of management attention from our business. In addition, the circumstances that led to the delay in the filing of our 2017 10-K have created, and any additional future delay in making our SEC filing may create, the risk of additional litigation and claims by investors and examinations, investigations, proceedings and orders by regulatory authorities. These include a broad range of potential actions that may be taken against us by the SEC or other regulatory agencies, including a cease and desist order, suspension of trading of our securities, deregistration of our securities, sanctioning of our officers and directors and/or the assessment of possible civil monetary penalties. Any such further actions could be expensive and damaging to our business, results of operations and financial condition.
We 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 the remediation of remaining deficienciesweaknesses in our internal control over financial reporting, and disclosure controls and procedures, and 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 replaced. Specifically, in connection with these efforts, we incurred professional fees of approximately $14 million in fiscal year 2020, $67 million in fiscal year 2019 and $42 million in fiscal year 2018, and we continue to incur additional fees related to remediation in the current fiscal year. 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 2017. We have taken a number of steps in order to strengthen our corporate culture, sales processes, and accounting function so as to allow us to be able to provide timely and accurate financial reporting. To the extent these steps are not successful, we could be required to 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 the internal control deficiencies, could havenot detect errors on a material adverse effect on our business, results of operations and financial condition.
The matters leading to the delay in the filing of our 2017 10-Ktimely basis and our lack of effectivefinancial statements may be materially misstated. If we identify material weaknesses in our internal control over financial reporting, including adverse publicityif we are unable to comply with the requirements of Section 404 in a timely manner, if we are unable to assert that our internal control over financial reporting is effective or if our independent registered public accounting firm is unable to attest that our internal control over financial reporting is effective, investors may lose confidence in the accuracy and potential concerns fromcompleteness of our customers, have hadfinancial reports and the market price of our common stock could decrease. We could also become subject to stockholder or other third-party litigation as well as investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources and could continue to have an adverse effect on our business and financial condition.result in fines, penalties, trading suspensions or other remedies.
We have been and could continue to be the subject of negative publicity focused on the matters that led to the delay in the filing of our 2017 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 time and effort required to address our accounting and control environment and our ability to be a long-term provider to our customers. The continued occurrence of any of the foregoing could harm our business and have an adverse effect on our financial condition.
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 through our 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. 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, Russia, and elsewhere in eastern Europe 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, Russia, eastern Europe and elsewhere. Further escalations in trade restrictions or hostilities, particularly between the United States and China or Russia, could impede our ability to sell or support our products.
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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.
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, indirect 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, indirect 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.
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Provisions of our certificate of incorporation and bylaws and Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, as a result, depress the trading price of our common stock.
Our certificate of incorporation and bylaws contain provisions that could discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:
•Establish a classified Board of Directors so that not all members of our Board are 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
We incurred significant expenses related to the matters that led to the delay in the filing of our 2017 10-K and may incur additional expenses related to 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 $4.4 million, $0.5 million and $14.0 million in fiscal years 2022, 2021 and 2020, respectively. In addition, as of and for the year ended June 30, 2022, we recorded a net litigation settlement cost of $2.0 million associated with the settlement of one of the stockholder actions associated with the delay in the filing of our 2017 10-K and, 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 continue to address litigation arising from the matters that led to the delay in the filing our 2017 10-K. The expenses we are and may incur 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.
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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.
One of our key strategies 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 believe 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.
Following the U.S. federal government’s enactment of the Tax Cuts and Jobs Act (“2017 Tax Reform Act”), 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 ofor future tax planning activities nor that such rate will not increase in the Board, is critical to the overall management of our company as well as to our strategic direction. Mr. Liang co-founded our company and has been our Chief Executive Officer since our inception. His experience in running our business and his personal involvement in key relationships with suppliers, customers and strategic partners are extremely valuable to our company. We currently do not have a succession plan for the replacement of Mr. Liang if it were to become necessary. Additionally, we are particularly dependent on the continued service of our existing research and development personnel because of the complexity of our products and technologies. Our employment arrangements with our executives and employees do not require them to provide services to us for any specific length of time, and they can terminate their employment with us at any time, with or without notice, without penalty. The loss of services of any of these executives or of one or more other key members of our team could seriously harm our business.future.
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.
Backlog does not provide a substantial portion of our net sales in any quarter.
OurWhile we had greater than normal backlog during certain periods of fiscal year 2022, historically, 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.
Our business and operations are especially subject to the risks of earthquakes and other natural catastrophic events.
Our corporate headquarters, including our most significant research and development and manufacturing operations, are located in the Silicon Valley area of Northern California, a region known for seismic activity. We have also established significant manufacturing and research and development operations in Taiwan which is also subject to seismic activity risks. While we have adopted a business continuity plan, no assurances can be given that our business continuity plan will be effective or we would be able to successfully recover from a significant natural disaster, such as an earthquake, which could have a material adverse impact on our business, operating results, and financial condition. In addition, climate change and natural disasters present operational and business risks to all companies on a global scale.
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, and may affect our business, results of operations and financial condition.
We are subject to federal, state and local regulations relating to the use, handling, storage, disposal and human exposure to materials, including hazardous and toxic materials. If we were to violate or become liable under environmental laws in the future as a result of our inability to obtain permits, human error, accident, equipment failure or other causes, we could be subject to fines, costs or civil or criminal sanctions, face third-party property damage or personal injury claims or be required to incur substantial investigation or remediation costs, which could be material, or experience disruptions in our operations, any of which could have a material adverse effect on our business, results of operations and financial condition. In addition, environmental laws could become more stringent over time imposing greater compliance costs and increasing risks and penalties associated with violations, which could harm our business, results of operations and financial condition.
We also face increasing complexity in our product design as we adjust to new and future requirements relating to the materials composition, energy efficiency and recyclability of our products, including EU eco-design requirements for servers and data storage products (Commission Regulation (EU) 2019/424). We are also subject to laws and regulations such as California’s “Proposition 65” which requires that clear and reasonable warnings be given to consumers who are exposed to certain chemicals deemed by the State of California to be dangerous, such as lead. We expect that our operations will be affected by other new environmental laws and regulations on an ongoing basis. Although we cannot predict the ultimate impact of any such new laws and regulations, they will likely result in additional costs, and could require that we change the design and/or manufacturing of our products, any of which could have a material adverse effect on our business, results of operations and financial condition.
We are also subject to the Section 1502 of the Dodd Frank Act concerning the supply of certain minerals coming from the conflict zones in and around the Democratic Republic of Congo. This United States legislation includes disclosure requirements regarding the use of conflict minerals mined from the Democratic Republic of Congo and adjoining countries and procedures regarding a manufacturer’s efforts to prevent the sourcing of such conflict minerals. These requirements could affect the cost and ease of sourcing minerals used in the manufacture of semiconductor or other devices. There may only be a limited pool of suppliers who provide conflict-free metals, and we cannot assure you that we will be able to obtain products in sufficient quantities or at competitive prices.
Risks Related to Owning Our Stock
The trading price of our common stock is likely to be volatile, and you might not be able to sell your shares at or above the price at which you purchased the shares.
The trading prices of technology company securities historically have been highly volatile. In addition, the global markets have experienced increased volatility as a result of the COVID-19 pandemic.pandemic, the global economic downturn and recent events in eastern Europe. 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 impact of COVID-19, the global economic downturn and recent events in eastern Europe on our business, the global economy and trading markets;
•The outcome of litigation and claims as well as regulatory examinations, investigations, proceedings and orders to 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;
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•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 limitlimits your ability to influence corporate matters.
As of July 31, 2020,2022, our executive officers, directors, current five percent or greater stockholders and affiliated entities together beneficially owned 34.8%37.4% 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.
Provisions of our certificate of incorporation and bylaws and Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, as a result, depress the trading price of our common stock.
Our certificate of incorporation and bylaws contain provisions that could discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:
Establish a classified Board of Directors so that not all members of our Board are 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 are subject to Section 203 of the Delaware General Corporation Law, which, subject to some exceptions, prohibits “business combinations” between a Delaware corporation and an “interested stockholder,” which is generally defined as a stockholder who becomes a beneficial owner of 15% or more of a Delaware corporation’s voting stock for a three-year period following the date that the stockholder became an interested stockholder. Section 203 could have the effect of delaying, deferring or preventing a change in control that our stockholders might consider to be in their best interests.
These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and cause us to take corporate actions other than those stockholders desire.
We do not expect to pay any cash dividends for the foreseeable future.
We do not anticipate that we will pay any cash dividends to holders of our common stock in the foreseeable future. In addition, under the terms of the credit agreement with Bank of America, dated April 19, 2018, we cannot pay any dividends, with limited exceptions. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.
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.
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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, 2020,2022, we owned approximately 1,320,0002,273,000 square feet and leased approximately 810,000690,000 square feet of office and manufacturing space. Our long-lived assets located outside of the United States represented36.8%, 34.4% and 23.5%, 21.5% and 22.9% of total value of long-lived assets in fiscal years 2020, 20192022, 2021 and 2018,2020, respectively. See Part II, Item 8, Note 18,17, “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 1,097,0001,307,000 square feet of office and manufacturing space. We lease approximately 5,000 square feet of office space in Jersey City, New Jersey under a lease that expires in January 2022,May 2027, lease approximately 47,00046,000 square feet of office space in San Jose, California under a lease that expires in January 2022, and2028, lease approximately 246,000 square feet of warehouse space in Fremont, California under a lease that expires in July 2025.2025, and lease approximately 28,000 square feet of warehouse space in Milpitas, California under a lease that expires in March 2027. 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 203,000 square feet of office and manufacturing space under five 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 7.06.77 acres of land. These manufacturing facilities are pledged as security under the existing term loans with $29.4$45.8 million remaining outstanding as of June 30, 2020.2022. Our research and development center, service operations, and warehouse space in Asia are located in an approximately 100,000110,000 square feet facility in Taipei, Taiwan under tenthirteen leases that expire at various dates ranging from November 20202022 through February 2023July 2025 and an approximately 202,00038,000 square feet facility in Taoyuan, Taiwan under eight leases that expire from December 2021 through December 2023. We lease approximately 4,000 square feet of office space in Shanghai and Beijing, China for sales and service operations under two leases that expire in August 2021 and November 2022, respectively. We lease approximately 3,000 square feet of office space in Japan under two leases, which both expire in August 2021. In addition, starting July 2020, we lease an additional 4,900 square feet of office space in Japan that expires in June 2023, in replacement to our two existing leases.December 2022.
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 aour third new manufacturing and warehouse building with approximately 182,000209,000 square feet of manufacturing space in August 2015.June 2021. In fiscal years 2019 and 2020,year 2022, 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 borrowings from banks.
See Part II, Item 8, Note 10,9, “Short-term and Long-term Debt” to the consolidated financial statements in this Annual Report for a discussion of our company's debt.
We believe that our existing properties, including both owned and leased, are in good condition and are suitable for the conduct of our business.
Item 3. Legal Proceedings
From timeThe information required by this item is incorporated herein by reference to time, we have been involvedthe information set forth under the caption “Litigation and Claims” in various legal proceedings arising from the coursePart II, Item 8, Note 15 “Commitments and Contingencies” of business activities. In management’s opinion, the resolution of any matters will not have a material adverse effect on our consolidated financial condition, results of operations or liquidity.
On February 8, 2018, two putative class action complaints were filed against us, our CEO, and our former CFO in the U.S. District Court for the Northern District of California (Hessefort v. Super Micro Computer, Inc., et al., No. 18-cv-00838 and United Union of Roofers v. Super Micro Computer, Inc., et al., No. 18-cv-00850). The complaints contain similar allegations, claiming that the defendants violated Section 10(b) of the Securities Exchange Act duenotes to alleged misrepresentations and/or omissions in public statements regarding recognition of revenue. The court subsequently appointed New York Hotel Trades Council & Hotel Association of New York City, Inc. Pension Fund as lead plaintiff. The lead plaintiff then filed an amended complaint naming our Senior Vice President of Investor Relations as an additional defendant. On June 21, 2019, the lead plaintiff filed a further amended complaint naming our former Senior Vice President of International Sales, Corporate Secretary, and Director as an additional defendant. On July 26, 2019, we filed a motion to dismiss the complaint. On March 23, 2020, the Court granted our 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 amended complaint. On June 15, 2020, we filed a motion to dismiss the further amended complaint, the hearing for which is calendared for September 23, 2020. We believe the claims are without merit and intend to vigorously defend against the lawsuit.
As previously disclosed, we cooperated with the SEC in its investigation of marketing expenses that contained certain irregularities discovered by our management, which irregularities were disclosed on August 31, 2015, and we cooperated with the SEC in its further investigation of the matters underlying our inability to timely file our 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 our products. On August 25, 2020, to fully resolve all matters under investigation, we 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. We 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. We 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. We also agreed to pay a civil money penalty of $17.5 million. In addition, our Chief Executive Officer concluded a settlement with the SEC on August 25, 2020, as announced by the SEC. Our Chief Executive Officer will pay us 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. As of and for the year ended June 30, 2020, we recorded a liability of $17.5 million for our SEC settlement which is included in accrued liabilities and general and administrative expenses in the consolidated financial statements. Our Chief Executive Officer’s payment of $2,122,000 to us is a contingent gain and will be recorded when it is realized.statements included in this Annual Report.
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.
SMCI | 2022 Form 10-K | 33
PART II
| |
Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
We became a public company in March 2007, prior to which there was no public market for our common stock. From March 29, 2007 through August 22, 2018, our common stock traded on the Nasdaq Global Select Market. Effective at the open of business on August 23, 2018, our common stock was suspended from trading on the Nasdaq Global Select Market. Effective March 22, 2019, our common stock was delisted from the Nasdaq Global Select Market, whereupon our common stock was quoted on the OTC Market and traded under the symbol “SMCI.” On January 14, 2020, our common stock was relisted on the NASDAQ Global Select Market under the symbol “SMCI".
Holders
As of July 31, 2020,2022, there were 3020 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, as amended, we may not pay any dividends.
Equity Compensation Plan
Please see Part III, Item 12, “Security“Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”Matters” of this Annual 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 performance graph used in our Annual Report on Form 10-K for the year ended June 30, 2019 (the "FY2019 Annual Report") included the cumulative total shareholder return of our peer issuers’ common stock for comparing against the cumulative total shareholder return on our common stock as our common stock had been delisted from the Nasdaq Global Select Market. On January 14, 2020, our common stock was relisted on the Nasdaq Global Select Market. For the Annual Report on Form 10-K for the fiscal year ending June 30, 2021 (the "FY2021 Annual Report") and onward, we will no longer use the performance of our peer issuers’ common stock to compare against the performance of our common stock, and we will use the NASDAQ Composite Index and NASDAQ Computer Index for comparing against the performance of our common stock beginning with the performance graph contained within this Annual Report on Form 10-K.
The following graph compares our cumulative five-year total stockholder return on our common stock with the cumulative return of the Nasdaq Computer Index theand Nasdaq Composite Index and an industry peer group, which we refer to as the FY2020 Peer Group, consisting of: Cray Inc., Extreme Networks, Inc., Infinera Corporation, NetApp, Inc., and NetGear, Inc. Such FY2020 Peer Group is the same as the peer group used in the FY2019 Annual Report to allow easier comparability to the prior year given we do not intend to use such peer group for the FY2021 Annual Report as described above. Cray Inc. was acquired in September 2019. In selecting the companies for inclusion, we considered and selected companies with similar industry comparability, net revenues, and operating income as our company.
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 and the FY2020 Peer Group, on June 30, 20152017, and our relative performance tracked through June 30, 2020.2022. 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.
28SMCI | 2022 Form 10-K | 34
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 6/30/2017 | | 6/30/2018 | | 6/30/2019 | | 6/30/2020 | | 6/30/2021 | | 6/30/2022 |
Super Micro Computer, Inc. | | 100.00 | | | 95.94 | | | 78.50 | | | 115.17 | | | 142.72 | | | 163.69 | |
Nasdaq Composite Index | | 100.00 | | | 122.31 | | | 130.39 | | | 163.81 | | | 236.20 | | | 179.61 | |
Nasdaq Computer Index | | 100.00 | | | 129.47 | | | 140.11 | | | 200.72 | | | 301.78 | | | 246.13 | |
|
| | | | | | | | | | | | | | | | | | |
| | 6/30/2015 | | 6/30/2016 | | 6/30/2017 | | 6/30/2018 | | 6/30/2019 | | 6/30/2020 |
Super Micro Computer, Inc. | | 100.00 |
| | 84.01 |
| | 83.33 |
| | 79.95 |
| | 65.42 |
| | 95.98 |
|
FY2020 Peer Group | | 100.00 |
| | 96.08 |
| | 103.58 |
| | 159.66 |
| | 132.35 |
| | 83.55 |
|
Nasdaq Composite Index | | 100.00 |
| | 97.11 |
| | 123.13 |
| | 150.60 |
| | 160.55 |
| | 201.71 |
|
Nasdaq Computer Index | | 100.00 |
| | 101.41 |
| | 138.22 |
| | 178.95 |
| | 193.66 |
| | 277.44 |
|
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
None.During the three months ended June 30, 2022, we did not repurchase shares of our common stock.
On January 29, 2021, a duly authorized subcommittee of the Board approved a share repurchase program (the "Prior Repurchase Program") to repurchase up to $200 million of our common stock at prevailing prices in the open market. Prior to the expiration of such repurchase program on July 31, 2022, an aggregate of $50 million had been purchased thereunder.
Subsequently, on August 3, 2022, after the expiration of the Prior Repurchase Program, a duly authorized subcommittee of the Board approved a new share repurchase program to repurchase shares of common stock for up to $200 million at prevailing prices in the open market. The share repurchase program is effective until January 31, 2024 or until the maximum amount of common stock is repurchased, whichever occurs first.
29SMCI | 2022 Form 10-K | 35
Item 6. Selected Financial Data[Reserved]
The following selected consolidated financial data should be read in conjunction with Part I, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and the notes thereto included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report to fully understand factors that may affect the comparability of the information presented below. We derived the selected consolidated balance sheet data as of June 30, 2020 and 2019, the consolidated statement of operations data and the stock-based compensation data for the years ended June 30, 2020, 2019 and 2018 from our audited consolidated financial statements and accompanying notes included in this Annual Report. The consolidated balance sheet data as of June 30, 2018, 2017 and 2016, the consolidated statement of operations data and stock-based compensation data for the years ended June 30, 2017 and 2016 are derived from our audited consolidated financial statements which are not included in this Annual Report. Operating results for any year are not necessarily indicative of results to be expected for any future periods.
SMCI | 2022 Form 10-K | 36
|
| | | | | | | | | | | | | | | | | | | |
| Years Ended June 30, |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| (in thousands, except per share data) |
Consolidated Statements of Operations Data: | | | | | | | | | |
Net sales | $ | 3,339,281 |
| | $ | 3,500,360 |
| | $ | 3,360,492 |
| | $ | 2,484,929 |
| | $ | 2,225,022 |
|
Cost of sales | 2,813,071 |
| | 3,004,838 |
| | 2,930,498 |
| | 2,134,971 |
| | 1,894,521 |
|
Gross profit | 526,210 |
| | 495,522 |
| | 429,994 |
| | 349,958 |
| | 330,501 |
|
Operating expenses: | | | | | | | | | |
Research and development | 221,478 |
| | 179,907 |
| | 165,104 |
| | 143,992 |
| | 124,223 |
|
Sales and marketing | 85,137 |
| | 77,154 |
| | 71,579 |
| | 66,445 |
| | 58,338 |
|
General and administrative | 133,941 |
| | 141,228 |
| | 98,597 |
| | 44,646 |
| | 40,449 |
|
Total operating expenses | 440,556 |
| | 398,289 |
| | 335,280 |
| | 255,083 |
| | 223,010 |
|
Income from operations | 85,654 |
| | 97,233 |
| | 94,714 |
| | 94,875 |
| | 107,491 |
|
Other income (expense), net | 1,410 |
| | (1,020 | ) | | (773 | ) | | (984 | ) | | 1,507 |
|
Interest expense | (2,236 | ) | | (6,690 | ) | | (5,726 | ) | | (2,300 | ) | | (1,594 | ) |
Income before income tax provision | 84,828 |
| | 89,523 |
| | 88,215 |
| | 91,591 |
| | 107,404 |
|
Income tax provision | (2,922 | ) | | (14,884 | ) | | (38,443 | ) | | (24,434 | ) | | (35,323 | ) |
Share of income (loss) from equity investee, net of taxes | 2,402 |
| | (2,721 | ) | | (3,607 | ) | | (303 | ) | | — |
|
Net income | $ | 84,308 |
| | $ | 71,918 |
| | $ | 46,165 |
| | $ | 66,854 |
| | $ | 72,081 |
|
Net income per common share: | | | | | | | | | |
Basic | $ | 1.65 |
| | $ | 1.44 |
| | $ | 0.94 |
| | $ | 1.38 |
| | $ | 1.50 |
|
Diluted | $ | 1.60 |
| | $ | 1.39 |
| | $ | 0.89 |
| | $ | 1.29 |
| | $ | 1.39 |
|
Shares used in per share calculation: | | | | | | | | | |
Basic | 50,987 |
| | 49,917 |
| | 49,345 |
| | 48,383 |
| | 47,917 |
|
Diluted | 52,838 |
| | 51,716 |
| | 52,151 |
| | 51,679 |
| | 51,836 |
|
|
| | | | | | | | | | | | | | | | | | | |
| As of June 30, |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| (in thousands) |
Consolidated Balance Sheet Data: | | | | | | | | | |
Cash and cash equivalents | $ | 210,533 |
| | $ | 248,164 |
| | $ | 115,377 |
| | $ | 110,606 |
| | $ | 178,820 |
|
Working capital | 885,126 |
| | 815,802 |
| | 719,321 |
| | 588,636 |
| | 544,698 |
|
Total assets | 1,918,646 |
| | 1,682,594 |
| | 1,769,505 |
| | 1,515,130 |
| | 1,191,483 |
|
Long-term obligations | 145,304 |
| | 135,449 |
| | 114,296 |
| | 68,754 |
| | 85,200 |
|
Total stockholders’ equity | 1,065,707 |
| | 941,176 |
| | 843,652 |
| | 773,846 |
| | 696,653 |
|
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. 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, particularly under the heading "Risk Factors."
Nasdaq Relisting of our Common Stock
As a result of the delay in filing our periodic reports with the SEC and failure to hold an annual meeting, we were unable to comply with the Nasdaq listing standards and our common stock was suspended from trading on the Nasdaq Global Select Market effective August 23, 2018 and formally delisted effective March 22, 2019. Following the suspension of trading, our common stock was quoted on the OTC Market and traded under the symbol “SMCI.” On January 14, 2020, our common stock was relisted on the NASDAQ Global Select Market under the symbol “SMCI". For further information regarding trading in our common stock, refer to Part II, Item 5, “Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” in this Annual Report.
Overview
We are a global leader and innovatorSilicon Valley-based provider of accelerated compute platforms that are application-optimized high performance and high-efficiency server and storage systems for a variety of markets, including enterprise data centers, cloud computing, artificial intelligence, 5G and edge computing. Our solutionsTotal IT Solutions include complete servers, storage systems, modular blade servers, blades, workstations, full racks,rack scale solutions, networking devices, server sub-systems, server management software, and server sub-systems.security software. We also provide global support and 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 2020, 20192022, 2021 and 2018,2020, our net income was $84.3$285.2 million, $71.9$111.9 million and $46.2$84.3 million, respectively. In order to increase our sales and profits, we believe that we must continue to develop flexible and application 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 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. Among the key non-financial indicators of our success is our ability to rapidly introduce new products and deliver the latest application-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., Nvidia Corporation, Samsung Electronics Company Limited, Micron Technology, Inc. and others 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)COVID-19 Pandemic Impact
The global spread of the coronavirus (COVID-19)COVID-19 and the various attemptsits variants have continued to contain it have created significantcreate 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 to close all businesses not deemed “essential,” shelter in place, and practice social distancing when engaging in essential activities.that govern the operations of businesses. We are an essential critical infrastructure (information technology) business under the relevant Federal, Statefederal, state and Countycounty regulations. In late March, we responded to the directives from Santa Clara County and the State of California regarding shelter in place instructions to combat the spread of COVID-19. Our first priority is the safety of our workforceworkforce and we immediately began to implementhave therefore implemented numerous health precautions and work practices to be in compliance with the law and to operate in a safe manner.
We quickly transitioned most of our indirect labor forces to work from home andhave 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 as we enter the first quarter of fiscal year 2021for our IT solutions and do not have significant direct exposure to industries such as retail and oil and gas, which have been impacted the greatest. As time passes, we may discoverThe COVID-19 pandemic has created additional demand for many server applications that support the global movement towards a digital economy. These applications include greater indirect exposure to distressed industries through our channel partnersuse of online transactions for everyday purchases by consumers of food, clothing, entertainment from gaming and OEM customers.video streaming, as well as tele-health, social networking, messaging, email, autonomous driving solutions and video conferencing companies.
We have actively managed our supply chain for potential shortage risk by first 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 to support our ability to fulfill customer orders. Our architecture, which is based on a lesser extent GPUs such that customer orders can be fulfilled as they are received.“Building Block Solutions” design approach, has also assisted us during the COVID-19 pandemic, to qualify different components for compatibility with our systems to help us overcome some shortages.
Logistics has emergedcontinued to be a challenge during the COVID-19 pandemic as a new challenge as globally the global transportation industry, restrictedand particularly ocean transportation, has been constrained by shortages of containers, labor, truckers and crowded ports. As a result, shipping by air, has been used more frequently despite that it is more expensive and there are fewer flights during the frequency of departures and increased logistics costs.COVID-19 pandemic than there were previously. We have experienced increased costs in freight as well asfreight.In addition, we also experienced increased 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 trendboth of these trends to continue for the duration of the uncertainties related tountil the COVID-19 pandemic.pandemic and other macroeconomic factors exacerbated by the COVID-19 pandemic end.
SMCI | 2022 Form 10-K | 37
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 May 2020,June 2021, we negotiated an extension of our credit facility with Bank of America to extend the maturity date to June 2021.2026 and, in March 2022, further negotiated an increase in the size of our credit facility with Bank of America from $200 million to $350 million. In June 2020,July 2021, we replaced our prior credit facility and term loan facility with CTBC Bank, with a new facility for omnibus credit lines. In September 2021, we replaced our prior credit facility with E.SUN Bank, with new credit facility and term facility. In September 2021 and April 2022, we entered into a ten-year, non-revolving term loan facility and credit line, respectively, with China TrustMega Bank which will be used to support our manufacturing activities (including the purchase of materials and components) and provide medium-term working capital. In October 2021, we entered into a credit facility with Chang Hwa Bank Corp ("CTBC Bank")and in January 2022 we entered into a loan agreement with HSBC Bank, each of which will be used to obtain financingsupport the growth of our Taiwan business. In May 2022, we also entered into a line of credit with Cathay Bank to be used for usegeneral corporate purposes to support our growth. In August 2022, we entered into a new general credit agreement with E.Sun Bank which replaced the prior E.Sun Bank credit facility which will also support the growth of our Taiwan business. Refer to Part II, Item 8, Note 9, “Short-term and Long-term Debt” in the expansion and renovation of the our Bade Manufacturing Facility locatednotes to consolidated financial statements in Taiwan.this Annual Report on Form 10-K for further information on our outstanding debt
Our management team is focused on guiding our company through the unfolding and emergingongoing challenges presented by COVID-19. Currently,the COVID-19 pandemic, including the emergence of any new variants. There are positive signs with the expiration of various COVID-19 mandates, vaccine availability and the rollout of boosters; however, with the possibility of the emergence of other new virus strains and ongoing adverse impacts of the COVID-19 pandemic on economic recovery, 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.operations.
Financial Highlights
The following is a summary of financial highlights of fiscal years 20202022 and 2019:2021:
•Net sales declinedincreased by 4.6%46.1% in fiscal year 20202022 as compared to fiscal year 2019.2021.
| |
• | Gross margin increased to 15.8% in fiscal year 2020•Gross margin increased to 15.4% in fiscal year 2022 from 15.0% in fiscal year 2021, primarily due to product and customer mix and was offset by increased logistic costs.
•14.2% in fiscal year 2019, primarily due to lower prices for key components and increased services and software revenues that have higher margins. |
Operating expenses increased by 10.6%13.2% in fiscal year 20202022 as compared to fiscal year 2019,2021, primarily due to the special performance bonuses to our employeesincrease in personnel expenses as a result of salary increases and the accrual for our settlement with the SEC.a higher headcount.
•Net income increased to $84.3$285.2 million in fiscal year 20202022 as compared to $71.9$111.9 million in fiscal year 2019,2021, which was primarily due to the higher net sales and lower operating expenses as a reduction in our effective tax rate to 3.4%percentage of revenues in fiscal year 20202022 as compared to 16.6% in fiscal year 2019.2021.
| |
• | Our cash and cash equivalents were $210.5 million and $248.2 million at the end of fiscal years 2020 and 2019, respectively. In fiscal year 2020, we used net cash of $49.8 million, of which $30.3 million was used in operating activities related primarily to additional working capital requirements such as building increased inventories of critical components. We also invested $44.3 million in purchases of property and equipment, including construction of a new facility in San Jose, California, and generated $23.8 million in financing activities primarily from the proceeds from exercises of stock options.
|
Subsequent Events
For details, see Part II, Item 8, Note 20, “Subsequent Events”•Our cash and cash equivalents were $267.4 million and $232.3 million at the end of fiscal years 2022 and 2021, respectively. In fiscal year 2022, we generated net cash of $35.1 million and $522.9 million in our notescash provided by financing activities primarily due to the consolidated financial statementsproceeds from borrowings and invested $45.2 million in this Annual Report.purchases of property and equipment. We used $440.8 million in operating activities primarily related to the increase in inventories and accounts receivables.
SMCI | 2022 Form 10-K | 38
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 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, net sales and expenses. We evaluate our estimates on an on-going basis and 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. 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.
Revenue Recognition
The most critical accounting policy estimate and judgments required in applying ASC 606, Revenue Recognition of Contracts from Customers, and our revenue recognition policy relate to the determination of the transaction price, distinct performance obligations and the evaluation of the standalone selling price (the “SSP”) for each performance obligation.
We generate revenues from the sale of server and storage systems, subsystems, accessories, services, server software management solutions, and support services.
Product sales. We recognize revenue from sales Many of products as control is transferred to customers, which generally happens at the point of shipment or upon delivery, unless customer acceptance is uncertain. Products sold are delivered via shipment from our facilities or drop shipment directly to our 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 requires management to make judgments about the individual promised goods or services and whether such goods or services are separable from our vendor. We may use distributors to sell products to end customers. Revenue from distributors is recognized when the distributor obtains controlother aspects of the product, which generally happens at the point of shipment or upon delivery.contractual relationship.
As part of determining the transaction price in contracts 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 for each major product line.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 the amount expected to be recorded in inventory upon product return, less the expected recovery costs. We also reduce revenue forestimate the estimated costs of customer and distributor programs and incentive offerings such as price protection, and rebates, as well as the estimated costs of cooperative marketing arrangements where the fair value of the benefit derived from the costs cannot be reasonably estimated. Any provision for customer and distributor programs and other discounts is recorded as a reduction of revenue at the time of sale based on an evaluation of the contract terms and historical experience.
Services sales. Our sale of services mainly consists of extended warranty and on-site services. Revenue related to extended warranty commences upon the expiration of the standard warranty period and is recognized ratably over the contractual period as we stand ready to perform any required warranty service. Revenue related to on-site services commences upon recognition of the product sale and is recognized ratably over the contractual period as the on-site services are made available to the customer. These service contracts are typically one to five years in length. Service revenue has been less than 10% of net sales for all periods presented and is not separately disclosed.
Contracts with multiple promised goods and services. Certain of our contracts contain multiple promised goods and services. Performance obligations in aWe allocate the transaction price for each customer contract are identifiedto each performance obligation based on the promised goods or services that will be transferred torelative SSP for each performance obligation within each contract. We recognize the customer that are both capableamount of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. If these criteria are not met, the promised goods and services are accounted for as a combined performance obligation. Revenuetransaction price allocated to each performance obligation is recognizedwithin a customer contract as revenue at the time the relatedrespective performance obligation is satisfied by transferring control of the promised good or service to a customer.
If Determining the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contractsrelative SSP for contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis.requires significant judgement. We determine standalone selling prices based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, we apply judgment to estimate the standalone selling price taking into account available information, such asSSP. For substantially all performance obligations, we are able to establish the SSP based on the observable prices of products or services sold separately in comparable circumstances to similar customers. We typically establish an SSP range for our products and services, which is reassessed on a periodic basis or when facts and circumstances change. SSP for our products and services can evolve over time due to changes in our pricing practices, internally approved pricing guidelines with respect to geographies, customer type, internal costs, and gross margin objectives for the related performance obligations.obligations which can also be influenced by intense competition, changes in demand for our products and services, economic and other factors.
When we receive consideration from a customerThese estimates and judgements have not fluctuated significantly for the fiscal year ended June 30, 2022 compared to prior to transferring goods or services to the customer, we record a contract liability (deferred revenue). We also recognize deferred revenue when we have an unconditional right to consideration (i.e., a receivable) before transfer of control of goods or services to a customer.fiscal years.
34SMCI | 2022 Form 10-K | 39
We consider shipping & handling activities as costs to fulfill the sales of products. Shipping revenue is included in net sales when control of the product is transferred to the customer, and the related shipping and handling costs are included in cost of sales. Taxes imposed by governmental authorities on our revenue producing activities with customers, such as sales taxes and value added taxes, are excluded from net sales and included in operating expenses.
Product Warranties
We offer product warranties typically ranging from 15 to 39 months against any defective products. These standard warranties are assurance type warranties and we do 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, we accrue for estimated returns of defective products at the time revenue is recognized. We monitor warranty obligations and may make revisions to our warranty reserve if actual costs of product repair and replacement are significantly higher or lower than estimated. Accruals for anticipated future warranty costs are recorded to cost of sales and included in accrued liabilities and other long-term liabilities. Warranty accruals are based on estimates that are updated on an ongoing basis taking into consideration inputs such as new product introductions, changes in the volume of claims compared with our historical experience, and the changes in the cost of servicing warranty claims. We account for the effect of such changes in estimates prospectively.
Inventories
Inventories are stated at lower of cost, using weighted average cost method, or net realizable value. Net realizable value is the estimated selling price of 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. We evaluate inventory on a quarterly basis for lower of cost or net realizable value and excess and obsolescence and, as necessary, write down the valuation of inventories based upon our inventory aging, forecasted usage and sales, anticipated selling price, product obsolescence and other factors. Once inventory is written down, its new value is maintained until it is sold or scrapped.
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 reduce 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 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 effectreflect 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 and non-employees, including stock options, restricted stock units ("RSUs") and performance-based restricted stock units (“PRSUs”). We recognize 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 estimated number of PRSUs that are expected to vest over the requisite service period.
That estimate is revised if subsequent information indicates that the actual number of PRSUs is likely to differ from previous estimates. The cumulative effect on current and prior periods of a change in the estimated number of PRSUs expected to vest is recognized in stock-based compensation expense in the period of the change. Previously recognized compensation expense is not reversed if vested stock options, RSUs or PRSUs for which the requisite service has been rendered and the performance condition has been met expire unexercised or are not settled.
SMCI | 2022 Form 10-K | 40
The fair value of RSUs and PRSUs is based on the closing market price of our common stock on the date of grant. We estimate the fair value of stock options granted using a Black-Scholes option 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 expected term represents the period that our stock-based awards are expected to be outstanding and was determined based on our historical experience. The expected volatility is based on the historical volatility of our common stock. The assumptions used to determine the fair value is then amortized on a straight-line basis over the requisite service periods of the option awards which is generallyrepresent management’s best estimates. These estimates involve inherent uncertainties and the vesting period.application of management’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 used, our stock-based compensation expense 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 is considered a variable interest entity ("VIE"). We consolidate VIEs when we are the primary beneficiary. The primary beneficiary of a VIE is the party that meets both of the following criteria: (1) has the power to make decisions that most significantly affect the economic performance of the VIE and (2) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE. Periodically, we assess whether any changes in the interest or relationship with the entity affect the determination of whether the entity is still a VIE and, if so, whether we are the primary beneficiary. If we are not the primary beneficiary in a VIE, we account for the investment or other variable interest in accordance with applicable GAAP.
We have concluded that Ablecom Technology, Inc. ("Ablecom") and its affiliate, Compuware, Technology, Inc. ("Compuware"), are 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, we considered our explicit arrangements with Ablecom and Compuware, including all contractual arrangements with these entities. Also, as a result of the substantial related party relationships between us and these two companies, we considered whether any implicit arrangements exist that would cause us to protect these related parties’ interests from suffering losses. We determined that no material implicit arrangements exist with Ablecom, Compuware, or their shareholders.
We and Ablecom jointly established Super Micro Asia Science and Technology Park, Inc. (the “Management Company”) in TaiwanOur ability to manage the common areas shared by us and Ablecom forassess correctly our separately constructed manufacturing facilities. In fiscal year 2012, each party contributed $0.2 million forinfluence or control over an entity at inception of our involvement or on a 50% ownership interest of the Management Company. We have concluded that the Management Company is a VIE and we arecontinuous basis when determining the primary beneficiary as we haveof a VIE affects the power to direct the activities that are most significant to the Management Company. For the fiscal years ended 2020, 2019 and 2018, the accountspresentation of the Management Company were consolidated with our accounts, and a noncontrolling interest was recorded for Ablecom’s interest in the net assets and operations of the Management Company. Net income (loss) attributable to Ablecom’s interest was not material for the periods presented and was included in general and administrative expensesthese entities in our consolidated statementsfinancial statements. Subsequent evaluations of operations.the primary beneficiary of a VIE may require the use of different assumptions that could lead to identification of a different primary beneficiary, resulting in a different consolidation conclusion than what was determined at inception of the arrangement.
36SMCI | 2022 Form 10-K | 41
Results of Operations
The following table presents certain items of our consolidated statements of operations expressed as a percentage of revenue.
| | | | | | | | | | | | | | | | | |
| Years Ended June 30, |
| 2022 | | 2021 | | 2020 |
Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of sales | 84.6 | % | | 85.0 | % | | 84.2 | % |
Gross profit | 15.4 | % | | 15.0 | % | | 15.8 | % |
Operating expenses: | | | | | |
Research and development | 5.2 | % | | 6.3 | % | | 6.6 | % |
Sales and marketing | 1.7 | % | | 2.4 | % | | 2.5 | % |
General and administrative | 2.0 | % | | 2.8 | % | | 4.1 | % |
Total operating expenses | 8.9 | % | | 11.5 | % | | 13.2 | % |
Income from operations | 6.5 | % | | 3.5 | % | | 2.6 | % |
Other (expense) income, net | 0.2 | % | | (0.1) | % | | — | % |
Interest expense | (0.1) | % | | (0.1) | % | | (0.1) | % |
Income before income tax provision | 6.6 | % | | 3.3 | % | | 2.5 | % |
Income tax provision | (1.0) | % | | (0.2) | % | | (0.1) | % |
Share of income from equity investee, net of taxes | — | % | | — | % | | 0.1 | % |
Net income | 5.6 | % | | 3.1 | % | | 2.5 | % |
|
| | | | | | | | |
| Years Ended June 30, |
| 2020 | | 2019 | | 2018 |
Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of sales | 84.2 | % | | 85.8 | % | | 87.2 | % |
Gross profit | 15.8 | % | | 14.2 | % | | 12.8 | % |
Operating expenses: | | | | | |
Research and development | 6.6 | % | | 5.1 | % | | 4.9 | % |
Sales and marketing | 2.5 | % | | 2.2 | % | | 2.1 | % |
General and administrative | 4.1 | % | | 4.0 | % | | 2.9 | % |
Total operating expenses | 13.2 | % | | 11.3 | % | | 9.9 | % |
Income from operations | 2.6 | % | | 2.9 | % | | 2.9 | % |
Other (expense) income, net | — | % | | — | % | | — | % |
Interest expense | (0.1 | )% | | (0.2 | )% | | (0.2 | )% |
Income before income tax provision | 2.5 | % | | 2.7 | % | | 2.7 | % |
Income tax provision | (0.1 | )% | | (0.4 | )% | | (1.1 | )% |
Share of income (loss) from equity investee, net of taxes | 0.1 | % | | (0.1 | )% | | (0.1 | )% |
Net income | 2.5 | % | | 2.2 | % | | 1.5 | % |
Net Sales
Net sales consist of sales of our server and storage solutions, including 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. The main factors that impact our net sales of our subsystems and accessories are units shipped and the average selling price per 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 memory. The prices for our subsystems and accessories can also vary widely based on whether a customer is purchasing power supplies, server boards, chassis or other accessories.
A compute node is an independent hardware configuration within a server system capable of having its own CPU, memory 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 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 CPU/GPU, memory and SSDs.storage.
The following table presents net sales by product type for fiscal years 2020, 20192022, 2021 and 20182020 (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended June 30, | | 2022 over 2021 Change | | 2021 over 2020 Change |
| 2022 | | 2021 | | 2020 | | $ | | % | | $ | | % |
Server and storage systems | $ | 4,463.8 | | | $ | 2,790.3 | | | $ | 2,620.8 | | | $ | 1,673.5 | | | 60.0 | % | | $ | 169.5 | | | 6.5 | % |
Percentage of total net sales | 85.9 | % | | 78.4 | % | | 78.5 | % | | | | | | | | |
Subsystems and accessories | 732.3 | | | 767.1 | | | 718.5 | | | (34.8) | | | (4.5) | % | | 48.6 | | | 6.8 | % |
Percentage of total net sales | 14.1 | % | | 21.6 | % | | 21.5 | % | | | | | | | | |
Total net sales | $ | 5,196.1 | | | $ | 3,557.4 | | | $ | 3,339.3 | | | $ | 1,638.7 | | | 46.1 | % | | $ | 218.1 | | | 6.5 | % |
SMCI | 2022 Form 10-K | 42
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended June 30, | | 2020 over 2019 Change | | 2019 over 2018 Change |
| 2020 | | 2019 | | 2018 | | $ | | % | | $ | | % |
Server and storage systems | $ | 2,620.8 |
| | $ | 2,858.7 |
| | $ | 2,663.6 |
| | $ | (237.9 | ) | | (8.3 | )% | | $ | 195.1 |
| | 7.3 | % |
Percentage of total net sales | 78.5 | % | | 81.7 | % | | 79.3 | % | | | | | | | | |
Subsystems and accessories | 718.5 |
| | 641.7 |
| | 696.9 |
| | 76.8 |
| | 12.0 | % | | (55.2 | ) | | (7.9 | )% |
Percentage of total net sales | 21.5 | % | | 18.3 | % | | 20.7 | % | | | | | | | | |
Total net sales | $ | 3,339.3 |
| | $ | 3,500.4 |
| | $ | 3,360.5 |
| | $ | (161.1 | ) | | (4.6 | )% | | $ | 139.9 |
| | 4.2 | % |
Fiscal Year 20202022 Compared with Fiscal Year 20192021
During fiscal year 20202022 we continued to experience a steady demand forexperienced increased revenue from server and storage systems, particularly from our large enterprise and datacenter customers. The year-over-year decreaseincrease in net sales of server and storage systems was primarily due to a decreasean increase of average selling prices per compute node by approximately 11%, offset by a slight32% as well as an increase of approximately 23% in the number of units of compute nodes sold. We typically adjust our prices as component costs riseThe year-over-year decrease in net sales of subsystems and fall. The decline in average selling pricesaccessories was primarily due to substantially lower costs for key components, specifically for memoryour emphasis on selling full systems and storage, as compared to the previous fiscal year.servers. Our services and software revenue, included in server and storage systems revenue, increased by $39.8$2.5 million year-over-year.
Fiscal Year 2021 Compared with Fiscal Year 2020
During fiscal year 2021 we experienced increased revenue from server and storage systems, particularly from our large enterprise and datacenter customers. The year-over-year increase in net sales of server and storage systems was primarily due to an increase of average selling prices per compute node by approximately 17%, offset by a decrease of approximately 9% in 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 was primarily due to significant inventory component price increases resulting from component shortages during fiscal year 2021. The year-over-year increase in net sales of subsystems and accessories was primarily due to an increase of approximately 19%5% in the volume of subsystems and accessories sold, mainly due to increased demand from our indirect sales channel offset byand an approximately 6% decrease2% increase in average selling prices due primarily to the decreaseincrease in costs of the components.
Fiscal Year 2019 Compared with Fiscal Year 2018
The year-over-year increase in server Our services and storage systems sales was primarily due to an increase of average selling price per compute node by approximately 15%, offset by a decrease of approximately 8% in the number of units of compute nodes sold. The decrease in the number of units of compute notes was primarily attributable to an overall market slowdown in the second half of fiscal year 2019. The increase in the average selling prices of our server and storage systems was primarily due to higher sales of our complete systems configured with higher density computing and more memory and storage capacity. During the first half of fiscal year 2019, we increased our average selling prices primarily to remain consistent with the increases in the cost of memory and SSDs on a year-over year basis. During October 2018, a 10% tariff was applied to certain key components made in China and was partially incorporated into our average selling prices to the extent that component sourcing alternatives were not available. As costs for memory and SSDs began to decline in the second half of fiscal year 2019, our average selling prices to customers declined accordingly. Our servicessoftware revenue, included in server and storage systems revenue, increased by $41.6$0.2 million year-over-year. The year-over-year decrease in net sales of our subsystems and accessories in fiscal year 2019 was primarily due to a decrease of average selling prices of approximately 8%.
The following table presents the percentages of net sales from products sold through our indirect sales channel and to our direct customers and OEMs for fiscal years 2020, 2019 and 2018 (dollars in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended June 30, | | 2020 over 2019 Change | | 2019 over 2018 Change |
| 2020 | | 2019 | | 2018 | | $ | | % | | $ | | % |
Indirect sales channel | $ | 1,771.6 |
| | $ | 1,376.7 |
| | $ | 1,395.8 |
| | $ | 394.9 |
| | 28.7 | % | | $ | (19.1 | ) | | (1.4 | )% |
Percentage of total net sales | 53.1 | % | | 39.3 | % | | 41.5 | % | | | | | | | | |
Direct customers and OEMs | 1,567.7 |
| | 2,123.7 |
| | 1,964.7 |
| | (556.0 | ) | | (26.2 | )% | | 159.0 |
| | 8.1 | % |
Percentage of total net sales | 46.9 | % | | 60.7 | % | | 58.5 | % | | | | | | | | |
Total net sales | $ | 3,339.3 |
| | $ | 3,500.4 |
| | $ | 3,360.5 |
| | $ | (161.1 | ) | | (4.6 | )% | | $ | 139.9 |
| | 4.2 | % |
Fiscal Year 2020 Compared with Fiscal Year 2019
The period-over-period increase in net sales through our indirect sales channel was primarily due to increased demand from the channel supporting large end users and partially offset by the lower average selling prices for our server and storage systems, caused by lower component pricing. Some direct customers also elected to move a part or all of their purchases to be through an indirect sales channel. The period-over-period decrease in net sales to our direct customers and OEMs was primarily due to a decline in demand from our internet datacenter and cloud customers and our enterprise datacenter customers.
Fiscal Year 2019 Compared with Fiscal Year 2018
The year-over-year decrease in net sales through our indirect sales channel was primarily due to the higher sales to our direct customers and OEMs. The year-over-year increase in net sales to direct customers and OEMs was primarily due to higher sales of our server and storage systems to internet data center and cloud, enterprise and OEM customers.
The following table presents percentages of net sales by geographic region for fiscal years 2020, 20192022, 2021 and 20182020 (dollars in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended June 30, | | 2020 over 2019 Change | | 2019 over 2018 Change |
| 2020 | | 2019 | | 2018 | | $ | | % | | $ | | % |
United States | $ | 1,957.3 |
| | $ | 2,032.9 |
| | $ | 1,902.1 |
| | $ | (75.6 | ) | | (3.7 | )% | | $ | 130.8 |
| | 6.9 | % |
Percentage of total net sales | 58.6 | % | | 58.1 | % | | 56.6 | % | | | | | | | | |
Asia | 650.7 |
| | 712.2 |
| | 762.7 |
| | (61.5 | ) | | (8.6 | )% | | (50.5 | ) | | (6.6 | )% |
Percentage of total net sales | 19.5 | % | | 20.3 | % | | 22.7 | % | | | | | | | | |
Europe | 598.6 |
| | 611.0 |
| | 547.5 |
| | (12.4 | ) | | (2.0 | )% | | 63.5 |
| | 11.6 | % |
Percentage of total net sales | 17.9 | % | | 17.5 | % | | 16.3 | % | | | | | | | | |
Others | 132.7 |
| | 144.3 |
| | 148.2 |
| | (11.6 | ) | | (8.0 | )% | | (3.9 | ) | | (2.6 | )% |
Percentage of total net sales | 4.0 | % | | 4.1 | % | | 4.4 | % | | | | | | | | |
Total net sales | $ | 3,339.3 |
| | $ | 3,500.4 |
| | $ | 3,360.5 |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended June 30, | | 2022 over 2021 Change | | 2021 over 2020 Change |
| 2022 | | 2021 | | 2020 | | $ | | % | | $ | | % |
United States | $ | 3,035.5 | | | $ | 2,107.9 | | | $ | 1,957.3 | | | $ | 927.6 | | | 44.0 | % | | $ | 150.6 | | | 7.7 | % |
Percentage of total net sales | 58.4 | % | | 59.3 | % | | 58.6 | % | | | | | | | | |
Asia | 1,139.9 | | | 699.7 | | | 650.7 | | | 440.2 | | | 62.9 | % | | 49.0 | | | 7.5 | % |
Percentage of total net sales | 21.9 | % | | 19.7 | % | | 19.5 | % | | | | | | | | |
Europe | 825.2 | | | 614.8 | | | 598.6 | | | 210.4 | | | 34.2 | % | | 16.2 | | | 2.7 | % |
Percentage of total net sales | 15.9 | % | | 17.3 | % | | 17.9 | % | | | | | | | | |
Others | 195.5 | | | 135.0 | | | 132.7 | | | 60.5 | | | 44.8 | % | | 2.3 | | | 1.7 | % |
Percentage of total net sales | 3.7 | % | | 3.7 | % | | 4.0 | % | | | | | | | | |
Total net sales | $ | 5,196.1 | | | $ | 3,557.4 | | | $ | 3,339.3 | | | $ | 1,638.7 | | | 46.1 | % | | $ | 218.1 | | | 6.5 | % |
Fiscal Year 20202022 Compared with Fiscal Year 20192021
The year-over-year decreaseyear over year increase in overall net sales is the result of increased selling prices and quantities of product shipments. Asia experienced the highest percentage growth among all regions. China, Japan and Korea exceeded the overall regional average of growth, which was the primary driver of the increases in net sales in the United States was primarilyAsia. Russia experienced a year over year decrease due to athe conflict in that region, which decrease in net sales ofhad an immaterial impact on our server and storage systems to our direct customers and OEMs. The year-over-year decrease in net sales in Asia was primarily due to a decrease in net sales of our server and storage systems to OEMs in China, India and Japan, partially offset by a slight increase in the net sales of subsystems and accessories in China and of server and storage systems in the rest of Asia region. The year-over-year decrease in net sales in Europe was primarily due to a decrease in net sales of our server and storage systems to our direct customers and OEMs in the Netherlands, partially offset by an increase in net sales of our subsystems and accessories to our indirect sales channel in Germany and an increase in sales to our indirect sales channel in France.
overall performance.
Fiscal Year 20192021 Compared with Fiscal Year 20182020
The year-over-year increase in net sales in the United States was primarily due to the higheran 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 to our direct customersin China, Singapore, India and OEMs. The year-over-yearJapan, partially offset by a decrease in the net sales in Asia was due primarily to decreased sales through our indirect sales channelTaiwan. The year-over-year increase in China, partially offset by increased sales in Taiwan to enterprise datacenter customers. The increased percentage of net sales in Europe was primarily due to higheran 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 to enterprise and cloud computing customers.Russia.
SMCI | 2022 Form 10-K | 43
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 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 purchased parts and material costs, shipping costs, 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 based on the cost of materials and market conditions. As a result, our cost of sales as a percentage of net sales in any period can increase due to significant component price increases resulting from component shortages.
We use several suppliers and contract manufacturers to design and manufacture subsystems in accordance with our specifications, with most final assembly and testing predominantly performed at our manufacturing facilityfacilities in San Jose, California. During the fiscal years 2020, we continued to expand manufacturing and service operations in Taiwan primarily to supportsame region where our Asian and European customers and have continued to work on improving our utilization of our overseas manufacturing capacity.products are sold. 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 10.1%8.3%, 9.2%7.8% and 9.0%10.1% of our cost of sales for fiscal years 2020, 20192022, 2021 and 2018,2020, respectively. For further details on our dealings with related parties, see Part II, Item 8, Note 13,12, “Related Party Transactions.”
Cost of sales and gross margin for fiscal years 2020, 20192022, 2021 and 2018,2020, are as follows (dollars in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended June 30, |
| 2020 over 2019 Change | | 2019 over 2018 Change |
| 2020 |
| 2019 |
| 2018 |
| $ |
| % |
| $ |
| % |
Cost of sales | $ | 2,813.1 |
|
| $ | 3,004.8 |
|
| $ | 2,930.5 |
|
| $ | (191.7 | ) |
| (6.4 | )% |
| $ | 74.3 |
|
| 2.5 | % |
Gross profit | 526.2 |
|
| 495.5 |
|
| 430.0 |
|
| 30.7 |
|
| 6.2 | % |
| 65.5 |
|
| 15.2 | % |
Gross margin | 15.8 | % |
| 14.2 | % |
| 12.8 | % |
|
|
| 1.6 | % |
|
|
|
| 1.4 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended June 30, | | 2022 over 2021 Change | | 2021 over 2020 Change |
| 2022 | | 2021 | | 2020 | | $ | | % | | $ | | % |
Cost of sales | $ | 4,396.1 | | | $ | 3,022.9 | | | $ | 2,813.1 | | | $ | 1,373.2 | | | 45.4 | % | | $ | 209.8 | | | 7.5 | % |
Gross profit | 800.0 | | | 534.5 | | | 526.2 | | | 265.5 | | | 49.7 | % | | 8.3 | | | 1.6 | % |
Gross margin | 15.4 | % | | 15.0 | % | | 15.8 | % | | | | 0.4 | % | | | | (0.8) | % |
Fiscal Year 20202022 Compared with Fiscal Year 20192021
The year-over-year decreaseincrease in cost of sales was primarily attributableattributed 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$1,262.6 million in costs of materials and contract manufacturing expenses primarily related to the increase in net sales volume, a $54.9 million increase in freight charges, a $23.6 million increase in overhead costs, attributable primarilya $18.9 million increase due to increased tariffslower cost recovery of cost paid in prior periods, a $8.3 million increase in excess and anobsolete inventory charges and a $4.9 million increase in other cost 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.
sales.
The period-over-periodyear-over-year increase in the gross margin percentage was primarily due to sales prices decliningincreases, product and customer mix and higher capitalization of manufacturing overhead due to higher inventory levels, offset by higher costs from freight, overhead, other cost of sales, excess and obsolete inventory charges, and lower recovery of costs from prior periods. Since the start of the COVID-19 pandemic, we have experienced an increase in costs of sales, logistics costs as well as direct labor costs as we incentivize our employees. This increase in costs negatively impacts our gross margin, and we expect these higher costs to continue for the duration of the COVID-19 pandemic.
Fiscal Year 2021 Compared with Fiscal Year 2020
The year-over-year increase in cost of sales was primarily attributable to an increase of $244.1 million in costs of materials and contract manufacturing expenses primarily related to the increase in net sales volume and an increase of $8.9 million in the cost of freight. This was offset by a decrease of $29.5 million in overhead 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 obsolescence 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 compared to the fiscal year 2020.
SMCI | 2022 Form 10-K | 44
The period-over-period decrease in the gross margin percentage was primarily due to sales prices increasing at a slower rate than the declineincrease in the costs of components and due to the increasedecrease 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, and we expect these higher costs to continue for the duration of the COVID-19 pandemic.
Fiscal Year 2019 Compared with Fiscal Year 2018
The year-over-year decrease in cost of sales was primarily attributable to an increase of $25.8 million in inventory costs related to the increase in net sales volume, increased expense of $23.3 million in the provision for excess inventory and obsolescence, an increase in overhead costs of $10.7 million attributable to increased tariffs for import of components from China, an increase of $8.6 million in compensation and benefits including stock-based compensation as a result of an increase in annual salaries and benefits and an increase in the number of operations personnel, and an increase of warranty provision of $5.4 million related to the increase in net sales.
The year-over-year increase in the gross margin percentage was primarily due to lower costs of memory and SSDs components in the second half of fiscal year 2019 and the timing of adjusting our average selling prices, as well as the increase in services and software revenue which have higher margins than product sales. In addition, in fiscal year 2020 as compared with fiscal year 2019, we had lower net sales in Asia where pricing is typically lower and the market there is more competitive which resulted in a shift in geographic mix that had a positive impact on our gross margin percentage.
Operating Expenses
Research and development expenses consist of personnel expenses, including salaries, benefits, stock-based compensation and incentive bonuses, and related expenses for our research and development personnel, as well as 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 funding from certain suppliers and customers for joint development. Under these arrangements, we are reimbursed for certain research and development costs that we incur as part of the joint development efforts 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, costscost for tradeshows, independent sales representative fees and marketing programs. From time to time, we receive cooperative marketing development funding from certain suppliers. Under these 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 new 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, outside legal, audit, tax fees, insurance and bad debt reserves on accounts receivable.
Operating expenses for fiscal years 2020, 20192022, 2021 and 20182020 are as follows (dollars in millions):
| | | Years Ended June 30, | | 2020 over 2019 Change | | 2019 over 2018 Change | | Years Ended June 30, | | 2022 over 2021 Change | | 2021 over 2020 Change |
| 2020 | | 2019 | | 2018 | | $ | | % | | $ | | % | | 2022 | | 2021 | | 2020 | | $ | | % | | $ | | % |
Research and development | $ | 221.5 |
| | $ | 179.9 |
| | $ | 165.1 |
| | $ | 41.6 |
| | 23.1 | % | | $ | 14.8 |
| | 9.0 | % | Research and development | $ | 272.3 | | | $ | 224.4 | | | $ | 221.5 | | | $ | 47.9 | | | 21.3 | % | | $ | 2.9 | | | 1.3 | % |
Percentage of total net sales | | Percentage of total net sales | 5.2 | % | | 6.3 | % | | 6.6 | % | |
Sales and marketing | 85.1 |
| | 77.2 |
| | 71.6 |
| | 7.9 |
| | 10.2 | % | | 5.6 |
| | 7.8 | % | Sales and marketing | 90.1 | | | 85.7 | | | 85.1 | | | 4.4 | | | 5.1 | % | | 0.6 | | | 0.7 | % |
Percentage of total net sales | | Percentage of total net sales | 1.7 | % | | 2.4 | % | | 2.5 | % | |
General and administrative | 133.9 |
| | 141.2 |
| | 98.6 |
| | (7.3 | ) | | (5.2 | )% | | 42.6 |
| | 43.2 | % | General and administrative | 102.4 | | | 100.5 | | | 133.9 | | | 1.9 | | | 1.9 | % | | (33.4) | | | (24.9) | % |
Percentage of total net sales | | Percentage of total net sales | 2.0 | % | | 2.8 | % | | 4.0 | % | |
Total operating expenses | $ | 440.5 |
| | $ | 398.3 |
| | $ | 335.3 |
| | 42.2 |
| | 10.6 | % | | 63.0 |
| | 18.8 | % | Total operating expenses | $ | 464.8 | | | $ | 410.6 | | | $ | 440.5 | | | 54.2 | | | 13.2 | % | | (29.9) | | | (6.8) | % |
|
Fiscal Year 20202022 Compared with Fiscal Year 20192021
The year-over-year increase in research and development expenses was primarily due to a $40.8 million increase in personnel expenses due to salary increases and a higher headcount, $3.7 million lower research and development credits from certain suppliers and customers towards our development efforts and a $3.4 million increase in product development costs.
The year-over-year increase in sales and marketing expenses was primarily due to a $9.6 million increase in personnel expenses due to salary increases and a higher headcount, offset by a $5.7 million increase in marketing development funds received and a $0.5 million increase in advertising and other expenses.
SMCI | 2022 Form 10-K | 45
The year-over-year increase in general and administrative expenses was primarily due to a $4.1 million increase in legal and litigation settlement expenses and $6.6 million increase in personnel and other expenses due to salary increases and a higher headcount offset by decrease of $1.5 million in professional fees driven by lower expenses incurred to remediate the causes that led to the delay in filing our periodic reports with the SEC and the associated restatement of our previously issued financial statements and a $7.3 million decrease in expense from special performance awards.
Fiscal Year 2021 Compared with Fiscal Year 2020
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 incurred as part of joint product development; an increase of $6.7$11.6 million in costs mainly related to materials, supplies and equipment used in product development; and an increase of $1.8 million in facilities expenses.development. 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 expensesmaterials, supplies and equipment costs for one canceled joint product development agreement. Personnel expenses increased $1.7 million as a result of an increase in the number of research and development employees. These increases were partially offset by an increase of $8.8 million in research and development credits from certain suppliers and customers towards our development efforts and a $1.5 million decrease mainly due to decrease in travel expenses as a result of 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 $8.1$1.2 million in personneladvertising 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 of an increase in a change in our operations in response to the number of sales and marketing personnel and a special performance bonus of $1.8 millionCOVID-19 pandemic.
The year-over-year decrease in general and administrative expenses was due to a decrease of $33.9$41.8 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 $17.5 million related to an expense accrual for the settlement with the SEC; an increase of $14.1 million in personnel expenses as a result of an increase in the number of personnel and a special performance bonus of $4.5 million; an increase of $3.2 million in insurance expense; and an increase of $1.7 million related primarily to facilities expenses.
Fiscal Year 2019 Compared with Fiscal Year 2018
The year-over-year increase in research and development expenses was due to an increase of $16.0 million in personnel expenses, an decrease of $3.3 million in reimbursements received for certain research and development costs that we incur as part of the joint development of our and our suppliers’ and customers’ products, offset by a decrease of $6.1 million in product development costs. Our personnel expenses increased primarily as a result of an increase in annual salaries and benefits, and an increase in the number of research and development personnel to support our expanded product development initiatives and to support the growth of our business in many market verticals.
The year-over-year increase in sales and marketing expenses was due to an increase of $6.1 million in personnel expenses, as a result of an increase in annual salaries and benefits and an increase in the number of sales and marketing personnel,offset by a $1.5 million decrease in expenses related to advertising and promotion activities.
The year-over-year increase in general and administrative expenses was attributable to an increase of $31.7 million in professional fees that were primarily incurred to investigate, assess and begin remediatingremediate 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, an increasea decrease of $7.2$3.4 million in bad debt provisionother expenses primarily asrelated to the COVID-19 pandemic and a result of our inability to collect receivables from
certain international customers and an increase of $2.7$1.1 million primarily attributable todecrease in supplies costs. These decreases were partially offset by a $12.9 million increase in sales tax accrualpersonnel expenses due to increased full time personnel and insurance costs.bonuses.
We anticipate the above expenses impacted by the COVID-19 pandemic to normalize if and when the COVID-19 pandemic is over.
Interest and Other Income (Expense), Net
Other income (expense), net consists primarily of interest earned on our investment and cash balances and foreign exchange gains and losses.
Interest expense represents interest expense on our term loans and lines of credit.
Interest and other income (expense), net for fiscal years 2020, 20192022, 2021 and 20182020 are as follows (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended June 30, | | 2022 over 2021 Change | | 2021 over 2020 Change |
| 2022 | | 2021 | | 2020 | | $ | | % | | $ | | % |
Other income (expense), net | $ | 8.1 | | | $ | (2.8) | | | $ | 1.4 | | | $ | 10.9 | | | (389.3) | % | | $ | (4.2) | | | (300.0) | % |
Interest expense | (6.4) | | | (2.5) | | | (2.2) | | | (3.9) | | | 156.0 | % | | (0.3) | | | 13.6 | % |
Interest and other income (expense), net | $ | 1.7 | | | $ | (5.3) | | | $ | (0.8) | | | $ | 7.0 | | | (132.1) | % | | $ | (4.5) | | | 562.5 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended June 30, | | 2020 over 2019 Change | | 2019 over 2018 Change |
| 2020 | | 2019 | | 2018 | | $ | | % | | $ | | % |
Other income (expense), net | $ | 1.4 |
| | $ | (1.0 | ) | | $ | (0.8 | ) | | $ | 2.4 |
| | (240.0 | )% | | $ | (0.2 | ) | | 25.0 | % |
Interest expense | (2.2 | ) | | (6.7 | ) | | (5.7 | ) | | 4.5 |
| | (67.2 | )% | | (1.0 | ) | | 17.5 | % |
Interest and other expense, net | $ | (0.8 | ) | | $ | (7.7 | ) | | $ | (6.5 | ) | | $ | 6.9 |
| | (89.6 | )% | | $ | (1.2 | ) | | 18.5 | % |
Fiscal Year 20202022 Compared with Fiscal Year 20192021
The year-over-year change of $7.0 million in interest and other (expense) income, net was primarily attributable to a $10.9 million increase in foreign exchange gain due to favorable currency fluctuations primarily related to our borrowing facilities in Taiwan offset by a $3.9 million increase in interest expense due to increase in loan balances and interest rates.
Fiscal Year 2021 Compared with Fiscal Year 2020
The change of $4.5 million is primarily a result of lowerin interest ratesexpense and reduced levels of borrowings in fiscal year 2020 as compared to fiscal year 2019. The change of $2.4 million in other (expense) income, (expense), net was attributable to an increasea decrease of $1.6$2.4 million in interest income on our interest bearinginterest-bearing deposits and a decrease of $0.8 million in other expenses.
Fiscal Year 2019 Compared with Fiscal Year 2018
The year-over-year increase in interest and other expense, net wasdue primarily due to lower yields on investments and an increase of $1.0$1.8 million in interest expense related to amortization of loan origination fees in connection with refinancing of our debt in the last quarter of fiscal year 2018, an increase in other expense of $2.1 million as a result of an impairment recorded for certain investments, offset by an increase of $1.9 million attributable to increase in interest income on our interest bearing deposits and foreign exchange gainloss due to favorableunfavorable foreign currency fluctuations.
SMCI | 2022 Form 10-K | 46
Provision for Income Taxes
Our income tax provision is based on our taxable income generated in the jurisdictions in which we operate, which primarily include the United States, Taiwan, and the Netherlands. Our effective tax rate differs from the statutory rate primarily due to research and development tax credits, releases from uncertain tax positions,certain non-deductible expenses, tax benefits from foreign derived intangible income and stock basedstock-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 15,14, “Income Taxes” to the consolidated financial statements in this Annual Report.
Provision for income taxes and effective tax rates for fiscal years 2020, 20192022, 2021 and 20182020 are as follows (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended June 30, | | 2022 over 2021 Change | | 2021 over 2020 Change |
| 2022 | | 2021 | | 2020 | | $ | | % | | $ | | % |
Income tax provision | $ | 52.9 | | | $ | 6.9 | | | $ | 2.9 | | | $ | 46.0 | | | 666.7 | % | | $ | 4.0 | | | 137.9 | % |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Percentage of total net sales | 1.0 | % | | 0.2 | % | | 0.1 | % | | | | | | | | |
Effective tax rate | 15.7 | % | | 5.8 | % | | 3.4 | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended June 30, | | 2020 over 2019 Change | | 2019 over 2018 Change |
| 2020 | | 2019 | | 2018 | | $ | | % | | $ | | % |
Income tax provision | $ | 2.9 |
| | $ | 14.9 |
| | $ | 38.4 |
| | $ | (12.0 | ) | | (80.5 | )% | | $ | (23.5 | ) | | (61.2 | )% |
Effective tax rate | 3.4 | % | | 16.6 | % | | 43.6 | % | | | | | | | | |
Fiscal Year 20202022 Compared with Fiscal Year 2019
2021
The year-over-year decrease in the effective tax rate was primarily due to an increase in tax benefits from research and development tax credits, stock based compensation, releases of uncertain tax positions, and U.S. sales to foreign jurisdictions, partially offset by the tax impact from the non-deductible settlement with the SEC.
Fiscal Year 2019 Compared with Fiscal Year 2018
The year-over-year decreaseincrease in the effective tax rate was primarily due to a reduction of the statutorysignificant increase in revenue and income before tax. Total effective tax rate increased by 9.5% from 28.1%5.8% for the fiscal year ended June 30, 2021 to 21%15.7% for the fiscal year ended June 30, 2022. This increase was driven by a 15.4% increase in the overall effective tax rate. R&D credit reduced the effective tax rate by 3.5% and foreign derived income reduced the effective tax rate by 1.4%.
Fiscal Year 2021 Compared with Fiscal Year 2020
The year-over-year increase in the effective tax rate was primarily due to a release of reserve from uncertain tax positions in the prior year.
Share of Income from Equity Investee, Net of Taxes
Share of income from equity investee, net of taxes represents our share of income from the Corporate Venture in which we have a 30% ownership.
Share of income from equity investee, net of taxes for fiscal years 2022, 2021 and 2020 are as a resultfollows (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended June 30, | | 2022 over 2021 Change | | 2021 over 2020 Change |
| 2022 | | 2021 | | 2020 | | $ | | % | | $ | | % |
Share of income from equity investee, net of taxes | $ | 1.2 | | | $ | 0.2 | | | $ | 2.4 | | | $ | 1.0 | | | 500.0 | % | | $ | (2.2) | | | 91.7 | % |
Percentage of total net sales | — | % | | — | % | | — | % | | | | | | | | |
Fiscal Year 2022 Compared with Fiscal Year 2021
The period-over-period increase of $1.0 million in share of income from equity investee, net of taxes was primarily due to more net income recognized by the tax reform, and a priorCorporate Venture.
Fiscal Year 2021 Compared with Fiscal Year 2020
The year-over-year decrease of $2.2 million in share of income from equity investee, net of taxes was primarily due to lower net income recognized by the Corporate Venture in the fiscal year recording of a one-time $12.9 million write down of U.S. deferred tax assets and liabilities, and a one-time transition tax of $2.8 million, all2021 as a result of the 2017 Tax Reform Act.compared to 2020.
SMCI | 2022 Form 10-K | 47
Liquidity and Capital Resources
We have financed our growth primarily with funds generated from operations, in addition to utilizing borrowing facilities, particularly in relation to an increase in the need for working capital due to longer supply chain manufacturing and delivery times as well as the financing of real property acquisitions as well as working capital.and funds received from the exercise of employee stock options. Our cash and cash equivalents were $210.5$267.4 million and $248.2$232.3 million as of June 30, 20202022 and 2019,2021, respectively. Our cash in foreign locations was $98.0$169.5 million and $124.6$152.6 million as of June 30, 20202022 and 2019,2021, respectively.
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 to keep cash balances outside of the U.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, cash equivalents, borrowing capacity available from our credit facilities and internally generated cash flows will be generally sufficient to support our operating businesses expansion of our manufacturing facilities, continued remediation of 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, and maturing debt and interest payments for the twelve months following the issuance of these consolidated financial statements. We expectIn August 2022, we entered into a new general credit agreement with E.Sun Bank. This New E.SUN Bank Credit Facility permits borrowings of up to pay special performance bonuses(i) NTD 1.8 billion ($61.0 million U.S. dollar equivalent) and (ii) US$30.0 million in loans that will support the growth of approximately $8.6 million to our CEO and certain membersTaiwan business.
On January 29, 2021, a duly authorized subcommittee of the Board of Directors withinapproved the next two yearsPrior Repurchase Program, which permitted us to repurchase up to an aggregate of $200.0 million of our common stock at market prices. The program was effective until the earlier of July 31, 2022 or the date when and if specified market and performance conditions are met. In addition, we made a settlement paymentthe maximum amount of $17.5common stock is repurchased. We had $150.0 million toof remaining availability under the SEC in connection withPrior Repurchase Program as of June 30, 2022. Subsequently, on August 3, 2022, after the conclusionexpiration of the ongoing investigations in August 2020.
On August 9, 2020,Prior Repurchase Program, a duly authorized subcommittee of our Board of Directors approved a new share repurchase program to repurchase shares of common stock for up to $30.0$200 million at prevailing prices in the open market. The share repurchase program is effective until DecemberJanuary 31, 20202024 or until the maximum amount of common stock is repurchased.repurchased, whichever occurs first.
Our key cash flow metrics were as follows (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended June 30, | | 2022 over 2021 | | 2021 over 2020 | | |
| 2022 | | 2021 | | 2020 | | | | |
Net cash (used in) provided by operating activities | $ | (440.8) | | | $ | 123.0 | | | $ | (30.3) | | | $ | (563.8) | | | $ | 153.3 | | | |
Net cash used in investing activities | $ | (46.3) | | | $ | (58.0) | | | $ | (43.6) | | | $ | 11.7 | | | $ | (14.4) | | | |
Net cash provided by (used in) financing activities | $ | 522.9 | | | $ | (44.4) | | | $ | 23.8 | | | $ | 567.3 | | | $ | (68.2) | | | |
Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 35.1 | | | $ | 21.1 | | | $ | (49.8) | | | $ | 14.0 | | | $ | 70.9 | | | |
|
| | | | | | | | | | | | | | | | | | | |
| Years Ended June 30, | | 2020 over 2019 | | 2019 over 2018 |
| 2020 | | 2019 | | 2018 | | |
Net cash (used in) provided by operating activities | $ | (30.3 | ) | | $ | 262.6 |
| | $ | 84.3 |
| | $ | (292.9 | ) | | $ | 178.3 |
|
Net cash used in investing activities | $ | (43.6 | ) | | $ | (24.8 | ) | | $ | (25.9 | ) | | $ | (18.8 | ) | | $ | 1.1 |
|
Net cash provided by (used in) financing activities | $ | 23.8 |
| | $ | (95.8 | ) | | $ | (50.8 | ) | | $ | 119.6 |
| | $ | (45.0 | ) |
Net (decrease) increase in cash, cash equivalents and restricted cash | $ | (49.8 | ) | | $ | 141.8 |
| | $ | 7.6 |
| | $ | (191.6 | ) | | $ | 134.2 |
|
Operating Activities
Net cash provided by operating activities decreased by $292.9$563.8 million for fiscal year 20202022 as compared to fiscal year 2019. While net income increased by $12.4 million in fiscal year 2020 as compared to fiscal year 2019, the2021. The decrease in cash flows from operating activities was primarily due primarily to an increase ofin net cash usedrequired for net working capital requirements of $281.3$739.6 million including a $181.3 million increase in inventories to meet customer demand, support expected business growth and mitigate supply chain risk due toas a result of the COVID-19 pandemic environment and a $16.2 million decrease in unrealized gain and loss. These decreases are partially offset by increases in provision for excess and obsolete inventories of $8.3 million, depreciation and amortization expense of $4.3 million, stock-based compensation expense of $4.3 million and net income of $173.3 million. Since the beginning of the COVID-19 pandemic and the accompanying supply chain disruptions our management decided to increase our holdings of all components of our inventory (finished goods, work in process and purchased parts and raw materials). This decision reflected our belief that we had opportunities to increase our net sales if we could mitigate the risk of being unable to satisfy customer demand because of these supply chain disruptions, including longer lead times. We expect disruption of the supply chain and longer lead times to continue for the foreseeable future and therefore expect to continue to carry larger amounts of inventory than we would if the supply chain were functioning more normally and predictably.
SMCI | 2022 Form 10-K | 48
Net cash provided by operating activities increased 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 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 excess and obsolete inventorystock-based compensation expense increased by $8.4 million, collection of bad debt previously reserved decreased by $14.6$2.3 million, related to bad debt reserve decreased by $10.1 million, related to income (loss) from equity investee decreased by $5.1$2.2 million and related to impairment of investments decreased by $2.7$5.4 million in fiscal year 2020 compared to fiscal year 2019. These decreases were offset by an increase of $8.9 milliondecrease 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 resultingassets. These increases in the cash flow from the amortization of operating lease right-of-use assets.
Net cash provided by operating activities increasedwere partially offset by $178.3the decrease of $11.6 million for fiscal year 2019 as compared to fiscal year 2018. The increase was due primarily to a reduction of net working capital of $160.6 million due to improved working capital management and reduced costs for key components in the second half of fiscal year 2019, higher net income in fiscal year 2019 of $25.8 million, the change in the non-cash charges related to an increase inpreviously reserved excess and obsolete inventory of $23.3 million forinventory.
aged inventory and $7.2 million for bad debt, partially offset by a reduction of $30.7 million in the non-cash charges related to the change in our deferred income tax assets, primarily as a result of the 2017 Tax Reform Act and a decrease of $8.0 million from the change in deferred revenue compared to prior year, related to the lower growth in services business year-over-year.
Investing Activities
Net cash used in investing activities was $46.3 million, $58.0 million and $43.6 million $24.8 million and $25.9 million for the fiscal years 2020, 20192022, 2021 and 2018,2020, respectively, as we invested in our Green Computing Park in San Jose to expand our capacity and office space we purchased and expanded our Bade Facility in Taiwan and made purchases of property, plant and equipment.
Financing Activities
Net cash used in financing activities decreased by $119.6 million for fiscal year 2020 as compared to fiscal year 2019 primarily due to decreased net repayments of debt of $96.4 million, and cash receipts from exercises of stock options of $28.3 million offset by increased cash payments for withholding taxes from the vesting of restricted stock of $5.2 million. Net cash used in financing activities increased by $45.0$567.3 million for fiscal year 20192022 as compared to fiscal year 20182021 primarily due to an increase of $446.2 million in proceeds from borrowings net of repayment, offset by a $130.0 million decrease in stock repurchases. Net cash used in financing activities increased debt repaymentsby $68.2 million for fiscal year 2021 as compared to fiscal year 2020 primarily due to an increase of $43.1 million.$130.0 million in repurchase of our common stock, partially offset by an increase of $61.9 million in proceeds from borrowings net of repayment.
Other Factors Affecting Liquidity and Capital Resources
Activities under Revolving Lines of CreditRefer to Part II, Item 8, Note 9, “Short-term and Term Loans
Bank of America
Long-term Debt” in our notes to consolidated financial statements in this Annual Report on Form 10-K for further information on our outstanding debt.
Capital Expenditure Requirements
2018 Bank
We anticipate our capital expenditures in fiscal year 2023 will be approximately $21.2 million, relating primarily to costs associated in our manufacturing 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 America Credit Facilityfactors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and our expected return on investment.
In April 2018, as amendedWe intend to continue to focus our capital expenditures in January and June 2019, we entered into a revolving line of credit with Bank of America (the "2018 Bank of America Credit Facility") for upfiscal year 2023 to $250.0 million. In May 2020, we entered into a third amendment to extendsupport the maturity from June 30, 2020 to June 30, 2021, release the real property as a collateral, modify certain payments and covenants provisions, specify that LIBOR cannot be less than 1% for purposes of determining interest rates, and increase the unused line fee from 0.25% per annum to 0.375% per annum. Interest shall accrue at LIBOR plus 2.00% on outstanding borrowings less than $125.0 million and LIBOR plus 2.25% on outstanding borrowings in excess of $125.0 million. As of June 30, 2020, we had no outstanding borrowings and we had a $6.4 million letter of credit outstanding under this facility. Our available borrowing capacity was $243.6 million, subject to the borrowing base limitation and compliance with other applicable terms. In the event of default or if outstanding borrowings are in excess of $220.0 million, we are required to grant the lenders a continuing security interest in and lien upon all amounts credited to anygrowth of our deposit accounts. Interest accruedoperations. Our future capital requirements will depend on any loans undermany factors including our growth rate, the 2018 Banktiming and extent of America Credit Facility is due onspending to support development efforts, the first dayexpansion of each month,sales and marketing activities, the loans are dueintroduction of new and payableenhanced software and services offerings, the investments in full onour office facilities and our systems infrastructure, the termination date of the 2018 Bank of America Credit Facility. Voluntary prepayments are permitted without early repayment fees or penalties. The 2018 Bank of America Credit Facility is secured by substantially all of Super Micro Computer’s assets, other than real property assets. In addition, we are not permitted to pay any dividends. Under the terms of the 2018 Bank of America Credit Facility agreement, we are required to maintain a certain fixed charge ratio and we have been in compliance with all covenants under the 2018 Bank of America Credit Facility.
CTBC Bank
2019 CTBC Credit Facility
In June 2019, we entered into a credit agreement with CTBC Bank in Taiwan that provides for term loans denominated in NTD of up to $50.0 million (the "2019 CTBC Credit Facility") and had an original maturity of June 30, 2020. We have since extended the maturity of the 2019 CTBC Credit Facility to August 31, 2021. During the year ended June 30, 2020, we borrowed and repaid $10.0 million under the revolving line of credit. The total outstanding borrowings under the 2019 CTBC Credit Facility were $23.7 million as of June 30, 2020. The amount available for future borrowing was $26.3 million as of June 30, 2020. The interest rate for these outstanding term loans was 0.45% per annum as of June 30, 2020. Term loans are secured by certaincontinuing market acceptance of our assets, including certain property, plant,offerings and equipment. There are no financial covenants under the 2019 CTBC Credit Facility.our planned investments, particularly in our product development efforts, applications or technologies.
2020 CTBC Term Loan Facility
In June 2020, we entered into a ten-year, non-revolving term loan facility (the “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 our 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 are drawn according to the progress of the renovations. Borrowings under the 2020 CTBC Term Loan Facility are available through June 2022. We are required to pay against total outstanding principal and interest in equal monthly installments starting June 2023 and continuing through the maturity date of June 2030. The 2020 CTBC Term Loan Facility is secured by the Bade Manufacturing Facility, including any expansion. Fees paid to the lender as debt issuance costs were immaterial. We borrowed $5.7 million in June 2020 with a rate of 0.45% per annum. As of June 30, 2020, the amount outstanding under the 2020 CTBC Term Loan Facility was $5.7 million and the net book value of the property serving as collateral was $10.1 million. We have financial covenants requiring our current ratio, debt service coverage ratio, and financial debt ratio, to be maintained at certain levels. We have been in compliance with all financial covenants under the 2020 CTBC Term Loan Facility.
Contractual Obligations
The following table describes our contractualOur estimated future obligations as of June 30, 2020:2022, include both current and long term obligations. For our long-term debt as noted in Part II, Item 8, Note 9, “Short-term and Long-term Debt”, we have a current obligation of $449.1 million and a long-term obligation of $147.6 million. Under our operating leases as noted in Part II, Item 8, Note 11, "Leases", we have a current obligation of $7.7 million and a long-term obligation of $17.4 million. As noted in Part II, Item 8, Note 15, "Commitments and Contingencies", we have current obligations related to noncancelable purchase commitments of $562.9 million.
|
| | | | | | | | | | | | | | | | | | | |
| Payments Due by Period |
| Less Than 1 Year | | 1 to 3 Years | | 3 to 5 Years | | More Than 5 Years | | Total |
| (in thousands) |
Operating lease obligations | $ | 7,073 |
| | $ | 9,942 |
| | $ | 8,530 |
| | $ | 956 |
| | $ | 26,501 |
|
Debt, including interest (1) | 23,740 |
| | 70 |
| | 1,675 |
| | 4,055 |
| | 29,540 |
|
Purchase commitments (2) | 192,419 |
| | 1,181 |
| | — |
| | — |
| | 193,600 |
|
Total (3) | $ | 223,232 |
| | $ | 11,193 |
| | $ | 10,205 |
| | $ | 5,011 |
| | $ | 249,641 |
|
__________________________
| |
(1) | Amount reflects total anticipated cash payments, including anticipated interest payments based on the interest rates under our 2018 Bank of America Credit Facility, our 2019 CTBC Credit Facility and 2020 CTBC Credit Facility at June 30, 2020. |
| |
(2) | Amount reflects total gross purchase commitments under our manufacturing arrangements with third-party contract manufacturers or vendors. See Part II, Item 8, Note 16, “Commitments and Contingencies” to the consolidated financial statements in this Annual Report for a discussion of purchase commitments. |
| |
(3) | The table above excludes liabilities for deferred revenue of $203.8 million and unrecognized tax benefits and related interest and penalties accrual of $15.5 million. Deferred revenue represents billed services in advance which include extended warranty, on-site technical support, and software maintenance. We have not provided a detailed estimate of the payment timing of unrecognized tax benefits due to the uncertainty of when the related tax settlements will become due. See Part II, Item 8, Note 15, “Income Taxes” to the consolidated financial statements in this Annual Report for a discussion of income taxes. |
We expect to fund our remaining contractual obligations from our ongoing operations and existing cash and cash equivalents on hand.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see Part II, Item 8, Note 1, “Organization and Summary of Significant Accounting Policies” to the consolidated financial statements in this Annual Report.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
45SMCI | 2022 Form 10-K | 49
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Interest Rate Risk
The primary objectives of our investment activities are to preserve principal, provide liquidity and maximize income without significantly increasing the risk. Some of the securities we invest in are subject to market risk. This means that a change in prevailing interest rates may cause the fair value of the investment to fluctuate. To minimize this risk, we maintain our portfolio of cash equivalents and short-term investments in money market funds and certificates of deposit. Our investment in an auction rate security has been classified as non-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, 2020,2022, 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 0.45%0.83% to 3.0%4.0% at June 30, 2020.2022. Based on the outstanding principal indebtedness of $29.4$596.8 million under our credit facilities as of June 30, 2020,2022, 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 gain (loss) gain for fiscal years 2022, 2021 and 2020 2019was $7.7 million, $(3.2) million and 2018 was $(1.4) million, $0.5 million and $(0.6) million, respectively.
SMCI | 2022 Form 10-K | 50
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | |
Index to Consolidated Financial Statements | | Page |
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| | |
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SMCI | 2022 Form 10-K | 51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors 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") as of June 30,202030, 2022 and 2019,2021, the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows, for each of the three years in the period ended June 30, 2020,2022, 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, 20202022 and 2019,2021, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2020,2022, 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, 2020,2022, 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 28, 2020,29, 2022, expressed an adverseunqualified opinion on the Company’s internal control over financial reporting because of a material weakness.reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the 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 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, 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 regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit mattersmatter communicated below are mattersis a matter arising from the current-period audit of the financial statements that werewas communicated or required to be communicated to the audit committee and that (1) relaterelates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit mattersmatter below, providing separate opinionsopinion on the critical audit mattersmatter or on the accounts or disclosures to which they relate.
Variable Interest Entities and Related Party Transactions - Refer to Notes 1 and 13 to the financial statements
Critical Audit Matter Description
The Company has a variety of business relationships defined by various agreements with Ablecom Technology, Inc. (“Ablecom”) and its affiliate, Compuware Technology, Inc. ("Compuware"). 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. Purchases from Ablecom and Compuware were $160.1 million and $131.8 million, respectively, for the fiscal year ended June 30, 2020. Net sales to Compuware as a distributor were $23.9 million for the fiscal year ended June 30, 2020.
The Company concluded that Ablecom and Compuware are variable interest entities (VIEs) and that it is not the primary beneficiary as it does not have the power to direct the activities that are most significant to Ablecom and Compuware. Therefore, the Company does not consolidate Ablecom and Compuware. The Company considered its explicit arrangements with Ablecom and Compuware, including its supplier arrangements, and as a result of the substantial related party relationships between the Company, Ablecom and Compuware, the Company also considered whether any implicit arrangements exist that
would cause the Company to protect those related parties’ interests from suffering losses. The Company determined that no material implicit arrangements exist with Ablecom, Compuware, or their shareholders.
We identified management’s conclusion that it is not the primary beneficiary as a critical audit matter because of the judgments necessary for management to determine whether any explicit and implicit arrangements exist that would cause the Company to protect those related parties’ interest from absorbing losses. This required extensive audit effort due to the complexity and variety of related party relationships with Ablecom and Compuware and required a high degree of auditor judgment when performing audit procedures to audit the Company’s conclusion that it is not the primary beneficiary.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s conclusion that it is not the primary beneficiary included the following, among others:
We evaluated and tested whether the arrangements are accurately considered and that such arrangements have been included in the consideration by comparing those related parties we had identified during our audit procedures for proper inclusion in the Company’s evaluation and performed inspection of source documents on a sample basis.
We tested management’s assertion that the Company does not direct the operations of, or is required to absorb and record losses incurred by Ablecom and Compuware by analyzing the gross margin for contract manufacturing transactions with Ablecom and Compuware in comparison to unrelated third parties to determine if there is an indication of off-market terms, assessing leasing arrangements by performing independent market data searches to assess if such leases are within the normal range of prices for Ablecom and Compuware and recalculating days sales outstanding as well as days purchases outstanding and compared to other contract manufacturers to assess comparability of payment terms.
We obtained confirmations directly from Ablecom and Compuware regarding the nature of their business relationships with the Company, the extent of power, if any, held by the Company over the most significant activities of Ablecom and Compuware’s businesses, and the existence of any implicit arrangements that may have a bearing on the Company’s ability to have power over Ablecom and Compuware.
relates.
Inventories - Excess and Obsolescence Reserve -— Refer to Notes 1 and 5 to the financial statements
Critical Audit Matter Description
The Company’s inventories are stated at lower of cost, using weighted average cost method, or net realizable value. The Company evaluates inventory on a quarterly basis for excess and obsolescence and lower of cost or net realizable value and, excess and obsolescence and, as necessary, writes down the valuation of unitsinventory based upon inventory aging, forecasted usage and sales, anticipated selling price, product obsolescence and other factors. The provision for excess and obsolete inventory for the fiscal year ended June 30, 2020, was $22.6 million.
We identified the excess and obsolescence reserve as a critical audit matter because of judgments made by management in recordingdetermining the manual adjustments that management may makereserve rates applied by inventory aging category to estimate the Company’s excess and obsolescence reserve. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the methodology and the reasonableness of the Company’s reserve rates within its estimation of the inventory excess and obsolescence reserve.
SMCI | 2022 Form 10-K | 52
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the reserve rates applied to the inventory aging categories to estimate the Company’s excess and obsolescence reserve included the following procedures, among others:
•We gained an understandingtested the effectiveness of controls over the review of the calculation of excess and evaluatedobsolescence reserve based on the Company’s reserve methodology, including management’s evaluation of the reserve rates by inventory aging category using historical data.
•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 manual adjustments.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.
•We evaluatedinvolved data specialists to assess management’s estimate on reserve rates by performing corroborative inquiryrecalculating historical reserve rates across multiple fiscal periods. We compared our independently developed historical reserve rates with the Company’s program managers, sales personnel, and/or buyers,reserve rates used by management to evaluate management’s ability to accurately estimate excess and inspected correspondenceobsolete inventory.
•We tested the accuracy and other communications between the Company’s operations team and customers.
As a resultcompleteness of the Company’s material weakness identifiedunderlying data utilized in IT general controls, we increasedmanagement’s excess and obsolescence reserve, including the extentclassification of testinginventory by aging category.
•We considered the existence of contradictory evidence based on reading of internal communications to management, Company press releases, and industry reports, derived fromas well as our observations and inquires as to changes within the Company’s systems and applications.business.
/s/ Deloitte & Touche LLP
San Jose, California
August 28, 202029, 2022
We have served as the Company's auditor since fiscal 2003.
50SMCI | 2022 Form 10-K | 53
SUPER MICRO COMPUTER, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
| | | | | | | | | | | |
| June 30, | | June 30, |
| 2022 | | 2021 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 267,397 | | | $ | 232,266 | |
Accounts receivable, net of allowances of $1,753 and $2,591 at June 30, 2022 and 2021, respectively (including amounts receivable from related parties of $8,398 and $8,678 at June 30, 2022 and 2021, respectively) | 834,513 | | | 463,834 | |
Inventories | 1,545,606 | | | 1,040,964 | |
Prepaid expenses and other current assets (including receivables from related parties of $24,412 and $23,837 at June 30, 2022 and 2021, respectively) | 158,799 | | | 130,195 | |
Total current assets | 2,806,315 | | | 1,867,259 | |
Investment in equity investee | 5,329 | | | 4,578 | |
Property, plant and equipment, net | 285,972 | | | 274,713 | |
Deferred income taxes, net | 69,929 | | | 63,288 | |
Other assets | 37,532 | | | 32,126 | |
Total assets | $ | 3,205,077 | | | $ | 2,241,964 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable (including amounts due to related parties of $87,355 and $70,096 at June 30, 2022 and 2021, respectively) | $ | 655,403 | | | $ | 612,336 | |
Accrued liabilities (including amounts due to related parties of $18,676 and $18,528 at June 30, 2022 and 2021, respectively) | 212,419 | | | 178,850 | |
Income taxes payable | 41,743 | | | 12,741 | |
Short-term debt | 449,146 | | | 63,490 | |
Deferred revenue | 111,313 | | | 101,479 | |
Total current liabilities | 1,470,024 | | | 968,896 | |
Deferred revenue, non-current | 122,548 | | | 100,838 | |
Long-term debt | 147,618 | | | 34,700 | |
Other long-term liabilities | 39,140 | | | 41,132 | |
Total liabilities | 1,779,330 | | | 1,145,566 | |
Commitments and contingencies (Note 15) | 0 | | 0 |
Stockholders’ equity: | | | |
Common stock and additional paid-in capital, $0.001 par value | | | |
Authorized shares: 100,000; Outstanding shares: 52,311 and 50,582 at June 30, 2022 and 2021, respectively | | | |
Issued shares: 52,311 and 50,582 at June 30, 2022 and 2021, respectively | 481,741 | | | 438,012 | |
| | | |
Accumulated other comprehensive income | 911 | | | 453 | |
Retained earnings | 942,923 | | | 657,760 | |
Total Super Micro Computer, Inc. stockholders’ equity | 1,425,575 | | | 1,096,225 | |
Noncontrolling interest | 172 | | | 173 | |
Total stockholders’ equity | 1,425,747 | | | 1,096,398 | |
Total liabilities and stockholders’ equity | $ | 3,205,077 | | | $ | 2,241,964 | |
|
| | | | | | | |
| June 30, | | June 30, |
| 2020 | | 2019 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 210,533 |
| | $ | 248,164 |
|
Accounts receivable, net of allowances of $4,586 and $8,906 at June 30, 2020 and 2019, respectively (including amounts receivable from related parties of $8,712 and $13,439 at June 30, 2020 and 2019, respectively) | 403,745 |
| | 393,624 |
|
Inventories | 851,498 |
| | 670,188 |
|
Prepaid expenses and other current assets (including receivables from related parties of $19,791 and $21,302 at June 30, 2020 and 2019, respectively) | 126,985 |
| | 109,795 |
|
Total current assets | 1,592,761 |
| | 1,421,771 |
|
Investment in equity investee | 2,703 |
| | 1,701 |
|
Property, plant and equipment, net | 233,785 |
| | 207,337 |
|
Deferred income taxes, net | 54,898 |
| | 41,126 |
|
Other assets | 34,499 |
| | 10,659 |
|
Total assets | $ | 1,918,646 |
| | $ | 1,682,594 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable (including amounts due to related parties of $72,368 and $59,809 at June 30, 2020 and 2019, respectively) | $ | 417,673 |
| | $ | 360,470 |
|
Accrued liabilities (including amounts due to related parties of $16,206 and $10,536 at June 30, 2020 and 2019, respectively) | 155,401 |
| | 114,678 |
|
Income taxes payable | 4,700 |
| | 13,021 |
|
Short-term debt | 23,704 |
| | 23,647 |
|
Deferred revenue | 106,157 |
| | 94,153 |
|
Total current liabilities | 707,635 |
| | 605,969 |
|
Deferred revenue, non-current | 97,612 |
| | 109,266 |
|
Long-term debt | 5,697 |
| | 0 |
|
Other long-term liabilities (including related party balance of $1,699 and $3,000 at June 30, 2020 and 2019, respectively) | 41,995 |
| | 26,183 |
|
Total liabilities | 852,939 |
| | 741,418 |
|
Commitments and contingencies (Note 16) |
|
| |
|
|
Stockholders’ equity: |
| |
|
Common stock and additional paid-in capital, $0.001 par value | | | |
Authorized shares: 100,000,000; Outstanding shares: 52,408,703 and 49,956,288 at June 30, 2020 and June 30, 2019, respectively | | | |
Issued shares: 53,741,828 and 51,289,413 at June 30, 2020 and 2019, respectively | 389,972 |
| | 349,683 |
|
Treasury stock (at cost), 1,333,125 shares at June 30, 2020 and 2019 | (20,491 | ) | | (20,491 | ) |
Accumulated other comprehensive loss | (152 | ) | | (80 | ) |
Retained earnings | 696,211 |
| | 611,903 |
|
Total Super Micro Computer, Inc. stockholders’ equity | 1,065,540 |
| | 941,015 |
|
Noncontrolling interest | 167 |
| | 161 |
|
Total stockholders’ equity | 1,065,707 |
| | 941,176 |
|
Total liabilities and stockholders’ equity | $ | 1,918,646 |
| | $ | 1,682,594 |
|
See accompanying notes to consolidated financial statements.
SMCI | 2022 Form 10-K | 54
SUPER MICRO COMPUTER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
| | | | | | | | | | | | | | | | | |
| Years Ended June 30, |
| 2022 | | 2021 | | 2020 |
Net sales (including related party sales of $147,091, $79,018, and $85,759 in fiscal years 2022, 2021 and 2020, respectively) | $ | 5,196,099 | | | $ | 3,557,422 | | | $ | 3,339,281 | |
Cost of sales (including related party purchases of $371,076, $239,558, and $288,271 in fiscal years 2022, 2021 and 2020, respectively) | 4,396,098 | | | 3,022,884 | | | 2,813,071 | |
Gross profit | 800,001 | | | 534,538 | | | 526,210 | |
Operating expenses: | | | | | |
Research and development | 272,273 | | | 224,369 | | | 221,478 | |
Sales and marketing | 90,126 | | | 85,683 | | | 85,137 | |
General and administrative | 102,435 | | | 100,539 | | | 133,941 | |
Total operating expenses | 464,834 | | | 410,591 | | | 440,556 | |
Income from operations | 335,167 | | | 123,947 | | | 85,654 | |
Other income (expense), net | 8,079 | | | (2,834) | | | 1,410 | |
Interest expense | (6,413) | | | (2,485) | | | (2,236) | |
Income before income tax provision | 336,833 | | | 118,628 | | | 84,828 | |
Income tax provision | (52,876) | | | (6,936) | | | (2,922) | |
Share of income from equity investee, net of taxes | 1,206 | | | 173 | | | 2,402 | |
Net income | $ | 285,163 | | | $ | 111,865 | | | $ | 84,308 | |
Net income per common share: | | | | | |
Basic | $ | 5.54 | | | $ | 2.19 | | | $ | 1.65 | |
Diluted | $ | 5.32 | | | $ | 2.09 | | | $ | 1.60 | |
Weighted-average shares used in calculation of net income per common share: | | | | | |
Basic | 51,478 | | | 51,157 | | | 50,987 | |
Diluted | 53,615 | | | 53,507 | | | 52,838 | |
|
| | | | | | | | | | | |
| Years Ended June 30, |
| 2020 |
| 2019 |
| 2018 |
Net sales (including related party sales of $85,759, $69,906, and $68,637 in fiscal years 2020, 2019 and 2018, respectively) | $ | 3,339,281 |
|
| $ | 3,500,360 |
|
| $ | 3,360,492 |
|
Cost of sales (including related party purchases of $283,056, $276,843 and $262,747 in fiscal years 2020, 2019 and 2018, respectively) | 2,813,071 |
|
| 3,004,838 |
|
| 2,930,498 |
|
Gross profit | 526,210 |
|
| 495,522 |
|
| 429,994 |
|
Operating expenses: |
|
|
|
|
|
Research and development | 221,478 |
|
| 179,907 |
|
| 165,104 |
|
Sales and marketing | 85,137 |
|
| 77,154 |
|
| 71,579 |
|
General and administrative | 133,941 |
|
| 141,228 |
|
| 98,597 |
|
Total operating expenses | 440,556 |
|
| 398,289 |
|
| 335,280 |
|
Income from operations | 85,654 |
|
| 97,233 |
|
| 94,714 |
|
Other income (expense), net | 1,410 |
|
| (1,020 | ) |
| (773 | ) |
Interest expense | (2,236 | ) |
| (6,690 | ) |
| (5,726 | ) |
Income before income tax provision | 84,828 |
|
| 89,523 |
|
| 88,215 |
|
Income tax provision | (2,922 | ) | | (14,884 | ) | | (38,443 | ) |
Share of income (loss) from equity investee, net of taxes | 2,402 |
|
| (2,721 | ) |
| (3,607 | ) |
Net income | $ | 84,308 |
|
| $ | 71,918 |
|
| $ | 46,165 |
|
Net income per common share: |
|
|
|
|
|
Basic | $ | 1.65 |
|
| $ | 1.44 |
|
| $ | 0.94 |
|
Diluted | $ | 1.60 |
|
| $ | 1.39 |
|
| $ | 0.89 |
|
Weighted-average shares used in calculation of net income per common share: |
|
|
|
|
|
Basic | 50,987 |
|
| 49,917 |
|
| 49,345 |
|
Diluted | 52,838 |
|
| 51,716 |
|
| 52,151 |
|
See accompanying notes to consolidated financial statements.
52SMCI | 2022 Form 10-K | 55
SUPER MICRO COMPUTER, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
| | | | | | | | | | | | | | | | | |
| Years Ended June 30, |
| 2022 | | 2021 | | 2020 |
Net income | $ | 285,163 | | | $ | 111,865 | | | $ | 84,308 | |
Other comprehensive income (loss), net of tax: | | | | | |
Foreign currency translation gain (loss) and other | (247) | | | 605 | | | (72) | |
Net change in defined benefit obligations | 705 | | — | | | — | |
| | | | | |
Total other comprehensive income (loss), net of tax | 458 | | | 605 | | | (72) | |
Total comprehensive income | $ | 285,621 | | | $ | 112,470 | | | $ | 84,236 | |
|
| | | | | | | | | | | |
| Years Ended June 30, |
| 2020 | | 2019 | | 2018 |
Net income | $ | 84,308 |
| | $ | 71,918 |
| | $ | 46,165 |
|
Other comprehensive (loss) income, net of tax: | | | | | |
Foreign currency translation (loss) gain | (72 | ) | | (245 | ) | | 280 |
|
Net changes in unrealized loss on investments | 0 |
| | 0 |
| | (38 | ) |
Total other comprehensive (loss) income | (72 | ) | | (245 | ) | | 242 |
|
Total comprehensive income | $ | 84,236 |
| | $ | 71,673 |
| | $ | 46,407 |
|
See accompanying notes to consolidated financial statements.
SMCI | 2022 Form 10-K | 56
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 Income (Loss) | | Retained Earnings | | Non-controlling Interest | | Total Stockholders’ Equity |
| Common Stock and Additional Paid-In Capital | | Treasury Stock | | Accumulated Other Comprehensive (Loss) Income | | Retained Earnings | | Non-controlling Interest | | Total Stockholders’ Equity | | Shares | | Amount | | Shares | | Amount | |
Balance at June 30, 2019 | | Balance at June 30, 2019 | 51,289,413 | | | $ | 349,683 | | | (1,333,125) | | | $ | (20,491) | | | $ | (80) | | | $ | 611,903 | | | $ | 161 | | | $ | 941,176 | |
| Shares | | Amount | | Shares | | Amount | | Accumulated Other Comprehensive (Loss) Income | | Retained Earnings | | Non-controlling Interest | | Total Stockholders’ Equity | |
Balance at June 30, 2017 | 50,273,527 |
| | $ | 308,271 |
| | (1,333,125 | ) | | $ | (20,491 | ) | | |
Cumulative effect of adjustment from adoption of new accounting standard, net of taxes | — |
| | 52 |
| | — |
| | — |
| | — |
| | 133 |
| | — |
| | 185 |
| |
Exercise of stock options, net of taxes | 267,970 |
| | 3,043 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,043 |
| 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 | 572,789 |
| | 0 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 0 |
| 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 | (199,715 | ) | | (4,472 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (4,472 | ) | Shares withheld for the withholding tax on vesting of restricted stock units | (331,648) | | | (8,243) | | | — | | | — | | | — | | | — | | | — | | | (8,243) | |
Stock-based compensation | — |
| | 24,656 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 24,656 |
| Stock-based compensation | — | | | 20,189 | | | — | | | — | | | — | | | — | | | — | | | 20,189 | |
Net changes in unrealized loss on investments, net of taxes | — |
| | — |
| | — |
| | — |
| | (38 | ) | | — |
| | — |
| | (38 | ) | |
Foreign currency translation gain | — |
| | — |
| | — |
| | — |
| | 280 |
| | — |
| | — |
| | 280 |
| |
Net income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | 46,165 |
| | (13 | ) | | 46,152 |
| |
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 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 0 |
| |
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 | ) | |
| Other comprehensive loss | | Other comprehensive loss | — | | | — | | | — | | | — | | | (72) | | | — | | | — | | | (72) | |
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 71,918 |
| | 4 |
| | 71,922 |
| Net income | — | | | — | | | — | | | — | | | — | | | 84,308 | | | 6 | | | 84,314 | |
Balance at June 30, 2019 | 51,289,413 |
| | $ | 349,683 |
| | (1,333,125 | ) | | $ | (20,491 | ) | | $ | (80 | ) | | $ | 611,903 |
| | $ | 161 |
| | $ | 941,176 |
| |
Balance at June 30, 2020 | | 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 | 1,804,789 |
| | 28,343 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 28,343 |
| 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 | 979,274 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 0 |
| 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 | (331,648 | ) | | (8,243 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (8,243 | ) | Shares withheld for the withholding tax on vesting of restricted stock units | (274,620) | | | (8,721) | | | — | | | — | | | — | | | — | | | — | | | (8,721) | |
Share repurchase and retirement | | Share repurchase and retirement | (5,542,336) | | | (175) | | | 1,333,125 | | | 20,491 | | | — | | | (150,316) | | | — | | | (130,000) | |
Stock-based compensation | — |
| | 20,189 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 20,189 |
| Stock-based compensation | — | | | 28,549 | | | — | | | — | | | — | | | — | | | — | | | 28,549 | |
Foreign currency translation loss | — |
| | — |
| | — |
| | — |
| | (72 | ) | | — |
| | — |
| | (72 | ) | |
| Other comprehensive income | | Other comprehensive income | — | | | — | | | — | | | — | | | 605 | | | — | | | — | | | 605 | |
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 84,308 |
| | 6 |
| | 84,314 |
| Net income | — | | | — | | | — | | | — | | | — | | | 111,865 | | | 6 | | | 111,871 | |
Balance at June 30, 2020 | 53,741,828 |
| | $ | 389,972 |
| | (1,333,125 | ) | | $ | (20,491 | ) | | $ | (152 | ) | | $ | 696,211 |
| | $ | 167 |
| | $ | 1,065,707 |
| |
Balance at June 30, 2021 | | Balance at June 30, 2021 | 50,582,078 | | | $ | 438,012 | | | — | | | $ | — | | | $ | 453 | | | $ | 657,760 | | | $ | 173 | | | $ | 1,096,398 | |
| Exercise of stock options, net of taxes | | Exercise of stock options, net of taxes | 1,197,756 | | | 20,994 | | | — | | | — | | | — | | | — | | | — | | | 20,994 | |
Release of common stock shares upon vesting of restricted stock units | | Release of common stock shares upon vesting of restricted stock units | 763,641 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Shares withheld for the withholding tax on vesting of restricted stock units | | Shares withheld for the withholding tax on vesting of restricted stock units | (232,461) | | | (10,081) | | | — | | | — | | | — | | | — | | | — | | | (10,081) | |
| Stock-based compensation | | Stock-based compensation | — | | | 32,816 | | | — | | | — | | | — | | | — | | | — | | | 32,816 | |
Other comprehensive income | | Other comprehensive income | — | | | — | | | — | | | — | | | 458 | | | — | | | — | | | 458 | |
Net income | | Net income | — | | | — | | | — | | | — | | | — | | | 285,163 | | | (1) | | | 285,162 | |
Balance at June 30, 2022 | | Balance at June 30, 2022 | 52,311,014 | | | $ | 481,741 | | | — | | | $ | — | | | $ | 911 | | | $ | 942,923 | | | $ | 172 | | | $ | 1,425,747 | |
See accompanying notes to consolidated financial statements.
SMCI | 2022 Form 10-K | 57
SUPER MICRO COMPUTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | | | | | | | | | | |
| Years Ended June 30, |
| 2022 | | 2021 | | 2020 |
OPERATING ACTIVITIES: | | | | | |
Net income | $ | 285,163 | | | $ | 111,865 | | | $ | 84,308 | |
Reconciliation of net income to net cash (used in) provided by operating activities: | | | | | |
Depreciation and amortization | 32,471 | | | 28,185 | | | 28,472 | |
Stock-based compensation expense | 32,816 | | | 28,549 | | | 20,189 | |
| | | | | |
Recovery of allowance for doubtful accounts | (840) | | | (820) | | | (3,081) | |
Provision for excess and obsolete inventories | 15,090 | | | 6,805 | | | 18,373 | |
Other | 368 | | | (1,044) | | | 1,364 | |
| | | | | |
Share of income from equity investee | (1,206) | | | (173) | | | (2,402) | |
Foreign currency exchange (gain) loss | (13,747) | | | 2,482 | | | 1,008 | |
Deferred income taxes, net | (6,817) | | | (8,390) | | | (13,772) | |
Changes in operating assets and liabilities: | | | | | |
Accounts receivable, net (including changes in related party balances of $280, $34 and $4,727 in fiscal years 2022, 2021 and 2020, respectively) | (371,598) | | | (59,325) | | | (7,023) | |
Inventories | (519,732) | | | (196,271) | | | (199,683) | |
Prepaid expenses and other assets (including changes in related party balances of $(575), $(3,969) and $1,511 in fiscal years 2022, 2021 and 2020, respectively) | (28,794) | | | (5,291) | | | (29,869) | |
Accounts payable (including changes in related party balances of $17,259, $(2,272) and $12,559 in fiscal years 2022, 2021 and 2020, respectively) | 50,145 | | | 189,309 | | | 59,889 | |
Income taxes payable | 29,002 | | | 8,041 | | | (8,321) | |
Accrued liabilities (including changes in related party balances of $148, $2,322 and $5,670 in fiscal years 2022, 2021 and 2020, respectively) | 35,891 | | | 24,705 | | | 27,865 | |
Deferred revenue | 31,544 | | | (1,452) | | | 350 | |
Other long-term liabilities (including changes in related party balances of $499, $(1,699) and $(1,301) in fiscal years 2022, 2021 and 2020, respectively) | (10,557) | | | (4,220) | | | (8,001) | |
Net cash provided by (used in) operating activities | (440,801) | | | 122,955 | | | (30,334) | |
INVESTING ACTIVITIES: | | | | | |
Purchases of property, plant and equipment (including payments to related parties of $4,818, $7,347 and $4,386 in fiscal years 2022, 2021 and 2020, respectively) | (45,182) | | | (58,016) | | | (44,338) | |
Investment in a privately-held company | (1,100) | | | — | | | — | |
Proceeds from sale of investment in a privately-held company | — | | | — | | | 750 | |
Net cash used in investing activities | (46,282) | | | (58,016) | | | (43,588) | |
FINANCING ACTIVITIES: | | | | | |
Proceeds from borrowings | 1,153,317 | | | 127,059 | | | 164,791 | |
Repayment of debt | (640,695) | | | (60,629) | | | (159,191) | |
Net repayment on asset-backed revolving line of credit, net of costs | — | | | — | | | (1,116) | |
Payment of other fees for debt financing | (592) | | | (561) | | | (650) | |
Proceeds from exercise of stock options, net of taxes | 20,994 | | | 28,387 | | | 28,343 | |
| | | | | |
Changes in obligations under capital leases | (72) | | | 25 | | | (138) | |
Payment of withholding tax on vesting of restricted stock units | (10,081) | | | (8,721) | | | (8,243) | |
Stock repurchases | — | | | (130,000) | | | — | |
Net cash (used in) provided by financing activities | 522,871 | | | (44,440) | | | 23,796 | |
Effect of exchange rate fluctuations on cash | (678) | | | 560 | | | 376 | |
Net increase (decrease) in cash, cash equivalents, and restricted cash | 35,110 | | | 21,059 | | | (49,750) | |
Cash, cash equivalents and restricted cash at beginning of year | 233,449 | | | 212,390 | | | 262,140 | |
Cash, cash equivalents and restricted cash at end of year | $ | 268,559 | | | $ | 233,449 | | | $ | 212,390 | |
| | | | | |
Supplemental disclosure of cash flow information: | | | | | |
Cash paid for interest | $ | 5,492 | | | $ | 1,948 | | | $ | 2,172 | |
Cash paid for taxes, net of refunds | $ | 19,690 | | | $ | 2,914 | | | $ | 43,317 | |
| | | | | |
|
| | | | | | | | | | | |
| Years Ended June 30, |
| 2020 | | 2019 | | 2018 |
OPERATING ACTIVITIES: | | | | | |
Net income | $ | 84,308 |
| | $ | 71,918 |
| | $ | 46,165 |
|
Reconciliation of net income to net cash (used in) provided by operating activities: | | | | | |
Depreciation and amortization | 28,472 |
| | 24,202 |
| | 21,846 |
|
Stock-based compensation expense | 20,189 |
| | 21,184 |
| | 24,656 |
|
Allowance (recoveries) for doubtful accounts | (3,081 | ) | | 7,058 |
| | (96 | ) |
Provision for excess and obsolete inventories | 18,373 |
| | 32,946 |
| | 9,649 |
|
Other | 1,364 |
| | 733 |
| | 909 |
|
Impairment of investments | 0 |
| | 2,661 |
| | 0 |
|
Share of (income) loss from equity investee | (2,402 | ) | | 2,721 |
| | 3,607 |
|
Foreign currency exchange (gain) loss | 1,008 |
| | (313 | ) | | 171 |
|
Deferred income taxes, net | (13,772 | ) | | (17,100 | ) | | 13,570 |
|
Changes in operating assets and liabilities: | | | | | |
Accounts receivable, net (including changes in related party balances of $4,727, $(10,357) and $3,795 in fiscal years 2020, 2019, and 2018, respectively) | (7,023 | ) | | 85,027 |
| | (127,082 | ) |
Inventories | (199,683 | ) | | 119,314 |
| | (126,232 | ) |
Prepaid expenses and other assets (including changes in related party balances of $1,511, $2,714 and $(10,689) in fiscal years 2020, 2019, and 2018, respectively) | (29,869 | ) | | 8,410 |
| | (15,714 | ) |
Accounts payable (including changes in related party balances of $12,559, $(18,001) and $21,882 in fiscal years 2020, 2019, and 2018, respectively) | 59,889 |
| | (173,410 | ) | | 132,533 |
|
Income taxes payable | (8,321 | ) | | 5,831 |
| | 5,827 |
|
Accrued liabilities (including changes in related party balances of $5,670, $(7,858), and $9,944 in fiscal years 2020, 2019, and 2018, respectively) | 27,865 |
| | 11,456 |
| | 23,238 |
|
Deferred revenue | 350 |
| | 59,800 |
| | 67,775 |
|
Other long-term liabilities (including changes in related party balances of $(1,301), $(500) and $(1,400) in fiscal years 2020, 2019, and 2018, respectively) | (8,001 | ) | | 116 |
| | 3,525 |
|
Net cash (used in) provided by operating activities | (30,334 | ) | | 262,554 |
| | 84,347 |
|
INVESTING ACTIVITIES: | | | | | |
Purchases of property, plant and equipment (including payments to related parties of $4,386, $4,472 and $6,005 in fiscal years 2020, 2019, and 2018, respectively) | (44,338 | ) | | (24,849 | ) | | (24,824 | ) |
Proceeds from redemption of auction rate security | 0 |
| | 0 |
| | 1,000 |
|
Proceeds from sale of investment in a privately-held company | 750 |
| | 0 |
| | (2,100 | ) |
Net cash used in investing activities | (43,588 | ) | | (24,849 | ) | | (25,924 | ) |
FINANCING ACTIVITIES: | | | | | |
Proceeds from borrowings, net of debt issuance costs | 164,791 |
| | 41,760 |
| | 107,337 |
|
Repayment of debt | (159,191 | ) | | (67,700 | ) | | (220,299 | ) |
Net (repayment) borrowings on asset-backed revolving line of credit, net of costs | (1,116 | ) | | (65,945 | ) | | 64,226 |
|
Payment of other fees for debt financing | (650 | ) | | (625 | ) | | (414 | ) |
Proceeds from exercise of stock options | 28,343 |
| | 0 |
| | 3,043 |
|
Payments of obligations under capital leases | (138 | ) | | (267 | ) | | (253 | ) |
Payment of withholding tax on vesting of restricted stock units | (8,243 | ) | | (3,051 | ) | | (4,472 | ) |
Net cash provided by (used in) financing activities | 23,796 |
| | (95,828 | ) | | (50,832 | ) |
Effect of exchange rate fluctuations on cash | 376 |
| | (119 | ) | | (6 | ) |
Net (decrease) increase in cash, cash equivalents, and restricted cash | (49,750 | ) | | 141,758 |
| | 7,585 |
|
Cash, cash equivalents and restricted cash at beginning of year | 262,140 |
| | 120,382 |
| | 112,797 |
|
Cash, cash equivalents and restricted cash at end of year | $ | 212,390 |
| | $ | 262,140 |
| | $ | 120,382 |
|
| | | | | |
Supplemental disclosure of cash flow information: | | | | | |
Cash paid for interest | $ | 2,172 |
| | $ | 3,861 |
| | $ | 4,541 |
|
Cash paid for taxes, net of refunds | $ | 43,317 |
| | $ | 23,604 |
| | $ | 14,734 |
|
| | | | | |
Non-cash investing and financing activities: | | | | | |
Unpaid property, plant and equipment purchases (including due to related parties of $2,223, $1,609 and $654 as of June 30, 2020, 2019, and 2018, respectively) | $ | 12,051 |
| | $ | 9,232 |
| | $ | 2,285 |
|
Contribution of certain technology rights to equity investee | $ | 0 |
| | $ | 3,000 |
| | $ | 0 |
|
SMCI | 2022 Form 10-K | 58
| | | | | | | | | | | | | | | | | |
| | | | | |
Non-cash investing and financing activities: | | | | | |
Unpaid property, plant and equipment purchases (including due to related parties of $689, $400 and $2,223 as of June 30, 2022, 2021 and 2020, respectively) | $ | 7,825 | | | $ | 9,003 | | | $ | 12,051 | |
Right of use ("ROU") assets obtained in exchange for operating lease commitments | $ | 11,151 | | | $ | 3,258 | | | $ | — | |
| | | | | |
See accompanying notes to consolidated financial statements.
SMCI | 2022 Form 10-K | 59
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. For equity investments over which the Company is able to exercise significant influence over the investee but does not control the investee and is not the primary beneficiary of the investee’s activities are accounted for using the equity method. Investments in equity securities which do not have readily determinable fair values and for which the Company is not able to exercise significant influence over the investee are accounted for under the measurement alternative which is the cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar securities of the same investee.
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 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 pressures, global economic recession, inflation and increased interest rates 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.
56SMCI | 2022 Form 10-K | 60
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 deposit and the 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 deposit with original maturities of less than three months.
Restricted Cash and Cash Equivalents
Restricted cash is comprised of amounts held in bank accounts which are controlled by the lenders pursuant to the terms of certain debt agreements, certificates of deposit primarily related to leases and customs requirements, and money market accounts held in escrow pursuant to the Company’s workers’ compensation program. These restricted cash balances have been excluded from the Company's cash and cash equivalents balance.
Investments in Auction Rate Securities
The Company classifies its investments in auction rate securities ("auction rate securities") as non-current available-for-sale investments. The auction rate securities consist of municipal securities, which are debt securities. The Company uses discounted cash flow to estimate the fair value of any auction rate securities. These auction rate securities are recorded within other assets in the consolidated balance sheets at fair value. Unrealized gains and losses on auction rate securities are included as a component of accumulated other comprehensive (loss) income, net of tax.
Inventories
Inventories are stated at lower of cost, using weighted average cost method, or net realizable value. Net realizable value is the estimated selling price of the Company's products in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Inventories consist of purchased parts and raw materials (principally electronic components), work in process (principally products being assembled) and finished goods. The Company evaluates inventory on a quarterly basis for excess and obsolescence and lower of cost or net realizable value and, as necessary, writes down the valuation of inventories based upon the Company's inventory aging, forecasted usage and sales, anticipated selling price, product obsolescence and other factors. Once inventory is written down, its new value is maintained until it is sold or scrapped.
The Company receives various rebate incentives from certain suppliers based on its contractual arrangements, including volume-based rebates. The rebates earned are recognized as a reduction of cost of inventories and reduce the cost of sales in the period when the related inventory is sold.
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:
|
| | | | |
Software | 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 |
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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. NaNNo impairment charge for long-lived assets has been recorded in any of the periods presented.
SMCI | 2022 Form 10-K | 61
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 as control is transferred to customers, which generally happens at the point of shipment or upon delivery, unless customer acceptance is uncertain. Products sold by the Company are delivered via shipment from the Company’s facilities or drop shipment directly to its customers from a Company vendor. The Company may use distributors to sell products to end customers. Revenue from distributors is recognized when the distributor obtains control of the product, which generally happens at the point of shipment or upon delivery.
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 reserves for future sales returns based on a review of its history of actual returns for each major product line. Based upon historical experience, a refund liability is recorded at the time of sale for estimated product returns and an asset is recognized for the amount expected to be recorded in inventory upon product return, less the expected recovery costs. The Company also reduces revenue for the estimated costs of customer and distributor programs and incentive offerings such as price protection and rebates as well as the estimated costs of cooperative marketing arrangements where the fair value of the benefit derived from the costs cannot be reasonably estimated. Any provision for customer and distributor programs and other discounts is recorded as a reduction of revenue at the time of sale based on an evaluation of the contract terms and historical experience.
Services sales. The Company’s sale of services mainly consists of extended warranty and on-site services. Revenue related to extended warranty commences upon the expiration of the standard warranty period and is recognized ratably over the contractual period as the Company stands ready to perform any required warranty service. Revenue related to on-site services commences upon recognition of the product sale and is recognized ratably over the contractual period as the on-site services are made available to the customer. These service contracts are typically one to five years in length. Service revenue has been less than 10% of net sales for all periods presented and is not separately disclosed.
Contracts with multiple promised goods and services. Certain of the Company’s contracts contain multiple promised goods and services. The Company assesses whether each promised good or service is distinct for the purpose of identifying the performance obligations in the contract. This assessment involves subjective determinations and requires management to make judgments about the individual promised goods or services and whether such goods or services are separable from the other aspects of the contractual relationship. Performance obligations in a contract are identified based on the promised goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. If these criteria are not met, the promised goods and services are accounted for as a combined performance obligation. Revenue allocated to each performance obligation is recognized at the time the related performance obligation is satisfied by transferring control of the promised good or service to a customer.
SMCI | 2022 Form 10-K | 62
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. ContractsFor contracts that contain multiple performance obligations, require an allocation ofthe Company allocates the transaction price for each customer contract to each performance obligation based on athe relative standalone selling price basis.(SSP) for each performance obligation within each contract. The Company recognizes the amount of transaction price allocated to each performance obligation within a customer contract as revenue at the time the related performance obligation is satisfied by transferring control of the promised good or service to a customer. Determining the relative SSP for contracts that contain multiple performance obligations requires significant judgement. The Company determines standalone selling pricesSSP based on the price at which the performance obligation is sold separately. If the standalone selling priceSSP is not observable
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
through past transactions, the Company applies judgment to estimate the standalone selling price taking into account available information, such asSSP. For substantially all performance obligations, the Company is able to establish the SSP based on the observable prices of products or services sold separately in comparable circumstances to similar customers. The Company typically establishes an SSP range for its products and services, which is reassessed on a periodic basis or when facts and circumstances change. SSP for the Company’s products and services can evolve over time due to changes in its pricing practices, internally approved pricing guidelines with respect to geographies, customer type, internal costs, and gross margin objectives for the related performance obligations.obligations which can also be influenced by intense competition, changes in demand for the Company’s products and services, economic and other factors.
These estimates and judgements have not fluctuated significantly for the fiscal year ended June 30, 2022, compared to prior fiscal years.
When the Company receives consideration from a customer prior to transferring goods or services to the customer, the Company records a contract liability (deferred revenue). The Company also recognizes deferred revenue when it has an unconditional right to consideration (i.e., a receivable) before transfer of control of goods or services to a customer.
The Company considers shipping & handling activities as costs to fulfill the sales of products. Shipping revenue is included in net sales when control of the product is transferred to the customer, and the related shipping and handling costs are included in cost of sales. Taxes imposed by governmental authorities on the Company's revenue producing activities with customers, such as sales taxes and value added taxes, are excluded from net sales and included in operating expenses.
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) provisionrecovery of allowance for bad debt was $(3.1)$(0.8) million, $7.1$(0.8) million, and $(0.1)$(3.1) million in fiscal years 2020, 20192022, 2021 and 2018,2020, 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 net realizable value and excess and obsolete inventory.
SMCI | 2022 Form 10-K | 63
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Product Warranties
The Company offers product warranties typically ranging from 15 to 39 months against any defective products. These standard warranties are assurance type warranties, and the Company does not offer any services beyond the assurance that the product will continue working as specified. Therefore, these warranties are not considered separate performance obligations in the arrangement. Based on historical experience, the Company accrues for estimated returns of defective products at the time revenue is recognized. The Company monitors warranty obligations and may make revisions to its warranty reserve if actual costs of product repair and replacement are significantly higher or lower than estimated. Accruals for anticipated future warranty costs are recorded to cost of sales and included in accrued liabilities and other long-term liabilities. Warranty accruals are based on estimates that are updated on an ongoing basis taking into consideration inputs such as new product introductions, changes in the volume of claims compared with the Company's historical experience, and the changes in the cost of servicing warranty claims. The Company accounts for the effect of such changes in estimates prospectively. The following table presents for the fiscal years ended June 30, 2020, 20192022, 2021 and 2018,2020, 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, |
| 2022 | | 2021 | | 2020 |
Balance, beginning of the year | $ | 12,863 | | | $ | 12,379 | | | $ | 11,034 | |
Provision for warranty | 28,150 | | | 29,638 | | | 35,962 | |
Costs utilized | (29,872) | | | (30,575) | | | (34,502) | |
Change in estimated liability for pre-existing warranties | 996 | | | 1,421 | | | (115) | |
Balance, end of the year | $ | 12,137 | | | $ | 12,863 | | | $ | 12,379 | |
Current portion | 9,073 | | | 10,185 | | | 9,984 | |
Non-current portion | $ | 3,064 | | | $ | 2,678 | | | $ | 2,395 | |
|
| | | | | | | | | | | |
| Years Ended June 30, |
| 2020 |
| 2019 |
| 2018 |
Balance, beginning of the year | $ | 11,034 |
|
| $ | 9,884 |
|
| $ | 7,721 |
|
Provision for warranty | 35,962 |
|
| 22,991 |
|
| 20,868 |
|
Costs utilized | (34,502 | ) |
| (26,281 | ) |
| (19,904 | ) |
Change in estimated liability for pre-existing warranties | (115 | ) |
| 4,440 |
|
| 1,199 |
|
Balance, end of the year | $ | 12,379 |
|
| $ | 11,034 |
|
| $ | 9,884 |
|
Current portion | 9,984 |
|
| 8,661 |
|
| 7,589 |
|
Non-current portion | $ | 2,395 |
|
| $ | 2,373 |
|
| $ | 2,295 |
|
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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. 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 $2.1$8.2 million, $2.8$10.9 million, and $6.1$2.1 million for the fiscal years ended June 30, 2020, 20192022, 2021 and 2018,2020, respectively. During the fiscal year ended June 30, 2020, the Company also recorded a $9.5 million net settlement fee as a reduction in the research and development expenses related to the reimbursement of previously incurred expenses for one1 canceled joint product development agreement.
Software development costs, including costs to develop 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 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 $3.0$0.1 million, $2.4$4.1 million and $3.5$3.0 million for the fiscal years ended June 30, 2022, 2021 and 2020, 2019 and 2018, respectively.respectively, net of credits from marketing development funds.
SMCI | 2022 Form 10-K | 64
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Stock-Based Compensation
The Company measures and recognizes compensation expense for all share-based awards made to employees and non-employees, including stock options, restricted stock units ("RSUs") and performance-based restricted stock units (“PRSUs”). The Company recognizes the grant date fair value of all share-based awards over the requisite service period and accounts for forfeitures as they occur. Stock 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 estimated number of PRSUs that are expected to vest over the requisite service period. That estimate is revised if subsequent information indicates that the actual number of PRSUs is likely to differ from previous estimates. The cumulative effect on current and prior periods of a change in the estimated number of PRSUs expected to vest is recognized in stock-based compensation expense in the period of the change. Previously recognized compensation expense is not reversed if vested stock options, RSUs or PRSUs for which the requisite service has been rendered and the performance condition has been met expire unexercised or are not settled.
The fair value of RSUs and PRSUs is based on the closing market price of the Company's common stock on the date of grant. The Company estimates the fair value of stock options granted using a Black-Scholes option pricing model. This model requires the Company to make estimates and assumptions with respect to the expected term of the option and the expected volatility of the price of the Company's common stock. The expected term represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on the Company's historical experience. The expected volatility is based on the historical volatility of the Company’s common stock. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.
Leases
Recognition of leases for periods after the Company’s adoption of the new leasing standard as of July 1, 2019
The Company has arrangements for the right to use certain of its office, warehouse spaces and other premises, and equipment. As of July 1, 2019, theThe Company determines at inception if an arrangement is or contains a lease. When the terms of a lease effectively transfer control of the underlying asset to the Company, it is classified as a finance lease. All other leases are classified as operating leases.
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 consolidated balance sheet. The Company's lease term includes options to extend or terminate the lease when it is reasonably certain that it will exercise that option. The Company elected to apply the short-term lease recognition exemption and does not recognize ROU asset and lease liabilities for leases with an initial term of 12 months or less and recognizes as expense the payments under such leases on a straight-line basis over the lease term. The Company's leases with an initial term of 12 months or less are immaterial.
Operating lease ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments over the lease term. Operating lease ROU assets and liabilities are recognized at lease commencement based on the present value of the remaining lease payments discounted using the Company’s incremental borrowing rate as the interest rate implicit in the lease arrangements is not readily determinable. The incremental borrowing rate is estimated to be the interest rate on a fully collateralized basis with similar terms and payments and in the economic environment where the leased asset is located. Operating lease ROU assets also include initial direct costs incurred, prepaid lease payments, minus any lease incentives. Operating lease expense is recognized on a straight-line basis over the lease term. The Company accounts for fixed payments for lease and non-lease components as a single lease component which increases the amount of ROU assets and liabilities. Non-lease components that are variable costs, such as common area maintenance, are expensed as incurred and not included in the ROU assets and lease liabilities.
SMCI | 2022 Form 10-K | 65
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Finance Leases
Assets under finance leases are recorded in property, plant and equipment, net and lease liabilities are included in accrued liabilities and other long-term liabilities on the consolidated balance sheet. Finance lease interest expense is recognized based on an effective interest method and depreciation of assets is recorded on a straight-line basis over the shorter of the lease term and useful life of the asset. The Company's finance leases are immaterial.
Recognition of leases for periods prior to the Company’s adoption of the new leasing standard as of July 1, 2019
Prior to July 1, 2019, leases were evaluated and recorded as capital leases if one of the following was true at inception: (a) the present value of minimum lease payments met or exceeded 90% of the fair value of the asset, (b) the lease term was greater than or equal to 75% of the economic life of the asset, (c) the lease arrangement contained a bargain purchase option, or (d) title to the property transferred to the Company at the end of the lease. The Company recorded an asset and liability for capital leases at present value of the minimum lease payments based on the incremental borrowing rate. Assets were depreciated over the useful life in accordance with the Company’s depreciation policy while rental payments and interest on the liability was accounted for using the effective interest method.
Leases that were not classified as capital leases were accounted for as operating leases. Operating lease agreements that had tenant improvement allowances were evaluated for lease incentives. For leases that contained escalating rent payments, the Company recognized rent expense on a straight-line basis over the lease term, with any lease incentives amortized as a reduction of rent expense over the lease term.
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
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 is considered a variable interest entity ("VIE"). The Company consolidates VIEs when it is the primary beneficiary. The primary beneficiary of a VIE is the party that meets both of the following criteria: (1) has the power to make decisions that most significantly affect the economic performance of the VIE and (2) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE. Periodically, the Company assesses whether any changes in the interest or relationship with the entity affect the determination of whether the entity is still a VIE and, if so, whether the Company is the primary beneficiary. If the Company is not the primary beneficiary in a VIE, the Company accounts for the investment or other variable interest in accordance with applicable GAAP.
The Company has concluded that Ablecom Technology, Inc. (“Ablecom”) and its affiliate, Compuware Technology, Inc. ("Compuware"), are VIEs; however, the Company is not the primary beneficiary as it does not have the power to direct the activities that are most significant to the entities and therefore, the Company does not consolidate these entities. In performing its analysis, the Company considered its explicit arrangements with Ablecom and Compuware, all contractual arrangements with these entities. Also, as a result of the substantial related party relationships between the Company and these entities, the Company considered whether any implicit arrangements exist that would cause the Company to protect these related parties’ interests from suffering losses. The Company determined it has no material implicit arrangements with Ablecom, Compuware or their shareholders.
The Company and Ablecom jointly established Super Micro Asia Science and Technology Park, Inc. (the "Management Company") in Taiwan to manage the common areas shared by the Company and Ablecom for its separately constructed manufacturing facilities. In fiscal year 2012, each party contributed $0.2 million for a 50% ownership interest of the Management Company. The Company has concluded that the Management Company is a VIE, and the Company is the primary beneficiary as it has the power to direct the activities that are most significant to the Management Company. For the fiscal years ended 2020, 20192022, 2021 and 2018,2020, the accounts of the Management Company were consolidated with the accounts of Super Micro Computer, and a noncontrolling interest was recorded for Ablecom's interest in the net assets and operations of the Management Company. Net income (loss) attributable to Ablecom's interest was not material for the periods presented and was included in general and administrative expenses in the Company's consolidated statements of operations.
SMCI | 2022 Form 10-K | 66
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 foreign currency are remeasured into U.S. dollars at period-end exchange rates. Non-monetary assets and liabilities that are denominated in the foreign currency are remeasured into U.S. dollars at the historical rates. Revenue and expenses that are denominated in the foreign 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 expense,income (expense), net.
The functional currency of Super Micro Asia and Technology Park, Inc. is New Taiwanese Dollar (“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) income in the accompanying consolidated balance sheets and periodic movements are summarized as a line item in the consolidated statements of comprehensive income.
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 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 and PRSUs. Additionally, the exercise of stock options and the vesting of RSUs results in a further dilutive effect on net income per share.
SMCI | 2022 Form 10-K | 67
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The computation of basic and diluted net income per common share is as follows (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | |
| Years Ended June 30, |
| 2022 | | 2021 | | 2020 |
Numerator: | | | | | |
Net income | $ | 285,163 | | | $ | 111,865 | | | $ | 84,308 | |
| | | | | |
Denominator: | | | | | |
Weighted-average shares outstanding | 51,478 | | | 51,157 | | | 50,987 | |
Effect of dilutive securities | 2,137 | | | 2,350 | | | 1,851 | |
Weighted-average diluted shares | 53,615 | | | 53,507 | | | 52,838 | |
| | | | | |
Basic net income per common share | $ | 5.54 | | | $ | 2.19 | | | $ | 1.65 | |
Diluted net income per common share | $ | 5.32 | | | $ | 2.09 | | | $ | 1.60 | |
|
| | | | | | | | | | | |
| Years Ended June 30, |
| 2020 | | 2019 | | 2018 |
Numerator: | | | | | |
Net income | $ | 84,308 |
| | $ | 71,918 |
| | $ | 46,165 |
|
| | | | | |
Denominator: | | | | | |
Weighted-average shares outstanding | 50,987 |
| | 49,917 |
| | 49,345 |
|
Effect of dilutive securities | 1,851 |
| | 1,799 |
| | 2,806 |
|
Weighted-average diluted shares | 52,838 |
| | 51,716 |
| | 52,151 |
|
| | | | | |
Basic net income per common share | $ | 1.65 |
| | $ | 1.44 |
| | $ | 0.94 |
|
Diluted net income per common share | $ | 1.60 |
| | $ | 1.39 |
| | $ | 0.89 |
|
For the fiscal years ended June 30, 2020, 20192022, 2021 and 2018,2020, the Company had stock options, RSUs and PRSUs outstanding that could potentially dilute basic earnings per share in the future but were excluded from the computation of diluted net income per share in the periods presented, as their effect would have been anti-dilutive. The anti-dilutive common share equivalents resulting from outstanding equity awards were 2,208,000, 3,758,000,475,529, 670,179, and 2,221,0002,208,000 for the fiscal years ended June 30, 2020, 20192022, 2021 and 2018,2020, respectively.
Concentration of Supplier Risk
Certain materials used by the Company in the manufacturing of its products are available from a limited number of suppliers. Shortages could occur in these materials due to an interruption of supply or increased demand in the industry. One supplierTwo suppliers accounted for 26.8%, 21.8%,18.1% and 26.0%11.4% of total purchases for the fiscal year ended June 30, 2022.Two suppliers accounted for 20.3% and 11.8% of total purchases for the fiscal years ended June 30, 2020, 2019 and 2018, respectively.2021. One supplier accounted for 26.8% of total purchases for the fiscal years ended June 30, 2020. Purchases from Ablecom and Compuware, related parties of the Company as noted in Part II, Item 8, Note 13,12, "Related Party Transactions,"
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
accounted for 10.1%a combined 8.3%, 9.2%7.8%, and 9.0%10.1% of total cost of sales for the fiscal years ended June 30, 2022, 2021 and 2020, 2019 and 2018, respectively.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration of credit risk consist primarily of cash and cash equivalents, restricted cash, investment in an auction rate security and accounts receivable.No single customer accounted for 10% or more of the net sales in any of fiscal years 2020, 20192022, 2021 and 2018.2020. One customer accounted for 10.1%21.7% and 17.0%13.5% of accounts receivable, net as of June 30, 20202022 and 2019,2021, respectively.
Treasury Stock
The Company accounts for treasury stock under the cost method. Upon the retirement of treasury shares, the Company deducts the par value of the retired 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 February 2016, the FASB issued an amendment to the accounting guidance, Leases. The new lease accounting guidance supersedes the existing guidance. Under the new lease accounting guidance, lessees are required to recognize assets and liabilities on the balance sheet for most leases and provide enhanced disclosures. Leases will continue to be classified as either finance or operating. The Company adopted the new lease accounting guidance on July 1, 2019 using the modified retrospective approach, and as a result did not restate prior comparative periods. The Company elected to apply the “package of practical expedients” under the transition guidance of the new standard, which permits it not to reassess under the new lease accounting guidance its prior conclusions about lease identification, lease classification and initial direct costs, for leases that are in effect as of the date of adoption of the new lease accounting guidance. In connection with the adoption of the new lease accounting guidance, the Company recorded a transition adjustment to recognize ROU assets and lease liabilities on the Company’s consolidated balance sheet of $14.8 million and $15.2 million, respectively, on July 1, 2019, primarily related to real estate leases. See Note 12, "Leases," for further details.
In February 2018, the FASB issued Income Statement - Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows companies to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act ("2017 Tax Reform Act"), from accumulated other comprehensive income to retained earnings. The guidance also requires certain new disclosures regardless of the election. The Company adopted this guidance on July 1, 2019. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements and related disclosures.
In June 2018, the FASB issued amended guidance to expand the scope of ASC 718 - Compensation-Stock Compensation, to include share-based payment transactions for acquiring goods and services from non-employees. The amendments specify that the guidance applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The Company adopted this guidance on July 1, 2019. The adoption of the guidance did not have an impact on the Company's consolidated financial statements and related disclosures.
Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued authoritative guidance, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments, that amends the impairment model for certain financial assets by requiring the use of an expected loss methodology, which will result in more timely recognition of credit losses. The amendment is effective for the Company from July 1, 2020. Early adoption is permitted. The adoption of the guidance is expected to result in the presentation of allowances for credit losses separately from the amortized cost of financial instruments that are not classified as available-for-sale debt securities. The adoption is also expected to change the presentation of the Company’s available-for-sale debt securities to include the amortized cost and the allowance for credit losses parenthetically. The adoption will have an immaterial effect on the allowance for credit losses for trade receivables and beginning retained earnings and will have an immaterial effect on the Company’s financial statement disclosures.
In August 2018, the FASB issued amended guidance, Fair Value Measurement: Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, to modify the disclosure requirements on fair value measurements based on the concepts in the FASB Concepts Statements, including the consideration of costs and benefits. The new standard is effective for the Company from July 1, 2020. The adoption of the new guidance will require the Company to present, on a prospective basis, narrative information regarding the uncertainty of the fair value measurements from the use of unobservable
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
inputs used in recurring fair value measurements categorized in Level 3 of the fair value hierarchy, to disclose the amount of gains and losses recognized in other comprehensive income for the period for financial instruments categorized within Level 3 of the fair value hierarchy, and quantitative information for the significant unobservable inputs used to develop the Level 3 fair value measurements. The adoption of the new guidance will also allow the Company to discontinue the presentation of information regarding transfers between Level 1 and Level 2 of the fair value hierarchy. As at June 30, 2020 the only financial instrument of the Company for which the recurring fair value measurements are categorized in Level 3 of the fair value hierarchy is its investment in an auction rate security.
In August 2018, the FASB issued authoritative guidance , Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments. According to the amendments, an entity shall determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. It requires an entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The new standard is effective for the Company from July 1, 2020. The Company will adopt the new guidance on a prospective basis for any new hosting arrangement entered into after July 1, 2020 and does not expect the adoption of the guidance to have a material impact on its consolidated financial statement disclosures, results of operations and financial position.
In December 2019, the FASB issued amended guidance, Simplifying the Accounting for Income Taxes,, to remove certain exceptions to the general principles from ASC 740 - Income Taxes, and to improve consistent application of U.S. GAAP for other areas of ASC 740 by clarifying and amending existing guidance. The guidance is effective for the Company from July 1, 2021; early adoption is permitted.2021. The adoption of the guidance isdid not anticipated to have a material impact on its condensed consolidated financial statements.statements and disclosures.
SMCI | 2022 Form 10-K | 68
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Accounting Pronouncements Not Yet Adopted
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 amendments in this update do not apply to contract modifications made after December 31, 2022, new hedging relationships entered into after December 31, 2022, and existing hedging relationships evaluated for effectiveness in periods after December 31, 2022, except for hedging relationships existing as of December 31, 2022 that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship. The amendment is effective for all entities through December 15,31, 2022. In January 2021, the FASB issued further guidance on this topic, which clarified the scope and application of the original guidance. In April 2022, FASB issued a proposed accounting standard update for the deferral of the sunset date of Topic 848 and amendments to the definition of secured overnight financing rate (“SOFR"). The proposed amendment defers the sunset date of Topic 848 to December 31, 2024. The Company has loans and lines of credit with various financial institutions. Benchmark interest rates are used to calculate the interest on borrowings under the Chang Hwa Bank, CTBC, HSBC, Mega Bank Credit Facilities. LIBOR iswas used to calculate the interest on borrowings under the Company's 2018 Bank of America Credit Facility and E.SUN Credit Facility. AsThe 2018 Bank of America Credit Facility was amended on June 28, 2021 to provide for a new maturity date of June 28, 2026 and fallback terms related to LIBOR replacement mechanics. On March 3, 2022, the 2018 Bank of America Credit Facility aswas amended will terminate on June 30, 2021 beforeto, among other items, increase the phase outsize of the facility from $200.0 million to $350.0 million and update provisions relating to payments and LIBOR replacement mechanics to SOFR. As these amendments had other contemporaneous changes to the facility, including the amount of borrowings permitted under the facility and not just directly related to LIBOR replacement, optional expedients under this guidance cannot be elected. The Company does not expectis currently evaluating the overall impact of 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 instruments of the Company measured at fair value on a recurring basis are included in cash equivalents, other assets and accrued liabilities. The Company classifies its financial instruments, except for its investment in an auction rate security, within Level 1 or Level 2 in the fair value hierarchy because the Company uses quoted prices in active markets or alternative pricing sources and models using market observable inputs to determine their fair value.
The Company’s investment in an auction rate security is classified within Level 3 of the fair value hierarchy as the determination of its fair value was not based on observable inputs as of June 30, 20202022 and 2019.June 30, 2021. See Part II, Item 8, Note 1, "Organization and Summary of Significant Accounting Policies," for a discussion of the Company’s policies regarding the fair value hierarchy. The Company usedis using the discounted cash flowsflow method to estimate the fair value of the auction rate security at each period end and the following assumptions: (i) the expected yield based on observable market rate of similar securities, (ii) the security coupon rate that is reset monthly, (iii) the estimated holding period and (iv) a liquidity discount. The liquidity discount assumption is based on the management estimate of lack of marketability discount of similar securities and is determined based on the analysis of financial market trends over time, recent redemptions of securities and other market activities. The Company performed a sensitivity analysis and applying a change of either plus or minus 100 basis points in the liquidity discount does not result in a significantly higher or lower fair value measurement of the auction rate security as of June 30, 2020 and 2019. The material factors used in preparing the discounted cash flows are (i) the discount rate utilized to present value the cash flows, (ii) the time period until redemption and (iii) the estimated rate of return.2022.
65SMCI | 2022 Form 10-K | 69
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Financial Assets and Liabilities Measured on a Recurring Basis
The following table sets forth the Company’s financial instruments as of June 30, 20202022 and 2019,2021, 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, 2022 | Level 1 | | Level 2 | | Level 3 | | Asset at Fair Value |
Assets | | | | | | | |
Money market funds(1) | $ | 20,220 | | | $ | — | | | $ | — | | | $ | 20,220 | |
Certificates of deposit(2) | — | | | 832 | | | — | | | 832 | |
Auction rate security | — | | | — | | | 1,590 | | | 1,590 | |
Total assets measured at fair value | $ | 20,220 | | | $ | 832 | | | $ | 1,590 | | | $ | 22,642 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
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 |
| | $ | 0 |
| | $ | 0 |
| | $ | 1,163 |
|
Certificates of deposit (2) | 0 |
| | 836 |
| | 0 |
| | 836 |
|
Auction rate security | 0 |
| | 0 |
| | 1,571 |
| | 1,571 |
|
Total assets measured at fair value | $ | 1,163 |
| | $ | 836 |
| | $ | 1,571 |
| | $ | 3,570 |
|
| | | | | | | |
Liabilities | | | | | | | |
Performance awards liability (3) | $ | 0 |
| | $ | 2,100 |
| | $ | 0 |
| | $ | 2,100 |
|
Total liabilities measured at fair value | $ | 0 |
| | $ | 2,100 |
| | $ | 0 |
| | $ | 2,100 |
|
| | | | | | | |
June 30, 2019 | Level 1 | | Level 2 | | Level 3 | | Asset at Fair Value |
Money market funds (1) | $ | 1,162 |
| | $ | 0 |
| | $ | 0 |
| | $ | 1,162 |
|
Certificates of deposit (2) | 0 |
| | 1,285 |
| | 0 |
| | 1,285 |
|
Auction rate security | 0 |
| | 0 |
| | 1,571 |
| | 1,571 |
|
Total assets measured at fair value | $ | 1,162 |
| | $ | 1,285 |
| | $ | 1,571 |
| | $ | 4,018 |
|
(1) $0.4$20.0 million and $0.4$0.0 million in money market funds are included in cash and cash equivalents and $0.8$0.2 million and $0.8$0.2 million in money market funds are included in restricted cash, non-current in other assets in the consolidated balance sheets as of June 30, 20202022 and 2019,2021, respectively.
(2) $0.2 million and $0.2 million in certificates of deposit are included in cash and cash equivalents, $0.3 million and $0$0.3 million in certificates of deposit are included in prepaid expenses and other assets, and $0.3 million and $1.1$0.4 million in certificates of deposit are included in restricted cash, non-current in other assets in the consolidated balance sheets as of June 30, 20202022 and 2019,2021, respectively.
(3) As ofOn a quarterly basis, the Company also evaluates the current expected credit loss by considering factors such as historical experience, market data, issuer-specific factors, and current economic conditions. For the fiscal year ended June 30, 2020,2022, the current portion ofcredit losses related to the performance awards liability of $1.5 million is included in accrued liabilities and the noncurrent portion of $0.6 million is included in other long-term liabilities in the consolidated balance sheets. There was 0 such liability outstanding as of June 30, 2019.
The performance awards liability consists of one-time employee performance bonuses for the Company's Chief Executive Officer and two members of the Board that are payable when specified market and performance conditions are achieved. The Company estimated the fair value of these performance awards using the Monte-Carlo simulation model and classified them within Level 2 of the fair value hierarchy as estimates are based on the observable inputs. The significant inputs used in estimating the fair value of the awards as of June 30, 2020 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% | | 0 |
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Company’s investments were not significant.
There was noan immaterial 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 20202022 and 2019.2021.
There were no transfers between Level 1, Level 2 or Level 3 financial instruments in fiscal years 20202022 and 2019.2021.
The following is a summary of the Company’s investment in an auction rate security as of June 30, 20202022 and 20192021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 |
| Cost Basis | | Gross Unrealized Holding Gains | | Gross Unrealized Holding Losses | | Fair Value |
Auction rate security | $ | 1,750 | | | $ | — | | | $ | (160) | | | $ | 1,590 | |
|
| | | | | | | | | | | | | | | |
| June 30, 2020 and 2019 |
| Cost Basis | | Gross Unrealized Holding Gains | | Gross Unrealized Holding Losses | | Fair Value |
Auction rate security | $ | 1,750 |
| | $ | 0 |
| | $ | (179 | ) | | $ | 1,571 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2021 |
| Cost Basis | | Gross Unrealized Holding Gains | | Gross Unrealized Holding Losses | | Fair Value |
Auction rate security | $ | 1,750 | | | $ | — | | | $ | (194) | | | $ | 1,556 | |
SMCI | 2022 Form 10-K | 70
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the fiscal year ended June 30, 2022, the Company recognized $0.03 million of unrealized gain for the auction rate security in other comprehensive income based on the current valuation. For the fiscal year ended June 30, 2021, the Company's loss recognized in other comprehensive income for the auction rate security was immaterial. No gain or loss was recognized in other comprehensive income for the auction rate security for the fiscal year ended June 30, 2020.
The Company measures the fair value of outstanding debt for disclosure purposes on a recurring basis. As of June 30, 20202022 and 2019,2021, total debt of $29.4$596.8 million and $23.6$98.2 million, respectively, areis reported at amortized cost. This outstanding debt is classified as Level 2 as it is not actively traded. The amortized cost of the outstanding debt approximates the fair value.
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 and $0.9$1.2 million as of each of June 30, 20202022, and 2019, respectively.2021. 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 the years ended June 30, 20202022 and 2019,2021, the Company did not record any upward 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 2022, 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. During fiscal year 2018, the Company did not record any other-than-temporary impairments on financial assets required to be measured at fair value on a non-recurring basis.
Note 3. Revenue
Disaggregation of Revenue
The Company disaggregates revenue by type of product byand geographical market and by products soldin order to indirect sales channel partners or direct customers and original equipment manufacturers ("OEMs") that depict the nature, amount, and timing of revenue and cash flows. Service revenues, 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, |
| 2022 | | 2021 | | 2020 |
Server and storage systems | $ | 4,463,833 | | | $ | 2,790,305 | | | $ | 2,620,754 | |
Subsystems and accessories | 732,266 | | | 767,117 | | | 718,527 | |
Total | $ | 5,196,099 | | | $ | 3,557,422 | | | $ | 3,339,281 | |
|
| | | | | | | | | | | |
| Years Ended June 30, |
| 2020 | | 2019 | | 2018 |
Server and storage systems | $ | 2,620,754 |
| | $ | 2,858,644 |
| | $ | 2,663,580 |
|
Subsystems and accessories | 718,527 |
| | 641,716 |
| | 696,912 |
|
Total | $ | 3,339,281 |
| | $ | 3,500,360 |
| | $ | 3,360,492 |
|
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, |
| 2022 | | 2021 | | 2020 |
United States | $ | 3,035,523 | | | $ | 2,107,910 | | | $ | 1,957,329 | |
Asia | 1,139,898 | | | 699,653 | | | 650,652 | |
Europe | 825,200 | | | 614,826 | | | 598,558 | |
Other | 195,478 | | | 135,033 | | | 132,742 | |
Total | $ | 5,196,099 | | | $ | 3,557,422 | | | $ | 3,339,281 | |
67SMCI | 2022 Form 10-K | 71
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
International net sales are based onStarting July 1, 2020, the country and region to which the products were shipped. The following is a summary for the fiscal years ended June 30, 2020, 2019 and 2018, of net salesCompany does not separately disclose revenue by geographic region (in thousands):
|
| | | | | | | | | | | |
| Years Ended June 30, |
| 2020 | | 2019 | | 2018 |
United States | $ | 1,957,329 |
| | $ | 2,032,948 |
| | $ | 1,902,106 |
|
Asia | 650,652 |
| | 712,211 |
| | 762,701 |
|
Europe | 598,558 |
| | 611,014 |
| | 547,507 |
|
Other | 132,742 |
| | 144,187 |
| | 148,178 |
|
Total | $ | 3,339,281 |
| | $ | 3,500,360 |
| | $ | 3,360,492 |
|
The following table presents the net sales from products sold through the Company'sto indirect sales channel and to itspartners or direct customers and OEMs for fiscal years 2020, 2019 and 2018 (in thousands):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.
|
| | | | | | | | | | | |
| Years Ended June 30, |
| 2020 | | 2019 | | 2018 |
Indirect sales channel | $ | 1,771,614 |
| | $ | 1,376,633 |
| | $ | 1,395,841 |
|
Direct customers and OEMs | 1,567,667 |
| | 2,123,727 |
| | 1,964,651 |
|
Total net sales | $ | 3,339,281 |
| | $ | 3,500,360 |
| | $ | 3,360,492 |
|
Contract Balances
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 completed (oreither partially completed) for which the Company has an unconditional right to consideration.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 statements.
Contract liabilities consist of deferred revenue and relate to amounts invoiced to or advance consideration received from customers, which precede the Company’s satisfaction of the associated performance obligation(s). The Company’s deferred revenue primarily results from customer payments received upfront for extended warranties and on-site services because these performance obligations are satisfied over time. Additionally, at times, deferred revenue may fluctuate due to the timing of advance consideration received from non-cancellable non-refundable contract liabilities relating to the sale of future products. Revenue recognized during fiscal year 2020,ended June 30, 2022, which was included in the opening deferred revenue balance as of June 30, 2019,2021, of $202.3 million, was $91.9$100.2 million.
Deferred revenue decreasedincreased $31.5 million during the fiscal year ended June 30, 20202022, as compared to the fiscal year ended June 30, 2021 mainly because the deferral on invoiced amounts for service contracts during the period exceeded the recognition of revenue from contracts entered into in prior periods exceeded the value of the transaction price allocated for service contracts obligations during the current period.
periods.
Transaction Price Allocated to the Remaining Performance Obligations
Remaining performance obligations represent in aggregate the amount of transaction price that has been allocated to performance obligations not delivered, or only partially undelivered,delivered, as of the end of the reporting period. The Company applies the optional exemption to not disclose information about remaining performance obligations that are part of a contract that has an original expected duration of one year or less. These performance obligations generally consist of services, such as on-site 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, 20202022, was approximately $203.8$233.8 million. The Company expects to recognize approximately 52%48% of remaining performance obligations as revenue in the next 12 months, and the remainder thereafter.
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Capitalized Contract Acquisition Costs and Fulfillment Cost
Contract acquisition costs are those incremental costs that the Company incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained. Contract acquisition costs consist primarily of incentive bonuses. Contract acquisition costs are considered incremental and recoverable costs of obtaining and fulfilling a contract with a customer and are therefore capitalizable. The Company applies the practical expedient to expense incentive bonus costs as incurred if the amortization period would be one year or less, generally upon delivery of the associated server and storage systems or components. Where the amortization period of the contract cost would be more than a year, the Company applies judgment in the allocation of the incentive bonus cost asset between hardware and service performance obligations and expenses the cost allocated to the hardware performance obligations upon delivery of associated server and storage systems or components and amortizes the cost allocated to service performance obligations over the period the services are expected to be provided. Such contractContract 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.
SMCI | 2022 Form 10-K | 72
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 4. Accounts Receivable Allowances
The Company has established an allowance for doubtful 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. Accounts receivable allowances as of June 30, 2020, 20192022, 2021 and 20182020 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, 2022 | $2,591 | | $(840) | | $2 | | $1,753 |
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 |
|
| | | | | | | | | | | | | | | |
| Beginning Balance | | Charged to Cost and Expenses (Recovered), net | | Write-offs | | Ending Balance |
Allowance for doubtful accounts: | | | | | | | |
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 |
|
Year ended June 30, 2018 | 2,370 |
| | (96 | ) | | (329 | ) | | 1,945 |
|
Note 5. Inventories
Inventories as of June 30, 20202022 and 20192021 consisted of the following (in thousands):
| | | | | | | | | | | |
| June 30, |
| 2022 | | 2021 |
Finished goods | $ | 1,025,555 | | | $ | 761,694 | |
Work in process | 209,576 | | | 80,472 | |
Purchased parts and raw materials | 310,475 | | | 198,798 | |
Total inventories | $ | 1,545,606 | | | $ | 1,040,964 | |
|
| | | | | | | |
| June 30, |
| 2020 | | 2019 |
Finished goods | $ | 656,817 |
| | $ | 492,387 |
|
Work in process | 38,146 |
| | 43,598 |
|
Purchased parts and raw materials | 156,535 |
| | 134,203 |
|
Total inventories | $ | 851,498 |
| | $ | 670,188 |
|
During fiscal years 2020, 20192022, 2021 and 2018,2020, the Company recorded a net provision for excess and obsolete inventory to cost of sales totaling $22.6$15.1 million, $28.5$6.8 million and $9.4$18.4 million, respectively, excluding a (recovery) provision for adjusting the cost of certain inventories to net realizable value of $(4.2) million and $4.4 million in fiscal years 2020 and 2019, respectively. The adjustment for lower of cost or net realizable value and lower of cost or market was not material in fiscal year 2018. The Company classifies subsystems and accessories that may be sold separately or incorporated into systems as finished goods.
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 6. Property, Plant, and Equipment
Property, plant and equipment as of June 30, 20202022 and 20192021 consisted of the following (in thousands):
| | | | | | | | | | | |
| June 30, |
| 2022 | | 2021 |
Buildings | $ | 143,509 | | | $ | 86,930 | |
Land | 84,616 | | | 76,421 | |
Machinery and equipment | 113,665 | | | 97,671 | |
Buildings construction in progress(1) | 303 | | | 87,438 | |
Building and leasehold improvements | 45,169 | | | 26,640 | |
Software | 23,186 | | | 22,592 | |
Furniture and fixtures | 43,282 | | | 22,843 | |
| 453,730 | | | 420,535 | |
Accumulated depreciation and amortization | (167,758) | | | (145,822) | |
Property, plant and equipment, net | $ | 285,972 | | | $ | 274,713 | |
|
| | | | | | | |
| June 30, |
| 2020 | | 2019 |
Buildings | $ | 86,930 |
| | $ | 86,136 |
|
Land | 75,251 |
| | 74,926 |
|
Machinery and equipment | 85,381 |
| | 79,946 |
|
Buildings construction in progress (1) | 46,311 |
| | 14,189 |
|
Building and leasehold improvements | 24,517 |
| | 22,307 |
|
Software | 20,597 |
| | 18,415 |
|
Furniture and fixtures | 21,544 |
| | 20,193 |
|
| 360,531 |
| | 316,112 |
|
Accumulated depreciation and amortization | (126,746 | ) | | (108,775 | ) |
Property, plant and equipment, net | $ | 233,785 |
| | $ | 207,337 |
|
__________________________
(1) PrimarilyConstruction in progress balance as of June 30, 2021, primarily relates to the development and construction costs associated with the Company’s Green Computing Park located in San Jose, California and to a lesser extent,the new building in Taiwan.
SMCI | 2022 Form 10-K | 73
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 7. Prepaid Expenses and Other Assets
Prepaid expenses and other current assets as of June 30, 20202022 and 20192021 consisted of the following (in thousands):
| | | | | | | | | | | |
| June 30, |
| 2022 | | 2021 |
Other receivables(1) | $ | 138,054 | | | $ | 99,921 | |
| | | |
Prepaid expenses | 5,632 | | | 6,719 | |
Deferred service costs | 5,562 | | | 4,900 | |
Prepaid income tax | 2,352 | | | 12,288 | |
Restricted cash | 251 | | | 251 | |
Others | 6,948 | | | 6,116 | |
Total prepaid expenses and other current assets | $ | 158,799 | | | $ | 130,195 | |
|
| | | | | | | |
| June 30, |
| 2020 | | 2019 |
Receivables from vendors (1) | $ | 94,859 |
| | $ | 83,050 |
|
Prepaid income tax | 14,323 |
| | 607 |
|
Prepaid expenses | 7,075 |
| | 7,269 |
|
Deferred service costs | 4,161 |
| | 3,374 |
|
Restricted cash | 250 |
| | 11,673 |
|
Others | 6,317 |
| | 3,822 |
|
Total prepaid expenses and other current assets | $ | 126,985 |
| | $ | 109,795 |
|
__________________________
(1)Includes other receivables from contract manufacturers based on certain buy-sell arrangements of $83.8$98.9 million and $82.0$76.2 million as of June 30, 20202022 and 2019,2021, respectively.
Other assets as of June 30, 2022 and 2021 consisted of the following (in thousands):
| | | | | | | | | | | |
| June 30, |
| 2022 | | 2021 |
Operating lease right-of-use asset | $ | 23,679 | | | $ | 20,047 | |
Deferred service costs, non-current | 6,316 | | | 5,421 | |
| | | |
Prepaid expense, non-current | 2,011 | | | 1,973 | |
Investment in auction rate security | 1,590 | | | 1,556 | |
Deposits | 1,069 | | | 1,669 | |
Restricted cash, non-current | 911 | | | 932 | |
Others | 1,956 | | | 528 | |
Total other assets | $ | 37,532 | | | $ | 32,126 | |
Cash, cash equivalents and restricted cash as of June 30, 2022 and 2021 consisted of the following (in thousands):
| | | | | | | | | | | |
| June 30, |
| 2022 | | 2021 |
Cash and cash equivalents | $ | 267,397 | | | $ | 232,266 | |
Restricted cash included in prepaid expenses and other current assets | 251 | | | 251 | |
Restricted cash included in other assets | 911 | | | 932 | |
Total cash, cash equivalents and restricted cash | $ | 268,559 | | | $ | 233,449 | |
70SMCI | 2022 Form 10-K | 74
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Other assets as of June 30, 2020 and 2019 consisted of the following (in thousands):
|
| | | | | | | |
| June 30, |
| 2020 | | 2019 |
Operating lease right-of-use asset | $ | 23,784 |
| | $ | — |
|
Deferred service costs, non-current | 4,632 |
| | 3,572 |
|
Restricted cash, non-current | 1,607 |
| | 2,303 |
|
Investment in auction rate security | 1,571 |
| | 1,571 |
|
Deposits | 1,201 |
| | 686 |
|
Non-marketable equity securities | 128 |
| | 878 |
|
Prepaid expense, non-current | 1,576 |
| | 1,649 |
|
Total other assets | $ | 34,499 |
| | $ | 10,659 |
|
Cash, cash equivalents and restricted cash as of June 30, 2020 and 2019 consisted of the following (in thousands):
|
| | | | | | | |
| June 30, |
| 2020 | | 2019 |
Cash and cash equivalents | $ | 210,533 |
| | $ | 248,164 |
|
Restricted cash included in prepaid expenses and other current assets | 250 |
| | 11,673 |
|
Restricted cash included in other assets | 1,607 |
| | 2,303 |
|
Total cash, cash equivalents and restricted cash | $ | 212,390 |
| | $ | 262,140 |
|
Note 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 the 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.
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. As a result of the adoption of new accounting guidance as of the beginning of fiscal year 2019, the Company recorded an increase of $3.0 million to the investment in equity investee for the contribution of those technology rights, and corresponding increases in deferred gain and retained earnings of $2.1 million and $0.9 million, respectively. As of June 30, 2020 and 2019, the Company had unamortized deferred gain balance of $2.0 million and $2.0 million, respectively, in accrued liabilities and $1.0 million and $3.0 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 impairment and makes appropriate reductions in carrying values if it determines that an impairment charge is required. In June 2020, the third-party parent company that controls the Corporate Venture was placed on a U.S. government export control list, along with several related entities. The Company is working with the Corporate Venture management to ensure that any future related parties transactions with the Corporate Venture are in accordance with the new restrictions and does not believe that the equity investment carrying value is impacted as of June 30, 2020. The Company did 0t recognize any impairment in the years ended June 30, 2020, 2019 and 2018.
As of June 30, 2020 and June 30, 2019, the Company's equity investment in the Corporate Venture was $2.7 million and $1.7 million, respectively, and was recorded under investment in equity investee on the Company's consolidated balance sheet.
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company's share of income (losses), net of taxes, of the Corporate Venture net of taxes were $2.4 million, $(2.7) million, and $(3.6) million for the fiscal years ended June 30, 2020, June 30, 2019, and June 30, 2018, respectively.
Additionally, the Company sold products worth $61.9 million, $52.2 million, $21.7 million to the Corporate Venture in the fiscal years 2020, 2019, 2018, respectively, and the Company's share of intra-entity profits on the products that remained unsold by the Corporate Venture in the amounts of $3.0 million and $1.7 million as of June 30, 2020 and June 30, 2019 have been eliminated and have reduced the carrying value of the Company's investment in the Corporate Venture. To the extent that the elimination of intra-entity profits reduces the investment balance below zero, such amounts are recorded within accrued liabilities. The Company had $7.8 million and $13.1 million due from the Corporate Venture in accounts receivable, net as of June 30, 2020 and 2019, respectively, in its consolidated balance sheets.
Note 9.8. Accrued Liabilities
Accrued liabilities as of June 30, 20192022 and 20182021 consisted of the following (in thousands):
| | | | | | | | | | | |
| June 30, |
| 2022 | | 2021 |
Accrued payroll and related expenses | $ | 57,736 | | | $ | 45,770 | |
Contract manufacturers liabilities | 41,125 | | | 45,319 | |
Customer deposits | 30,421 | | | 32,419 | |
Accrued legal liabilities (Note 15) | 18,250 | | | — | |
Accrued warranty costs | 9,073 | | | 10,185 | |
Accrued cooperative marketing expenses | 8,757 | | | 5,652 | |
Operating lease liability | 7,139 | | | 6,322 | |
| | | |
Accrued professional fees | 4,281 | | | 2,737 | |
| | | |
Others | 35,637 | | | 30,446 | |
Total accrued liabilities | $ | 212,419 | | | $ | 178,850 | |
|
| | | | | | | |
| June 30, |
| 2020 | | 2019 |
Accrued payroll and related expenses | $ | 33,577 |
| | $ | 25,552 |
|
Contract manufacturers liability | 36,249 |
| | 25,308 |
|
Accrued legal liabilities | 18,114 |
| | 0 |
|
Accrued professional fees | 5,661 |
| | 11,756 |
|
Customer deposits | 9,942 |
| | 11,133 |
|
Accrued warranty costs | 9,984 |
| | 8,661 |
|
Operating lease liability | 6,310 |
| | — |
|
Accrued cooperative marketing expenses | 5,925 |
| | 5,830 |
|
Others | 29,639 |
| | 26,438 |
|
Total accrued liabilities | $ | 155,401 |
| | $ | 114,678 |
|
Performance Awards Liability
In March 2020, the Company’s Board of Directors (the “Board”) approved $25.3 million of special performance bonuses to employees, which included $8.0 million paid in cash during the fourth quarter of fiscal year 2020 and $17.3 million paid in cash upon the occurrence of the average closing price for the Company's common stock equaling or exceeding $21.39 for any period of 10 consecutive trading days following March 26, 2020. The entire amount of the special performance bonuses to employees was paid in the fourth quarter of fiscal year 2020.
The Board also approved performance bonuses for the Chief Executive Officer, a senior executive and two members of the Board, which payments will be earned when specified market and performance conditions are achieved.
The Chief Executive Officer’s aggregatetotal cash bonuses of up tobonus opportunity was $8.1 million, aredivided into 2 equal tranches. Each tranche would be 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 followingreached specified targets. The Board retained the date offlexibility to reduce the agreement and ending prior to Septemberamount payable under the first tranche (but not the second tranche) based on performance goals. Both price targets were reached during the fiscal year ended June 30, 2021, and the second tranche totaled $4.0 million was paid in full. As of June 30, 2021, the Company also expected it would likely pay the first tranche in full, and therefore recorded an expense of $3.6 million since March 2020 relating to the first tranche.
In September 2021, after the Company had closed its books for the year ended June 30, 2021, the Board decided to exercise its discretion to reduce the amount to be paid to the Chief Executive Officer remains employed withfor the first tranche to $2.0 million, which was paid in the quarter ended December 31, 2021. As a result of the Board’s decision to reduce the amount to be paid under the first tranche, the Company throughadjusted the date that such common stock price goal is determined to have been achieved and$3.6 million expense previously recorded for the date that the payment is made. This payment can be reduced at the discretion of the Boardfirst tranche to the extentnew amount of $2.0 million, which resulted in the Company has not made adequate progress in remediating its material weaknesses in its internal control over financial reporting as determined byrecognizing a $1.6 million benefit from this adjustment during the Board. The second 50% is payable ifquarter ended September 30, 2021. For 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 tofiscal years ended June 30, 2022 and the Chief Executive Officer remains employed with the Company through the date that such common stock price goal is achievedJune 30, 2021, $1.6 million of benefit and the date that the payment is made.$5.8 million of expense was recognized, respectively.
Performance bonuses for a senior executive and 2 members of the Board are earned based on achieving a specified target average closing price for the Company’s common stock over the specified period as determined by the Board at the grant
72SMCI | 2022 Form 10-K | 75
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
dates and continuous services through the payment dates. A senior executive earned an aggregate cash payment of $0.1 million when the target average closing price was met in the fourth quarter of fiscal year 2020. The 2 members of the Board can earn aggregate cash payments of $0.3 million in 2 tranches if the target average closing price reaches $31.61 for the first tranche and $32.99 per share for the second tranche. These awards expire in two equal amounts at September 30, 2021 and June 30, 2022 for the 2 Board members' awards.
The Company accounts for the outstanding performance bonuses as liabilities and estimates fair value of payable amounts using a Monte-Carlo simulation model. The awards are re-measured at each period end with changes in fair value recorded in the Company’s consolidated statement of operations in cost of sales and operating expenses. The cumulative recorded expense at each period end is trued-up to the expected payable amount vested through the period end. The requisite service periods over which expenses are recognized are derived from the Monte-Carlo model for all performance awards, except for the first 50% of the Chief Executive Officer’s award that includes a performance condition. The Company estimates if it is probable that the performance condition will be met through the expiration date of this award. If at the measurement date it is determined to be probable, the Company estimates the requisite period as the longer of the service period derived by the Monte-Carlo model and the implicit service period when the Company expects to make adequate progress in remediating its material weaknesses in its internal control over financial reporting, as reported by the Company's Audit Committee. If it is determined to not be probable, then the Company will reverse any previously recognized expense for this award in the period when it is no longer probable that the performance condition will be achieved.
As of June 30, 2020, the Company's outstanding balance related to performance bonuses was $2.1 million of which $1.5 million is recorded within accrued liabilities and $0.6 million is recorded within other long-term liabilities on the Company's consolidated balance sheet. An unrecognized compensation expense of $3.3 million will be recorded over the remaining service periods from 0.19 years to 1.18 years. The unrecognized expense and remaining service periods will be remeasured each reporting period.
Note 10.9. Short-term and Long-term Debt
Short-term and long-term debt obligations as of June 30, 20202022 and 20192021 consisted of the following (in thousands):
| | | | | | | | | | | |
| June 30, |
| 2022 | | 2021 |
Line of credit: | | | |
2018 Bank of America Credit Facility | $ | 268,245 | | | $ | — | |
2022 Bank of America Credit Facility | 9,500 | | — | |
Cathay Bank Line of Credit | 30,000 | | — | |
2021 CTBC Credit Lines | 84,800 | | 18,000 | |
HSBC Bank Credit Facility | 30,000 | | — | |
2021 E.SUN Bank Credit Facility | 7,800 | | 20,400 |
Mega Bank Credit Facility | 3,500 | | — | |
Total line of credit | 433,845 | | | 38,400 | |
Term loan facilities: | | | |
Chang Hwa Bank Credit Facility due October 15, 2026 | 33,643 | | — | |
CTBC Bank term loan, due August 31, 2022 | — | | | 25,090 | |
CTBC Bank term loan, due June 4, 2030 | 40,372 | | 34,700 | |
2021 CTBC Credit Lines, due December 27, 2027 | 5,468 | | — | |
2021 E.SUN Bank Credit Facility, due September 15, 2026 | 43,064 | | — | |
Mega Bank Credit Facility, due September 15, 2026 | 40,372 | | — | |
Total term loans | 162,919 | | | 59,790 | |
Total debt | 596,764 | | | 98,190 | |
Short-term debt and current portion of long-term debt | 449,146 | | | 63,490 | |
Debt, non-current | $ | 147,618 | | | $ | 34,700 | |
|
| | | | | | | |
| June 30, |
| 2020 | | 2019 |
Line of credit: | | | |
Bank of America | $ | 0 |
| | $ | 1,116 |
|
Term loans: | | | |
CTBC Bank, due August 31, 2020 | 23,704 |
| | 22,531 |
|
CTBC Bank, due June 4, 2030 | 5,697 |
| | 0 |
|
Total term loans | 29,401 |
| | 22,531 |
|
Total debt | 29,401 |
| | 23,647 |
|
Short-term debt and current portion of long-term debt | 23,704 |
| | 23,647 |
|
Debt, Non-current | $ | 5,697 |
| | $ | 0 |
|
Activities under Revolving Lines of Credit and Term Loans
Bank of America
2018 Bank of America Credit Facility
In April 2018, the Company entered into a revolving line of credit with Bank of America (thefor up to $250.0 million (as amended from time to time, the "2018 Bank of America Credit Facility"), which replaced. On March 3, 2022, the then existing credit facility with Bank of America (the "2016 Bank of America Credit Facility"). The 2018 Bank of America Credit Facility provides for a revolving credit line and other financial accommodations of up to $250.0 million extended by certain lenders, including a $5.0 million letter of credit sublimit, which was extended to $15.0 million in October 2019. The 2018 Bank of America Credit Facility was originally setamended to, expire after 364 days and on
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
January 31, 2019,among other items, increase the Company paid a fee and entered into an amendmentsize of the 2018 Bank of America Credit Facility that resulted in the extension of the maturity datefacility from April 19, 2019$200.0 million to June 30, 2019. On June 27, 2019, the Company entered into a second amendment of the 2018 Bank of America Credit Facility that extended the maturity date from June 30, 2019 to June 30, 2020. On May 12, 2020, the Company paid a fee of $0.7$350.0 million and entered intochange provisions relating to payments and LIBOR replacement mechanics to SOFR. The obligations bear a third amendment ofbase interest rate plus 0.5% to 1.5% based on the 2018 Bank of America Credit Facility that extended the maturity of the credit facility to June 30, 2021 and changed certain terms of the original agreement.SOFR availability. The amendment was accounted for as a modification and the impact was immaterial to the consolidated financial statements. Under the original terms, interest accrued at the LIBOR rate plus 2.75% per annum, while under the third amendment, interest shall accrue at LIBOR rate plus 2.00%Prior to that, on outstanding borrowings less than $125.0 million and LIBOR rate plus 2.25% on outstanding borrowings in excess of $125.0 million. Under the terms of the third amendment ofJune 28, 2021, the 2018 Bank of America Credit Facility inwas amended to, among other items, extend the event of default or if outstanding borrowings are in excess of $220.0 million,maturity to June 28, 2026, and increase the maximum amount that the Company is requiredcan request the facility be increased from $100 million to grant the lenders a continuing security interest in and lien upon all amounts credited to any of the Company's deposit accounts. In addition, the third amendment released the real property of Super Micro Computer as a collateral.$150 million. Interest accrued on any loans under the 2018 Bank of America Credit Facility is due on the first day of each month, and the loans are due and payable in full on the termination date of the 2018 Bank of America Credit Facility. Voluntary prepayments are permitted without early repayment fees or penalties. Subject to customary exceptions, the 2018 Bank of America Credit Facility is secured by substantially all of Super Micro Computer’s assets, other than real property assets. Under the terms of the 2018 Bank of America Credit Facility, the Company is not permitted to pay any dividends. The Company is required to pay 0.375% per annum on the 2018 Bank of America Credit Facility for any unused borrowings. The 2018 Bank of America Credit Facility contains customary representations and warranties and customary affirmative and negative covenants applicable to the Company and its subsidiaries and contains a financial covenant, which requires that the Company maintain a certain Fixed Charge Coverage Ratio,fixed charge coverage ratio, for each twelve-month period while in a Trigger Period, as defined in the agreement, is in effect.
SMCI | 2022 Form 10-K | 76
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of June 30, 2020, the Company had 0 outstanding borrowings under the 2018 Bank of America Credit Facility. As of June 30, 2019,2022, the total outstanding borrowings under the 2018 Bank of America Credit facilityFacility were $1.1$268.2 million. As of June 30, 2021, the Company had no outstanding borrowings under the 2018 Bank of America Credit Facility. The interest ratesrate under the 2018 Bank of America Credit Facility as of June 30, 20202022 and 2019 were 3.0% per annum2021 was 2.53% and 4.5% per annum,1.50%, respectively. In October 2018, a $3.2 million letter of credit was issued under the 2018 Bank of America Credit Facility. and in October 2019, the letter of credit amount was increased to $6.4 million. The balance of debt issuance costs outstanding were $0.6 million and $0.3 million as of June 30, 20202022 and 2019,June 30, 2021 was $1.0 million and $0.5 million, respectively. The Company has beenis in compliance with all the covenants under the 2018 Bank of America Credit Facility, and as of June 30, 2020,2022, the Company's available borrowing capacity was $243.6$81.8 million, subject to the borrowing base limitation and compliance with other applicable terms.
2022 Bank of America Credit Facility
On March 23, 2022, the Company through its Taiwan subsidiary entered into an Uncommitted Facility Agreement for credit lines with Bank of America – Taipei Branch (the “2022 Bank of America Credit Facility”), for an amount not to exceed in aggregate $20.0 million. The interest rate will be quoted by Bank of America - Taipei Branch for each drawdown. As of June 30, 2022, the total outstanding borrowings were $9.5 million with an interest rate of 1.85% per annum under the 2022 Bank of America Credit Facility.
CTBC Bank
20192021 CTBC Credit FacilityLines
In January 2018,The Company through its Taiwan subsidiary was party to (i) that certain credit agreement, dated May 6, 2020, with CTBC Bank Co., Ltd. (“CTBC Bank”), which provided for a ten-year, non-revolving term loan facility (the “2020 CTBC Term Loan Facility”) to obtain up to NTD 1,200.0 million ($40.7 million U.S. dollar equivalent) and (ii) that certain credit agreement, dated August 24, 2020, with CTBC Bank (the “CTBC Credit Facility”), which provided for total borrowings of up to $50.0 million (collectively, the “Prior CTBC Credit Lines”).
On July 20, 2021 (the “Effective Date”), the Company through its Taiwan subsidiary entered into a general agreement for omnibus credit agreementlines with China TrustCTBC Bank (the “2021 CTBC Credit Lines), which replaced the Prior CTBC Credit Lines in their entirety and Bank Corp ("permit borrowings, from time to time, pursuant to (i) a term loan facility of up to NTD 1,550.0 million ($55.4 million U.S. dollar equivalent) including the existing 2020 CTBC Bank"Term Loan Facility of NTD 1,200.0 million ($42.9 million U.S. dollar equivalent) and a new 75-month, non-revolving term loan facility of NTD 350.0 million ($12.5 million U.S. dollar equivalent) to use to purchase machinery and equipment for the Company’s Bade Manufacturing Facility located in Taiwan (the “2021 CTBC Machine Loan”) that provided for, and (ii) a line of credit facility of up to $105.0 million (the “2021 CTBC Credit Facility”), which increased the borrowing capacity of CTBC Credit Facility. The 2021 CTBC Credit Facility provides (i) a 12-month NTD $700.01,250.0 million ($23.644.7 million U.S. dollar equivalent) term loan facility secured by the land and building located in Bade, Taiwan with an interest rate equal to the lender's established NTD interest rate plus 0.25% per annum, which was adjusted monthly, which term loan facility also included a 12-month guarantee of up to NTD $100.0 million ($3.4 million U.S. dollar equivalent) with an annual fee equal to 0.50% per annum, and (ii) a 12-month NTD $1,500.0 million ($50.5 million U.S. dollar equivalent) term loan facility with an interest rate equal to the lender's established NTD interest rate plus 0.25% per annum, which was adjusted monthly (collectively, the “2018 CTBC Credit Facility”). The total borrowings allowed under the 2018 CTBC Credit Facility was initially capped at $50.0 million and in August 2018 was reduced to $40.0 million. In June 2019 prior to its maturity, the 2018 CTBC Credit Facility was replaced by the 2019 CTBC Credit Facility (defined below).
In June 2019, the Company entered into a credit agreement with CTBC Bank that provides for (i) a 12-month NTD $700.0 million ($22.5 million U.S. dollar equivalent) term loan facility secured by the land and building located in Bade, Taiwan with an interest rate equal to the lender's established NTD interest rate plus 0.25% per annum which is adjusted monthly, which term loan facility also includes a 12-month guarantee of up to NTD $100.0100.0 million ($3.23.6 million U.S. dollar equivalent) with an annual fee equal to 0.50% per annum, (ii) a 180-day NTD $1,500.0 million ($48.2 million U.S. dollar equivalent) term loan facility up to 100% of eligible accounts receivable in an aggregate amount with an interest rate equal to the lender's established NTD interest rate ranging from 0.30% to 0.50% per annum which is adjusted monthly, and (ⅲ)(ii) a 12-month revolving line of credit of up to 100% of eligible accounts receivable in an aggregate amount of up to $50.0$105.0 million with an interest rate equal to the lender's established USD interest rate plus 0.70% to 0.75% per annum which is adjusted monthly.
Interest rates are to be established according to individual credit arrangements established pursuant to the 2021 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 the Taiwan subsidiary’s assets, including certain property, land, plant, and equipment. There are 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.
As of June 30, 2022 and 2021, the amounts outstanding under the 2020 CTBC Term Loan Facility were $40.4 million and $34.7 million, respectively. The interest rates for these loans were 0.825% per annum as of June 30, 2022 and 0.45% as of June 30, 2021. Under the 2021 CTBC Machine Loan, the amounts outstanding were $5.5 million on June 30, 2022. The interest rate for this loan was 1.025% per annum as of June 30, 2022. As of June 30, 2021 there were no outstanding borrowings under the 2021 CTBC Machine Loan.
74SMCI | 2022 Form 10-K | 77
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
an interest rate equal to the lender's established USD interest rate plus an interest rate ranging from 0.30% to 0.50% per annum which is adjusted monthly (collectively, the “2019 CTBC Credit Facility”). The total borrowings allowed under the 2019 CTBC Credit Facility was capped at $50.0 million. There are no financial covenants associated with the 2019 CTBC Credit Facility. On June 30, 2020, the maturity date of the 2019 CTBC credit facility was extended to August 31, 2020. On August 24, 2020, the maturity of the 2019 CTBC credit facility was further extended to August 31, 2021.
The total outstanding borrowings under the 20192021 CTBC Credit Facility term loan were denominated in NTD and remeasured into U.S. dollars of $23.7$0.0 million and $22.5$25.1 million at June 30, 20202022 and 2019,2021, respectively. The 2021 CTBC Credit Facility term loan was repaid on October 26, 2021. The interest rate for the 2021 CTBC Credit Facility term loan was 0.75% per annum as of June 30, 2021. As of June 30, 20202022 and 2019,2021, the Company did 0t have any outstanding borrowings under the 20192021 CTBC Credit Facility revolving line of credit.credit were $84.8 million and $18.0 million, respectively. The interest raterates for these loans were 0.45%ranged from 1.80% to 2.52% per annum as of June 30, 20202022 and 0.93%were 0.98% per annum as of June 30, 2019. At2021. As of June 30, 2020,2022, the amount available for future borrowing under the 20192021 CTBC Credit Facility was $26.3$20.2 million. As of June 30, 2020,2022, the net book value of land and building located in Bade, Taiwan, collateralizing the 20192021 CTBC Credit Facility term loanLines was $25.4$77.3 million.
2020 CTBC Term Loan Facility
In June 2020, the Company entered into a ten-year, non-revolving term loan facility (“2020 CTBC Term Loan Facility”) to obtain up to NTD 1.2 billion ($40.7 million in U.S. dollar equivalents) in financing for use in the expansion and renovation of the Company’s Bade Manufacturing Facility located in Taiwan. Drawdowns on the 2020 CTBC Term Loan Facility are based on 80% of balances owed on commercial invoices from the contractor and shall be drawn according to the progress of the renovations. Borrowings under the 2020 CTBC Term Loan Facility are available through June 2022. The Company is required to pay against total outstanding principal and interest in equal monthly installments starting June 2023 and continuing through the maturity date of June 2030. Interest under the 2020 CTBC Term Loan Facility is the two-year term floating rate of postal saving interest rate plus 0.105% and is established on the date of the drawdown application. If no interest rate is agreed upon, interest shall accrue at the annual base rate for CTBC plus 4.00%. The 2020 CTBC Term Loan Facility is secured by the Bade Manufacturing Facility and its expansion. Fees paid to the lender as debt issuance costs were immaterial. The Company has financial covenants requiring the Company's current ratio, debt service coverage ratio, and financial debt ratio, as defined in the agreement, to be maintained at certain levels under the 2020 CTBC Term Loan Facility.
The Company borrowed $5.7 million in June 2020 with an interest rate of 0.45% per annum. As of June 30, 2020, the amount outstanding under the 2020 CTBC Term Loan Facility was $5.7 million and the net book value of the property serving as collateral was $10.1 million. As of June 30, 2020, the Company was in compliance with all financial covenants under 2021 CTBC Credit Lines as of June 30, 2022.
E.SUN Bank Credit Facility
2021 E.SUN Bank Credit Facility
The Company through its Taiwan subsidiary was party to that certain General Credit Agreement, dated December 2, 2020, with E.SUN Bank (“E.SUN Bank”), which provided for the 2020 CTBCissuance of loans, advances, acceptances, bills, bank guarantees, overdrafts, letters of credit, and other types of drawdown instruments up to a credit limit of US $30.0 million (the “Prior E.SUN Bank Credit Facility”). The term of the Prior E.SUN Bank Credit Facility expired on September 18, 2021.
On September 13, 2021 (the “Old E.SUN Bank Effective Date”), the Company through its Taiwan subsidiary entered into a new General Credit Agreement with E.SUN Bank, which replaced the Prior E.SUN Bank Credit Facility (the “2021 E.SUN Bank Credit Facility”). The 2021 E.SUN Bank Credit Facility permitted borrowings of up to (i) NTD 1,600.0 million ($57.6 million U.S. dollar equivalent) and (ii) $30.0 million as loans, advances, acceptances, bills, bank guarantees, overdrafts, letters of credit, and other types of drawdown instruments. Other terms of the 2021 E.SUN Bank Credit Facility were substantially identical to the Prior E.SUN Bank Credit Facility. Generally, interest for base rate loans made under the 2021 E.SUN Bank Credit Facility were based upon an average interbank overnight call loan rate in the finance industry (such as LIBOR or TAIFX) plus a fixed margin and is subject to occasional adjustment. The 2021 E.SUN Bank Credit Facility had 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 the Taiwan subsidiary has an overdue liability at another financial organization. There were various financial covenants under the 2021 E.SUN Bank Credit Facility, including current ratio, net debt ratio, and interest coverage requirements to be reviewed on a yearly basis at fiscal year end.
Terms for specific drawdown instruments issued under the 2021 E.SUN Bank Credit Facility, such as credit amount, term of use, mode of drawdown, specific lending rate, and other relevant terms, were to be set forth in Notifications and Confirmation of Credit Conditions (a “Notification and Confirmation”) negotiated with E.SUN Bank. A Notification and Confirmation was entered into on the Old E.SUN Bank Effective Date for (i) a five-year, non-revolving term loan facility to obtain up to NTD 1,600.0 million ($57.6 million U.S. dollar equivalent) in financing for use in research and development activities (the “Term Loan”), and (ii) a $30.0 million import loan (the “Import Loan”) with a tenor of 120 days. As of June 30, 2022, the total outstanding borrowings under the Term Loan were denominated in NTD and remeasured into U.S. dollars of $43.1 million and the interest rates for the Term Loan was 1.37% per annum. As of June 30, 2022 and June 30, 2021, the amounts outstanding under the Import Loan were $7.8 million and $20.4 million, respectively. The interest rate for the fiscal year ended June 30, 2022 was 1.81% per annum. The interest rate for the fiscal year ended June 30, 2021 ranged from 1.00% to 1.29% per annum. As of June 30, 2022 the amount available for future borrowing under the Import Loan was $22.2 million. The Company was in compliance with all financial covenants under 2021 E.SUN Bank Credit Facility as of June 30, 2022.
SMCI | 2022 Form 10-K | 78
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2022 E.SUN Bank Credit Facility
On August 9, 2022 (the “New E.SUN Bank Effective Date”), the Company through its Taiwan subsidiary entered into a new General Credit Agreement with E.SUN Bank, which replaced the 2021 E.SUN Bank Credit Facility (the “New E.SUN Bank Credit Facility”). The New E.SUN Bank Credit Facility permits borrowings of up to (i) NTD 1.8 billion ($61.0 million U.S. dollar equivalent) and (ii) US$30.0 million. Other terms of the New E.SUN Bank Credit Facility are substantially identical to the Prior E.SUN Bank Credit Facility. Generally, interest for base rate loans made under the New E.SUN Bank Credit Facility are based upon an average interbank overnight call loan rate in the finance industry (such as TAIFX) plus a fixed margin, and is subject to occasional adjustment. The New E.SUN Bank 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 the Taiwan subsidiary has an overdue liability at another financial organization. The Company is not a guarantor of the New E.SUN Bank Credit Facility.
Terms for specific drawdown instruments issued under the New E.SUN Bank 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 (a “Notification and Confirmation”) negotiated with E.SUN Bank. Under a Notification and Confirmation entered into on the New E.SUN Bank Effective Date, the Subsidiary and E.SUN Bank have agreed to both a medium term credit loan of NTD 680.0 million ($23.0 million U.S. dollar equivalent) with a tenor of 5 years (the “Medium Term Loan”) and a drawdown of US $30.0 million under the E.SUN Bank Credit Facility for an import loan with a tenor of 120 days (the “Import O/A Loan”). With respect to the Medium Term Loan, the period of use is between April 28, 2022 and April 28, 2023. The interest rate thereunder is based upon a floating annual rate plus a fixed margin, subject to adjustment under certain circumstances. Interest payments are due on a monthly basis. Principal is amortized evenly on a monthly basis, with principal payments subject to a one year grace period prior to the commencement of repayment. The Medium Term Loan will be used by the Taiwan subsidiary to support its manufacturing activities (such as purchase of materials and components) (“Use of Proceeds”). Drawdowns may be in amounts of up to 80% of permitted Use of Proceeds expenses. The Subsidiary is subject to various financial covenants in connection with the Medium Term Loan, including a current ratio, net debt to equity ratio, and interest coverage ratio. The current Medium Term Loan and the prior medium term loan under the Prior E.SUN Bank Credit Facility shall not exceed in aggregate NTD 1.8 billion. With respect to the Import O/A Loan, the period of use is between April 28, 2022 and April 28, 2023. The interest rate thereunder is based on TAIFX3 plus a fixed margin, subject to negotiation on a monthly basis and adjustment under certain circumstances. Interest payments are due on a monthly basis, and principal is repayable on the due date. Neither the Medium Term Loan nor Import O/A loan are secured.
Mega Bank
Mega Bank Credit Facilities
On September 13, 2021 (the “Mega Bank Effective Date”), the Company through its Taiwan subsidiary entered into a NTD 1,200.0 million ($43.2 million U.S. dollar equivalent) credit facility (the “Mega Bank Credit Facility”) with Mega International Commercial Bank (“Mega Bank”). The Mega Bank Credit Facility will be used to support manufacturing activities (such as purchase of materials and components), and to provide medium-term working capital (the “Permitted Uses”). Drawdowns under the Mega Bank Credit Facility may be made through December 31, 2024, with the first drawdown date not later than November 5, 2021. The first drawdown date was on October 4, 2021. Drawdowns may be in amounts of up to 80% of Permitted Uses certified to the Bank in drawdown certificates. The interest rate depends upon the amount borrowed under Mega Bank Credit Facility, and as of the Mega Bank Effective Date, ranged from 0.645% to 0.845% per annum. The interest rate is subject to adjustment in certain circumstances, such as events of default. Interest is payable monthly. Principal payments for amounts borrowed commence on the 15th day of the month following two years after the first drawdown and are repaid in monthly installments over a period of three years thereafter. The Mega Bank Credit Facility is unsecured and has customary default provisions permitting Mega Bank to reduce or cancel the extension of credit, or declare all principal and interest amounts immediately due and payable. As of June 30, 2022, the total outstanding borrowings under the Mega Bank Credit Facility were denominated in NTD and remeasured into U.S. dollars of $40.4 million and the interest rates ranged from 1.02% to 1.22% per annum.
SMCI | 2022 Form 10-K | 79
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Credit Agreement with Mega Bank
On April 25, 2022, the Company through its Taiwan subsidiary, entered into a $20.0 million (or foreign currency equivalent) (the “Credit Limit”) Omnibus Credit Authorization Agreement (the “Omnibus Credit Authorization Agreement”) with Mega Bank. The Omnibus Credit Authorization Agreement permits individual credit authorizations subject to specified drawdown conditions up to the Credit Limit (on a revolving basis) to be used as loans for the purchase of materials or supplies.
Pursuant to the Omnibus Credit Authorization Agreement, the Taiwan subsidiary also entered into both a Credit Authorization Agreement (the “Credit Authorization Agreement”) and Credit Authorization Approval Notice (the “Credit Authorization Approval Notice”) with Mega Bank and an associated branch of Mega Bank, respectively. Pursuant to such Agreement and Notice, Mega Bank permits the Taiwan subsidiary to make drawdowns up to the Credit Limit for short-term loans for material purchases with a tenor not to exceed 120 days on a revolving basis. Drawdowns may be made through March 2023. The interest rate for each individual credit authorization is adjusted according to the Mega Bank’s USD basic loan interest rate at the time of signing the agreement which was 0.90% per annum. Interest on such drawdowns is based upon TAIFX OFFER for six months plus 0.23% then divided by 0.946, subject to periodic adjustment and adjustment in certain other circumstances, such as failure to maintain a sufficient balance in a demand deposit account with Mega Bank which are subject to the bank’s right of set off. The interest rate shall be adjusted once every month but shall not be lower than the USD basic loan interest rate plus 0.1%. If the loan involves the acceptance of a bill of exchange, the Company would be required to pay a handling fee at the annual rate of 0.75% calculated based on the number of actual acceptance days. The fee is paid in full upon acceptance and a minimum handling fee of NTD 400 is charged for each transaction. Amounts borrowed are otherwise unsecured, and the Credit Authorization Agreement has customary default provisions permitting Mega Bank to reduce the extension of credit, shorten the term for loan repayment or declare all of the amounts immediately due and payable. The Company is not a guarantor under the Credit Authorization Agreement or Credit Authorization Approval Notice.
As of June 30, 2022 the amount outstanding under the Credit Authorization Agreement was $3.5 million. The interest rate for the fiscal year ended June 30, 2022, was 1.85% per annum. As of June 30, 2022, the amount available for future borrowing under the Credit Limit was $16.5 million.
Chang Hwa Bank
Chang Hwa Bank Credit Facility
On October 5, 2021 (the “Chang Hwa Bank Effective Date”), the Company through its Taiwan subsidiary entered into a credit facility (the “Chang Hwa Bank Credit Facility”) with Chang Hwa Commercial Bank, Ltd. (“Chang Hwa Bank”). The Chang Hwa Bank Credit Facility permits borrowings of up to NTD 1,000.0 million ($36.0 million U.S. dollar equivalent), including up to $20.0 million as loans, advances, acceptances, bills, bank guarantees, overdrafts, letters of credit, and other types of drawdown instruments. The Chang Hwa Bank Credit Facility has customary default provisions permitting Chang Hwa Bank to terminate or reduce the credit limit, shorten the credit period, or deem all liabilities due and payable, including in cross-default provisions with respect to the other Taiwan subsidiary debt obligations. Under the Chang Hwa Bank Credit Facility, Chang Hwa Bank has the right to demand collateral for debts owed.
On May 13, 2022, Chang Hwa Bank notified that they increased the borrowing capacity limit by $20.0 million.
As of June 30, 2022, the total outstanding borrowings under the Chang Hwa Bank Credit Facility were denominated in NTD and remeasured into U.S. dollars of $33.6 million and the interest rate was 1.175% per annum.
Terms for specific drawdown instruments issued under the Chang Hwa Bank 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 separate loan contracts (each, a “Loan Contract”) negotiated with Chang Hwa Bank. On the Chang Hwa Bank Effective Date, three Loan Contracts were entered into. None of the 3 Loan Contracts are secured and there are no financial covenants. The Company is not a guarantor under Chang Hwa Bank Credit Facility.
SMCI | 2022 Form 10-K | 80
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
HSBC Bank
HSBC Bank Credit Facility
On January 7, 2022 (the “HSBC Bank Effective Date”), the Company, through its Taiwan subsidiary, entered into a General Loan, Export/Import Financing, Overdraft Facilities and Securities Agreement (the “Loan Agreement”) with a Taiwan affiliate of HSBC Bank (“HSBC Bank”). The Loan Agreement provides for borrowings in the form of loans, export/import financings, overdrafts, commercial paper guaranties, and other types of drawdown instruments. The Loan Agreement has customary default provisions permitting HSBC Bank to terminate or reduce the credit limit, shorten the credit period, or deem all liabilities due and payable, including in the event the Company’s Taiwan subsidiary fails to make payment of sums under another agreement which permits acceleration of maturity of such indebtedness. The Company is not a guarantor of the Loan Agreement.
Terms for specific drawdown instruments issued under the Loan Agreement, such as credit amount, term of use, mode of drawdown, specific lending rate, and other relevant terms, may be set forth in facility letters (each, a “Facility Letter”) negotiated with HSBC Bank. Under a Facility Letter entered into on the HSBC Bank Effective Date, the Company’s Taiwan subsidiary and HSBC Bank agreed to a $30.0 million export/seller trade facility under the Loan Agreement with a tenor of 120 days. The interest rate thereunder is based on HSBC Bank’s base rate plus a fixed margin, subject to adjustment under certain circumstances. Interest payments are due on a monthly basis, and principal is repayable on the due date.
As of June 30, 2022, the outstanding borrowings under the 2022 HSBC Bank Credit Facility revolving line of credit were $30.0 million. The interest rates for these loans ranged from 1.95% to 2.20% per annum as of June 30, 2022. As of June 30, 2022, there was no amount available for future borrowing under the 2022 HSBC Bank Credit Facility.
Cathay Bank
Cathay Bank Line of Credit
On May 19, 2022 (the “Cathay Bank Effective Date”), the Company entered into a Loan Agreement (the “Cathay Bank Loan Agreement”) with Cathay Bank (“Cathay Bank”) pursuant to which Cathay Bank has agreed to provide a revolving line of credit of up to $132 million (the “Commitment”) for the five-year period following the Cathay Bank Effective Date. On the fifth anniversary of the Cathay Bank Effective Date, the total outstanding borrowings under the Cathay Bank Loan Agreement will automatically be converted into a five-year term loan. The interest rate under the Cathay Bank Loan Agreement is based upon either the SOFR index or prime rate index, at the Company’s quarterly election, plus a tiered spread that is based upon the average amounts deposited by the Company at Cathay Bank as a percentage of the Commitment. The spread is either 1.65% or 2.0% if the index is SOFR index, or 1.25% or 1.00% if the spread is the prime rate index with the higher spread applying in each case if an amount less than 25% of the Commitment is on deposit with Cathay Bank. Interest is payable monthly during the five-year period following the Cathay Bank Effective Date. After conversion to a term loan on the fifth anniversary of the Cathay Bank Effective Rate, interest is payable monthly based on a 20-year amortization schedule with the unpaid balance due at maturity. The Cathay Bank Loan Agreement has customary default provisions and is cross defaulted with other indebtedness to the extent such default causes a material adverse effect with respect to the Commitment. The Company is required to comply with certain covenants, including maintaining a fixed charge coverage ratio of at least 1.15:1.00. The Company is required to pay Cathay Bank an unused facility fee in the amount of 0.15% per annum of the undrawn Commitment payable quarterly in arrears.
Borrowings under the Loan Agreement are secured against certain of the Company’s properties located in San Jose, California (the “Collateral”). The Company has agreed to indemnify the Bank with respect to certain environmental matters with respect to the Collateral. The Collateral is subject to re-appraisal every two years at the election of the Bank, and the Bank reserves the right to reduce the Commitment in accordance with such appraised values. As of June 30, 2022, the outstanding borrowings under the Cathay Bank line of credit were $30.0 million.
SMCI | 2022 Form 10-K | 81
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Principal payments on short-term and long-term debt obligations are due as follows (in thousands):
|
| | | |
Fiscal Year: | Principal Payments |
2021 | $ | 23,704 |
|
2022 | 0 |
|
2023 | 68 |
|
2024 | 814 |
|
2025 | 814 |
|
2026 and thereafter | 4,001 |
|
Total short-term and long-term debt | $ | 29,401 |
|
| | | | | |
Fiscal Year: | Principal Payments |
2023 | $ | 449,146 | |
2024 | 36,404 | |
2025 | 39,769 | |
2026 | 39,769 | |
2027 | 14,855 | |
2028 and thereafter | 16,821 | |
Total short-term and long-term debt | $ | 596,764 | |
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 11.10. Other Long-term Liabilities
Other long-term liabilities as of June 30, 20202022 and 20192021 consisted of the following (in thousands):
| | | | | | | | | | | |
| June 30, |
| 2022 | | 2021 |
Accrued unrecognized tax benefits including related interest and penalties, non-current | $ | 18,866 | | | $ | 17,841 | |
Operating lease liability, non-current | 16,661 | | | 14,539 | |
Accrued warranty costs, non-current | 3,064 | | | 2,678 | |
Other | 549 | | | 6,074 | |
Total other long-term liabilities | $ | 39,140 | | | $ | 41,132 | |
|
| | | | | | | |
| June 30, |
| 2020 | | 2019 |
Operating lease liability, non-current | $ | 18,102 |
| | $ | 0 |
|
Accrued unrecognized tax benefits including related interest and penalties | 15,496 |
| | 20,102 |
|
Accrued warranty costs, non-current | 2,395 |
| | 2,373 |
|
Others | 6,002 |
| | 3,708 |
|
Total other long-term liabilities | $ | 41,995 |
| | $ | 26,183 |
|
Note 12.11. Leases
Upon adoption of the new lease accounting guidance, the Company recognized operating lease liabilities of approximately $15.2 million based on the present value of the remaining minimum rental payments using an incremental borrowing rate of approximately 4%. The Company also recognized corresponding operating lease ROU assets of approximately $14.8 million. The difference relates to adjustments made to operating lease ROU assets for prepaid rent and deferred rent that existed as of the date of adoption. These operating lease ROU assets relate toleases offices, warehouses and other premises, leased under non-cancelable operating leases expiring through June 2026 and vehicles and certain equipment leased under non-cancelable operating leases expiring through August 2023.
leases. Operating lease expense recognized, and supplemental cash flow information related to operating leases for the years ended June 30, 20202022 and 20192021 were as follows (in thousands):
|
| | | | |
| | Years Ended June 30, |
| | 2020 |
Operating lease expense (including expense for lease agreements with related parties of $1,421 and $0 for the years ended June 30, 2020 and 2019, respectively) | | $ | 6,993 |
|
Cash payments for operating leases (including payments to related parties of $1,443 and $0 for the years ended June 30, 2020 and 2019, respectively) | | $ | 6,411 |
|
New operating lease assets obtained in exchange for operating lease liabilities | | $ | 15,229 |
|
| | | | | | | | | | | |
| Years Ended June 30, |
| 2022 | | 2021 |
Operating lease expense (including expense for lease agreements with related parties of $711 and $1,319 for the years ended June 30, 2022 and 2021, respectively) | $ | 8,265 | | | $ | 7,827 | |
Cash payments for operating leases (including payments to related parties of $766 and $1,351 for the years ended June 30, 2022 and 2021, respectively) | 8,007 | | | 7,966 | |
New operating lease assets obtained in exchange for operating lease liabilities | 11,151 | | | 3,538 | |
During the years ended June 30, 20202022 and 2019,2021, 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, 2022, 2021 and 2020 2019were $1.1 million, $1.8 million and 2018 were $1.3 million, $0.0 million and $0.0 million respectively.
SMCI | 2022 Form 10-K | 82
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of June 30, 2020,2022, the weighted average remaining lease term for operating leases was 4.63.8 years and the weighted average discount rate was 3.5%3.0%. Maturities of operating lease liabilities under noncancelable operating lease arrangements as of June 30, 20202022, were as follows (in thousands):
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
|
| | | | |
Fiscal Year: | | Maturities of operating leases |
2021 | | $ | 7,073 |
|
2022 | | 5,696 |
|
2023 | | 4,246 |
|
2024 | | 4,221 |
|
2025 | | 4,309 |
|
2026 and beyond | | 956 |
|
Total future lease payments | | $ | 26,501 |
|
Less: Imputed interest | | (2,089 | ) |
Present value of operating lease liabilities | | $ | 24,412 |
|
| | | | | | | | |
Fiscal Year: | | Maturities of operating leases |
2023 | | $ | 7,721 | |
2024 | | 6,525 | |
2025 | | 6,136 | |
2026 | | 2,602 | |
2027 | | 1,550 |
2028 and beyond | | 533 | |
Total future lease payments | | $ | 25,067 | |
Less: Imputed interest | | (1,267) | |
Present value of operating lease liabilities | | $ | 23,800 | |
As of June 30, 2019, prior to the adoption of the new lease accounting guidance, future minimum payments under operating leases having initial or remaining non-cancelable lease terms in excess of one year were as follows (in thousands):
|
| | | | |
Fiscal Year: | | Minimum lease payments |
2020 | | $ | 6,582 |
|
2021 | | 3,831 |
|
2022 | | 2,439 |
|
2023 | | 1,175 |
|
2024 | | 1,166 |
|
2025 and beyond | | 2,279 |
|
Total minimum lease payments | | $ | 17,472 |
|
As of June 30, 2020,2022, commitments under short-term lease and financing lease arrangements were immaterial. As of June 30, 2020,and operating and financing leases that have not yet commenced were immaterial.
The Company has entered into lease agreements with related parties. See Part II, Item 8, Note 13,12, "Related Party Transactions,"Transactions" for a further discussion.
Note 13.12. 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.Board. Steve Liang and his family members owned approximately 28.8% of Ablecom’s stock and Charles Liang and his spouse, Sara Liu, who is also an officer and director of the Company, collectively owned approximately 10.5% of Ablecom’s capital stock as of June 30, 2020. 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, 2020.2022. Bill Liang, a brother of both Charles Liang and Steve Liang, 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. Charles Liang or Sara Liu do not own any capital stock of Compuware and the Company does not own any of Ablecom or Compuware's capital stock.
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 other components. Ablecom manufactured approximately 95.5%88.2%, 96.3%91.8% and 97.0%95.5% of the chassis included in the products sold by the Company during fiscal years 2020, 20192022, 2021 and 20182020, 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.
SMCI | 2022 Form 10-K | 83
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
With respect to the manufacturing aspects of the relationship, Ablecom purchases most of materials needed to manufacture the chassis from third 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.
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 cancellable and non-cancellable purchase orders from the Company to Ablecom on June 30, 2022 were $23.2$39.5 million and $31.0$36.0 million, atrespectively, and outstanding cancellable and non-cancellable purchase orders from the Company to Ablecom on June 30, 20202021 were $44.9 million and 2019,$40.2 million, respectively, effectively 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 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
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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.costs, including overhead and labor. 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.
SMCI | 2022 Form 10-K | 84
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 cancellable and non-cancellable purchase orders from the Company to Compuware on June 30, 2022 were $45.7$213.3 million and $70.6$44.3 million, atrespectively, and outstanding cancellable and non-cancellable purchase orders from the Company to Compuware on June 30, 20202021 were $123.3 million and 2019,$71.0 million, respectively, effectively 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, 2020, 2019, and 2018 are as follows (in thousands):
|
| | | | | | | | | | | |
| Years Ended June 30, |
| 2020 | | 2019 | | 2018 |
Ablecom | | | | | |
Purchases (1) | $ | 160,084 |
| | $ | 145,273 |
| | $ | 152,332 |
|
| | | | | |
Compuware | | | | | |
Net sales | $ | 23,867 |
| | $ | 17,651 |
| | $ | 46,921 |
|
Purchases (1) | 131,763 |
| | 139,579 |
| | 119,548 |
|
__________________________
(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, 2020, 2019, and 2018.
The Company had the following balances related to transactions with Ablecom and Compuware as of June 30, 2020 and 2019 (in thousands):
|
| | | | | | | |
| June 30, |
| 2020 | | 2019 |
Ablecom | | | |
Accounts receivable and other receivables (1) | $ | 6,379 |
| | $ | 7,236 |
|
Accounts payable and accrued liabilities (2) | 40,056 |
| | 33,928 |
|
Other long-term liabilities (3) | 513 |
| | 0 |
|
| | | |
Compuware | | | |
Accounts receivable and other receivables (1) | 14,323 |
| | 14,396 |
|
Accounts payable and accrued liabilities (2) | 46,518 |
| | 34,417 |
|
Other long-term liabilities (3) | 186 |
| | 0 |
|
__________________________Dealings with Investment in a Corporate Venture
(1) Other receivables include receivables from vendors.
(2) Includes current portion of operating lease liabilities.
(3) Represents non-current portion of operating lease liabilities.
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 located in China to expand the Company's presence in China. The Corporate Venture whichis 30% owned by the Company and 70% owned by another company in China. The transaction was closed in the third fiscal quarter of 2017 and the investment is accounted for using the equity method. See Note 8, "InvestmentAs such, the Corporate Venture is also a related party.
The Company recorded a deferred gain related to the contribution of certain technology rights. As of June 30, 2022 and 2021, the Company had unamortized deferred gain balance of $0.0 million and $1.0 million, respectively, in a Corporate Venture" for a discussion ofaccrued liabilities and none in other long-term liabilities in the Company’s consolidated balance sheets.
The Company monitors the investment for events or circumstances indicative of potential impairment and makes appropriate reductions in carrying values if it determines that an impairment charge is required. In June 2020, the transactionsthird-party parent company that took place duringcontrols 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, 2022. No impairment charge was recorded for the fiscal years ended June 30, 2022 and 2021.
The Company sold products worth $121.0 million, $51.2 million, $61.9 million to the Corporate Venture in the fiscal years 2022, 2021 and 2020, 2019,respectively, and 2018.the Company's share of intra-entity profits on the products that remained unsold by the Corporate Venture as of June 30, 2022 and June 30, 2021 have been eliminated and have reduced the carrying value of the Company's investment in the Corporate Venture. To the extent that the elimination of intra-entity profits reduces the investment balance below zero, such amounts are recorded within accrued liabilities. The Company had $8.0 million and $8.5 million due from the Corporate Venture in accounts receivable, net as of June 30, 2022 and 2021, respectively.
Dealings with Monolithic Power Systems, Inc.
The Company procures certain semiconductor products from Monolithic Power Systems, Inc. (“MPS”), a fabless manufacturer of high-performance analog and mixed-signal semiconductors, through its contract manufacturers for use in its products. A member of the Board of Directors, who served during fiscal year 2022 until May 18, 2022, also serves as an officer of MPS.
SMCI | 2022 Form 10-K | 85
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company had the following balances related to transactions with its related parties as of the fiscal years ended June 30, 2022, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ablecom | | Compuware | | Corporate Venture | | MPS | | Total |
| Years Ended June 30, | | Years Ended June 30, | | Years Ended June 30, | | Years Ended June 30, | | Years Ended June 30, |
| 2022 | 2021 | 2020 | | 2022 | 2021 | 2020 | | 2022 | 2021 | 2020 | | 2022 | 2021 | 2020 | | 2022 | 2021 | 2020 |
Accounts receivable | $ | 2 | | $ | 2 | | $ | (27) | | | $ | 404 | | $ | 198 | | $ | 938 | | | $ | 7,992 | | $ | 8,478 | | $ | 7,801 | | | $ | — | | $ | — | | $ | — | | | $ | 8,398 | | $ | 8,678 | | $ | 8,712 | |
Other receivable (1) | $ | 4,816 | | $ | 5,575 | | $ | 6,406 | | | $ | 19,596 | | $ | 18,173 | | $ | 13,385 | | | $ | — | | $ | — | | $ | — | | | $ | — | | $ | 89 | | $ | — | | | $ | 24,412 | | $ | 23,837 | | $ | 19,791 | |
Accounts payable | $ | 42,463 | | $ | 38,152 | | $ | 36,955 | | | $ | 44,892 | | $ | 31,944 | | $ | 35,413 | | | $ | — | | $ | — | | $ | — | | | $ | — | | $ | — | | $ | — | | | $ | 87,355 | | $ | 70,096 | | $ | 72,368 | |
Accrued liabilities (2) | $ | 3,531 | | $ | 3,042 | | $ | 3,101 | | | $ | 15,145 | | $ | 14,486 | | $ | 11,105 | | | $ | — | | $ | 1,000 | | $ | 2,000 | | | $ | — | | $ | — | | $ | — | | | $ | 18,676 | | $ | 18,528 | | $ | 16,206 | |
(1)Other receivables include receivables from vendors included in prepaid and other current assets.
(2)Includes current portion of operating lease liabilities included in other current liabilities.
The Company's results from transactions with its related parties for each of the fiscal years ended June 30, 2022, 2021 and 2020, are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ablecom | | Compuware | | Corporate Venture | | MPS | | Total |
| Years Ended June 30, | | Years Ended June 30, | | Years Ended June 30, | | Years Ended June 30, | | Years Ended June 30, |
| 2022 | 2021 | 2020 | | 2022 | 2021 | 2020 | | 2022 | 2021 | 2020 | | 2022 | 2021 | 2020 | | 2022 | 2021 | 2020 |
| | | | | | | | | | | | | | | | | | | |
Net sales | $ | 15 | | $ | (23) | | $ | (7) | | | $ | 26,085 | | $ | 27,865 | | $ | 23,867 | | | $ | 120,991 | | $ | 51,176 | | $ | 61,899 | | | $ | — | | $ | — | | $ | — | | | $ | 147,091 | | $ | 79,018 | | $ | 85,759 | |
Purchases - inventory | $ | 192,441 | | $ | 122,243 | | $ | 152,464 | | | $ | 170,300 | | $ | 113,400 | | $ | 130,592 | | | $ | — | | $ | — | | $ | — | | | $ | 8,335 | | $ | 3,915 | | $ | 5,215 | | | $ | 371,076 | | $ | 239,558 | | $ | 288,271 | |
Purchases - other miscellaneous items | $ | 8,265 | | $ | 8,609 | | $ | 7,620 | | | $ | 1,455 | | $ | 1,813 | | $ | 1,171 | | | $ | — | | $ | — | | $ | — | | | $ | — | | $ | — | | $ | — | | | $ | 9,720 | | $ | 10,422 | | $ | 8,791 | |
SMCI | 2022 Form 10-K | 86
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company’s cash flow impact from transactions with its related parties for the fiscal years ended June 30, 2022, 2021 and 2020, are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ablecom | | Compuware | | Corporate Venture | | MPS | | Total |
| Years Ended June 30, | | Years Ended June 30, | | Years Ended June 30, | | Years Ended June 30, | | Years Ended June 30, |
| 2022 | 2021 | 2020 | | 2022 | 2021 | 2020 | | 2022 | 2021 | 2020 | | 2022 | 2021 | 2020 | | 2022 | 2021 | 2020 |
| | | | | | | | | | | | | | | | | | | |
Changes in accounts receivable | $ | — | | $ | (29) | | $ | 42 | | | $ | (206) | | $ | 740 | | $ | (623) | | | $ | 486 | | $ | (677) | | $ | 5,308 | | | $ | — | | $ | — | | $ | — | | | $ | 280 | | $ | 34 | | $ | 4,727 | |
Changes in other receivable | $ | 759 | | $ | 832 | | $ | 816 | | | $ | (1,423) | | $ | (4,788) | | $ | 695 | | | $ | — | | $ | — | | $ | — | | | $ | 89 | | $ | (13) | | $ | — | | | $ | (575) | | $ | (3,969) | | $ | 1,511 | |
Changes in accounts payable | $ | 4,311 | | $ | 1,198 | | $ | 5,709 | | | $ | 12,948 | | $ | (3,470) | | $ | 6,850 | | | $ | — | | $ | — | | $ | — | | | $ | — | | $ | — | | $ | — | | | $ | 17,259 | | $ | (2,272) | | $ | 12,559 | |
Changes in accrued liabilities | $ | 489 | | $ | (59) | | $ | 419 | | | $ | 659 | | $ | 3,381 | | $ | 5,251 | | | $ | (1,000) | | $ | (1,000) | | $ | — | | | $ | — | | $ | — | | $ | — | | | $ | 148 | | $ | 2,322 | | $ | 5,670 | |
Changes in other long-term liabilities | $ | — | | $ | (513) | | $ | 513 | | | $ | 499 | | $ | (186) | | $ | 186 | | | $ | — | | $ | (1,000) | | $ | (2,000) | | | $ | — | | $ | — | | $ | — | | | $ | 499 | | $ | (1,699) | | $ | (1,301) | |
Purchases of property, plant and equipment | $ | 4,678 | | $ | 7,110 | | $ | 4,384 | | | $ | 140 | | $ | 237 | | $ | 2 | | | $ | — | | $ | — | | $ | — | | | $ | — | | $ | — | | $ | — | | | $ | 4,818 | | $ | 7,347 | | $ | 4,386 | |
Unpaid property, plant and equipment | $ | 583 | | $ | 338 | | $ | 2,158 | | | $ | 106 | | $ | 62 | | $ | 65 | | | $ | — | | $ | — | | $ | — | | | $ | — | | $ | — | | $ | — | | | $ | 689 | | $ | 400 | | $ | 2,223 | |
Tripartite Agreement
On November 8, 2021, Super Micro Computer Inc., Taiwan (the “Subsidiary”), a Taiwan corporation and wholly-owned subsidiary of the Company, entered into a Tripartite Agreement (the “Agreement”) with Ablecom and Compuware related to a three-way purchase of land.
Pursuant to the Agreement, the Subsidiary will participate in purchasing 33.33% of the 137,225.97 square meters (approximately 34 acres) of land Ablecom has agreed to acquire from third-party landowners in proximity to the Company’s campus in Bade, Taiwan. Compuware will acquire 17.21% of such land and Ablecom will retain the remaining 49.46% of the land. Under the Agreement, fees and costs related to such land purchase would be borne by the parties according to their proportionate share of the land purchased. The Company intends to fund its proportionate share of the land purchased under the Agreement which is estimated to be approximately NTD 789.0 million (or approximately US $28.3 million) from either available cash and/or borrowings under loan agreements to which the Subsidiary is a party in Taiwan. Amounts payable related to the purchase of the land are due in 3 installments based upon the achievement of specified milestones. The transaction is subject to various customary conditions precedent, including the receipt of government approvals, the discharge of mortgages and leases on the land, and the completion of due diligence. As of June 30, 2022, due diligence and discussions with government officials are continuing, and no installment payments have been made with respect to the transaction. If the transaction does not close within 12 months, Ablecom may offer the land to other parties.
Note 14.13. Stock-based Compensation and Stockholders’ Equity
Equity Incentive Plan
On June 5, 2020, the stockholders of the Company approved the 2020 Equity and Incentive Compensation Plan (the "2020"Original 2020 Plan"). The maximum number of shares available under the Original 2020 Plan iswas 5,000,000 plus 1,045,000 shares of common stock that remained available for future awards under the 2016 Equity Incentive Plan (the “2016 Plan”), at the time of adoption of the Original 2020 Plan. NaNNo other awards can be granted under the 2016 Plan and 7,246,000 shares of common stock remain reserved for outstanding awards issued under the Original 2016 Plan at the time of adoption of the Original 2020 Plan. On May 18, 2022, the stockholders of the Company approved an amendment and restatement of the Original 2020 Plan (as amended and restated, the “2020 Plan”) which, among other things, increased the number of shares available for award under the 2020 Plan by an additional 2,000,000 shares.
SMCI | 2022 Form 10-K | 87
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Under the 2020 Plan, the Company can grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, dividend equivalents, and certain other awards, including those denominated or payable in, or otherwise based on, the Company’s common stock. The exercise price per share for incentive stock options granted to employees owning shares representing more than 10% of the Company's outstanding voting stock at the time of grant cannot be less than 110% of the fair value of the underlying shares on the grant date. Nonqualified stock options and incentive stock options granted to all other persons are granted at a price not less than 100% of the fair value. Options generally expire ten years after the date of grant. Stock options and RSUs generally vest over four years; 25% at the end of one year and one sixteenth per quarter thereafter.
As of June 30, 2020,2022, the Company had 5,249,1983,604,025 authorized shares available for future issuance under the 2020 Plan.
Common Stock Repurchase and Retirement
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 was effective until July 31, 2022 or if earlier, until the maximum amount of common stock is repurchased (the "Prior Repurchase Program"). 1,391,171 shares of common stock were repurchased and retired for an aggregate $50.0 million as of June 30, 2021. The Company had $150.0 million of remaining availability under the Prior Repurchase Program as of June 30, 2022. There were no shares repurchased under the Prior Repurchase Program during fiscal year 2022.
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.
On August 3, 2022, after the expiration of the Prior Repurchase Program, a duly authorized subcommittee of the Company's Board approved a new share repurchase program to repurchase shares of common stock for up to $200 million at prevailing prices in the open market. The share repurchase program is effective until January 31, 2024 or until the maximum amount of common stock is repurchased, whichever occurs first.
Determining Fair Value
The Company's fair value of RSUs and PRSUs is based on the closing market price of the Company's common stock on the date of grant. The Company estimates the fair value of stock options granted using the Black-Scholes-option-pricing model. This fair value is then amortized ratably over the requisite service periods of the awards, which is generally the vesting period. The key inputs in using the Black-Scholes-option-pricing model were as follows:
Expected Term—The Company’s expected term represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on the Company's historical experience.
Expected Volatility—Expected volatility is based on the Company's 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.
SMCI | 2022 Form 10-K | 88
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The fair value of stock option grants for the fiscal years ended June 30, 2020, 20192022, 2021 and 20182020 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| | | | | | | | | | | | | | | | | |
| Years Ended June 30, |
| 2022 | | 2021 | | 2020 |
Risk-free interest rate | 0.81% - 3.02% | | 0.27% - 1.09% | | 0.47% - 1.72% |
Expected term | 6.09 years | | 5.98 years | | 6.27 years |
Dividend yield | — | % | | — | % | | — | % |
Volatility | 49.69% - 50.13% | | 50.03% - 50.43% | | 49.61% - 50.46% |
Weighted-average fair value | $ | 20.25 | | | $ | 14.92 | | | $ | 9.59 | |
|
| | | | | | | | | | | |
| Years Ended June 30, |
| 2020 | | 2019 | | 2018 |
Risk-free interest rate | 0.47% - 1.72% |
| | 2.32% - 2.97% |
| | 1.92% - 2.86% |
|
Expected term | 6.27 years |
| | 6.05 years |
| | 5.82 years |
|
Dividend yield | 0 | % | | 0 | % | | 0 | % |
Volatility | 49.61% - 50.46% |
| | 47.34% - 50.28% |
| | 45.32% - 48.07% |
|
Weighted-average fair value | $ | 9.59 |
| | $ | 9.25 |
| | $ | 10.98 |
|
The following table shows total stock-based compensation expense included in the consolidated statements of operations for the fiscal years ended June 30, 2020, 20192022, 2021 and 20182020 (in thousands):
| | | Years Ended June 30, | | Years Ended June 30, |
| 2020 | | 2019 | | 2018 | | 2022 | | 2021 | | 2020 |
Cost of sales | $ | 1,504 |
| | $ | 1,663 |
| | $ | 1,812 |
| Cost of sales | $ | 1,876 | | | $ | 1,762 | | | $ | 1,504 | |
Research and development | 12,202 |
| | 12,981 |
| | 13,893 |
| Research and development | 16,571 | | | 14,030 | | | 12,202 | |
Sales and marketing | 1,680 |
| | 1,805 |
| | 1,980 |
| Sales and marketing | 2,058 | | | 2,022 | | | 1,680 | |
General and administrative | 4,803 |
| | 4,735 |
| | 6,971 |
| General and administrative | 12,311 | | | 10,735 | | | 4,803 | |
Stock-based compensation expense before taxes | 20,189 |
| | 21,184 |
| | 24,656 |
| Stock-based compensation expense before taxes | 32,816 | | | 28,549 | | | 20,189 | |
Income tax impact | (6,814 | ) | | (4,349 | ) | | (6,902 | ) | Income tax impact | (12,220) | | | (8,574) | | | (6,814) | |
Stock-based compensation expense, net | $ | 13,375 |
| | $ | 16,835 |
| | $ | 17,754 |
| Stock-based compensation expense, net | $ | 20,596 | | | $ | 19,975 | | | $ | 13,375 | |
As of June 30, 2020, $5.52022, $12.5 million of unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 2.193.41 years $31.2and $56.5 million of unrecognized compensation cost related to unvested RSUs is expected to be recognized over a weighted-average period of 2.52 years and $0.52.78 years. Additionally, as described below, $5.6 million of unrecognized compensation cost related to unvested PRSUsthe 2021 CEO Performance Stock Option is expected to be recognized over a period of 0.90 year.3.0 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 trading day average stock price), 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.
SMCI | 2022 Form 10-K | 89
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The achievement status of the operational and stock price milestones as of June 30, 2022, was as follows:
| | | | | | | | | | | | | | | | | | | | |
Annualized Revenue Milestone | | Achievement Status | | Stock Price Milestone | | Achievement Status |
(in billions) | | | | | | |
$4.0 | | Achieved | | $45 | | Achieved(1) |
$4.8 | | Achieved(2) | | $60 | | Not yet achieved |
$5.8 | | Probable | | $75 | | Not yet achieved |
$6.8 | | Probable | | $95 | | Not yet achieved |
$8.0 | | Probable | | $120 | | Not yet achieved |
(1)The Company’s Compensation Committee had certified achievement of the $4 billion annualized revenue milestone on March 26, 2022. The $45 stock price milestone was achieved based upon the 60-trading day average stock price from March 15, 2022 through June 8, 2022. The achievement of such stock price milestone and the vesting of the first tranche of 200,000 option shares under the 2021 CEO Performance Stock Option, representing one-fifth of such award were certified by the Company's Compensation Committee subsequent to June 30, 2022.
(2)To be certified by the Company's Compensation Committee after Annual Report on Form 10-K for the year ended June 30, 2022, as filed with the SEC.
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, 2022, the Company recognized compensation expense related to the 2021 CEO Performance Stock Option of $7.1 million. As of June 30, 2022, $5.6 million in unrecognized compensation cost related to the 2021 CEO Performance Stock Option is expected to be recognized over a period of 3.0 years.
SMCI | 2022 Form 10-K | 90
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes stock option activity during the fiscal years ended June 30, 2020, 20192022, 2021 and 20182020 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, 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 | | | | | |
Granted | | 489,940 | | | $ | 40.23 | | | | | |
Exercised | | (1,197,756) | | | $ | 17.82 | | | | | |
Forfeited/Cancelled | | (156,322) | | | $ | 30.47 | | | | | |
Balance as of June 30, 2022 | | 4,311,416 | | | $ | 29.99 | | | 5.60 | | $ | 50,010 | |
| | | | | | | | |
Options vested and exercisable at June 30, 2022 | | 2,497,977 | | | $ | 22.24 | | | 3.31 | | $ | 45,232 | |
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
|
| | | | | | | | | | | | | |
| | 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, 2017 | | 8,375,659 |
| | $ | 15.88 |
| | | | |
Granted | | 489,705 |
| | $ | 23.58 |
| | | | |
Exercised | | (267,970 | ) | | $ | 11.36 |
| | | | |
Forfeited/Cancelled | | (296,256 | ) | | $ | 15.36 |
| | | | |
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 |
| | 4.07 | | $ | 50,245 |
|
Options vested and exercisable at June 30, 2020 | | 4,723,734 |
| | $ | 19.25 |
| | 3.46 | | $ | 44,932 |
|
The total pretax intrinsic value of options exercised during the fiscal year ended June 30, 2022, 2021 and 2020 2019was $29.6 million, $24.3 million and 2018 was $19.3 million, $0 and $4.0 million, respectively. Additional information regarding options outstanding as of June 30, 2020,2022, 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 - $14.23 | | 479,265 | | | 1.72 | | $ | 12.22 | | | 469,819 | | | $ | 12.20 | |
$14.95 - $20.37 | | 459,117 | | | 4.13 | | $ | 18.34 | | | 417,757 | | | $ | 18.42 | |
$20.54 - $22.10 | | 491,131 | | | 3.08 | | $ | 21.19 | | | 475,696 | | | $ | 21.20 | |
$22.15 - $25.44 | | 486,997 | | | 4.48 | | $ | 24.28 | | | 404,847 | | | $ | 24.48 | |
$26.60 - $30.33 | | 559,007 | | | 4.91 | | $ | 27.91 | | | 478,856 | | | $ | 27.50 | |
$33.36 - $37.88 | | 432,552 | | | 5.95 | | $ | 35.81 | | | 214,674 | | | $ | 35.20 | |
$38.50 - $41.25 | | 351,827 | | | 9.28 | | $ | 39.99 | | | 34,231 | | | $ | 38.67 | |
$42.35 - $42.35 | | 8,390 | | | 3.82 | | $ | 42.35 | | | 2,097 | | | $ | 42.35 | |
$45.00 - $45.00 | | 1,000,000 | | | 8.67 | | $ | 45.00 | | | — | | | $ | — | |
$53.04 - $53.04 | | 43,130 | | | 9.85 | | $ | 53.04 | | | — | | | $ | — | |
$9.24 - $53.04 | | 4,311,416 | | | 5.60 | | $ | 29.99 | | | 2,497,977 | | | $ | 22.24 | |
|
| | | | | | | | | | | | | | | | |
| | 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 - $11.76 | | 613,268 |
| | 2.35 | | $ | 10.26 |
| | 613,268 |
| | $ | 10.26 |
|
12.37 - 13.67 | | 554,260 |
| | 2.62 | | $ | 13.01 |
| | 489,132 |
| | $ | 13.01 |
|
14.23 - 15.22 | | 583,989 |
| | 2.84 | | $ | 14.65 |
| | 559,995 |
| | $ | 14.64 |
|
15.54 - 17.60 | | 588,616 |
| | 3.69 | | $ | 17.29 |
| | 454,312 |
| | $ | 17.20 |
|
17.69 - 18.93 | | 776,839 |
| | 2.65 | | $ | 18.51 |
| | 776,839 |
| | $ | 18.51 |
|
20.37 - 22.05 | | 546,617 |
| | 5.61 | | $ | 20.93 |
| | 385,163 |
| | $ | 20.98 |
|
22.10 - 25.44 | | 786,440 |
| | 6.40 | | $ | 23.98 |
| | 562,458 |
| | $ | 24.51 |
|
26.60 - 28.45 | | 652,579 |
| | 5.66 | | $ | 27.15 |
| | 606,617 |
| | $ | 27.09 |
|
28.71 - 37.06 | | 249,160 |
| | 4.76 | | $ | 34.28 |
| | 247,950 |
| | $ | 34.31 |
|
39.19 | | 28,000 |
| | 4.62 | | $ | 39.19 |
| | 28,000 |
| | $ | 39.19 |
|
$9.24 - $39.19 | | 5,379,768 |
| | 4.07 | | $ | 19.38 |
| | 4,723,734 |
| | $ | 19.25 |
|
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. The first award was a one-year PRSU and the second award was a two-year PRSU.
82SMCI | 2022 Form 10-K | 91
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
RSU and PRSU Activity
The one-year PRSUs were earned based on the Company’s performance as it related to a revenue growth metric and a minimum non-GAAP operating margin metric during the fiscal year ended June 30, 2018 with eligibility up to 200% of the targeted number of units based on revenue growth if the minimum non-GAAP operating margin was achieved. Upon achievement of the performance metrics, 50% of the PRSUs vested at June 30, 2018 while the remainder vest in equal amounts over the following ten quarters if the Company's Chief Executive Officer continued to be employed during those ten quarters. In December 2019, the Compensation Committee of the Company's Board of Directors determined that the Company achieved the revenue and non-GAAP operating margin metrics for the fiscal year ended June 30, 2018 at a level that entitled the Chief Executive Officer to 200% of the originally targeted number of shares subject to the one-year PRSU. 50% of the PRSUs so earned were vested as of June 30, 2018, and an additional 40% of the PRSUs vested during the eight quarters ended June 30, 2020, in accordance with the terms of the grant.
The two-year PRSUs are earned based on the Company’s performance for the average non-GAAP operating margin metric for the two fiscal years ended June 30, 2019 with eligibility up to 100% of the targeted number of units. If the performance metrics were met, 50% of the PRSUs would have vested at June 30, 2019 while the remainder would have been vested in equal amounts over the following ten quarters if the Chief Executive Officer continued to be employed during those ten quarters. In December 2019, the Compensation Committee of the Board determined that the Company did not achieve the required performance metrics for the two-year PRSUs and none of the two-year PRSUs vested.
In March 2020, the Compensation Committee granted a PRSU award to one of the Company's senior executives. The award vests in two2 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 vesthave vested in November 2021. NaNNo additional units were earned for fiscal year 2020 as revenue decreased from fiscal year 2019. An additional 2,939 units were earned for fiscal year 2021 that vested on November 10, 2021.
The following table summarizes RSUs and PRSUs activity during the fiscal years ended June 30, 20202022, and 20192021 under all plans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Time-based RSUs Outstanding | | Weighted Average Grant-Date Fair Value per Share | | PRSUs Outstanding | | | Weighted Average Grant-Date Fair Value per Share |
Balance as of June 30, 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 | | | — | | | | 0 |
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 | |
Granted | | 1,121,451 | | | $ | 38.99 | | | 2,939 | | | | $ | 34.27 | |
Released(1) | | (745,702) | | | $ | 25.16 | | | (17,939) | | | | $ | 34.27 | |
Forfeited | | (351,632) | | | $ | 30.19 | | | — | | | | $ | — | |
Balance as of June 30, 2022 | | 1,879,073 | | | $ | 33.72 | | | — | | | | $ | — | |
|
| | | | | | | | | | | | | | | |
| | 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, 2017 | | 1,226,357 |
| | $ | 26.11 |
| | 0 |
| | | |
Granted | | 986,680 |
| | $ | 21.90 |
| | 120,000 |
| (1) | | $ | 27.10 |
|
Released (2) | | (572,789 | ) | | $ | 26.34 |
| | 0 |
| | | |
Forfeited | | (159,643 | ) | | $ | 24.90 |
| | 0 |
| | | |
Balance as of June 30, 2018 | | 1,480,605 |
| | $ | 23.34 |
| | 120,000 |
| | | $ | 27.10 |
|
Granted | | 1,086,911 |
| | $ | 18.37 |
| | 0 |
| | | |
Released (2) | | (549,886 | ) | | $ | 24.87 |
| | 0 |
| | | |
Forfeited | | (144,528 | ) | | $ | 20.25 |
| | 0 |
| | | |
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 (2) | | (871,274 | ) | | $ | 20.97 |
| | (108,000 | ) | | | $ | 27.10 |
|
Forfeited | | (177,451 | ) | | $ | 19.49 |
| | 0 |
| | | |
Balance as of June 30, 2020 | | 1,768,027 |
| | $ | 20.08 |
| | 42,000 |
| | | $ | 22.29 |
|
__________________________
| |
(1) | Reflects the number of PRSUs that have been earned based on the achievement of performance metrics. |
| |
(2) | (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. The number of vested but not released RSUs for fiscal year 2020 was not material. The number of shares released also excludes 24,000 and 60,000 PRSUs that were vested but not released in fiscal years 2019 and 2018, respectively. 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. |
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The total pretax intrinsic value of RSUs and PRSUs vested was $18.9$33.1 million, $14.3$32.6 million and $16.8$18.9 million for the fiscal years ended June 30, 2020, 20192022, 2021 and 2018,2020, respectively. In fiscal years 2020, 20192022, 2021 and 2018,2020, the Company withheld 331,648, 175,044232,461, 274,620 and 199,715331,648 shares with value equivalent to the employees' minimum statutory obligation for the applicable income and other employment taxes from the vesting and release of 979,274, 549,886763,641, 1,011,406 and 572,789979,274 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 tax authorities were $8.2$10.1 million, $3.1$8.7 million and $4.5$8.2 million for the fiscal years ended June 30, 2020, 20192022, 2021 and 2018,2020, respectively, and are reflected as a financing activity within the consolidated statements of cash flows. Pursuant to the terms of the 2020 and 2016 Plan, shares withheld in connection with net-share settlements are returned to the 2020 and 2016 Plan, respectively, and are available for future grants under the 20162020 Plan.
SMCI | 2022 Form 10-K | 92
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 15.14. Income Taxes
The components of income before income tax provision for the fiscal years ended June 30, 2020, 20192022, 2021 and 20182020 are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended June 30, |
| 2022 | | 2021 | | 2020 |
United States | $ | 250,513 | | | $ | 80,922 | | | $ | 35,701 | |
Foreign | 86,320 | | | 37,706 | | | 49,127 | |
Income before income tax provision | $ | 336,833 | | | $ | 118,628 | | | $ | 84,828 | |
|
| | | | | | | | | | | |
| Years Ended June 30, |
| 2020 | | 2019 | | 2018 |
United States | $ | 35,701 |
|
| $ | 45,126 |
|
| $ | 39,394 |
|
Foreign | 49,127 |
|
| 44,397 |
|
| 48,821 |
|
Income before income tax provision | $ | 84,828 |
|
| $ | 89,523 |
|
| $ | 88,215 |
|
The income tax provision for the fiscal years ended June 30, 2020, 20192022, 2021 and 2018,2020, consists of the following (in thousands):
| | | Years Ended June 30, | | Years Ended June 30, |
| 2020 | | 2019 | | 2018 | | 2022 | | 2021 | | 2020 |
Current: | | | | | | Current: | | | | | |
Federal | $ | 4,568 |
| | $ | 12,308 |
| | $ | 11,090 |
| Federal | $ | 34,711 | | | $ | 3,406 | | | $ | 4,568 | |
State | 1,727 |
| | 2,917 |
| | 815 |
| State | 4,327 | | | 1,077 | | | 1,727 | |
Foreign | 10,399 |
| | 16,531 |
| | 12,984 |
| Foreign | 20,495 | | | 10,843 | | | 10,399 | |
| 16,694 |
| | 31,756 |
| | 24,889 |
| | 59,533 | | | 15,326 | | | 16,694 | |
Deferred: | | | | | | Deferred: | | | | | |
Federal | (10,108 | ) | | (13,078 | ) | | 14,304 |
| Federal | (4,030) | | | (5,489) | | | (10,108) | |
State | (1,621 | ) | | (2,888 | ) | | 265 |
| State | (257) | | | (409) | | | (1,621) | |
Foreign | (2,043 | ) | | (906 | ) | | (1,015 | ) | Foreign | (2,370) | | | (2,492) | | | (2,043) | |
| (13,772 | ) | | (16,872 | ) | | 13,554 |
| | (6,657) | | | (8,390) | | | (13,772) | |
Income tax provision | $ | 2,922 |
| | $ | 14,884 |
| | $ | 38,443 |
| Income tax provision | $ | 52,876 | | | $ | 6,936 | | | $ | 2,922 | |