UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Securities registered pursuant to section 12(g) of the Act:

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

The aggregate market value of the registrant’s Common Stockcommon stock held by non-affiliates, based upon the closing price of the Common Stockcommon stock on December 31, 2015,2019, as reported by the NASDAQ Global SelectOTC Market, was $1,312,866,144.$1,057,388,840. Shares of Common Stockcommon stock held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock,common stock, based on filings with the Securities and Exchange Commission, have been

 

    

This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended that involve risks and uncertainties. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology including “would,” “could,” “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of these terms or other comparable terminology. In evaluating these statements, you should specifically consider various factors, including the risks described below, under “ItemPart I, Item 1A, Risk“Risk Factors”, and in other parts of this Form 10-K as well as in our other filings with the SEC. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Annual Report on Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

    

Item 1.        Business

We are a global leader inSilicon Valley-based provider of application-optimized high performance high efficiencyand high-efficiency server technology and innovation. We develop and provide end-to-end green computing solutions to thestorage systems for a variety of markets, including enterprise data centers, cloud computing, data center, enterprise IT, big data, high performance computing, or HPC,artificial intelligence, 5G and Internet of Things, or IoT,/ embedded markets.edge computing. Our solutions range frominclude complete server,servers, storage systems, modular blade andservers, blades, workstations, to full racks, networking devices, server management software, and technologyserver sub-systems. We also provide global support and services.services to help our customers install, upgrade and maintain their computing infrastructure. We offer our customers a high degree of flexibility and customization by providing what we believe to be the industry’s broadesta broad array of server configurations from which they can choose the optimal solution which fitsbest solutions to fit their computing needs. Our server and storage systems, subsystems and accessories are architecturally designed to provide high levels of reliability, quality, configurability, and scalability, thereby enabling our customers to benefit from improvements in compute performance, density, thermal management and power efficiency which lead to lower overall total cost of ownership.scalability.

Strategy

Our objective is to be the world’s leading provider of application optimized, high performanceapplication-optimized, high-performance server, storage and networking solutions worldwide.solutions. Achieving this objective requires continuous development and innovation of our solutions with better price performanceprice-performance and architectural advantages compared with both our prior generation of solutions and thewith solutions ofoffered by our competitors as well as solutions which expand the breadth of our coverage of data center needs. We believe that many of these product innovations are gaining momentum based on the strong year-over-year revenue growth across these next-generation products. We believe thatcompetitors. Through our strategy, and our abilitywe seek to innovate and execute may enable us to maintain or improve our relative competitive position in many of our product areas and improve our competitive position in others while providingpursue markets that provide us with severaladditional long-term growth opportunities. Key elements of our strategy include:include executing upon the following:

We believe oneare continually investing in our engineering organization. As of our major competitive advantages is our ability to rapidly incorporate the latest computing innovations into our products. We intend to maintain our time-to-market advantage by continuing our investmentJune 30, 2020, we employed over 1,700 persons in our research and development effortsorganization. These resources, along with our understanding of complex computing and storage requirements, enable us to rapidly developdeliver product innovation featuring advanced functionality and capabilities required by our customers. Also, substantially all of our servers are tested and assembled in our facilities, and more than half of our final server and storage production is completed in San Jose, California. Our engineering aptitude, coupled with our internal manufacturing capability, enables rapid prototyping and product roll-out, contributing to a high level of responsiveness to our customers.

We seek to sustain advantages in both time-to-market and breadth of products incorporating the latest technological innovations, such as new proprietary server,processors, advancements in storage and networking solutions basedevolving I/O technologies. We seek these advantages by leveraging our in-house design capabilities and our Building Block Solutions ® architecture. This allows us to offer customers a broad choice of products to match their target application requirements. For example, in early February 2020, we introduced over 100 new systems in support of Intel’s introduction of its second-generation Xeon Scalable processor.

Capitalizing on industry standard components. We planNew Applications and Technologies

In addition to serving traditional needs for server and storage systems, we have devoted, and will continue to work closely with technology partners such as Intel Coporation ("Intel"), Advanced Micro Devices, Inc. ("AMD")devote, substantial resources to developing systems that support emerging and Nvidia Corporation ("Nvidia"), among others,growing applications including cloud computing, artificial intelligence, 5G/edge computing and others. We believe there are significant opportunities for us in each of these rapidly developing markets due to develop productsstringent design requirements for these applications that are compatible withoften require the use of the latest generation of industry standard technologies. We believe these efforts will allowtechnologies, allowing us to continueleverage our capabilities in product innovation, superior time-to-market, and portfolio breadth.

Driving Software and Services Sales to offerour Global Enterprise Customers

We seek to grow our global enterprise revenue by bolstering and expanding our software management products that lead in price for performance as each generationand support services. These software products and services are important because the uptime requirements and need to extend the functionality of computing innovations becomes available.

We plan to continue to increase our overseasworldwide manufacturing capacity and logistics capabilitiesabilities in the United States, the Netherlands and Taiwan and continue our effort toward optimizing the efficiency of our global tax structure by expanding our reach geographically in order to more efficiently serve our customers and lower our overall manufacturing costs. We have recently started to increase our manufacturing capacity in Taiwan to diversify our operating base and taxoptimize relatively low labor costs as compared to the United States. In addition, Taiwan has been less affected by COVID-19, which makes it a well-suited manufacturing location for our Asia and export operations and will also lower our logistics costs.

Products and Services

We offer a broad range of application optimizedapplication-optimized server solutions, including storage, rackmount and blade server systemsservers, storage, and subsystems and accessories, which customers can usebe used to build complete server and storage systems. These solutions and products are designed to serve a variety of markets, such as enterprise data centers, cloud computing, artificial intelligence (“AI”), 5G/edge computing. The percentage of our net sales represented by sales of server and storage systems decreased to 78.5% in fiscal year 2020 from 81.7% in fiscal year 2019 and from 79.3% in fiscal year 2018, and the percentage of our net sales represented by

We sell server and storage systems in rackmount, standalone tower, blade, Twin and multi-node form factors. As of June 30, 2016, we offered over 1,200 different server systems. A summary of some of our server systems are listed below:factors, which support single, dual, and multiprocessor architectures. Our key product lines include:

We seekOn December 22, 2017, the U.S. federal government enacted the Tax Cuts and Jobs Act (“2017 Tax Reform Act”). As a result of the 2017 Tax Reform Act, we recorded a one-time write down of our U.S. deferred tax assets and liabilities resulting from the U.S. federal corporate income tax rate decrease from 35% to structure21%, and a one-time transition tax, in our worldwideincome tax provision for the fiscal year ended June 30, 2018. Subsequent to the implementation of the 2017 Tax Reform Act, in December 2019, we realigned our international business operations and group structure to take advantage of certain international tax planning opportunities and incentives. Our future effective income tax rates could be adversely affected if tax authorities challenge our international tax structure or if the relative mix of our United States and international income changes for any reason, or if United Statesdue to changes in U.S. or international tax laws were to change in the future.laws. In particular, a substantial portion of our revenue is generated from customers located outside the United States Foreign withholding taxesStates.

The effectiveness of our tax planning activities is based upon certain assumptions that we make regarding our future operating performance and United States income taxes have not been provided on undistributed earnings for certain non-United States subsidiaries, because such earnings are intendedtax laws. We continue to be indefinitely reinvested in theoptimize our tax structure to align with our business operations of those subsidiaries. In the past, the administration has considered initiatives which could substantially reduce our ability to defer United States taxes including: limitations on deferral of United States taxation of foreign earnings eliminate utilization or substantially reduce our ability to claim foreign tax credits, and eliminate various tax deductions until foreign earnings are repatriated to the United States. If any of these proposals are constituted into law, they could have a negative impact on our financial position and results of operations.growth strategy. We cannot assure you that we will be able to lower our effective tax rate as a result of theseour current or future tax planning activities nor that such rate will not increase in the future.

The market in which we participate is highly competitive, and if we do not compete effectively, we may not be able to increase our market penetration, grow our net sales or improve our gross margins.

The market for server and storage solutions is intensely competitive and rapidly changing. The market continues to evolve with the growth of public cloud shifting server and storage purchasing from traditional data centers to lower margin public cloud vendors. Barriers to entry in our market are relatively low and we expect increased challenges from existing as well as new competitors. Some of our principal competitors offer server solutions at a lower price, which has resulted in pricing pressures on sales of our server solutions. We expect further downward pricing pressure from our competitors and expect that we will have to price some of our server and storage solutions aggressively to increase our market share with respect to those products or geographies, particularly for internet data center and cloud customers and other large sale opportunities. If we are unable to maintain the margins on our server and storage solutions, our operating results could be negatively impacted. In addition, if we do not develop new innovative server solutions, or enhance the reliability, performance, efficiency and other features of our existing server and storage solutions, our customers may turn to our competitors for alternatives. In addition, pricing pressures and increased competition generally may also result in reduced sales, less efficient utilization of our manufacturing operations, lower margins or the failure of our products to achieve or maintain widespread market acceptance, any of which could have a material adverse effect on our business, results of operations and financial condition.

Our principal competitors include global technology companies such as Cisco, Dell, Inc., Hewlett-Packard Enterprise, LenovoHuawei, and Cisco.Lenovo. In addition, we also compete with a number of other vendors who also sell application optimized servers, contract manufacturers and original design manufacturers or ODMs,(“ODMs”), such as Inspur, Quanta Computer, Incorporated.and Wiwynn Corporation. ODMs sell server solutions marketed or sold under a third partythird-party brand.

Many of our competitors enjoy substantial competitive advantages, such as:

Some of our current or potential ODM competitors are also currently or have in the past been suppliers to us. As a result, they may possess sensitive knowledge or experience which may be used against us competitively and/or which may require us to alter our supply arrangements or sources in a way which could adversely impact our cost of sales or results of operations.

Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. Competitors may seek to copy our innovations and use cost advantages from greater size to compete aggressively with us on price. Certain customers are also current or prospective competitors and as a result, assistance that we provide to them as customers may ultimately result in increased competitive pressure against us.

We expect that our direct sales force will continue to grow as larger customers increasingly require a direct sales approach. Competition for direct sales personnel with the advanced sales skills and technical knowledge we need is intense.intense, and we face significant competition for direct sales personnel from our competitors. Our ability to grow our revenue in the future will depend, in large part, on our success in recruiting, training, retaining and successfully managing sufficient qualified direct sales personnel. We have traditionally experienced much greater turnover in our sales and marketing personnel as compared to other departments and other companies. New hires require significant training and may take six months or longer before they reach full productivity. Our recent hires and planned hires may not become as productive as we would like, and we may be unable to hire sufficient numbers of qualified individuals in the future in the markets where we do business. If we are unable to hire, develop and retain sufficient numbers of productive sales personnel, our customer relationships and resulting sales of our server solutions will suffer.

We must work closely with our suppliers to make timely new product introductions.

We rely on our close working relationships with our suppliers, including Intel, AMD and Nvidia, to anticipate and deliver new products on a timely basis when new generation materials and corekey components are made available. Intel, AMD and Nvidia are the only suppliers of the microprocessors we use in our server systems. If we are not able to maintain our relationships with our suppliers or continue to leverage their research and development capabilities to develop new technologies desired by our customers, our ability to quickly offer advanced technology and product innovations to our customers would be impaired. We have no long term agreements that obligate our suppliers to continue to work with us or to supply us with products.

We need our material and corekey component suppliers, such as Intel, AMD and Nvidia, to provide us with core components that are innovative, reliable and attractive to our customers. Due to the pace of innovation in our industry, many of our customers may delay or reduce purchase decisions until they believe that they are receiving best of breed products that will not be rendered obsolete by an impending technological development. Accordingly, demand for new server and storage systems that incorporate new products and features is significantly impacted by our suppliers’ new product introduction schedules and the functionality, performance and reliability of those new products. If our materials and corekey component suppliers fail to deliver new and improved materials and core 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.

Certain raw materials used in the manufacture of our products are available from a limited number of suppliers. Shortages could occur in these essential materials due to an interruption of supply, including interruptions on the global supply chain in connection with COVID-19, or increased demand in the industry. One of our suppliers accounted for 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. Ablecom and Compuware, related parties, accounted for 10.1%, 9.2% and 9.0% of our total cost of sales for the fiscal years ended June 30, 2020, 2019 and 2018, respectively. If any of our largest suppliers discontinue their operations or if our relationships with them are adversely impacted, we expect that we may be exposed to greater customer credit risks.

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 third party distributors and resellersour indirect sales channel accounted for 44.8%53.1%, 50.3%39.3% and 54.1%41.5% of our net sales in fiscal years 2016, 20152020, 2019 and 2014,2018, respectively. We depend on our distributorsindirect 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. To maintain and potentially increase our revenue and profitability, we will have to successfully preserve and

The discontinuation of cooperative marketing arrangements or pricing concessions could have a negative effect on our business.business, results of operations and financial condition. Our distributorsindirect 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 with distributorsin our indirect sales channel or expand our distribution channelschannel or we experience unexpected changes in payment terms, inventory levels or other practices byin our distributors,indirect sales channel, our business will suffer.

Our strategy is to focus on being consistently rapid-to-marketfirst-to-market with flexible and customizableapplication 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 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 a vendorcertain vendors have provided us with a defective capacitorcomponents that failed under certain heavy use applications. As a result, our productproducts needed to be repaired. Though the vendor agreed to pay for a large percentage of the costs of the repairs,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 server solutions,products, which could result in a decrease in revenue, an increase in our provision for doubtful accounts an increaseor 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 solutions.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.

    

We use Ablecom, a related party, for contract design and manufacturing coordination support.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 12.8%10.1%, 13.6%9.2%, and 16.3%9.0% of our cost of sales for fiscal years 2016, 20152020, 2019 and 2014,2018, respectively. Ablecom’sAblecom and Compuware’s sales to us constitute a substantial majority of Ablecom’sAblecom and Compuware’s net sales. Ablecom is aand Compuware are both privately-held Taiwan-based company.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.Board”). Steve Liang owned no shares of our common stock as of June 30, 2020, 2019 or 2018. Charles Liang and his spouse, Chiu-Chu (Sara)Sara Liu, Liang, our Co-Founder, Senior Vice President of Operations, Treasurer and director, jointly ownowned approximately 10.5% of Ablecom’s outstanding commoncapital stock, while Mr. Steve Liang and other family members own 36.0%owned approximately 28.8% of Ablecom’s outstanding common stock. Mr. and Mrs.stock as of June 30, 2020. Bill Liang, a brother of both Charles Liang as directors, officers and significant stockholdersSteve Liang, is a member of the Company, haveBoard of Directors of Ablecom as well.

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 theirthe economic interests of Mr. Charles Liang and Ms. Sara Liu as stockholders of Ablecom and theirMr. Charles

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 Steve Liang ceases to have significant influence over Ablecom or if those of our stockholders who hold sharesCompuware are acquired or sold, new ownership could reassess the business and strategy of Ablecom cease to haveor Compuware, and as a significant amount of the outstanding shares of Ablecom,result, our supply chain could be disrupted or the terms and conditions of our agreements with Ablecom or Compuware may not be as favorable as those in our existing contracts.change. As a result, our operations could be negatively impacted or costs could increase, andeither 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 theour research and development efforts we are undertaking and continue toefforts. 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 we orour commercial relationship with Ablecom fail to manage the contract manufacturing services and warehouse operations in Asia,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 and power supply 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

Our growth into markets outside the United States exposes us to risks inherent in international business operations.

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:

These factors could limit our future international sales or otherwise adversely impact our operations or our results of operations.

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 past enteredcorporate venture which as of June 30, 2020 and 2019 was $2.7 million and $1.7 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” 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 pleain the future could adversely impact, or result in fluctuations in, our results of operations.

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 settlement agreementswhich contained our audited consolidated balance sheets as of June 30, 2019 and 2018 and the related audited consolidated statements of operations loss, stockholders’ equity and cash flows for the years ended June 30, 2019, 2018 and 2017, along with selected unaudited condensed consolidated financial data for the years ended June 30, 2017 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.

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 relatingofficial” with the intent of improperly influencing the official’s act or decision, inducing the official to violationsact or refrain from acting in violation of exportlawful 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 and related laws; ifregulations 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 future civil or criminal penalties, which may have a material adverse effect on our business or ability to do business outside the United States.

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, resellersindirect sales channel partners or vendors, redesign our products, or pay significant royalties to third parties, and materially harm our business.

Our industry is marked by a large number of patents, copyrights, trade secrets and trademarks and by frequent litigation based on allegations of infringement or other violation of intellectual property rights. Our primary competitors have substantially greater numbers of issued patents than we have which may position us less favorably in the event of any claims or litigation with them. Other third-partiesthird parties have in the past sent us correspondence regarding their intellectual property or filed claims that our products infringe or violate third parties’ intellectual property rights. In addition, increasingly non-operating companies are purchasing patents and bringing claims against technology companies. We have been subject to several such claims and may be subject to such claims in the future.

Successful intellectual property claims against us from others could result in significant financial liability or prevent us from operating our business or portions of our business as we currently conduct it or as we may later conduct it. In addition, resolution of claims may require us to redesign our technology to obtain licenses to use intellectual property belonging to third parties, which we may not be able to obtain on reasonable terms, to cease using the technology covered by those rights, and to indemnify our customers, resellersindirect sales channel partners or vendors. Any claim, regardless of its merits, could be expensive and time consuming to defend against, and divert the attention of our technical and management resources.

If we lose Charles Liang, our President, Chief Executive Officer and Chairman, or any other current key employee or are unable to attract additional key employees, we may not be able to implement our business strategy in a timely manner.

Our future success depends in large part upon the continued service of our current executive management team and other current key employees. In particular, Charles Liang, our President, Chief Executive Officer and Chairman of the Board, is critical to the overall management of our company as well as to the development of our culture and 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.

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 in the past and may continue to experience difficulty in hiring and retaining highly skilled employees with appropriate qualifications. In particular, we are currently working to add personnel in our finance, accounting and general administration departments, which have historically had limited budgets and staffing. 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.

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

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. We do not currentlyWhile we have adopted a comprehensive disaster recovery program and as a result,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. Although we are in the process of preparing suchIn addition, climate change and natural disasters present operational and business risks to all companies on a program, there is no assurance that it will be effective in the event of such a disaster.global scale.

Our operations could involve the use of hazardous and toxicregulated 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 operating results.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 partythird-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.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.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 the restrictions on leadEU eco-design requirements for servers and other hazardous substances applicable to specified electronicdata storage products placed on the market in the European Union (Restriction on the Use of Hazardous Substances Directive 2002/95/EC, also known as the RoHS Directive)(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.business, results of operations and financial condition.

We are also subject to the regulationsSection 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 newer 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. The implementation of theseThese requirements could affect the sourcingcost and availabilityease of sourcing minerals used in the manufacture of semiconductor or other devices. As a result, thereThere 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 andvolatile. In addition, the global markets have experienced increased volatility as a result of the COVID-19 pandemic. The trading price of our common stock

has been and is likely to continue to be subject to wide fluctuations. Factors, in addition to those outlined elsewhere in this filing, that may affect the trading price of our common stock include:

Future sales of shares by existing stockholders could cause our stock price to decline.

Attempts by existing stockholders to sell substantial amounts of our common stock in the public market could cause the trading price of our common stock to decline significantly. All of our shares are eligible for sale in the public market, including shares held by directors, executive officers and other affiliates, sales of which are subject to volume limitations and other requirements under Rule 144 under the Securities Act. In addition, shares subject to outstanding options and reserved for future issuance under our stock option plans are eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements. If these additional shares are sold, or if it is perceived that they will be sold in the public market, the trading price of our common stock could decline.

The concentration of our capital stock ownership with insiders will likely limit your ability to influence corporate matters.

As of August 18, 2016,July 31, 2020, our executive officers, directors, current five percent or greater stockholders and affiliated entities together beneficially owned 44.4%34.8% of our common stock, net of treasury stock. As a result, these stockholders, acting together, will 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:

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

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.

Item 1B.    Unresolved Staff Comments

Additionally, we own 36 acres of land in San Jose, California on which we planthat would allow us to develop and construct a total of five multi-function buildings that will serve asexpand our Green Computing Park. We remodeled one exiting warehouse with approximately 312,000310,000 square feet of storage space and completed the construction of a new manufacturing and warehouse building with approximately 182,000 square feet of manufacturing space in August 2015. In fiscal year 2016,years 2019 and 2020, we continued to engage several contractors for the development and construction of improvements on the property. We plan to completecompleted the construction of a second new manufacturing and warehouse building in the fourthfirst quarter of fiscal year 2017.2018. We financed this development through our operating cash flows and additional borrowings from banks. Refer

See Part II, Item 8, Note 10, “Short-term and Long-term Debt” to Note 7the consolidated financial statements in this Annual Report for a discussion of the Company’s short-term and long-term obligations.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 time to time, we have been involved in various legal proceedings arising from the normal course of business activities. We defend ourselves vigorously against any such claims. In management'smanagement’s opinion, the resolution of any pending matters will not have a material adverse effect on our consolidated financial condition, results of operations or liquidity.

Item 4.        Mine Safety Disclosures

    

Not applicable.

Market Information

 

As of August 18, 2016,July 31, 2020, there were 2630 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

Stock Performance Graph

The following graph compares our cumulative five-year total stockholder return on our common stock with the cumulative return of the NASDAQNasdaq Computer Index, and the NASDAQNasdaq Composite Index and an industry peer group, which both include our common stock,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 comparable period.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.

The graph reflects an investment of $100 (with reinvestment of all dividends, if any) in our common stock, the NASDAQNasdaq Computer Index, the Nasdaq Composite Index and the NASDAQ Composite Index,FY2020 Peer Group, on June 30, 20112015 and itsour relative performance tracked through June 30, 2016.2020. 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.

Recent Sales of Unregistered Securities

None.

Issuer Purchases of Equity Securities

    

None.

Item 6.        Selected Financial Data

The following selected consolidated financial data is qualified by reference to, and should be read in conjunction with our Consolidated Financial Statements and notes thereto in Part II,I, Item 8 and “Management’s7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations" and the consolidated financial statements and the notes thereto included in Part II, Item 7,8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. Our historicalto 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 the results to be expected infor any future period.