UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q



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

For the quarterly period ended ~~December~~March 31, ~~2016~~2020



¨☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-33383

Super Micro Computer, Inc.

(Exact name of registrant as specified in its charter)



Delaware		77-0353939
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

980 Rock Avenue

San Jose, CA95131

(Address of principal executive offices, including zip code)

~~(408)~~ (408) 503-8000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.001 par value per share	SMCI	NASDAQ Global Select Market

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

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes x☒ No ¨☐

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.



Large accelerated filer	x	Accelerated filer¨	☐
Non-accelerated filer¨ ~~(Do not check if a smaller reporting company)~~	☐	Smaller reporting company¨	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x☒

As of ~~January~~April 30, ~~2017~~2020 there were ~~48,295,896~~51,923,646 shares of the registrant’s common stock, $0.001 par value, outstanding, which is the only class of common stock of the registrant issued.

SUPER MICRO COMPUTER, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE ~~SIX~~THREE MONTHS ENDED ~~DECEMBER~~MARCH 31, ~~2016~~2020

TABLE OF CONTENTS



		Page
PART I	FINANCIAL INFORMATION
ITEM 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets as of ~~December~~March 31, ~~2016~~2020 and June 30, ~~2016~~2019	1
	Condensed Consolidated Statements of Operations for the Three and ~~Six~~Nine Months Ended ~~December~~March 31, ~~2016~~2020 and ~~2015~~2019	2
	Condensed Consolidated Statements of Comprehensive Income for the Three and ~~Six~~Nine Months Ended ~~December~~March 31, ~~2016~~2020 and ~~2015~~2019	3
	Condensed Consolidated Statements of ~~Cash Flows~~Stockholders' Equity for the ~~Six~~Three and Nine Months Ended ~~December~~March 31, ~~2016~~2020 and ~~2015~~2019	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2020 and 2019	6
	Notes to Condensed Consolidated Financial Statements	58
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1934
ITEM 3.	Quantitative and Qualitative Disclosures ~~about~~About Market Risk	3245
ITEM 4.	Controls and Procedures	3246
PART II	OTHER INFORMATION
ITEM 1.	Legal Proceedings	3347
ITEM 1A.	Risk Factors	3347
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4648
ITEM 3.	Defaults ~~upon~~Upon Senior Securities	4648
ITEM 4.	Mine Safety Disclosures	4648
ITEM 5.	Other Information	4648
ITEM 6.	Exhibits	4649
	Signatures	4749

Unless the context requires otherwise, the words “Super Micro,” “Supermicro,” “we,” “Company,” “us” and “our” in this document refer to Super Micro Computer, Inc. and where appropriate, our wholly owned subsidiaries. Supermicro, the Company logo and our other registered or common law trademarks, service marks, or trade names appearing in this Quarterly Report on Form 10-Q are the property of Super Micro Computer, Inc. or its affiliates. Other trademarks, service marks, or trade names appearing in this Quarterly Report on Form 10-Q are the property of their respective owners.

Table of Contents

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

SUPER MICRO COMPUTER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

(unaudited)


	December 31,			June 30,			March 31,			June 30,
	2016			2016			2020			2019
ASSETS
Current assets:
Cash and cash equivalents	$	128,752		$	180,964		$	300,859		$	248,164
Accounts receivable, net of allowances of $2,771 and $2,721 at December 31, 2016 and June 30, 2016, respectively (including amounts receivable from a related party of $12,378 and $4,678 at December 31, 2016 and June 30, 2016, respectively)	366,885			288,941
Inventory	599,269			448,980
Prepaid income taxes	5,164			5,682
Prepaid expenses and other current assets	13,738			13,435
Accounts receivable, net of allowances of $10,317 and $8,906 at March 31, 2020 and June 30, 2019, respectively (including amounts receivable from related parties of $11,827 and $13,439 at March 31, 2020 and June 30, 2019, respectively)							333,172			393,624
Inventories							866,226			670,188
Prepaid expenses and other current assets (including receivables from related parties of $21,354 and $21,302 at March 31, 2020 and June 30, 2019, respectively)							148,102			109,795
Total current assets	1,113,808			938,002			1,648,359			1,421,771
Long-term investments	2,643			2,643
Investment in equity investee							—			1,701
Property, plant and equipment, net	193,670			187,949			230,477			207,337
Deferred income taxes-noncurrent	32,255			28,460
Deferred income taxes, net							45,562			41,126
Other assets	7,480			8,546			35,838			10,659
Total assets	$	1,349,856		$	1,165,600		$	1,960,236		$	1,682,594
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable (including amounts due to a related party of $54,278 and $39,152 at December 31, 2016 and June 30, 2016, respectively)	$	341,940		$	249,239
Accrued liabilities	74,331			55,618
Accounts payable (including amounts due to related parties of $55,124 and $59,809 at March 31, 2020 and June 30, 2019, respectively)							$	462,808		$	360,470
Accrued liabilities (including amounts due to related parties of $20,270 and $10,536 at March 31, 2020 and June 30, 2019, respectively)							177,148			114,678
Income taxes payable	1,048			5,172			1,979			13,021
Short-term debt and current portion of long-term debt, net of debt issuance costs	92,443			53,589
Short-term debt							33,158			23,647
Deferred revenue							109,730			94,153
Total current liabilities	509,762			363,618			784,823			605,969
Long-term debt, net of current portion and debt issuance costs	34,732			40,000
Other long-term liabilities	53,001			40,603
Deferred revenue, non-current							95,752			109,266
Other long-term liabilities (including related party balance of $2,871 and $3,000 at March 31, 2020 and June 30, 2019, respectively)							41,266			26,183
Total liabilities	597,495			444,221			921,841			741,418
Commitments and contingencies (Note 9)
Commitments and contingencies (Note 11)
Stockholders’ equity:
Common stock and additional paid-in capital, $0.001 par value
Authorized shares: 100,000,000
Issued shares: 49,627,204 and 48,999,717 at December 31, 2016 and June 30, 2016, respectively	291,275			277,339
Treasury stock (at cost), 1,333,125 and 445,028 shares at December 31, 2016 and June 30, 2016, respectively	(20,491		)	(2,030		)
Authorized shares: 100,000,000; Outstanding shares: 51,915,646 and 49,956,288 at March 31, 2020 and June 30, 2019, respectively
Issued shares: 53,248,771 and 51,289,413 at March 31, 2020 and June 30, 2019, respectively							381,125			349,683
Treasury stock (at cost), 1,333,125 shares at March 31, 2020 and June 30, 2019							(20,491		)	(20,491		)
Accumulated other comprehensive loss	(83		)	(85		)	(166		)	(80		)
Retained earnings	481,499			445,971			677,761			611,903
Total Super Micro Computer, Inc. stockholders’ equity	752,200			721,195			1,038,229			941,015
Noncontrolling interest	161			184			166			161
Total stockholders’ equity	752,361			721,379			1,038,395			941,176
Total liabilities and stockholders’ equity	$	1,349,856		$	1,165,600		$	1,960,236		$	1,682,594

See accompanying notes to condensed consolidated financial statements.

Table of Contents

SUPER MICRO COMPUTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)


	Three Months Ended December 31,						Six Months Ended December 31,						Three Months Ended March 31,						Nine Months Ended March 31,
	2016			2015			2016			2015			2020			2019			2020			2019
Net sales (including related party sales of $7,003 and $2,492 in the three months ended December 31, 2016 and 2015, respectively, and $10,345 and $7,712 in the six months ended December 31, 2016 and 2015, respectively)	$	651,954		$	638,964		$	1,180,922		$	1,158,582
Cost of sales (including related party purchases of $64,930 and $71,451 in the three months ended December 31, 2016 and 2015, respectively, and $115,135 and $130,712 in the six months ended December 31, 2016 and 2015, respectively)	558,576			532,602			1,007,480			980,005
Net sales (including related party sales of $21,528 and $17,590 in the three months ended March 31, 2020 and 2019, respectively, and $70,974 and $48,849 in the nine months ended March 31, 2020 and 2019, respectively)													$	772,408		$	743,499		$	2,443,155		$	2,646,126
Cost of sales (including related party purchases of $60,387 and $62,624 in the three months ended March 31, 2020 and 2019, respectively, and $200,753 and $215,331 in the nine months ended March 31, 2020 and 2019, respectively)													639,048			631,172			2,040,462			2,282,638
Gross profit	93,378			106,362			173,442			178,577			133,360			112,327			402,693			363,488
Operating expenses:
Research and development	34,033			30,264			67,224			58,590			49,586			44,800			154,730			133,718
Sales and marketing	18,153			16,461			34,069			30,710			21,886			18,494			64,057			56,463
General and administrative	9,429			10,511			20,184			18,711			46,342			36,174			107,680			106,214
Total operating expenses	61,615			57,236			121,477			108,011			117,814			99,468			326,467			296,395
Income from operations	31,763			49,126			51,965			70,566			15,546			12,859			76,226			67,093
Interest and other income, net	45			24			74			111
Other income (expense), net													937			(86		)	2,110			707
Interest expense	(497		)	(400		)	(827		)	(724		)	(518		)	(1,271		)	(1,630		)	(5,480		)
Income before income tax provision	31,311			48,750			51,212			69,953			15,965			11,502			76,706			62,320
Income tax provision	9,315			14,061			15,684			21,565
Income tax benefit (provision)													899			(497		)	(9,782		)	(10,540		)
Share of loss from equity investee, net of taxes													(1,057		)	(359		)	(1,066		)	(3,572		)
Net income	$	21,996		$	34,689		$	35,528		$	48,388		$	15,807		$	10,646		$	65,858		$	48,208
Net income per common share:
Basic	$	0.46		$	0.73		$	0.74		$	1.02		$	0.31		$	0.21		$	1.30		$	0.97
Diluted	$	0.43		$	0.67		$	0.69		$	0.94		$	0.29		$	0.21		$	1.26		$	0.94
Weighted-average shares used in calculation of net income per common share:
Basic	48,124			47,651			48,144			47,584			51,526			49,988			50,591			49,845
Diluted	51,521			51,489			51,352			51,405			53,693			51,558			52,399			51,557

See accompanying notes to condensed consolidated financial statements.

Table of Contents

SUPER MICRO COMPUTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

Three Months Ended
December 31, Six Months Ended
December 31,
2016 2015 2016 2015
Net income $ 21,996
$ 34,689
$ 35,528
$ 48,388
Other comprehensive income, net of tax:
Foreign currency translation gains (losses) (7 ) 2
2
(16 )
Unrealized gains (losses) on investments —
—
—
—
Total other comprehensive gains (losses) (7 ) 2
2
(16 )
Comprehensive income $ 21,989
$ 34,691
$ 35,530
$ 48,372



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

See accompanying notes to condensed consolidated financial statements.

SUPER MICRO COMPUTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share amounts)

(unaudited)



Three Months Ended March 31, 2020	Common Stock and Additional Paid-In Capital					Treasury Stock					Accumulated Other Comprehensive Loss			Retained Earnings		Non-controlling Interest		Total Stockholders’ Equity
	Shares		Amount			Shares		Amount			Accumulated Other Comprehensive Loss			Retained Earnings		Non-controlling Interest		Total Stockholders’ Equity
Balance at December 31, 2019	51,923,260		$	360,060		(1,333,125	)	$	(20,491	)	$	(135	)	$	661,954	$	165	$	1,001,553
Exercise of stock options, net of shares withheld for withholding taxes	1,163,309		19,120			—		—			—			—		—		19,120
Release of common stock shares upon vesting of restricted stock units	262,742		—			—		—			—			—		—		—
Shares withheld for the withholding tax on vesting of restricted stock units	(100,540	)	(2,860		)	—		—			—			—		—		(2,860		)
Stock-based compensation	—		4,805			—		—			—			—		—		4,805
Foreign currency translation loss	—		—			—		—			(31		)	—		—		(31		)
Net income	—		—			—		—			—			15,807		1		15,808
Balance at March 31, 2020	53,248,771		$	381,125		(1,333,125	)	$	(20,491	)	$	(166	)	$	677,761	$	166	$	1,038,395



Three Months Ended March 31, 2019	Common Stock and Additional Paid-In Capital					Treasury Stock					Accumulated Other Comprehensive Loss			Retained Earnings		Non-controlling Interest		Total Stockholders’ Equity
	Shares		Amount			Shares		Amount			Accumulated Other Comprehensive Loss			Retained Earnings		Non-controlling Interest		Total Stockholders’ Equity
Balance at December 31, 2018	51,136,062		$	341,070		(1,333,125	)	$	(20,491	)	$	(72	)	$	577,547	$	157	$	898,211
Release of common stock shares upon vesting of restricted stock units	118,617		—			—		—			—			—		—		—
Shares withheld for the withholding tax on vesting of restricted stock units	(39,640	)	(722		)	—		—			—			—		—		(722		)
Stock-based compensation	—		4,960			—		—			—			—		—		4,960
Foreign currency translation gain	—		—			—		—			60			—		—		60
Net income	—		—			—		—			—			10,646		3		10,649
Balance at March 31, 2019	51,215,039		$	345,308		(1,333,125	)	$	(20,491	)	$	(12	)	$	588,193	$	160	$	913,158

See accompanying notes to condensed consolidated financial statements.

SUPER MICRO COMPUTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share amounts)

(unaudited)



Nine Months Ended March 31, 2020	Common Stock and Additional Paid-In Capital					Treasury Stock					Accumulated Other Comprehensive Loss			Retained Earnings		Non-controlling Interest		Total Stockholders’ Equity
	Shares		Amount			Shares		Amount			Accumulated Other Comprehensive Loss			Retained Earnings		Non-controlling Interest		Total Stockholders’ Equity
Balance at June 30, 2019	51,289,413		$	349,683		(1,333,125	)	$	(20,491	)	$	(80	)	$	611,903	$	161	$	941,176
Exercise of stock options, net of shares withheld for withholding taxes	1,447,296		23,053			—		—			—			—		—		23,053
Release of common stock shares upon vesting of restricted stock units	771,721		—			—		—			—			—		—		—
Shares withheld for the withholding tax on vesting of restricted stock units	(259,659	)	(6,434		)	—		—			—			—		—		(6,434		)
Stock-based compensation	—		14,823			—		—			—			—		—		14,823
Foreign currency translation loss	—		—			—		—			(86		)	—		—		(86		)
Net income	—		—			—		—			—			65,858		5		65,863
Balance at March 31, 2020	53,248,771		$	381,125		(1,333,125	)	$	(20,491	)	$	(166	)	$	677,761	$	166	$	1,038,395



Nine Months Ended March 31, 2019	Common Stock and Additional Paid-In Capital					Treasury Stock					Accumulated Other Comprehensive Gain (Loss)			Retained Earnings		Non-controlling Interest		Total Stockholders’ Equity
	Shares		Amount			Shares		Amount			Accumulated Other Comprehensive Gain (Loss)			Retained Earnings		Non-controlling Interest		Total Stockholders’ Equity
Balance at June 30, 2018	50,914,571		$	331,550		(1,333,125	)	$	(20,491	)	$	165		$	532,271	$	157	$	843,652
Cumulative effective adjustment from adoption of standards, net of taxes	—		—			—		—			—			7,714		—		7,714
Release of common stock shares upon vesting of restricted stock units	439,379		—			—		—			—			—		—		—
Shares withheld for the withholding tax on vesting of restricted stock units	(138,911	)	(2,323		)	—		—			—			—		—		(2,323		)
Stock-based compensation	—		16,081			—		—			—			—		—		16,081
Foreign currency translation loss	—		—			—		—			(177		)	—		—		(177		)
Net income	—		—			—		—			—			48,208		3		48,211
Balance at March 31, 2019	51,215,039		$	345,308		(1,333,125	)	$	(20,491	)	$	(12	)	$	588,193	$	160	$	913,158

See accompanying notes to condensed consolidated financial statements.

Table of Contents

SUPER MICRO COMPUTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



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

Table of Contents

Six Months Ended
December 31,
2016 2015
OPERATING ACTIVITIES:
Net income $ 35,528
$ 48,388
Reconciliation of net income to net cash provided by (used in) operating activities:
Depreciation and amortization 7,711
5,953
Stock-based compensation expense 9,213
7,882
Excess tax benefits from stock-based compensation (745 ) (355 )
Allowance for doubtful accounts 356
805
Provision for inventory 6,391
3,780
Exchange loss (gain) 232
(1,539 )
Deferred income taxes (3,791 ) (4,380 )
Changes in operating assets and liabilities:
Accounts receivable, net (including changes in related party balances of $(7,700) and $6,702 during the six months ended December 31, 2016 and 2015, respectively) (78,300 ) 7,613
Inventory (156,680 ) (26,818 )
Prepaid expenses and other assets 941
(4,259 )
Accounts payable (including changes in related party balances of $15,126 and $202 during the six months ended December 31, 2016 and 2015, respectively) 96,774
20,738
Income taxes payable, net (3,176 ) 650
Accrued liabilities 18,234
9,715
Other long-term liabilities 12,442
18,749
Net cash provided by (used in) operating activities (54,870 ) 86,922
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (17,372 ) (15,235 )
Change in restricted cash (287 ) (404 )
Net cash used in investing activities (17,659 ) (15,639 )
FINANCING ACTIVITIES:
Proceeds from debt, net of debt issuance costs 130,116
14,400
Repayment of debt (96,552 ) (13,300 )
Payment to acquire treasury stock

(18,461 ) —
Proceeds from exercise of stock options 5,873
2,439
Excess tax benefits from stock-based compensation 745
355
Minimum tax withholding paid on behalf of employees for restricted stock units (1,542 ) (504 )
Payment of obligations under capital leases (118 ) (86 )
Advances (payments) under receivable financing arrangements 787
(18 )
Net cash provided by financing activities 20,848
3,286
Effect of exchange rate fluctuations on cash (531 ) (119 )
Net increase (decrease) in cash and cash equivalents (52,212 ) 74,450
Cash and cash equivalents at beginning of period 180,964
95,442
Cash and cash equivalents at end of period $ 128,752
$ 169,892
Supplemental disclosure of cash flow information:
Cash paid for interest $ 749
$ 693
Cash paid for taxes, net of refunds $ 20,004
$ 19,636
Non-cash investing and financing activities:
Equipment purchased under capital leases $ 86
$ 127
Accrued costs for property, plant and equipment purchases $ 5,325
$ 5,366



Supplemental disclosure of cash flow information:
Cash paid for interest	$	1,651	$	3,402
Cash paid for taxes, net of refunds	42,516		21,657

Non-cash investing and financing activities:
Unpaid property, plant and equipment purchases (including due to related parties of $215 and $1,067 as of March 31, 2020 and 2019, respectively)	$	12,609	$	9,039
Contribution of certain technology rights to equity investee	—		3,000

See accompanying notes to condensed consolidated financial statements.

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Organization and Summary of Significant Accounting Policies

Organization

Super Micro Computer, Inc. (“Super Micro Computer”) was incorporated in 1993. Super Micro Computer is a global leader in server technology and green computing innovation. Super Micro Computer develops and provides high performance server and storage solutions based upon an innovative, modular and open-standard architecture. Super Micro Computer has operations primarily in ~~San Jose, California,~~the United States, the Netherlands, Taiwan, China and Japan.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements ~~reflect~~have been prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP"). The condensed consolidated ~~balance sheets, results of operations, comprehensive income and cash flows~~financial statements of Super Micro Computer ~~Inc.~~include the accounts of Super Micro Computer and ~~its wholly-owned subsidiaries (collectively,~~entities consolidated under the ~~“Company”).~~variable interest model or the voting interest model. Noncontrolling interests are not presented separately in the condensed consolidated statements of operations and condensed consolidated statements of comprehensive income as the amounts are immaterial. All intercompany accounts and transactions of Super Micro Computer and its consolidated entities (collectively, the "Company") have been eliminated in consolidation. Equity investments over which the Company is able to exercise significant influence over the investee but does not control the investee, and is not the primary beneficiary of the investee’s activities are accounted for using the equity method. Investments in equity securities which do not have readily determinable fair values and for which the Company is not able to exercise significant influence over the investee are accounted for under the measurement alternative which is the cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar securities of the same investee.

The unaudited condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the United States Securities and Exchange Commission ~~(“SEC”~~(the “SEC”) ~~and include the accounts of the Company and its wholly-owned subsidiaries.~~. Certain information and footnote disclosures normally included in financial statements prepared in accordance with ~~United States generally accepted accounting principles~~U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the fiscal year ended June 30, 2016 included in its Annual Report on Form 10-K, as filed with the SEC (the “Annual Report”).

The unaudited condensed consolidated financial statements included herein reflect all adjustments, including normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the periods presented. The ~~condensed~~ consolidated results of operations for the three and ~~six~~nine months ended ~~December~~March 31, ~~2016~~2020 are not necessarily indicative of the results that may be expected for future quarters or for the fiscal year ending June 30, ~~2017.~~2020.

~~The Company consolidates its investment in Super Micro Asia Science~~Use of Estimates

U.S. GAAP requires management to make estimates and ~~Technology Park, Inc. as it is a variable interest entity~~assumptions that affect the reported amounts of assets and ~~the Company is the primary beneficiary. The noncontrolling interest is presented as a separate component from the Company's equity in the equity section~~liabilities and disclosure of the condensed consolidated balance sheets. Net income attributable to the noncontrolling interest is not presented separately in the condensed consolidated statements of operations and is included in the general and administrative expenses as the amount is not material for any of the fiscal periods presented.

~~Fair Value of Financial Instruments~~

~~The Company accounts for certain~~contingent assets and liabilities at ~~fair value. Accounts receivable~~the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Such estimates include, but are not limited to: allowances for doubtful accounts ~~payable~~and sales returns, inventory valuation, useful lives of property, plant and equipment, product warranty accruals, stock-based compensation, valuation and recognition of performance awards liability, impairment of investments and long-lived assets, and income taxes. The Company’s estimates are ~~carried at cost, which approximates fair value due to the short maturity of these instruments. Cash equivalents~~evaluated on an ongoing basis and long-term investments 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. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observablechanges in the ~~market.~~estimates are recognized prospectively. Actual results could differ from those estimates. The Company ~~categorizes each~~considered estimates of ~~its fair value measurements~~the economic implications of the coronavirus ("COVID-19") pandemic on our critical and significant accounting estimates, including assessment of collectibility of customer contracts, valuation of accounts receivable, provision for excess and obsolete inventory and impairment of long-lived assets. Collectibility of customer contracts assessment resulted in ~~one~~delaying revenue recognition of ~~these~~$3.4 million for certain orders shipped during the three ~~levels based on~~months ended March 31, 2020.

Revenue Recognition

The Company generates revenues from the ~~lowest level input that is significant to the fair value measurement in its entirety. These levels are:~~sale of server and storage systems, subsystems, accessories, services, server software management solutions, and support services.

~~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.~~

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Product sales. The Company recognizes revenue from sales of products as control is transferred to customers, which generally happens at the point of shipment or upon delivery, unless customer acceptance is uncertain. Products sold by the Company are delivered via shipment from the Company’s facilities or drop shipment directly to its customer from a Company vendor. The Company may use distributors to sell products to end customers. Revenue from distributors is recognized when the distributor obtains control of the product, which generally happens at the point of shipment or upon delivery, unless customer acceptance is uncertain, and in the amount of consideration to which the Company expects to be entitled.

~~Net Income Per Common Share~~

As part of determining the transaction price in contracts with customers, the Company estimates reserves for future sales returns based on a review of its history of actual returns for each major product line. Based upon historical experience, a refund liability is recorded at the time of sale for estimated product returns, with a corresponding decrease in revenue, and an asset is recognized for the amount expected to be recorded in inventory upon product return, less the expected recovery costs, with a corresponding decrease in cost of sales. The Company also reduces revenue for the estimated costs of customer and distributor programs and incentive offerings such as price protection and rebates as well as the estimated costs of cooperative marketing arrangements where the fair value of the benefit derived from the costs cannot be reasonably estimated. Any provision for customer and distributor programs and other discounts is recorded as a reduction of revenue at the time of sale based on an evaluation of the contract terms and historical experience.

Services sales. The Company’s sale of services mainly consists of extended warranty and on-site services. Revenue related to extended warranty commences upon the expiration of the standard warranty period and is recognized ratably over the contractual period as the Company stands ready to perform any required warranty service. Revenue related to on-site services commences upon recognition of the product sale and is recognized ratably over the contractual period as the on-site services are made available to the customer. These service contracts are typically one to five years in length. Service revenue has been less than 10% of net sales for all periods presented and is not separately disclosed.

Contracts with multiple promised goods and services. Certain of the Company’s contracts contain multiple promised goods and services. Performance obligations in a contract are identified based on the promised goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. If these criteria are not met, the promised goods and services are accounted for as a combined performance obligation. Revenue allocated to each performance obligation is recognized at the time the related performance obligation is satisfied by transferring control of the promised good or service to a customer.

If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis. The Company determines standalone selling prices based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information, such as internally approved pricing guidelines with respect to geographies, customer type, internal costs, and gross margin objectives, for the related performance obligations.

When the Company receives consideration from a customer prior to transferring goods or services to the customer, the Company records a contract liability (deferred revenue). The Company also recognizes deferred revenue when it has an unconditional right to consideration (i.e., a receivable) before transfer of control of goods or services to a customer.

The Company considers shipping & handling activities as costs to fulfill the sales of products. Shipping revenue is included in net sales when control of the product is transferred to the customer, and the related shipping and handling costs are included in cost of products sold. Taxes imposed by governmental authorities on the Company's ~~basic~~revenue producing activities with customers, such as sales taxes and value added taxes, are excluded from net sales.

Product Warranties

The Company offers product warranties ranging from 15 to 39 months against any defective products. These standard warranties are assurance type warranties, and the Company does not offer any services beyond the assurance that the product

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

will continue working as specified. Therefore, these warranties are not considered separate performance obligations in the arrangement. Based on historical experience, the Company accrues for estimated repair and replacement of defective products at the time revenue is recognized. The Company monitors warranty obligations and may make revisions to its warranty reserve if actual costs of product repair and replacement are significantly higher or lower than estimated. Accruals for anticipated future warranty costs are charged to cost of sales and included in accrued liabilities and other long-term liabilities. Warranty accruals are based on estimates that are updated on an ongoing basis taking into consideration inputs such as new product introductions, changes in the volume of claims compared with the Company's historical experience, and the changes in the cost of servicing warranty claims. The Company accounts for the effect of such changes in estimates prospectively.

Research and Development

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

Inventories

Inventories are stated at lower of cost, using weighted average cost method, or net realizable value. Net realizable value is the estimated selling price of the Company's products in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Inventories consist of purchased parts and raw materials (principally electronic components), work in process (principally products being assembled) and finished goods. The Company evaluates inventory on a quarterly basis for lower of cost or net realizable value and excess and obsolescence and, as necessary, writes down the valuation of inventories based upon the Company's forecasted usage and sales, anticipated selling price, product obsolescence and other factors. Once inventory is written down, its new value is maintained until it is sold or scrapped.

The Company receives various rebate incentives from certain suppliers based on its contractual arrangements, including volume-based rebates. The rebates earned are recognized as a reduction of cost of inventories and reduce the cost of sales in the period when the related inventory is sold.

Income Taxes

The Company accounts for income ~~per share~~taxes under an asset and liability approach. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax reporting purposes, net operating loss carry-forwards and other tax credits measured by applying enacted tax laws related to the financial statement periods. Valuation allowances are provided when necessary to reduce deferred tax assets to an amount that is ~~computed by dividing net~~more likely than not to be realized.

The Company recognizes tax liabilities for uncertain income bytax positions on the ~~weighted-average number~~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 ~~shares~~being realized upon ultimate settlement with the tax authority. Estimating these amounts requires the Company to determine the probability of ~~common stock outstanding during~~various possible outcomes. The Company evaluates these uncertain tax positions on a quarterly basis. This evaluation is based on the ~~period. Diluted net income per share~~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 ~~computed by dividing net income by~~lower or that the ~~weighted-average number of shares of common stock outstanding~~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 ~~increased~~in which the Company makes such a determination.

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Stock-Based Compensation

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

The fair value of RSUs and PRSUs is based on the closing market price of the Company's common stock on the date of grant. The Company estimates the fair value of stock options granted using a Black-Scholes option pricing model. This model requires the Company to make estimates and assumptions with respect to the expected term of the option and the expected volatility of the price of the Company's common stock. The expected term represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on the Company's historical experience. The expected volatility is based on the historical volatility of the Company’s common ~~stock results~~stock. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.

Leases

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

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

Operating Leases

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

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

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Finance Leases

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

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

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

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

Variable Interest Entities

The Company determines at the inception of each arrangement whether an entity in which the Company holds an investment or in which the Company has other variable interests is considered a variable interest entity ("VIE"). The Company consolidates VIEs when it is the primary beneficiary. The primary beneficiary of a VIE is the party that meets both of the following criteria: (1) has the power to make decisions that most significantly affect the economic performance of the VIE and (2) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE. Periodically, the Company assesses whether any changes in the interest or relationship with the entity affect the determination of whether the entity is still a VIE and, if so, whether the Company is the primary beneficiary. If the Company is not the primary beneficiary in a ~~greater dilutive effect~~VIE, the Company accounts for the investment or other variable interest in accordance with applicable GAAP.

The Company has concluded that Ablecom Technology, Inc. (“Ablecom”) and its affiliate, Compuware Technology, Inc. ("Compuware"), are VIEs in accordance with applicable accounting standards and guidance; however, the Company is not the primary beneficiary with respect to either Ablecom or Compuware as it does not have the power to direct the activities that are most significant to the entities and therefore, the Company does not consolidate these entities. In performing its analysis, the Company considered its explicit arrangements with Ablecom and Compuware, including the supplier arrangements. Also, as a result of the substantial related party relationships between the Company and these entities, the Company considered whether any implicit arrangements exist that would cause the Company to protect those related parties’ interests from ~~outstanding stock options~~suffering losses. The Company determined it has no material implicit arrangements with Ablecom, Compuware or their shareholders.

The Company and ~~RSUs. Additionally,~~Ablecom jointly established Super Micro Asia Science and Technology Park, Inc. (the "Management Company") in Taiwan to manage the ~~exercise~~common areas shared by the Company and Ablecom for its separately constructed and operated manufacturing facilities. In fiscal year 2012, each company contributed $0.2 million and owns 50% of ~~employee stock options~~the Management Company. The Company has concluded that the Management Company is a VIE, and the ~~vesting~~Company is the primary beneficiary as it has the power to direct the activities that are most significant to the Management Company. For the three and nine months ended March 31, 2020 and 2019, the accounts of ~~restricted stock units results~~the Management Company were consolidated with the accounts of Super Micro Computer, and a noncontrolling interest was recorded for Ablecom's interest in the net assets and operations of the Management Company. Net income (loss) attributable to Ablecom's interest was not material for the periods presented and was included in general and administrative expenses in the Company's condensed consolidated statements of operations.

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Investment in a ~~further dilutive effect on net income per share.~~Corporate Venture

~~Recently Issued Accounting Pronouncements~~

In ~~May 2014,~~October 2016, the ~~Financial Accounting Standards Board (“FASB”) issued new accounting guidance,~~ ~~Revenue from Contracts with Customers~~, that replaces all current U.S. GAAP guidance on revenue, eliminates all industry-specific guidance and provides a unified model in determining when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the considerationCompany entered into agreements pursuant to which the ~~entity expects~~Company contributed certain technology rights in connection with an investment in a privately-held company (the "Corporate Venture") located in China to ~~be entitled~~expand the Company's presence in ~~exchange~~China. The Corporate Venture is 30% owned by the Company and 70% owned by a third party in China. The transaction was closed in the third fiscal quarter of 2017 and the investment is accounted for ~~those goods~~using the equity method. As such, the Corporate Venture is also a related party. As of March 31, 2020 and June 30, 2019, the Company's equity investment in the Corporate Venture was $0 and $1.7 million, respectively, and was recorded under investment in equity investee on the Company's condensed consolidated balance sheets. The Company's share of losses, net of taxes, of the Corporate Venture were $1.1 million and $0.4 million for the three months ended March 31, 2020 and 2019, respectively, and $1.1 million and $3.6 million for the nine months ended March 31, 2020 and 2019, respectively, and were recorded as share of loss from equity investee, net of taxes in the Company’s condensed consolidated statements of operations. The Company does not have an obligation or ~~services. Further,~~commitment to share in ~~March 2016,~~losses of the ~~FASB issued an amendment~~Corporate Venture above its investment amounts and will discontinue equity method accounting if the investment carrying value is below zero.

The Company previously recorded a deferred gain related to the ~~accounting guidance,~~ ~~Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net)~~,contribution of certain technology rights of $10.0 million. The amortization of the deferred gain is being recognized as a credit to research and development expenses in the Company's condensed consolidated statement of operations over a period of five years which ~~clarifies~~represents the ~~implementation guidance~~estimated period over which the remaining obligations will be fulfilled. As of March 31, 2020 and June 30, 2019, the Company had unamortized deferred gain balance of $2.5 million and $2.0 million, respectively, in accrued liabilities and $1.5 million and $3.0 million, respectively, in other long-term liabilities in the Company’s condensed consolidated balance sheets.

The Company monitors the investment for ~~principal versus agent considerations.~~ events or circumstances indicative of potential other-than-temporary impairment and makes appropriate reductions in carrying values if it determines that an impairment charge is required. NaN impairment charge was recorded for the three and nine months ended March 31, 2020 and 2019, respectively.

In ~~April 2016,~~addition, the ~~FASB issued an amendment~~Company sells products to the ~~accounting guidance,~~ ~~Revenue from Contracts with Customers: Identifying Performance Obligations~~Corporate Venture. The Company's share of intra-entity profits on the products that remained unsold by the Corporate Venture as of each period end is eliminated and ~~Licensing, which clarifies~~recorded as a reduction of the ~~guidance~~Company's investment balance in the Corporate Venture. To the extent that the elimination of intra-entity profits reduces the investment balance below zero, such amounts are recorded within accrued liabilities. The Company sold products worth $14.0 million and $13.7 million to the Corporate Venture in the three months ended March 31, 2020 and 2019, respectively, and $51.5 million and $35.2 million in the nine months ended March 31, 2020 and 2019, respectively. As of March 31, 2020, the Company recorded $0.5 million related to ~~identifying performance obligations~~unrealized intra-entity profits in accrued liabilities in the Company’s condensed consolidated balance sheet. The Company had $10.4 million and ~~accounting~~$13.1 million due from the Corporate Venture in accounts receivable, net as of March 31, 2020 and June 30, 2019, respectively, in its condensed consolidated balance sheets.

Concentration of Supplier Risk

Certain materials used by the Company in the manufacture of its products are available from a limited number of suppliers. Shortages could occur in these materials due to an interruption of supply or increased demand in the industry. The COVID-19 pandemic has already and may further disrupt our supply chain. One supplier accounted for ~~licenses~~26.1% and 20.1% of ~~intellectual property. In May 2016, the FASB issued an amendment to the accounting guidance,~~ ~~Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients, which clarifies the guidance related to collectibility and non-cash consideration, as well as provides practical expedients~~total purchases for the ~~transition~~three months ended March 31, 2020 and 2019, respectively, and 27.9% and 21.2% for the nine months ended March 31, 2020 and 2019, respectively. Ablecom and Compuware, related parties of the Company as noted in Note 9, "Related Party Transactions," accounted for 9.4% and 9.9% of total cost of sales for the three months ended March 31, 2020 and 2019, respectively, and 9.8% and 9.4% for the nine months ended March 31, 2020 and 2019, respectively.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash and cash equivalents, restricted cash, investment in an auction rate security and accounts receivable. No single customer accounted for 10% or more of the ~~new accounting guidance. This guidance can be applied either retrospectively or as a cumulative-effect adjustment~~net sales for the three and nine months ended March 31, 2020 and 2019. No country other than the United States represented greater than 10% of the Company’s total net sales in the three and nine months ended March 31, 2020 and 2019. No customer accounted for greater than 10% of the Company's accounts receivable, net as of ~~the date~~March 31, 2020, whereas one customer accounted for 17.0% of adoption. Early adoption is permitted for annual periods beginning after December 15, 2016. The new standard is effective for the Company on July 1, 2018. The Company is currently evaluating the effect the guidance will have on its financial statement disclosures, resultsaccounts receivable, net as of ~~operations and financial position. The Company has not yet selected a transition method nor has it determined the effect~~June 30, 2019.

Table of ~~the guidance on its ongoing financial reporting.~~Contents

~~In April 2015, the FASB issued an amendment to the accounting guidance,~~ ~~Interest-Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs.~~ This amendment requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued an amendment to the accounting guidance, ~~Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements.~~ This amendment clarifies that an entity may defer and present debt issuance costs associated with line-of-credit arrangements as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. These amendments should be applied retrospectively to all prior periods presented in the financial statements. The Company adopted these amendments in the first quarter of fiscal year 2017. There was no material impact on its financial statement disclosures, results of operations and financial position.SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

~~In July 2015, the FASB issued an amendment to the accounting guidance,~~ ~~Inventory: Simplifying the Measurement of Inventory~~. The amendment requires entities to measure inventory at the lower of cost and net realizable value thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The amendment is effective for the Company on July 1, 2018. The Company is currently evaluating the effect the guidance will have on its financial statement disclosures, results of operations and financial position.(Unaudited)

Accounting Pronouncements Recently Adopted

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

In February 2018, the FASB issued Income Statement - Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows companies to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act ("2017 Tax Reform Act"), from accumulated other comprehensive income to retained earnings. The guidance also requires certain new disclosures regardless of the election. The Company adopted this guidance on July 1, 2019. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements and related disclosures.

In June 2018, the FASB issued amended guidance to expand the scope of ASC 718 - Compensation-Stock Compensation, to include share-based payment transactions for acquiring goods and services from non-employees. The amendments specify that the guidance applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The Company adopted this guidance on July 1, 2019. The adoption of the guidance did not have a material impact on the Company's consolidated financial statements and related disclosures.

Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued authoritative guidance, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments, that amends the impairment model for certain financial assets by requiring the use of an expected loss methodology, which will result in more timely recognition of credit losses. The amendment is effective for the Company onfrom July 1, ~~2018.~~2020. Early adoption is permitted. The Company has started its accounting assessment of the adoption of the new standard, the process of establishing new accounting policies and evaluation of changes to systems and internal controls necessary to support the requirements of the new standard. The Company will continue to update its assessment as more information becomes available. The Company cannot reasonably estimate quantitative information related to the impact of the new guidance on its consolidated financial statements at this time.

In August 2018, the FASB issued amended guidance, Fair Value Measurement: Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, to modify the disclosure requirements on fair value measurements based on the concepts in the FASB Concepts Statements, including the consideration of costs and benefits. The new standard is effective for the Company from July 1, 2020. The adoption of the new guidance will simplify the disclosure of the fair value measurements for the Company's financial assets and liabilities.

In August 2018, the FASB issued authoritative guidance , Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments. According to the amendments, the entity shall determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. It requires the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The new standard is effective for the Company from July 1, 2020. The Company will adopt the new guidance on a prospective basis for any new hosting arrangement entered into after July 1, 2020.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

In December 2019, the FASB issued amended guidance, Simplifying the Accounting for Income Taxes, to remove certain exceptions to the general principles from ASC 740 - Income Taxes, and to improve consistent application of U.S. GAAP for other areas of ASC 740 by clarifying and amending existing guidance. The guidance is effective for the Company from July 1, 2021; early adoption is permitted. The Company is currently evaluating the effect the guidance will have on its consolidated financial statement disclosures, results of operations and financial position.

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

Note 2. Revenue

Disaggregation of Revenue

The Company disaggregates revenue by type of product, by geographical market, and by products sold to indirect sales channel partners or direct customers and original equipment manufacturers ("OEMs") that depict the nature, amount, and timing of revenue and cash flows. Service revenues are not a significant component of total revenue and are aggregated within the respective categories.

The following is a summary of net sales by product type (in thousands):



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

Server and storage systems constitute an assembly and integration of subsystems and accessories, and related services. Subsystems and accessories are comprised of serverboards, chassis and accessories.

International net sales are based on the country and region to which the products were shipped. The following is a summary for the three and nine months ended March 31, 2020 and 2019, of net sales by geographic region (in thousands):



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

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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



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

Contract Balances

Generally, the payment terms of the Company’s offerings range from 30 to 60 days. In certain instances, customers may prepay for products and services in advance of delivery. Accounts receivable relate to the Company’s right to consideration for performance obligations completed (or partially completed) for which the Company has an unconditional right to consideration.

Contract assets are rights to consideration in exchange for goods or services that the Company has transferred to a customer when such right is conditional on something other than the passage of time. Such contract assets are insignificant to the Company’s condensed consolidated financial statements.

Contract liabilities consist of deferred revenue and relate to amounts invoiced to or advance consideration received from customers, which precede the Company’s satisfaction of the associated performance obligation(s). The Company’s deferred revenue primarily results from customer payments received upfront for extended warranties and on-site services because these performance obligations are satisfied over time. Revenue recognized during the three and nine months ended March ~~2016, the FASB issued new accounting guidance,~~ ~~Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting~~ ~~on the accounting for certain aspects of share-based payment to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements as well as classification~~31, 2020, which was included in the ~~statement~~opening deferred revenue balance as of ~~cash flows. This guidance is effective~~June 30, 2019, was $22.9 million and $71.6 million, respectively.

Deferred revenue increased during the nine months ended March 31, 2020 because the amounts for service contracts invoiced during the ~~Company on July 1, 2017. The Company is currently evaluating~~period exceeded the ~~effect the guidance will have on its financial statement disclosures, results~~recognition of ~~operations and financial position.~~revenue from contracts entered into in prior periods.

~~In August 2016, the FASB issued an amendment~~Transaction Price Allocated to the ~~accounting guidance,~~ ~~Statement~~Remaining Performance Obligations

Remaining performance obligations represent in aggregate the amount of ~~Cash Flows: Classification of Certain Cash Receipts and Cash Payments.~~ ~~This amendment consists of eight provisions~~transaction price that ~~provide guidance on the classification of certain cash receipts and cash payments. If practicable, this amendment should be applied using a retrospective transition method~~has been allocated to ~~each period presented. For the provisions that are impracticable to apply retrospectively, those provisions may be applied prospectively~~performance obligations not delivered, or only partially undelivered, as of the ~~earliest date practicable. This amendment is effective for~~end of the ~~Company on July 1, 2019. Early adoption is permitted.~~reporting period. The Company ~~is currently evaluating~~applies the ~~effect~~optional exemption to not disclose information about remaining performance obligations that are part of a contract that has an original expected duration of one year or less. These performance obligations generally consist of services, such as on-site integration services and extended warranty services that are contracted for one year or less, and products for which control has not yet been transferred. The value of the ~~guidance will have on its financial statement disclosures, results~~transaction price allocated to remaining performance obligations as of ~~operations and financial position.~~

~~In October 2016, the FASB issued an amendment to the accounting guidance,~~ ~~Intra-Entity Transfers of Assets Other Than Inventory~~. This amendment simplifies the accounting for income tax consequences of intra-entity transfers of assets other than inventory by requiring recognition of current and deferred income tax consequences when such transfers occur. This amendment is effective for the Company on July 1, 2018. Early adoption is permitted.March 31, 2020 was approximately $205.5 million. The Company ~~is currently evaluating~~expects to recognize approximately 53% of remaining performance obligations as revenue in the ~~effect~~next 12 months, and the ~~guidance will have on its financial statement disclosure, results of operations and financial position.~~remainder thereafter.

~~In November 2016, the FASB issued an amendment to the accounting guidance,~~ ~~Statement of Cash Flows: Restricted Cash.~~ This amendment addresses presentations of total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This amendment is effective for the Company on July 1, 2018. Early adoption is permitted. The Company does not expect the impact of adopting this guidance to be significant.

Note 2.3. Stock-based Compensation ~~and Stockholders’ Equity~~

~~Share Repurchase Program~~

In July 2016, the Company’s Board of Directors adopted a program to repurchase from time to time at management’s discretion up to $100,000,000 of the Company’s common stock in the open market or in private transactions during the next twelve months at prevailing market prices. Repurchases will be made under the program using the Company’s own cash resources. This share repurchase program does not obligate the Company to acquire any particular amount of common stock, and it may be suspended at any time at the Company’s discretion. During the three months ended December 31, 2016, the Company did not purchase any shares of its common stock in the open market. During the six months ended December 31, 2016, the Company purchased 888,097 shares of the Company's common stock in the open market at a weighted average price of $20.79 for $18,461,000.

Equity Incentive Plan

~~In January~~Commencing March 8, 2016, the ~~Board of Directors approved~~Company began granting stock options, RSUs, PRSUs and other equity-based awards under the 2016 Equity Incentive Plan (the "2016 Plan") ~~and reserved for issuance 4,700,000 shares of common stock for awards of stock options, stock appreciation rights, restricted stock, RSUs and other share-based awards.~~. The 2016 Plan was approved by the stockholders of the Company and became effective on March 8, 2016. As of such date, 8,696,444 shares of common stock were reserved for outstanding awards under the Company's 2006 Equity Incentive Plan (the "2006" Plan). Such awards remained outstanding under the 2006 Plan following the adoption of the 2016 Plan, although no further awards will be granted under the 2006 Plan. Up to 2,800,000 shares subject to awards that remained outstanding under the 2006 Plan but that are forfeited in the future will become available for use under the 2016 Plan. In addition, 1,153,412 shares of common stock originally reserved for issuance under the 2006 Plan were cancelled upon the adoption of the 2016 Plan. Under the 2016 Plan, the exercise price per share for incentive stock options granted to employees owning shares representing more than 10% of the ~~Company~~Company's outstanding voting stock at the time of grant cannot be less than 110% of the fair value of the underlying ~~share~~shares on the grant date. Nonqualified stock options and incentive stock options granted to all other persons ~~shall be~~are granted at a price not less than 100% of the fair ~~value of the underlying share on grant date.~~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~~

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

sixteenth per quarter thereafter. As of ~~December~~March 31, ~~2016,~~2020, the Company had ~~3,525,695~~231,312 authorized shares available for future issuance under the 2016 Plan.

Determining Fair Value

The Company's fair value of RSUs and PRSUs is based on the closing market price of the Company's common stock on the date of grant. The Company estimates the fair value of stock options granted using the Black-Scholes-option-pricing ~~formula and a single option award approach.~~model. This fair value is then amortized ratably over the requisite service periods of the awards, which is generally the vesting period. The key inputs in using the Black-Scholes-option-pricing model were as follows:

Expected Term—The Company’s expected term represents the period that the Company’s ~~share-based~~stock-based awards are expected to be outstanding and was determined based on ~~a combination of the Company's peer group and~~ the Company's historical experience.

Expected Volatility—Expected volatility is based on ~~a combination of~~ the Company's ~~implied and~~ historical volatility.

Expected Dividend—The Black-Scholes valuation model calls for a single expected dividend yield as an input and the Company has no plans to pay dividends.

Risk-Free Interest Rate—The risk-free interest rate used in the Black-Scholes valuation method is based on the United States Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of option.

Estimated Forfeitures—The estimated forfeiture rate is based on the Company’s historical forfeiture rates and the estimate is revised in subsequent periods if actual forfeitures differ from the estimate.

The fair value of stock option grants for the three and ~~six~~nine months ended ~~December~~March 31, ~~2016~~2020 and ~~2015~~2019 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:



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

Three Months Ended
December 31, Six Months Ended
December 31,
2016 2015 2016 2015
Risk-free interest rate 1.29% - 1.34%
1.42 % 1.12% - 1.34%
1.42% - 1.57%
Expected term 5.32 years
5.31 years
5.32 - 5.38 years
5.31 - 5.33 years
Dividend yield — % — % — % — %
Volatility 49.20% - 49.43%
49.46 % 49.20% - 49.64%
47.06% - 49.46%
Weighted-average fair value $ 9.95
$ 11.50
$ 9.52
$ 11.54

The following table shows total stock-based compensation expense included in the condensed consolidated statements of operations for the three and ~~six~~nine months ended ~~December~~March 31, ~~2016~~2020 and ~~2015~~2019 (in thousands):



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

Three Months Ended
December 31, Six Months Ended
December 31,
2016 2015 2016 2015
Cost of sales $ 325
$ 258
$ 634
$ 498
Research and development 3,012
2,472
5,920
4,874
Sales and marketing 520
435
998
839
General and administrative 852
841
1,661
1,671
Stock-based compensation expense before taxes 4,709
4,006
9,213
7,882
Income tax impact (1,435 ) (1,814 ) (2,721 ) (2,099 )
Stock-based compensation expense, net $ 3,274
$ 2,192
$ 6,492
$ 5,783

~~The cash flows resulting from the tax benefits for tax deductions resulting from the exercise~~As of March 31, 2020, $6.5 million of unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 2.32 years, $34.2 million of unrecognized compensation cost related to unvested RSUs is expected to be recognized over a weighted-average period of 2.63 years and ~~vesting~~$0.7 million of ~~RSUs in excess~~unrecognized compensation cost related to unvested PRSUs is expected to be recognized over a period of ~~the compensation expense recorded for those share-based awards (excess tax benefits) issued or~~1.04 years.

817

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

modified since July 1, 2006 are classified as cash from financing activities. The Company had $393,000 and $878,000 of excess tax benefits recorded in additional paid-in capital in the six months ended December 31, 2016 and December 31, 2015, respectively. The Company had excess tax benefits classified as cash provided by financing activities of $745,000 and $355,000 in the six months ended December 31, 2016 and 2015, respectively, for share-based awards issued since July 1, 2006.

As of December 31, 2016, the Company’s total unrecognized compensation cost related to non-vested share-based awards granted to employees and non-employee directors was $38,057,000, which will be recognized over a weighted-average vesting period of approximately 2.34 years.

Stock Option Activity

The following table summarizes stock option activity during the ~~six~~nine months ended ~~December~~March 31, ~~2016~~2020 under all plans:



	Options Outstanding		Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (in Years)
Balance as of June 30, 2019	7,374,635		$	18.02
Granted	251,930		$	19.39
Exercised	(1,454,507	)	$	15.98
Forfeited/Cancelled	(440,807	)	$	11.62
Balance as of March 31, 2020	5,731,251		$	19.09	4.11
Options vested and exercisable at March 31, 2020	4,988,991		$	18.88	3.54

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, 2016 (7,495,131 shares exercisable at weighted average exercise price of $13.35 per share) 8,960,867
$ 14.88

Granted (weighted average fair value of $9.52) 194,700
$ 21.08

Exercised (505,799 ) $ 11.61

Forfeited (18,038 ) $ 20.89

Balance as of December 31, 2016 8,631,730
$ 15.20
4.96 $ 113,060
Options vested and expected to vest at December 31, 2016 8,567,668
$ 15.13
4.93 $ 112,786
Options vested and exercisable at December 31, 2016 7,473,690
$ 13.88
4.47 $ 106,956

The total pretax intrinsic value of options exercised was $3,423,000 and $6,075,000 during the three and six months ended December 31, 2016, respectively, and $2,113,000 and $4,854,000 during the three and six months ended December 31, 2015, respectively.

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~~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 ~~settlement.~~service conditions. The first award was a one-year PRSU and the second award was a two-year PRSU. The one-year PRSUs would be earned based on the Company’s performance as it relates 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 30,000 units based on revenue growth if the minimum non-GAAP operating margin is achieved. If the performance metrics were met, 50% of the PRSUs would vest at June 30, 2018 while the remainder would 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 (the "Board") 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 35% of the PRSUs vested during the seven quarters ended March 31, 2020, in accordance with the terms of the grant.

The two-year PRSUs would be 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 vested in equal amounts over the following ~~table summarizes~~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 two tranches and includes service and performance conditions. Each tranche has 15,000 RSUs ~~activity during the six months ended December 31, 2016 under all plans:~~ that vest in May 2021 and November 2021 based on service conditions only. Additional units can be earned based on revenue growth percentage in fiscal year 2020 compared to fiscal year 2019, which units would vest in May 2021, and based on revenue growth percentage in fiscal year 2021 compared to fiscal year 2020, which units would vest in November 2021.

RSUs
Outstanding

Weighted
Average
Grant-Date Fair Value per Share

Aggregate
Intrinsic
Value
(in thousands)
Balance as of June 30, 2016 926,983
$ 30.23

Granted 434,410
$ 21.36

Released (187,645 ) $ 27.74

Forfeited (57,795 ) $ 27.22

Balance as of December 31, 2016 1,115,953
$ 27.35
$ 31,302

The total pretax intrinsic value of RSUs vested was $2,543,000 and $4,395,000 during the three and six months ended December 31, 2016, respectively, and $811,000 and $1,358,000 during the three and six months ended December 31, 2015, respectively. In the three and six months ended December 31, 2016, upon vesting, 101,200 and 187,645 shares of RSUs were

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

~~partially net share-settled such that~~The following table summarizes RSU and PRSU activity during the Company withheld 35,083 and 65,882 shares with value equivalent to the employees' minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities, respectively. In the three and sixnine months ended ~~December~~March 31, 2015, upon vesting, 31,807 and 52,006 shares of RSUs were partially net share-settled such that the Company withheld 12,089 and 19,321 shares with value equivalent to the employees' minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities, respectively. 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 taxing authorities were $882,000 and $1,542,000 during the three and six months ended December 31, 2016, respectively, and $308,000 and $504,000 during the three and six months ended December 31, 2015, respectively, and are reflected as a financing activity within the condensed consolidated statements of cash flows. These net-share settlements had the effect of share repurchases by the Company as they reduced and retired the number of shares that would have otherwise been issued as a result of the vesting and did not represent an expense to the Company. Pursuant to the terms of the 2016 Plan, shares withheld in connection with net-share settlements are returned to the 2016 Plan and are available for future grants2020 under ~~the 2016 Plan.~~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		(1)	$	27.10
Granted	841,880		$	20.24	30,000			$	20.37
Released	(669,721	)	$	20.79	(102,000	)		$	27.10
Forfeited	(126,039	)	$	18.88	—
Balance as of March 31, 2020	1,919,222		$	20.14	48,000			$	22.89

__________________________


(1)	Reflects the number of PRSUs that have been earned based on the achievement of performance metrics.

Note 3.4. Net Income Per Common Share

The following table shows the computation of basic and diluted net income per common share for the three and ~~six~~nine months ended ~~December~~March 31, ~~2016~~2020 and ~~2015~~2019 (in thousands, except per share amounts):



	Three Months Ended March 31,				Nine Months Ended March 31,
	2020		2019		2020		2019
Numerator:
Net income	$	15,807	$	10,646	$	65,858	$	48,208

Denominator:
Weighted-average shares outstanding	51,526		49,988		50,591		49,845
Effect of dilutive securities	2,167		1,570		1,808		1,712
Weighted-average diluted shares	53,693		51,558		52,399		51,557

Basic net income per common share	$	0.31	$	0.21	$	1.30	$	0.97
Diluted net income per common share	$	0.29	$	0.21	$	1.26	$	0.94

Three Months Ended
December 31, Six Months Ended
December 31,
2016 2015 2016 2015
Numerator:
Net income $ 21,996
$ 34,689
$ 35,528
$ 48,388

Denominator:
Weighted-average shares outstanding 48,124
47,651
48,144
47,584
Effect of dilutive securities 3,397
3,838
3,208
3,821
Weighted-average diluted shares 51,521
51,489
51,352
51,405

Basic net income per share $ 0.46
$ 0.73
$ 0.74
$ 1.02
Diluted net income per share $ 0.43
$ 0.67
$ 0.69
$ 0.94

For the three and ~~six~~nine months ended ~~December~~March 31, ~~2016~~2020 and ~~2015,~~2019, the Company had stock options and RSUs 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 ~~share-based~~equity awards were ~~1,637,000~~1,882,238 and ~~1,662,000~~2,305,538 for three and nine months ended March 31, 2020, respectively, and 4,443,127 and 4,194,283 for the three and ~~six~~nine months ended ~~December~~March 31, ~~2016, respectively, and 1,329,000 and 1,291,000 for the three and six months ended December 31, 2015,~~2019, respectively.

Note 4.5. Balance Sheet Components

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

~~Inventory:~~Inventories:



	March 31, 2020		June 30, 2019
Finished goods	$	623,868	$	492,387
Work in process	82,108		43,598
Purchased parts and raw materials	160,250		134,203
Total inventories	$	866,226	$	670,188

December 31,
2016 June 30,
2016
Finished goods $ 432,254
$ 351,209
Work in process 73,473
19,105
Purchased parts and raw materials 93,542
78,666
Total inventory $ 599,269
$ 448,980

1019

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The Company recorded a provision for ~~lower of cost or market and~~ excess and obsolete inventory to cost of sales totaling ~~$2,498,000~~$4.7 million and ~~$6,391,000~~$21.6 million in the three and ~~six~~nine months ended ~~December~~March 31, ~~2016,~~2020, respectively, and ~~$2,062,000~~$4.7 million and ~~$3,780,000~~$17.3 million in the three and ~~six~~nine months ended ~~December~~March 31, ~~2015,~~2019, respectively. These amounts exclude a (recovery) provision for adjusting the cost of certain inventories to net realizable value of $(0.8) million and $(3.5) million for the three and nine months ended March 31, 2020, respectively, and $5.7 million and $7.3 million for the three and nine months ended March 31, 2019, respectively.

Prepaid Expenses and Other Current Assets:



	March 31, 2020		June 30, 2019
Receivables from vendors (1)	$	90,006	$	83,050
Prepaid income tax	15,483		607
Restricted cash	16,804		11,673
Prepaid expenses	9,704		7,269
Deferred service costs	3,790		3,374
Others (2)	12,315		3,822
Total prepaid expenses and other current assets	$	148,102	$	109,795

__________________________

(1) Includes receivables from contract manufacturers based on certain buy-sell arrangements of $87.1 million and $82.0 million as of March 31, 2020 and June 30, 2019, respectively.

(2) Includes input value added tax (“VAT”) paid for inventories purchased in Taiwan of $8.4 million and $0 as of March 31, 2020 and June 30, 2019, respectively.

Cash, cash equivalents and restricted cash:



	March 31, 2020		June 30, 2019
Cash and cash equivalents	$	300,859	$	248,164
Restricted cash included in prepaid expenses and other current assets	16,804		11,673
Restricted cash included in other assets	1,601		2,303
Total cash, cash equivalents and restricted cash	$	319,264	$	262,140

Property, Plant, and Equipment:


	December 31, 2016			June 30, 2016			March 31, 2020			June 30, 2019
Buildings							$	86,930		$	86,136
Machinery and equipment							84,711			79,946
Land	$	70,484		$	70,454		75,240			74,926
Buildings	71,665			71,665
Buildings construction in progress (1)							41,637			14,189
Building and leasehold improvements	14,484			10,941			24,390			22,307
Buildings construction in progress (1)	19,431			15,803
Machinery and equipment	56,431			53,282
Furniture and fixtures	12,917			10,364			21,038			20,193
Purchased software	14,152			13,920
Purchased software construction in progress	444			532
Software							20,619			18,415
	260,008			246,961			354,565			316,112
Accumulated depreciation and amortization	(66,338		)	(59,012		)	(124,088		)	(108,775		)
Property, plant and equipment, net	$	193,670		$	187,949		$	230,477		$	207,337

__________________________

(1) ~~In connection~~Primarily relates to the development and construction costs associated with the ~~purchase of property~~Company’s Green Computing Park located in San Jose, California ~~for the Company's Green Computing Park, the Company continues to engage several contractors for the development~~ and new building construction ~~of improvements on the property.~~in Taiwan.

~~Other Assets:~~

December 31,
2016 June 30,
2016
Long-term deferred service costs $ 2,893
$ 3,498
Restricted cash 2,136
1,851
Investment in a privately held company 1,411
1,411
Deposits 276
910
Prepaid royalty license 623
748
Others $ 141
$ 128
Total other assets $ 7,480
$ 8,546

~~Accrued Liabilities:~~

December 31,
2016 June 30,
2016
Accrued payroll and related expenses $ 23,862
$ 16,015
Customer deposits 8,521
6,265
Accrued warranty costs 5,677
5,816
Accrued cooperative marketing expenses 7,594
7,300
Deferred revenue (1) 20,205
13,418
Others 8,472
6,804
Total accrued liabilities $ 74,331
$ 55,618

~~(1) As of December 31, 2016 and June 30, 2016, deferred revenue consist primarily of deferred extended warranty and on-site service revenue of $18,714,000 and $12,746,000, respectively.~~

1120

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Other Assets:



	March 31, 2020		June 30, 2019
Operating lease right-of-use asset	$	25,304	$	—
Deferred service costs, non-current	4,413		3,572
Prepaid expense, non-current	1,615		1,649
Restricted cash, non-current	1,601		2,303
Investment in auction rate security	1,571		1,571
Deposits	1,206		686
Non-marketable equity securities	128		878
Total other assets	$	35,838	$	10,659

Accrued Liabilities:



	March 31, 2020	June 30, 2019
Contract manufacturing liabilities	48,835	25,308
Accrued payroll and related expenses	28,716	25,552
Accrued legal liabilities (Note 11)	17,500	—
Customer deposits	15,958	11,133
Performance awards liability, current	10,257	—
Accrued warranty costs	9,386	8,661
Accrued cooperative marketing expenses	6,649	5,830
Operating lease liability	6,103	—
Accrued professional fees	2,804	11,756
Others (accrued liabilities)	30,940	26,438
Total accrued liabilities	177,148	114,678

Performance Awards Liability

In March 2020, the Board approved $25.3 million one-time performance bonuses to employees, which include $8.0 million payable in cash during the fourth quarter of fiscal year 2020 and $17.3 million payable in cash if the average closing price for the Company’s common stock equals or exceeds $21.39 for any period of 10 consecutive trading days following March 26, 2020. The target price criteria were achieved in April 2020. Therefore, the Company expects to pay the entire amount of the one-time performance bonuses to employees in the fourth fiscal quarter 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 aggregate cash bonuses of up to $8.1 million are earned in two tranches. The first 50% is payable if the average closing price for the Company’s common stock equals or exceeds $31.61 for any period of 20 consecutive trading days following the date of the agreement and ending prior to September 30, 2021 and the Chief Executive Officer remains employed with the Company through the date that such common stock price goal is determined to have been achieved and the date that the payment is made. This payment can be reduced at the discretion of the Board to the extent the Company has not made adequate progress in remediating its material weaknesses in its internal control over financial reporting as determined by the Board. The second 50% is payable if the average closing price for the Company’s common stock equals or exceeds $32.99 for any period of 20 consecutive trading days following the date of the agreement and ending prior to June 30, 2022 and the Chief Executive Officer remains employed with the Company through the date that such common stock price goal is achieved and the date that the payment is made.

Table of Contents

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Performance bonuses for a senior executive and two members of the Board are earned based on achieving a specified target average closing price for the Company’s common stock over the specified period as determined by the Board at the grant dates and continuous services through the payment dates. A senior executive can earn an aggregate cash payment up to $0.1 million and the two members of the Board can earn aggregate cash payments of $0.3 million. The target average closing price ranges from $25.80 to $32.99 per share. These awards expire in two equal amounts at September 30, 2021 and June 30, 2022 for the two Board members' awards, and in September 30, 2022 for the senior executive’s award.

Except for cash bonuses of $8.0 million to employees, the Company accounts for these 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 condensed 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 March 31, 2020, the Company recorded a $10.3 million compensation expense related to performance bonuses, which amount includes the $8.0 million in cash payable in the fourth quarter of fiscal year 2020. An unrecognized compensation expense of $15.6 million will be recorded over the remaining service periods from one month for employees’ awards to 1.43 years for the first 50% of the Chief Executive Officer’s award. The unrecognized expense and remaining service periods will be remeasured each reporting period. As of March 31, 2020, the Company recorded $10.3 million in accrued liabilities and $0.1 million in other long-term liabilities in its condensed consolidated balance sheet.

Other Long-term Liabilities:

December 31,
2016 June 30,
2016
Deferred revenue-net of current portion (1) $ 31,765
$ 21,940
Accrued unrecognized tax benefits including related interests and penalties-net of current portion 18,784
16,056
Accrued warranty costs-net of current portion 1,248
1,313
Others 1,204
1,294
Total other long-term liabilities $ 53,001
$ 40,603



	March 31, 2020		June 30, 2019
Operating lease liability, non-current	$	19,488	$	—
Accrued unrecognized tax benefits including related interest and penalties	17,804		20,102
Accrued warranty costs, non-current	2,348		2,373
Others	1,626		3,708
Total other long-term liabilities	$	41,266	$	26,183

(1) As of December 31, 2016 and June 30, 2016, deferred revenue-net of current portion consist primarily of deferred extended warranty and on-site service revenue of $30,244,000 and $21,265,000, respectively.

Product Warranties:



	Three Months Ended March 31,						Nine Months Ended March 31,
	2020			2019			2020			2019
Balance, beginning of the period	$	11,441		$	10,434		$	11,034		$	9,884
Provision for warranty	8,521			5,510			25,627			17,163
Costs utilized	(8,130		)	(6,346		)	(24,907		)	(18,083		)
Change in estimated liability for pre-existing warranties	(98		)	918			(20		)	1,552
Balance, end of the period	11,734			10,516			11,734			10,516
Current portion	9,386			8,200			9,386			8,200
Non-current portion	$	2,348		$	2,316		$	2,348		$	2,316

Three Months Ended
December 31, Six Months Ended
December 31,
2016 2015 2016 2015
Balance, beginning of period $ 6,926
$ 7,545
$ 7,129
$ 7,700
Provision for warranty 4,772
4,678
9,698
8,544
Costs charged to accrual (4,749 ) (2,854 ) (9,557 ) (6,673 )
Change in estimated liability for pre-existing warranties (24 ) (1,592 ) (345 ) (1,794 )
Balance, end of period 6,925
7,777
6,925
7,777
Current portion (5,677 ) (6,116 ) (5,677 ) (6,116 )
Long-term portion $ 1,248
$ 1,661
$ 1,248
$ 1,661

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Note 5.6. Fair Value Disclosure

The financial ~~assets~~instruments of the Company measured at fair value on a recurring basis are included in cash equivalents, other assets and ~~long-term investments.~~accrued liabilities. The ~~Company’s money market funds are classified~~Company classifies its financial instruments, except for its investment in an auction rate security, within Level 1 ofor Level 2 in the fair value hierarchy ~~which is based on~~because the Company uses quoted ~~market~~ prices ~~for the identical underlying securities~~ in active ~~markets.~~markets or alternative pricing sources and models using market observable inputs to determine their fair value. The Company’s ~~long-term~~investment in an auction rate ~~securities investments are~~security is classified within Level 3 of the fair value hierarchy ~~which did~~as the determination of its fair value was not ~~have~~based on observable inputs as of ~~December~~March 31, ~~2016~~2020 and June 30, ~~2016. Refer to Note 1 for a discussion of the Company’s policies regarding the fair value hierarchy.~~2019. The Company ~~has~~ used a discounted cash ~~flow model~~flows to estimate the fair value of the auction rate ~~securities~~security as of ~~December~~March 31, ~~2016~~2020 and June 30, ~~2016.~~2019. The material factors used in preparing the discounted cash ~~flow model~~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.

Financial Assets and Liabilities Measured on a Recurring Basis

The following table sets forth the Company’s cash equivalents, certificates of deposit, investment in an auction rate security and ~~long-term investments~~performance awards liability as of ~~December~~March 31, ~~2016~~2020 and June 30, ~~2016~~2019, 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):



March 31, 2020	Level 1		Level 2		Level 3		Asset at Fair Value
Assets
Money market funds (1)	$	1,164	$	—	$	—	$	1,164
Certificates of deposit (2)	—		577		—		577
Auction rate security	—		—		1,571		1,571
Total assets measured at fair value	$	1,164	$	577	$	1,571	$	3,312

Liabilities
Performance awards liability (3)	$	—	$	2,344	$	—	$	2,344
Total liabilities measured at fair value	$	—	$	2,344	$	—	$	2,344

June 30, 2019	Level 1		Level 2		Level 3		Asset at Fair Value
Assets
Money market funds (1)	$	1,162	$	—	$	—	$	1,162
Certificates of deposit (2)	—		1,285		—		1,285
Auction rate security	—		—		1,571		1,571
Total assets measured at fair value	$	1,162	$	1,285	$	1,571	$	4,018

__________________________

(1) $0.4 million and $0.4 million in money market funds are included in cash and cash equivalents and $0.8 million and $0.8 million in money market funds are included in restricted cash, non-current in other assets in the condensed consolidated balance sheets as of March 31, 2020 and June 30, 2019, respectively.

(2) $0.2 million and $0.2 million in certificates of deposit are included in cash and cash equivalents and $0.4 million and $1.1 million in certificates of deposit are included in restricted cash, non-current in other assets in the condensed consolidated balance sheets as of March 31, 2020 and June 30, 2019, respectively.

(3) As of March 31, 2020, the current portion of the performance awards liability of $2.2 million is included in accrued liabilities and the noncurrent portion of $0.1 million is included in other long-term liabilities in the condensed consolidated balance sheets. There was 0 such liability outstanding as of June 30, 2019.

Table of Contents

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

December 31, 2016 Level 1 Level 2 Level 3
Asset at
Fair Value
Money market funds $ 323
$ —
$ —
$ 323
Auction rate securities —
—
2,643
2,643
Total $ 323
$ —
$ 2,643
$ 2,966

June 30, 2016 Level 1 Level 2 Level 3
Asset at
Fair Value
Money market funds $ 315
$ —
$ —
$ 315
Auction rate securities —
—
2,643
2,643
Total $ 315
$ —
$ 2,643
$ 2,958

The ~~above table excludes $128,206,000~~performance awards liability consists of one-time employee performance bonuses for the Company's Chief Executive Officer, a senior executive, two members of the Board, and ~~$180,426,000~~other employees that are payable when specified market and performance conditions are achieved. The Company estimated the fair value of ~~cash~~these performance awards using the Monte-Carlo simulation model and ~~$2,418,000 and $2,133,000~~classified them within Level 2 of ~~certificates~~the fair value hierarchy as estimates are based on the observable inputs. The significant inputs used in estimating the fair value of ~~deposit held by~~ the ~~Company~~awards as of ~~December~~March 31, ~~2016 and June 30, 2016, respectively.~~ 2020 are as follows:



Stock Price as of Period End	Performance Period	Risk-free Rate	Volatility	Dividend Yield

$21.28	1.5 - 2.5 years	0.26%	53.8%	—%

There were no transfers between Level 1, Level 2 or Level 3 ~~securities~~financial instruments in the three and ~~six~~nine months ended ~~December~~March 31, ~~2016~~2020 and ~~2015.~~2019.

~~The following table provides a reconciliation~~There was no movement in the balances of the ~~Company’s~~Company's financial assets measured at fair value on a recurring basis, consisting of ~~long-term~~investment in an auction rate ~~securities,~~security, using significant unobservable inputs (Level 3) for the three and ~~six~~nine months ended ~~December~~March 31, ~~2016~~2020 and ~~2015 (in thousands):~~2019.

Three Months Ended
December 31, Six Months Ended
December 31,
2016 2015 2016 2015
Balance as of beginning of period $ 2,643
$ 2,633
$ 2,643
$ 2,633
Total realized gains or (losses) included in net income —
—
—
—
Total unrealized gains or (losses) included in other comprehensive income —
—
—
—
Sales and settlements at par —
—
—
—
Transfers in and/or out of Level 3 —
—
—
—
Balance as of end of period $ 2,643
$ 2,633
$ 2,643
$ 2,633

The following is a summary of the Company’s ~~long-term investments~~investment in an auction rate security as of ~~December~~March 31, ~~2016~~2020 and June 30, ~~2016~~2019 (in thousands):



	March 31, 2020 and June 30, 2019
	Cost Basis		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Fair Value
Auction rate security	$	1,750	$	—	$	(179	)	$	1,571

December 31, 2016

Amortized
Cost

Gross
Unrealized
Holding
Gains

Gross
Unrealized
Holding
Losses
Fair Value
Auction rate securities $ 2,750
$ —
$ (107 ) $ 2,643

June 30, 2016

Amortized
Cost

Gross
Unrealized
Holding
Gains

Gross
Unrealized
Holding
Losses
Fair Value
Auction rate securities $ 2,750
$ —
$ (107 ) $ 2,643

The Company measures the fair value of outstanding debt for disclosure purposes on a recurring basis. As of ~~December~~March 31, ~~2016~~2020 and June 30, ~~2016, short-term and long-term~~2019, total debt of ~~$127,175,000~~$33.2 million and ~~$93,589,000,~~$23.6 million, respectively, ~~are~~is reported at amortized cost. This outstanding debt is classified as Level 2 as it is not actively ~~traded and is valued using a discounted cash flow model that uses observable market inputs. Based on the discounted cash flow model, the fair value~~traded. The amortized cost of the outstanding debt approximates ~~amortized cost.~~the fair value.

Other Financial Assets - Investments into Non-Marketable Equity Securities

The Company's non-marketable equity securities are investments in privately held companies without readily determinable fair values. 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 three and nine months ended March 31, 2020 and 2019, 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 the three and nine months ended March 31, 2020. During the three and nine months ended March 31, 2019, the Company recorded impairment charges of $0.7 million for its non-marketable equity securities which had an initial cost basis of $0.7 million as it was determined the carrying value of the investments were not recoverable.

1324

Table of Contents

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Note 6.7. Short-term ~~and Long-term~~ Debt ~~Obligations~~

Short-term ~~and long-term~~debt obligations as of ~~December~~March 31, ~~2016~~2020 and June 30, ~~2016~~2019 consisted of the following (in thousands):

December 31, June 30,
2016 2016
Line of credit:
Bank of America $ 43,199
$ 62,199
CTBC Bank 20,800
10,100
Total line of credit 63,999
72,299
Term loans:
Bank of America 45,000
933
CTBC Bank 18,521
20,357
Total term loans 63,521
21,290
Total debt 127,520
93,589
Less: debt issuance costs (345 ) —
Total debt, net of debt issuance costs 127,175
93,589
Current portion, net of debt issuance costs (92,443 ) (53,589 )
Long-term portion, net of debt issuance costs $ 34,732
$ 40,000



	March 31,		June 30,
	2020		2019
Line of credit:
Bank of America	$	—	$	1,116
CTBC Bank	10,000		—
Total line of credit	10,000		1,116
CTBC Bank term loan	23,158		22,531
Total short-term debt	$	33,158	$	23,647

~~Activities under Revolving Lines of Credit and Term Loans~~

Bank of America

2018 Bank of America Credit Facility

In ~~June 2015,~~April 2018, the Company entered into ~~an amendment to the existing~~a revolving line of credit ~~agreement~~ with Bank of America ~~N.A. ("~~(the "2018 Bank of ~~America"~~America Credit Facility"), which ~~provided~~replaced 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 ~~(i)~~ a ~~$65,000,000~~ 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 ~~facility that would have matured on November 15, 2015~~sublimit, which was extended to $15.0 million in October 2019. The 2018 Bank of America Credit Facility was originally set to expire after 364 days and ~~(ii)~~was extended to June 30, 2020 through subsequent amendments. Prior to its maturity, at the Company's option and if certain conditions are satisfied, the 2018 Bank of America Credit Facility may convert into a five-year ~~$14,000,000 term loan~~revolving credit facility. ~~The term loan is secured by three buildings located~~If and upon such conversion, the lenders for the 2018 Bank of America Credit Facility shall extend, in ~~San Jose, California and~~aggregate, a principal amount of up to $400.0 million. Prior to the ~~principal and~~2018 Bank of America Credit Facility’s conversion to the five-year revolving credit facility, interest ~~were payable monthly through September 30, 2016 with an interest rate~~shall accrue at the LIBOR rate plus ~~1.50%~~2.75% per annum. Upon the 2018 Bank of America Credit Facility converting to the five-year revolving credit facility, interest shall accrue at the LIBOR rate plus an amount between 1.50% and 2.00% for loans to both Super Micro Computer and Super Micro Computer B.V. Under the terms of the 2018 Bank of America Credit Facility, the Company is required to grant the lenders a continuing security interest in and lien upon all amounts credited to any of the Company's deposit accounts. Interest accrued on any loans under the 2018 Bank of America Credit Facility is due on the first day of each month, and the loans are due and payable in full on the termination date of the 2018 Bank of America Credit Facility, unless payment is required earlier as determined by the lenders. Voluntary prepayments are permitted without early repayment fees or penalties. The ~~Company extended~~terms of the ~~revolving~~arrangement require any amounts in the deposit accounts to be applied against the Company's line of credit the next business day. Subject to ~~mature on~~customary exceptions, the 2018 Bank of America Credit Facility is secured by substantially all of Super Micro Computer’s assets. If converted to the five-year revolving credit facility, Super Micro Computer’s assets, and at the Company's option, Super Micro Computer B.V.'s assets will be used as collateral for the 2018 Bank of America Credit Facility. Under the terms of the 2018 Bank of America Credit Facility, the Company is not permitted to either repurchase its common stock or pay any dividends.

On January 31, 2019, the Company paid a fee and entered into an amendment of the 2018 Bank of America Credit Facility that resulted in the extension of the maturity date from April 19, 2019 to June 30, ~~2016.~~

In2019. On June ~~2016,~~27, 2019, the Company entered into a ~~new credit agreement with~~second amendment of the 2018 Bank of America ~~which provided for (i) a $55,000,000 revolving line of credit facility including a $5,000,000 letter of credit sublimit~~Credit Facility that ~~matures on~~extended the maturity date from June 30, ~~2017 and (ii) a five-year $50,000,000 term loan facility. This revolving line~~2019 to June 30, 2020. The Company is in the process of ~~credit facility replaced the existing revolving line~~negotiating an extension of its credit facility with Bank of ~~America. This additional term loan is secured~~America and expects this process will be completed by ~~seven buildings located in San Jose, California and~~ the ~~property, plant and equipment and~~end of May, 2020.

As of March 31, 2020, the ~~inventory in those buildings. The principal and interest of the term loan are payable monthly through June 30, 2021 with an interest rate at the LIBOR rate plus 1.25% per annum.~~

~~The interest rate for the revolving line of credit~~Company had 0 outstanding borrowings under the ~~above credit agreements with~~2018 Bank of America ~~is at the LIBOR rate plus 1.25% per annum. The LIBOR rate was 0.61% at December 31, 2016. The letter~~Credit Facility. As of ~~credit is charged at 1.25% per annum.~~

In June 2016, the Company also entered into a separate credit agreement with Bank of America, which provided for a revolving line of credit of $10,000,000 for the Taiwan and the Netherlands subsidiaries that matures on June 30, ~~2017. The interest rate of the revolving line of credit is equal to a minimum of 0.9% per annum plus the lender's cost of funds.~~

In December 2016, the Company entered into an amendment to the credit agreement with Bank of America to reduce the $55,000,000 revolving line of credit facility to $45,000,000 and increase the revolving line of credit for the Taiwan and the Netherlands subsidiaries from $10,000,000 to $20,000,000.

~~As of December 31, 2016 and June 30, 2016,~~2019, the total outstanding borrowings under the 2018 Bank of America ~~term loan was $45,000,000 and $933,000, respectively.~~Credit facility were $1.1 million. The ~~total outstanding borrowings~~interest rates under the 2018 Bank of America ~~lines~~Credit Facility as of March 31, 2020 and June 30, 2019 were 3.63% per annum and 4.50% per annum, respectively. In October 2018, a $3.2 million letter of credit was ~~$43,199,000 and $62,199,000~~issued under the 2018 Bank of America Credit Facility. In October 2019, the letter of credit amount was increased from $3.2 million to $6.4 million. The balance of debt issuance costs outstanding were immaterial as of ~~December~~March 31, ~~2016~~2020 and June 30, ~~2016, respectively. The interest rates for these loans~~2019. As of March 31, 2020, the Company's

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~~ranged from 1.19% to 2.14% per annum at December 31, 2016 and from 1.02% to 1.96% per annum at June 30, 2016. As of December 31, 2016,~~available borrowing capacity under the ~~amount of the unused revolving lines of credit with~~2018 Bank of America ~~under~~Credit Facility was $243.6 million, subject to the ~~credit agreements was $21,801,000.~~borrowing base limitation and compliance with other applicable terms.

In February 2017, the Company drew an additional $10,000,000 from Bank of America revolving line of credit with interest rate at 1.29% per annum to support the Company's growth and expansion of its business in the Netherlands.

CTBC Bank

In ~~November 2015,~~January 2018, the Company entered into ~~an amendment to the existing~~a credit agreement with CTBC Bank ~~Co., Ltd ("CTBC Bank")~~ that ~~provides~~provided for (i) a 12-month ~~NTD$700,000,000 or $22,017,000~~NTD $700.0 million ($23.6 million U.S. dollar ~~equivalent~~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 iswas 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 ~~revolving line of credit up to 80.00% of eligible accounts receivable in an aggregate amount of up to $17,000,000~~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 ~~USD~~NTD interest rate plus ~~0.30%~~0.25% per annum, which iswas adjusted ~~monthly.~~monthly (collectively, the “2018 CTBC Credit Facility”). The total borrowings allowed under the ~~credit agreement are~~2018 CTBC Credit Facility was initially capped at ~~NTD$1,000,000,000 or $30,340,000 U.S. dollar equivalent.~~$50.0 million and in August 2018 was reduced to $40.0 million. In ~~January 2016,~~June 2019 prior to its maturity, the ~~Company extended~~2018 CTBC Credit Facility was replaced by the ~~revolving line of credit to mature on March 31, 2016.~~2019 CTBC Credit Facility (defined below).

In ~~April 2016,~~June 2019, the Company entered into a credit agreement with CTBC Bank ~~Co., Ltd~~ that provides for (i) a 12-month ~~NTD$700,000,000 or $21,620,000~~NTD $700.0 million ($22.5 million U.S. dollar ~~equivalent~~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. This~~monthly, which term loan facility also includes a 12-month ~~customs bond~~guarantee of up to ~~NTD$100,000,000 or $3,089,000~~NTD $100.0 million ($3.2 million U.S. dollar ~~equivalent~~equivalent) with an annual fee equal to ~~0.5%~~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 ~~(ii)~~(iii) a 12-month revolving line of credit of up to ~~80.00%~~100% of eligible accounts receivable in an aggregate amount of up to ~~$40,000,000~~$50.0 million with 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.~~monthly (collectively, the “2019 CTBC Credit Facility”). The total borrowings allowed under the ~~credit agreement are~~2019 CTBC Credit Facility was capped at ~~$40,000,000.~~$50.0 million. The ~~credit agreement matures~~2019 CTBC Credit Facility is to mature on ~~March 31, 2017.~~June 30, 2020.

The total outstanding borrowings under the 2019 CTBC ~~Bank~~Credit Facility term loan ~~was~~were denominated in ~~Taiwanese dollars~~NTD and ~~was translated~~remeasured into U.S. dollars of ~~$18,521,000~~$23.2 million and ~~$20,357,000~~$22.5 million at ~~December~~March 31, ~~2016~~2020 and June 30, ~~2016,~~2019, respectively. ~~At December~~As of March 31, ~~2016 and June 30, 2016,~~2020, the total outstanding borrowings under the 2019 CTBC ~~Bank~~Credit Facility revolving line of credit ~~was $20,800,000 and $10,100,000, respectively,~~were $10.0 million in U.S. dollars. At June 30, 2019, the Company did not have any outstanding balance under the 2019 CTBC Credit Facility revolving line of credit. The interest rate for these loans ~~ranged from 0.95% and 2.15% at December 31, 2016 and 0.90% and 1.25%~~were 0.91% per annum atas of March 31, 2020 and 0.93% per annum as of June 30, ~~2016.~~2019. At ~~December~~March 31, ~~2016,~~2020, the amount available for future borrowing under ~~this credit agreement~~the 2019 CTBC Credit Facility was ~~$612,000.~~$16.8 million. As of March 31, 2020, the net book value of land and building located in Bade, Taiwan, collateralizing the 2019 CTBC Credit Facility term loan was $25.5 million.

In January 2017, the Company drew an additional $8,000,000 from CTBC Bank revolving line of credit with the interest rate at 1.55% per annum to support the Company's growth and expansion of its business in the Netherlands.

Covenant Compliance

2018 Bank of America Credit Facility

The credit agreement with Bank of America related to 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. The credit agreement contains ~~certain~~a financial ~~covenants, including~~covenant, which requires that the ~~following:~~

~~Not to incur on~~Company maintain a ~~consolidated basis, a net loss before taxes and extraordinary items for any two consecutive fiscal quarters;~~

~~The Consolidated Leverage~~Fixed Charge Coverage Ratio, as defined in the agreement as of ~~the end of any fiscal quarter, measured~~at least 1.00 for ~~the most recently completed twelve (12) months of the Company, shall not be greater than 2.00;~~

~~The domestic unencumbered liquid assets,~~each twelve-month period while a Trigger Period, as defined in the agreement, ~~maintained~~is in ~~accounts within~~effect. The Company has been in compliance with all the ~~United States shall have an aggregate market value of not less than $30,000,000, measured quarterly as of~~covenants under the ~~last day of each fiscal quarter.~~

~~As of December 31, 2016 and June 30, 2016, total assets of $998,259,000 and $934,625,000, respectively, collateralized the line of credit with~~2018 Bank of America under the credit agreement, which represent the total assets of the United States headquarter company, except for seven buildings located in San Jose, California and property, plant and equipment and inventory in those buildings. As of December 31, 2016 and June 30, 2016, total assets collateralizing the term loan withCredit Facility.

On September 7, 2018, Bank of America ~~under~~issued an extension letter to the ~~credit~~Company in connection with the 2018 Bank of America Credit Facility, which extended the delivery date of the Company's audited consolidated financial statements, compliance certificates and other material reports for the fiscal year ended June 30, 2018 to January 31, 2019. On January 31, 2019, the Company entered into an amendment of the loan and security agreement ~~were $101,074,000~~with respect to the 2018 Bank of America Credit Facility to, among other matters, (a) extend the delivery date of the Company's audited consolidated financial statements, compliance certificates and ~~$59,258,000, respectively. As~~other material reports for the fiscal year ended June 30, 2018 to June 30, 2019, and (b) require the delivery, by no later than March 31, 2019 of ~~December~~the Company's audited consolidated financial statements for the fiscal year ended

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~~31, 2016,~~June 30, 2017. In April 2019, the Company paid a fee to extend the delivery to June 30, 2019 of its audited consolidated financial statements for the fiscal year ended June 30, 2017. In connection with the second amendment of the 2018 Bank of America Credit Facility to extend the maturity of the 2018 Bank of America Credit Facility, the Company was required to deliver its audited consolidated financial statements for the fiscal year ended June 30, 2018 by December 31, 2019, and deliver its audited consolidated financial statements for the fiscal year ended June 30, 2019 by March 31, 2020. If the Company elects to deliver the audited consolidated financial statements for the fiscal years ended June 30, 2019 and 2018 together in ~~compliance with all financial covenants associated~~a combined filing with the ~~credit agreements~~SEC, the Company is required to deliver its audited financial statements by March 31, 2020.

On December 19, 2019, the Company filed with the SEC its comprehensive Annual Report on Form 10-K for the fiscal year ended June 30, 2019, with expanded financial and other disclosures in lieu of filing a separate Annual Report on Form 10-K for the fiscal year ended June 30, 2018 and in lieu of filing Quarterly Reports on Form 10-Q for the first three quarters of fiscal year 2018. On December 19, 2019, the Company also filed with the SEC its Quarterly Reports on Form 10-Q for the quarters ended September 30, 2018, December 31, 2018 and March 31, 2019. As such, the Company complied with the requirements of the second amendment of the 2018 Bank of ~~America.~~America Credit Facility.

CTBC Bank

~~As of December 31, 2016 and June 30, 2016, the land and building located in Bade, Taiwan with a value of $26,623,000 and $26,804,000, respectively, collateralized the term loan with CTBC Bank.~~ There are no financial covenants associated with the ~~term loan with~~2018 CTBC ~~Bank at December 31, 2016.~~Credit Facility or the 2019 CTBC Credit Facility.

Note ~~7. Related-party~~8. 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 ~~Other~~deferred rent that existed as of the date of adoption. These operating lease ROU assets relate to 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.

Operating lease expense recognized and supplemental cash flow information related to operating leases for the three and nine months ended March 31, 2020 were as follows (in thousands):



	Three Months Ended		Nine Months Ended
	March 31, 2020		March 31, 2020
Operating lease expense (including expense for lease agreements with related parties of $359 and $1,086 for the three and nine months ended March 31, 2019, respectively)	$	1,605	$	4,909
Cash payments for operating leases (including payments to related parties of $369 and $1,106 for the three and nine months ended March 31, 2019, respectively)	$	1,667	$	5,082
New operating lease assets obtained in exchange for operating lease liabilities	$	14,221	$	14,889

During the three and nine months ended March 31, 2020, the Company's costs related to short-term lease arrangements for real estate and non-real estate assets were immaterial. Variable payments expensed in the three and nine months ended March 31, 2020 were $0.2 million and $0.9 million, respectively.

As of March 31, 2020, the weighted average remaining lease term for operating leases was 4.7 years and the weighted average discount rate was 3.6%. Future minimum lease payments under noncancelable operating lease arrangements as of March 31, 2020 were as follows (in thousands):

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(Unaudited)



Fiscal Year:	Minimum lease payments
2020 (remainder)	$	2,208
2021	6,974
2022	5,613
2023	4,219
2024	4,204
2025 and beyond	5,232
Total future lease payments	$	28,450
Less: Imputed interest	(2,859		)
Present value of operating lease liabilities	$	25,591

As of March 31, 2020, commitments under short-term lease arrangements were immaterial. As of March 31, 2020, operating and financing leases that have not yet commenced were immaterial.

The Company has entered into lease agreements with related parties. See Note 9, "Related Party Transactions," for discussion.

Note 9. Related Party Transactions

The Company has a variety of business relationships with Ablecom ~~Technology Inc.~~—and Compuware. Ablecom aand Compuware are both Taiwan ~~corporation, together with one of its subsidiaries, Compuware (collectively “Ablecom”),~~corporations. Ablecom is one of the Company’s major contract ~~manufacturers. Ablecom’s ownership of~~manufacturers; Compuware is ~~below~~ ~~50%~~ ~~but Compuware remains~~both a ~~related party as Ablecom still has significant influence over its operations.~~distributor of the Company’s products and a contract manufacturer for the Company. Ablecom’s ~~chief executive officer,~~Chief Executive Officer, Steve Liang, is the brother of Charles Liang, the Company’s President, Chief Executive Officer and Chairman of the ~~Board~~Board. As of ~~Directors. Ablecom owns approximately 0.4% of the Company’s common stock.~~March 31, 2020, Charles Liang and his ~~wife,~~spouse, Sara Liu, who is also an officer and director of the Company, collectively ~~own~~owned approximately 10.5% of ~~Ablecom, while~~Ablecom’s capital stock. The Company does not own, nor has it ever owned, any of Ablecom’s capital stock. Steve Liang and ~~other~~his family members owned approximately 28.8% of Ablecom’s stock as of March 31, 2020. 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. None of the Company, Charles Liang or Sara Liu own ~~approximately 36.0%~~any capital stock of ~~Ablecom at December 31, 2016.~~Compuware.

Dealings with Ablecom

The Company has entered into a series of agreements with Ablecom, including multiple product ~~design~~development, production and service agreements, product manufacturing agreements, manufacturing services agreements ~~(“product design~~ and ~~manufacturing agreements”) and a distribution agreement (“distribution agreement”) with Ablecom.~~lease agreements for warehouse space.

Under ~~the product design and manufacturing~~these agreements, the Company outsources to Ablecom a portion of its design activities and a significant part of its ~~manufacturing of components such as~~ server chassis manufacturing as well as an immaterial portion of other components. Ablecom manufactured approximately 95.1% and 96.0% of the chassis included in the products sold by the Company during the three months ended March 31, 2020 and 2019, respectively; and approximately 95.3% and 95.5% of the chassis included in the products sold by the Company during the nine months ended March 31, 2020 and 2019, respectively. With respect to ~~Ablecom.~~design activities, Ablecom generally agrees to design certain agreed-upon products according to the Company’s ~~specifications. Additionally, Ablecom~~specifications, and further agrees to build the tools needed to manufacture the products. The Company ~~has agreed to pay~~pays Ablecom for ~~Ablecom's cost of chassis and related product tooling~~the design and engineering services, and ~~will~~further agrees to pay Ablecom for ~~those items when~~ the ~~work has been completed.~~tooling. The Company retains full ownership of any intellectual property resulting from the design of these products and tooling.

~~Under~~With respect to the ~~distribution agreement,~~manufacturing aspects of the relationship, Ablecom purchases ~~server products~~most of materials needed to manufacture the chassis from third parties and the Company ~~for distribution~~provides certain components used in ~~Taiwan. The Company believes that~~ the ~~pricing~~manufacturing process (such as power supplies) to Ablecom through consignment or sales transactions. Ablecom uses these materials and ~~terms under~~components to manufacture the ~~distribution agreement are similar~~completed chassis and then sell them back to the ~~pricing and terms~~Company. For the components purchased from the

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(Unaudited)

Company, Ablecom sells the ~~Company has with similar, third party distributors.~~

~~Ablecom’s net sales~~components back to the Company at a price equal to the price at which the Company sold the components to Ablecom. The Company and ~~its net sales~~Ablecom frequently review and negotiate the prices of the Company’s products to others comprise a substantial majority of Ablecom’s net sales. The Company purchased products from Ablecom totaling $64,930,000 and $115,135,000, and sold products to Ablecom totaling $7,003,000 and $10,345,000 for the three and six months ended December 31, 2016, respectively. The Company purchased products from Ablecom totaling $71,451,000 and $130,712,000, and sold products to Ablecom totaling $2,492,000 and $7,712,000 for the three and six months ended December 31, 2015, respectively.

~~Amounts owed to~~chassis the Company ~~by Ablecom as of December 31, 2016 and June 30, 2016 were $12,378,000 and $4,678,000, respectively. Amounts owed~~purchases from Ablecom. In addition to ~~Ablecom by~~inventory purchases, the Company ~~as of December 31, 2016~~also incurs other costs associated with design services, tooling and June 30, 2016 were $54,278,000 and $39,152,000, respectively. For the three and six months ended December 31, 2016, the Company paid Ablecom the majority of invoiced dollars between 48 and 83 days of invoice date. For the three and six months ended December 31, 2016, the Company paid $1,191,000 and $2,936,000, respectively, for tooling assets andother miscellaneous costs ~~to Ablecom. For the three and six months ended December 31, 2015, the Company paid $1,736,000 and $2,898,000, respectively, for tooling assets and miscellaneous costs to~~from Ablecom.

The Company’s exposure to financial loss as a result of its involvement with Ablecom is limited to ~~(a)~~ potential losses on its purchase orders in the event of an unforeseen decline in the market price and/or demand of the Company’s products such that the Company incurs a loss on the sale or cannot sell the products. Outstanding purchase orders from the Company to Ablecom were $60.0 million and $31.0 million at March 31, 2020 and June 30, 2019, respectively, representing the maximum exposure to financial loss. The Company does not directly or indirectly guarantee any obligations of Ablecom, or any losses that the equity holders of Ablecom may suffer. Since Ablecom manufactures substantially all the chassis that the Company incorporates into its products, if Ablecom were to suddenly be unable to manufacture chassis for the Company, the Company’s business could suffer if the Company is unable to quickly qualify substitute suppliers who can supply high-quality chassis to the Company in volume and at acceptable prices.

Dealings with Compuware

The Company has entered into a distribution agreement with Compuware, under which the Company appointed Compuware as a non-exclusive distributor of the Company’s products in Taiwan, China and Australia. Compuware assumes the responsibility to install the Company's products at the site of the end customer, if required, and administers customer support in exchange for a discount from the Company's standard price for its purchases.

The Company also has entered into a series of agreements with Compuware, including a multiple product development, production and service agreements, product manufacturing agreements, and lease agreements for office space.

Under these agreements, the Company outsources to Compuware a portion of its design activities and a significant part of its power supplies manufacturing as well as an immaterial portion of 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 ~~(b)~~tooling. With respect to the manufacturing aspects of the relationship, Compuware purchases most of materials needed to manufacture the power supplies from outside markets and uses these materials to manufacture the products and then sell those products to the Company. The Company and Compuware frequently review and negotiate the prices of the power supplies the Company purchases from Compuware.

Compuware also manufactures motherboards, backplanes and other components used on printed circuit boards for the Company. The Company sells to Compuware most of the components needed to manufacture the above products. Compuware uses the components to manufacture the products and then sells the products back to the Company at a purchase price equal to the price at which the Company sold the components to Compuware, plus a “manufacturing value added” fee and other miscellaneous material charges and costs. The Company and Compuware frequently review and negotiate the amount of the “manufacturing value added” fee that will be included in the price of the products the Company purchases from Compuware. In addition to the inventory purchases, the Company also incurs costs associated with design services, tooling assets, and miscellaneous costs.

The Company’s exposure to financial loss as a result of its involvement with Compuware is limited to potential losses on ~~outstanding accounts receivable from Ablecom~~its purchase orders in the event of an unforeseen ~~deterioration~~decline in the ~~financial condition~~market price and/or demand of ~~Ablecom~~the Company’s products such that ~~Ablecom defaults~~the Company incurs a loss on ~~its payable to~~ the ~~Company.~~sale or cannot sell the products. Outstanding purchase orders ~~with Ablecom~~from the Company to Compuware were ~~$104,569,000~~$111.2 million and ~~$62,782,000~~$70.6 million at ~~December~~March 31, ~~2016~~2020 and June 30, ~~2016,~~2019, respectively, representing the maximum exposure to ~~loss relating to (a) above.~~financial loss. The Company does not ~~have~~directly or indirectly guarantee any ~~direct~~obligations of Compuware, or ~~indirect guarantees~~any losses that the equity holders of ~~losses of Ablecom.~~Compuware may suffer.

In May 2012, the Company and Ablecom jointly established Super Micro Asia Science and Technology Park, Inc. ("Management Company") in Taiwan to manage the common areas shared by the Company and Ablecom for their separately constructed manufacturing facilities. Each company contributed ~~$168,000~~ ~~and owns~~ ~~50%~~ ~~of the Management Company. Although the operations of the Management Company are independent of the Company, through governance rights, the~~

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(Unaudited)

~~Company has the ability to direct the Management Company's business strategies. Therefore, the Company has concluded that the Management Company is a variable interest entity~~The Company’s results from transactions with Ablecom and Compuware for each of the Company as the Company is the primary beneficiary of the Management Company. The accounts of the Management Company are consolidated with the accounts of the Company, and a noncontrolling interest has been recorded for the Ablecom's interests in the net assets and operations of the Management Company. In the three and ~~six~~nine months ended ~~December~~March 31, ~~2016, $29,000~~2020 and ~~$24,000~~2019, are as follows (in thousands):



	Three Months Ended March 31,				Nine Months Ended March 31,
	2020		2019		2020		2019
Ablecom
Purchases (1)	$	37,607	$	29,372	$	115,295	$	110,290

Compuware
Net sales	$	7,503	$	3,846	$	19,456	$	13,628
Purchases (1)	24,908		34,140		91,662		111,629

__________________________

(1) Includes principally purchases of inventory and other miscellaneous items.

The Company's net ~~loss attributable~~sales to ~~Ablecom's interest was included in the Company's general and administrative expenses in the condensed consolidated statements of operations, respectively. In~~Ablecom were not material for the three and ~~six~~nine months ended ~~December~~March 31, ~~2015, $6,000~~2020 and ~~$4,000~~2019.

The Company had the following balances related to transactions with Ablecom and Compuware as of ~~net loss attributable to Ablecom's interest was included~~March 31, 2020 and June 30, 2019 (in thousands):



	March 31, 2020		June 30, 2019
Ablecom
Accounts receivable and other receivables (1)	$	4,749	$	7,236
Accounts payable and accrued liabilities (2)	28,928		33,928
Other long-term liabilities (3)	1,036		—

Compuware
Accounts receivable and other receivables (1)	$	18,046	$	14,396
Accounts payable and accrued liabilities (2)	43,935		34,417
Other long-term liabilities (3)	335		—

____________________________

(1) Other receivables include receivables from vendors.

(2) Includes current portion of operating lease liabilities.

(3) Represents non-current portion of operating lease liabilities.

See Note 1, "Organization and Summary of Significant Accounting Policies" for a discussion of the transactions and balances in the ~~Company's general and administrative expenses in the condensed consolidated statements of operations, respectively.~~Company’s Corporate Venture.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Note 8.10. Income Taxes

The Company recorded a benefit for income taxes of $0.9 million for the three months ended March 31, 2020, and a provision for income taxes of $9.8 million for the nine months ended March 31, 2020. The Company recorded provisions for income taxes of ~~$9,315,000~~$0.5 million and ~~$15,684,000~~$10.5 million for the three and ~~six~~nine months ended ~~December~~March 31, ~~2016, respectively, and $14,061,000 and $21,565,000 for the three and six months ended December 31, 2015,~~2019, respectively. The effective tax rate was ~~29.7%~~(5.6)% and ~~30.6%~~12.8% for the three and ~~six~~nine months ended ~~December~~March 31, ~~2016,~~2020, respectively, and ~~28.8%~~4.3% and ~~30.8%~~16.9% for the three and ~~six~~nine months ended ~~December~~March 31, ~~2015,~~2019, respectively. The effective tax rate for the three and ~~six~~nine months ended ~~December~~March 31, ~~2016~~2020 is ~~estimated to be~~ lower than that for the ~~federal statutory rate~~three and nine months ended March 31, 2019, primarily due to the tax benefit from ~~U.S. federal research~~employees’ exercises of stock options.

As a result of the 2017 Tax Reform Act, in December 2019, the Company realigned its international business operations and ~~development ("R&D"~~group structure. As a part of this restructuring, the Company moved certain intellectual property back to the United States. This tax restructuring is not expected to have a material impact on the estimated annual effective tax rate.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted. The CARES Act provides temporary relief from certain aspects of the 2017 Tax Reform Act that imposed limitations on the utilization of certain losses, interest expense deductions and alternative minimum tax credits and ~~domestic production activities deductions.~~made a technical correction to the 2017 Tax Reform Act related to the depreciable life of qualified improvement property. The CARES Act is not expected to have a material impact on the Company.

As of ~~December~~March 31, ~~2016,~~2020, the Company had a liability for gross unrecognized tax benefits of ~~$18,784,000,~~$25.8 million, substantially all of which, if recognized, would affect the Company's effective tax rate. During the ~~three and six~~nine months ended ~~December~~March 31, ~~2016,~~2020, there were no material changes in the total amount of the liability for gross unrecognized tax benefits. The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the provision for taxes on the condensed consolidated statements of operations. As of ~~December~~March 31, ~~2016,~~2020, the Company had accrued ~~$1,507,000~~$2.0 million of interest and penalties relating to unrecognized tax benefits.

~~The~~Under the 2017 Tax Reform Act, starting on July 1, 2018, the Company is no longer subject to ~~United States~~ federal income tax ~~as well as income taxes~~on earnings remitted from our foreign subsidiaries. As a result of the 2017 Tax Reform Act, the Company has determined that its foreign undistributed earnings are indefinitely reinvested except for undistributed earnings related to the Company's operations in ~~many state and foreign jurisdictions. The Company's 2012 and 2013 federal tax returns are currently under~~ the ~~Internal Revenue Service ("IRS") examination.~~Netherlands. The Company ~~has responded~~may repatriate certain foreign earnings from the Netherlands that have been previously taxed in the U.S. The tax impact of such repatriation is estimated to ~~Information Document Requests ("IDRs"), issued by~~be immaterial.

In October 2019, the ~~IRS. No adjustment has been proposed by the IRS as of December 31, 2016. The Company was also under~~Taiwan tax authority completed its audit in Taiwan for ~~tax~~fiscal year ~~2013 related to local income taxes. The audit~~2018 and proposed a transfer pricing adjustment on the Company which resulted in ~~minimal~~additional tax ~~adjustments. While management~~liability of $1.6 million. The Company accepted the proposed adjustment in October 2019 and paid the $1.6 million tax liability in accordance with the tax assessment notice issued in February 2020. The impact of this adjustment on the income statement has been offset by the recognition of previously unrecognized tax benefits for the three months ended March 31, 2020.

In February 2020, the Taiwan tax authority proposed an adjustment to the Company’s fiscal year 2019 transfer pricing which resulted in additional tax liability of $1.0 million. The Company accepted the proposed adjustment and paid the $1.0 million tax liability in February 2020. The impact of this adjustment on the income statement has been offset by the recognition of previously unrecognized tax benefits for the three months ended March 31, 2020.

The Company believes that ~~the Company~~it has adequately provided reserves for all uncertain tax ~~positions,~~positions; however, amounts asserted by tax authorities could be greater or less than the Company’s current position. Accordingly, the Company’s provision on federal, state and foreign tax related matters to be recorded in the future may change as revised estimates are made or as the underlying matters are settled or otherwise resolved.

The federal statute of limitations remains open in general for tax years ended June 30, 2017 through 2019. Various states statute of limitations remain open in general for tax years ~~2012~~ended June 30, 2016 through ~~2016. The state statute of limitations remain open in general for tax years 2012 through 2016. The statute~~2019. Certain statutes of limitations in major foreign jurisdictions remain open ~~for examination~~ in general for the tax years ~~2010~~ended June 30, 2014 through ~~2016. For the third quarter of fiscal year 2017, the~~2019. The Company ~~expects a decrease of approximately $1,890,000 of~~does not expect its unrecognized tax benefits ~~related~~ to ~~foreign uncertain tax positions as a result~~change materially over the next 12 months, except for the reductions arising from the lapse of the ~~completion~~statute of limitations. It is reasonably possible that our gross unrecognized tax benefits will decrease by approximately $5.5 million in the next 12 months, primarily due to the lapse of the ~~income~~statute of limitations and

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

settlement with the Tax Authorities. These adjustments, if recognized, would positively impact our effective tax ~~audit in Taiwan.~~rate, and would be recognized as additional tax benefits.

Note 9.11. Commitments and Contingencies

Litigation and Claims— On February 8, 2018, 2 putative class action complaints were filed against the Company, the Company's Chief Executive Officer, and the Company's former Chief Financial Officer in the U.S. District Court for the Northern District of California (Hessefort v. Super Micro Computer, Inc., et al., No. 18-cv-00838 and United Union of Roofers v. Super Micro Computer, Inc., et al., No. 18-cv-00850). The complaints contain similar allegations, claiming that the defendants violated Section 10(b) of the Securities Exchange Act due 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 the Company's Senior Vice President of Investor Relations as an additional defendant. On June 21, 2019, the lead plaintiff filed a further amended complaint naming the Company's former Senior Vice President of International Sales, Corporate Secretary, and Director as an additional defendant. On July 26, 2019, the Company filed a motion to dismiss the complaint. On March 23, 2020, the Court granted the Company’s motion to dismiss the complaint, with leave for lead plaintiff to file an amended complaint within 30 days. On April 22, 2020, lead plaintiff filed a further amended complaint. The Company believes the claims are without merit and intends to vigorously defend against the lawsuit.

SEC Matter— The Company has cooperated with the SEC in its investigation of marketing expenses that contained certain irregularities discovered by the Company’s management, which irregularities were disclosed on August 31, 2015. In addition, the Company received subpoenas from the SEC in connection with the matters underlying its inability to timely file the Company's Form 10-K for the fiscal year ended June 30, 2017. The Company also received a subpoena from the SEC following the publication of a false and widely discredited news article in October 2018 concerning its products. The Company has cooperated fully to comply with these government requests. The Company has reached an agreement in principle regarding a proposed settlement of these matters with the staff of the SEC, subject to final approval by the Commissioners of the SEC. Under the terms of the proposed resolution, the Company will pay a penalty of $17.5 million. In addition, the Company’s Chief Executive Officer has reached an agreement in principle regarding a proposed settlement of these matters with the staff of the SEC, subject to final approval by the Commissioners of the SEC. Under the terms of the proposed resolution, the Chief Executive Officer will pay the Company the sum of $2,122,000 as reimbursement of profits from certain stock sales during the relevant period, pursuant to Section 304 of the Sarbanes-Oxley Act of 2002. As of March 31, 2020, the Company recorded a liability of $17.5 million for the Company’s potential SEC settlement included in general and administrative expenses and accrued liabilities in the condensed consolidated financial statements. The Chief Executive Officer’s potential payment of $2,122,000 to the Company is a contingent gain and will be recorded if and when it is realized. The Company and the Chief Executive Officer have not reached final resolutions of these matters with the SEC and the Company cannot predict when settlements, if finally agreed, would become final, nor whether any of the proposed terms may change in connection with final resolutions.

Other legal proceedings and indemnifications

From time to time, the Company has been involved in various legal proceedings arising from the normal course of business activities. The ~~Company defends itself vigorously against any such claims. In management’s opinion, the~~ resolution of any such matters ~~will~~have not ~~have~~had a material ~~adverse effect~~impact on the Company’s consolidated financial condition, results of operations or ~~liquidity.~~liquidity as of March 31, 2020 and any prior periods.

The Company has entered into indemnification agreements with its current and former directors and executive officers. Under these agreements, the Company has agreed to indemnify such individuals to the fullest extent permitted by law against liabilities that arise by reason of their status as directors or officers and to advance expenses incurred by such individuals in connection with related legal proceedings. It is not possible to determine the maximum potential amount of payments the Company could be required to make under these agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each claim. However, the Company maintains directors and officers liability insurance coverage to reduce its exposure to such obligations.

Purchase Commitments— The Company has agreements to purchase ~~certain units of~~ inventory and non-inventory items primarily through ~~fiscal year 2017.~~the next 12 months. As of ~~December~~March 31, ~~2016,~~2020, these remaining ~~non-cancellable~~noncancelable commitments were ~~$402,229,000 compared to $334,010,000 as of June 30, 2016.~~ $381.1 million, including $122.2 million for related parties.

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Standby Letter of Credit— In October 2019, Bank of America increased the value of a previously issued standby letter of credit from $3.2 million to $6.4 million to facilitate ongoing operations of the Company. The standby letter of credit is cancellable upon written notice from the issuer. No amounts have been drawn under the standby letter of credit.

Note ~~10.~~12. Segment Reporting

The Company operates in ~~one~~1 operating segment that develops and provides high performance server solutions based upon an innovative, modular and open-standard architecture. The Company’s chief operating decision maker is the Chief Executive Officer.

International net sales are based on the country and region to which the products were shipped. The following is a summary for the three and six months ended December 31, 2016 and 2015, of net sales by geographic region (in thousands):

Three Months Ended
December 31, Six Months Ended
December 31,
2016 2015 2016 2015
Net sales:
United States $ 357,881
$ 407,038
$ 653,412
$ 745,734
Europe 130,076
114,134
243,787
200,960
Asia 137,801
88,394
234,081
163,051
Other 26,196
29,398
49,642
48,837
$ 651,954
$ 638,964
$ 1,180,922
$ 1,158,582

The following is a summary of ~~long-lived assets, excluding financial instruments, deferred tax assets~~property, plant and ~~other assets~~equipment, net (in thousands):



	March 31,		June 30,
Long-lived assets:	2020		2019
United States	$	179,154	$	162,835
Asia	47,717		41,915
Europe	3,606		2,587
	$	230,477	$	207,337

December 31, June 30,
2016 2016
Long-lived assets:
United States $ 149,791
$ 142,764
Asia 41,132
42,052
Europe 2,747
3,133
$ 193,670
$ 187,949

The ~~following~~Company’s revenue is presented on a ~~summary~~disaggregated basis in Note 2, “Revenue,” by type of ~~net~~product, by geographical market, and by products sold through its indirect sales ~~by product type (in thousands):~~channel or to its direct customers and OEMs.

Three Months Ended
December 31, Six Months Ended
December 31,
2016 2015 2016 2015
Amount Percent of
Net Sales Amount Percent of
Net Sales Amount Percent of
Net Sales Amount Percent of
Net Sales
Server systems $ 443,998
68.1 % $ 453,747
71.0 % $ 801,491
67.9 % $ 809,958
69.9 %
Subsystems and accessories 207,956
31.9 % 185,217
29.0 % 379,431
32.1 % 348,624
30.1 %
Total $ 651,954
100.0 % $ 638,964
100.0 % $ 1,180,922
100.0 % $ 1,158,582
100.0 %

Server systems constitute an assembly of subsystems and accessories. Subsystems and accessories are comprised of serverboards, chassis and accessories. No customer represented greater than 10% of the Company's total net sales in the three and six months ended December 31, 2016 and one customer represented 15.0% and 12.8% of the Company's total net sales in the three and six months ended December 31, 2015, respectively. No country other than the United States represented greater than ~~10%~~ of the Company’s total net sales in the three and six months ended December 31, 2016 and 2015. No customer accounted for 10% or more of the Company's accounts receivable as of December 31, 2016 and June 30, 2016.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This section and other parts of this ~~Form 10-Q~~Quarterly Report contain “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 (the “Exchange Act”) 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~~discussed under “Risk Factors” ~~below and~~ in ~~other parts~~Part II, Item 1A of this ~~Form 10-Q as well as in our other filings with the SEC.~~filing. These factors may cause our actual results to differ materially from those anticipated or implied in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. We cannot guarantee future results, levels of activity, performance or achievements.

The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with our condensed consolidated financial statements and related footnotes included elsewhere in this Quarterly Report and included in our comprehensive Annual Report on Form 10-K for the fiscal year ended June 30, 2019 (the “2019 Comprehensive 10-K”), which includes our consolidated financial statements for the fiscal years ended June 30, 2019 and 2018.

Nasdaq Relisting of Our Common Stock

On January 14, 2020, our common stock was relisted on the NASDAQ Global Select Market under the symbol “SMCI.”

Overview

We are a global leader ~~in high performance, high efficiency~~and innovator of high-performance, high-efficiency server ~~technology~~ and ~~innovation.~~storage technology. We develop and provide end-to-end green computing solutions to the cloud computing, data center, enterprise, ~~IT,~~ big data, ~~high performance~~artificial intelligence ("AI"), High-Performance Computing ("HPC"), edge computing ~~(“HPC”),~~ and Internet of ~~Things~~Things/embedded (“IoT”)~~/embedded~~ markets. Our solutions range from complete server, storage, modular blade servers, blades and workstations to full racks, networking devices, server management software, server sub-systems and ~~technology~~global support and services. Our net sales were $652.0 million and $1,180.9 million for the three and six months ended December 31, 2016, respectively, and $639.0 million and $1,158.6 million for the three and six months ended December 31, 2015, respectively. The increase in our net sales in the three and six months ended December 31, 2016 compared with the three and six months ended December 31, 2015 was primarily due to increased sales of our subsystems and accessories to our distributors. Net sales of optimized servers were $444.0 million and $801.5 million for the three and six months ended December 31, 2016, respectively, and $453.7 million and $810.0 million for the three and six months ended December 31, 2015, respectively, and net sales of subsystems and accessories were $208.0 million and $379.4 million for the three and six months ended December 31, 2016, respectively, and $185.2 million and $348.6 million for the three and six months ended December 31, 2015, respectively. In the three and six months ended December 31, 2016, we experienced a decrease in sales of our complete server systems primarily due to a decrease in ultra and data center optimized servers offset in part by growth in sales of high density Twin family of servers, storage, accelerated GPU computing servers or HPC and MicroBlade and strong growth from enterprise cloud and Asia Pacific, particularly China. The percentage of our net sales represented by sales of server systems decreased to 68.1% and 67.9% in the three and six months ended December 31, 2016 from 71.0% and 69.9% in the three and six months ended December 31, 2015, respectively.

We commenced operations in 1993 and have been profitable every year since inception. Our net income was $22.0 million and $35.5 million for the three and six months ended December 31, 2016, respectively, and $34.7 million and $48.4 million for the three and six months ended December 31, 2015, respectively. Our decrease in net income in the three and six months ended December 31, 2016 was primarily attributable to lower gross margins from sales of our complete server systems due to higher costs related to shortages of memory and solid state drives ("SSD") and higher operating expenses from headcount and annual salary increases to support our business growth.

We sell our server systems and subsystems and accessories through our direct sales force as well as through distributors and OEMs. We derived 53.8% and 52.1% of our net sales from products sold to direct customers and OEMs for the three and six months ended December 31, 2016, respectively. We derived 58.1% and 56.4% of our net sales from products sold to direct customers and OEMs for the three and six months ended December 31, 2015, respectively. None of our customers accounted for 10% or more of our net sales in the three and six months ended December 31, 2016. Sales to SoftLayer, a division of IBM Corporation, represented 15.0% and 12.8% of our net sales in the three and six months ended December 31, 2015. We derived 55.0% and 55.4% of our net sales from customers in the United States for the three and six months ended December 31, 2016, respectively, and 63.7% and 64.4% for the three and six months ended December 31, 2015, respectively.

~~We perform the majority of our research and development efforts in-house. Research and development expenses represented 5.2% and 5.7% of our net~~ sales for the three ~~and six~~ months ended ~~December~~March 31, ~~2016, respectively,~~2020 increased to $772.4 million from $743.5 million for the corresponding period in the prior year, and ~~4.7% and 5.1% of~~ our net ~~sales~~income for the three ~~and six~~ months ended ~~December~~March 31, ~~2015, respectively.~~

~~We use several suppliers and contract manufacturers~~2020 increased to design and manufacture components in accordance with our specifications, with most final assembly and testing performed at our manufacturing facility in San Jose, California. During fiscal year 2017, we have continued to increase manufacturing and service operations in Taiwan and the Netherlands primarily to support our Asian and European customers, and we have continued to improve our utilization of our overseas manufacturing

~~capacity. One of our key suppliers is Ablecom, a related party, which supplies us with contract design and manufacturing support. For the three and six months ended December 31, 2016, our purchases~~$15.8 million from ~~Ablecom represented 11.6% and 11.4% of our cost of sales, respectively, compared to 13.4% and 13.3% of our cost of sales~~$10.6 million for the three and six months ended December 31, 2015, respectively. Ablecom’s sales to us constitute a substantial majority of Ablecom’s net sales. We continue to maintain our manufacturing relationship with Ablecom in an effort to reduce our cost of sales. In addition to providing contract manufacturing services for us, Ablecom continues to warehouse for us a number of components and subassemblies manufactured by multiple suppliers prior to shipment to our facilitiescorresponding period in the ~~United States and Europe.~~prior year. We typically negotiate the price of products that we purchase from Ablecom on a quarterly basis; however, either party may re-negotiate the price of products with each order. As a result of our relationship with Ablecom, it is possible that Ablecom may in the future sell products to us at a price higher or lower than we could obtain from an unrelated third party supplier. This may result in our future reporting of gross profit as a percentage of net sales that is less than or in excess of what we might have obtained absent our relationship with Ablecom.

~~In order to continue~~seek to increase our ~~net~~ sales and profits weevery quarter. We believe that to do so, we must continue to develop flexible and ~~customizable~~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 our customer service and support offerings, particularly as we increasingly focus on larger enterprise ~~sales.~~customers. Additionally, we 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 ~~as a percentage of net sales,~~margin and operating ~~income as a percentage of net sales, levels of inventory, and days sales outstanding (“DSOs”). In connection with these efforts, we monitor daily and weekly sales and shipment reports.~~margin. Among the key non-financial indicators of our success is our ability to rapidly introduce new products and deliver the latest ~~application optimized~~application-optimized server and storage solutions. In this regard, we work closely with microprocessor and other key component vendors ~~to take advantage of~~incorporating 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 product introduction cycles of Intel ~~AMD~~Corporation, Advanced Micro Devices, Inc., Nvidia Corporation, Samsung Electronics Company Limited, Micron Technology, Inc. and ~~Nvidia~~others carefully. This also impacts our research and development expenditures as we continue to invest ~~more~~significantly in our current and future product development efforts.

~~Other~~ Coronavirus (COVID-19) Pandemic Impact

The global spread of the coronavirus (COVID-19) and the various attempts to contain it have created significant volatility, uncertainty and economic disruption for many businesses worldwide. In an effort to contain COVID-19 or slow its spread, governments around the world have enacted various measures, including orders to close all businesses not deemed “essential,” shelter in place, and practice social distancing when engaging in essential activities. We are an essential business under the relevant 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 workforce and we immediately began to implement numerous health precautions and work practices to operate in a safe manner.

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We quickly transitioned most of our indirect labor forces to work from home and continued to operate our local assembly in Taiwan and, to a lesser extent, 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 fourth quarter of fiscal year 2020 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 discover greater indirect exposure to distressed industries through our channel partners and OEM customers.

We have actively managed our supply chain for potential shortage risk by 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 to a lesser extent GPUs such that customer orders can be fulfilled as they are received.

We are monitoring the changes in liquidity and payment patterns of our customer base to evaluate risk in specific industries or geographic areas where cash flow may be disrupted. While we believe that we are adequately capitalized, we are actively managing our liquidity needs and working to expand our access to credit facilities. We are in the process of negotiating an extension of our credit facility with Bank of America and expect this process will be completed by the end of May, 2020.

Looking forward, logistics has emerged as a new challenge as the transportation industry restricts the frequency of departures and increases logistics costs. We expect increased costs in freight as well as direct labor costs as we incentivize our employees to continue to work and assist us in serving our customers, many of whom are in critical industries.

Our management team is focused on guiding our company through the unfolding and emerging challenges presented by COVID-19. Currently, 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.

Financial Highlights

The following is a summary of ~~other~~our financial highlights of the ~~second quarter of fiscal 2017:~~

Net cash provided by (used in) operating activities was $(54.9) million and $86.9 million during the six months ended December 31, 2016 and 2015, respectively. Our cash and cash equivalents, together with our investments, were $131.5 million at the end of the secondthird quarter of fiscal year ~~2017,~~2020:

Net sales increased by 3.9% as compared ~~with $183.7 million at~~to the ~~end~~three months ended March 31, 2019. The increase was mainly due to an increase in the sales of ~~fiscal year 2016. The decrease~~subsystems and accessories and an increase in ~~our cash~~the volume of server and ~~cash equivalents, together with our investments at~~storage systems sold, partially offset by lower average selling prices per system.

Gross margin increased to 17.3% in the ~~end of~~three months ended March 31, 2020 from 15.1% for the ~~second quarter of fiscal year 2017 was~~three months ended March 31, 2019, primarily due to ~~$54.9 million of cash used in our operating activities, $18.5 million used to purchase outstanding common stock~~a favorable geographic, customer and ~~$17.4 million used to purchase property and equipment, of which $8.2 million was related to property and equipment for use at our Green Computing Park in San Jose, California, partially offset~~product mix.

Operating expenses increased by ~~$33.6 million of borrowings, net of repayments.~~

~~Days sales outstanding in accounts receivable (“DSO”) at the end of the second quarter of fiscal year 2017 was 49 days,~~18.4% as compared ~~with 50 days at the end of fiscal year 2016.~~

Our inventory balance was $599.3 million at the end of the second quarter of fiscal year 2017, compared with $449.0 million at the end of fiscal year 2016. Days sales of inventory at the end of the second quarter of fiscal year 2017 was 91 days, compared with 87 days at the end of fiscal year 2016.

Our purchase commitments with contract manufacturers and suppliers were $402.2 million at the end of the second quarter of fiscal year 2017 and $334.0 million at the end of fiscal year 2016. See Note 9 of Notes to our Condensed Consolidated Financial Statements for a discussion of purchase commitments.

~~Fiscal Year~~

~~Our fiscal year ends on June 30. References to fiscal year 2017, for example, refer~~ to the ~~fiscal year ending June 30, 2017.~~three months ended March 31, 2019, and were equal to 15.3% and 13.4% of net sales in the three months ended March 31, 2020 and 2019, respectively.

20Effective tax rate decreased from 4.3% in the three months ended March 31, 2019 to (5.6)% in the three months ended March 31, 2020.

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Revenues and Expenses

Net sales. Net sales consist of sales of our server and storage solutions, including ~~server~~ systems and related services and subsystems and accessories. The main factors ~~which~~that impact our net sales are the number of compute nodes ~~shipped and~~sold, the average selling prices per node for our server and storage system sales and units shipped and the average selling price per unit and units shipped for our subsystem and ~~accessories sales.~~accessories. The prices for our server and storage systems range widely depending upon the configuration, including the number of compute nodes onin a server system as well as the level of integration of key components such as SSDs, and memory, and the prices for our subsystems and accessories can also vary widely based on ~~the type.~~whether a customer is purchasing power supplies, server boards, chassis or other accessories. A compute node is aan independent hardware configuration within a server system capable of having its own CPU, ~~RAM~~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 ~~products,~~product life cycles, average selling prices typically are highest at the time of introduction of new products ~~which~~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, and due to price transparency of certain higher cost components, we must

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actively change our selling price per unit in response to changes in costs for key components such as memory and SSDs, and actively adjust our procurement practices in anticipation of near term fluctuations in market prices for key components.

Cost of ~~sales.~~ sales. Cost of sales primarily consists of the costs to manufacture our products, including the costs of materials, contract manufacturing, shipping, personnel and related expenses including ~~stock based~~stock-based compensation, equipment and facility expenses, warranty costs and inventory excess and ~~obsolete~~obsolescence provisions. The primary factors that impact our cost of sales are the mix of products sold and cost of materials, which include ~~raw material costs,~~purchased parts, shipping costs, ~~and~~ salary and benefits and overhead costs related to production. Cost of sales as a percentage of net sales may increase over time if decreases in average selling prices are not offset by corresponding decreases in our costs. Our cost of sales as a percentage of net sales is also impacted by the extent to which we are able to efficiently utilize our expanding manufacturing capacity. Because we generally do not have long-term fixed supply agreements, our cost of sales is subject to change 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 ~~be negatively impacted by~~increase due to significant component price increases resulting from a number of factors, including 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 performed at our manufacturing facility in San Jose, California. Beginning in fiscal year 2019, we expanded manufacturing and service operations in Taiwan and the Netherlands primarily to support our Asian and European customers and have continued to work on improving our utilization of our overseas manufacturing capacity. We continue to enhance our Taiwan manufacturing operations to increase the diversification of our manufacturing capabilities in order to strengthen our business continuity and better position the Company to respond to challenges, such as those arising from COVID-19. 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 subsystems, particularly power supplies. Our purchases of products from Ablecom and Compuware represented 9.4% and 9.9% of total cost of sales for the three months ended March 31, 2020 and 2019, respectively, and 9.8% and 9.4% for the nine months ended March 31, 2020 and 2019, respectively. For further details on our dealings with related parties, see Part I, Item 1, Note 9, “Related Party Transactions.”

Research and development expenses. Research and development expenses consist of ~~the~~ personnel expenses including: salaries, benefits, stock-based compensation and incentive bonuses, and related expenses ~~including stock based compensation of~~for our research and development ~~teams, and~~personnel, as well as other product development costs such as materials and supplies, consulting services, ~~third party~~third-party testing services and equipment and facility expenses related to our research and development activities. All research and development costs are expensed as incurred. We occasionally receive non-recurring engineering ~~(“NRE”),~~ funding from certain suppliers and ~~customers.~~customers for joint development. Under these ~~programs,~~arrangements, we are reimbursed for certain research and development costs that we incur as part of the joint development ~~of our products and those of~~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. Sales and marketing expenses consist primarily of personnel expenses, including: salaries, ~~stock based~~benefits, stock-based compensation and incentive bonuses, and related expenses for our sales and marketing personnel, costs for tradeshows, independent sales representative fees and marketing programs. From time to time, we receive cooperative marketing funding from certain suppliers. Under these ~~programs,~~arrangements, we are reimbursed for certain marketing costs that we incur as part of the joint promotion of our products and those of our suppliers. These amounts offset a portion of the related expenses and have the effect of reducing our reported sales and marketing expenses. ~~Similarly, we from time to time offer our distributors cooperative marketing funding. To the extent the funding is not recorded as contra-revenue, it has the effect of increasing our expenses.~~ The timing, magnitude and estimated usage of ~~our~~these programs ~~and those of our suppliers~~ can result in significant variations in reported sales and marketing expenses from period to period. Spending on cooperative marketing, ~~either~~reimbursed by ~~us or~~ our suppliers, typically increases in connection with ~~significant~~new product releases by ~~us or~~ our suppliers.

General and administrative expenses. General and administrative expenses consist primarily of general corporate costs, including personnel expenses such as: salaries, benefits, stock-based compensation and incentive bonuses, and related expenses for our general and administrative personnel, financial reporting, information technology, corporate governance and compliance and outside legal, audit, tax fees, insurance and ~~tax fees.~~bad debt.

~~Interest and other~~Other income ~~net. Interest and other~~(expense), net. Other income (expense), net ~~consist~~consists primarily of interest earned on our investment and cash ~~balances.~~balances and foreign exchange gains and losses.

Interest ~~expense~~. expense. Interest expense represents interest expense on our term loans and lines of credit.

Income tax provision. Our income tax provision is based on our taxable income generated in the jurisdictions in which we operate, primarily the United States, Taiwan and the Netherlands. Our effective tax rate differs from the statutory rate

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primarily due to the benefit of research and development tax credits and the domestic production activities deduction which were partially offset by state taxes and unrecognized tax benefits related to permanent establishment exposures.

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Critical Accounting Policies and Estimates

~~There~~

Our financial statements are prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

Except for the changes to our accounting policy as a result of the adoption of the new lease accounting guidance on July 1, 2019, there have been no material changes ~~in the matters for which we make~~to our critical accounting policies and estimates ~~in the preparation of our Condensed Consolidated Financial Statements during the three and six months ended December 31, 2016,~~ as compared to those disclosed in our ~~Annual Report on Form 10-K for~~2019 Comprehensive 10-K. For a description of our critical accounting policies and estimates, see Part I, Item 1, Note 1, "Organization and Summary of Significant Accounting Policies" in our notes to the ~~fiscal year ended June 30, 2016.~~condensed consolidated financial statements in this Quarterly Report.

Results of Operations

The following table presents certain items of our condensed consolidated statements of operations expressed as a percentage of revenue.



	Three Months Ended March 31,				Nine Months Ended March 31,
	2020		2019		2020		2019
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	82.7	%	84.9	%	83.5	%	86.3	%
Gross profit	17.3	%	15.1	%	16.5	%	13.7	%
Operating expenses:
Research and development	6.4	%	6.0	%	6.3	%	5.1	%
Sales and marketing	2.8	%	2.5	%	2.6	%	2.1	%
General and administrative	6.0	%	4.9	%	4.4	%	4.0	%
Total operating expenses	15.3	%	13.4	%	13.4	%	11.2	%
Income from operations	2.0	%	1.7	%	3.1	%	2.5	%
Other (expense) income, net	0.1	%	—	%	0.1	%	—	%
Interest expense	(0.1	)%	(0.2	)%	(0.1	)%	(0.2	)%
Income before income tax provision	2.1	%	1.5	%	3.1	%	2.4	%
Income tax provision	0.1	%	(0.1	)%	(0.4	)%	(0.4	)%
Share of loss from equity investee, net of taxes	(0.1	)%	—	%	—	%	(0.1	)%
Net income	2.0	%	1.4	%	2.7	%	1.8	%

Net Sales

The following table presents net sales by product type for the three and ~~six~~nine months ended ~~December~~March 31, ~~2016~~2020 and ~~2015~~2019 (dollars in millions):


	Three Months Ended December 31,						Change					Six Months Ended December 31,						Change					Three Months Ended March 31,						Change					Nine Months Ended March 31,						Change
	2016			2015			$			%		2016			2015			$			%		2020			2019			$			%		2020			2019			$			%
Server systems	$	444.0		$	453.7		$	(9.7	)	(2.1	)%	$	801.5		$	810.0		$	(8.5	)	(1.0	)%
Server and storage systems																							$	571.3		$	592.8		$	(21.5	)	(3.6	)%	$	1,880.0		$	2,161.3		$	(281.3	)	(13.0	)%
Percentage of total net sales	68.1		%	71.0		%						67.9		%	69.9		%						74.0		%	79.7		%						77.0		%	81.7		%
Subsystems and accessories	208.0			185.2			22.7			12.3	%	379.4			348.6			30.8			8.8	%	$	201.1		$	150.7		$	50.4		33.4	%	$	563.1		$	484.8		$	78.3		16.2	%
Percentage of total net sales	31.9		%	29.0		%						32.1		%	30.1		%						26.0		%	20.3		%						23.0		%	18.3		%
Total net sales	$	652.0		$	639.0		$	13.0		2.0	%	$	1,180.9		$	1,158.6		$	22.3		1.9	%	$	772.4		$	743.5		$	28.9		3.9	%	$	2,443.1		$	2,646.1		$	(203.0	)	(7.7	)%

~~The following table presents the number~~

Table of ~~compute node sales and average selling price per node of our server systems for the three and six months ended December 31, 2016 and 2015 (nodes in thousands):~~

Contents

Three Months Ended
December 31, Change Six Months Ended
December 31, Change
2016 2015 % 2016 2015 %
Server systems:
Number of compute node sales (1) 145
133
9.0 % 267
249
7.2 %
Average selling price per node $ 3,064
$ 3,400
(9.9 )% $ 3,001
$ 3,249
(7.6 )%

~~(1) A compute node is a hardware configuration having its own CPU, RAM~~Server and storage systems constitute an assembly and ~~that is capable~~integration of ~~running its own instance of a non-virtualized operating system.~~

~~The following table presents unit sales and average selling price of our~~ subsystems and accessories, ~~for the three~~ and ~~six months ended December 31, 2016~~related services. Subsystems and ~~2015 (units in thousands):~~

accessories are comprised of serverboards, chassis and accessories.

Three Months Ended
December 31, Change Six Months Ended
December 31, Change
2016 2015 % 2016 2015 %
Subsystems and accessories:
Unit sales 1,214
1,092
11.2 % 2,358
2,008
17.4 %
Average selling price per unit $ 171
$ 169
1.2 % $ 161
$ 173
(6.9 )%

Comparison of Three Months Ended ~~December~~March 31, ~~2016~~2020 and ~~2015~~2019

The increase in our net sales in the three months ended December 31, 2016 compared with the three months ended December 31, 2015 was primarily due to an increase in sales of our subsystems and accessories to our distributors as well as growth in our Twin family product line of servers including our FatTwin, storage, accelerated GPU computing servers or HPC and MicroBlade. The year-over-yearperiod-over-period decrease in net sales of our server and storage systems was due to a slight decrease in the ~~three months ended December 31, 2016 was due primarily to~~number of units of compute nodes shipped and a ~~decrease~~3% decline in the average selling ~~price~~prices per ~~node of our server systems as we experienced a decrease in sales of complete server systems for ultra and data center optimized servers which offset an increase~~node. The decline in the number of units of compute ~~node sales~~nodes shipped was due to fewer shipments of multimode systems, such as ~~we sold higher nodes per~~blades and twin systems, ~~for our Twin family product line of servers.~~compared to the same period last year.

~~Table of Contents~~

The ~~year-over-year~~period-over-period increase in net ~~sales and unit~~ sales of our subsystems and accessories ~~in the three months ended December 31, 2016 was primarily due to higher sales of server accessories and serverboards to our distributors.~~

~~Comparison of Six Months Ended December 31, 2016 and 2015~~

~~The increase in our net sales in the six months ended December 31, 2016 compared with the six months ended December 31, 2015 was~~is primarily due to an increase in ~~sales~~the volume of ~~our~~ subsystems and accessories units sold by approximately 38% mainly due to increased demand from our ~~distributors as well as growth~~indirect sales channel, which was offset by an approximately 5% decrease in ~~our Twin family product line~~the average selling price.

Comparison of ~~servers including our FatTwin, storage, accelerated GPU computing servers or HPC~~Nine Months Ended March 31, 2020 and ~~MicroBlade.~~ 2019

The ~~year-over-year~~period-over-period decrease in net sales of our server and storage systems ~~in the six months ended December 31, 2016~~was primarily due to a decrease in ~~the~~ average selling ~~price~~prices per compute node ~~of our server systems~~by approximately 13% as ~~we experienced~~well as a slight decrease ~~in sales of complete server systems for ultra and data center optimized servers which offset an increase~~ in the number of units of compute ~~node sales as we sold higher~~ nodes ~~per systems~~shipped. The decline in average selling prices was primarily due to substantially lower costs for ~~our Twin family product line~~key components in the first two quarters of ~~servers.~~the fiscal year.

The ~~year-over-year~~period-over-period increase in net ~~sales and unit~~ sales of our subsystems and accessories ~~in the six months ended December 31, 2016 was~~is primarily due to ~~higher sales~~an increase in the volume of ~~serverboards~~subsystems and ~~server~~ accessories ~~to our distributors.~~sold by approximately 35%, partially offset by a decrease in the average selling prices per unit by approximately 12%.

The following table presents ~~the percentages of~~ net sales from products sold through our indirect sales channel and to ~~distributors~~our direct customers and ~~direct/OEM~~OEMs customers for the three and ~~six~~nine months ended ~~December~~March 31, ~~2016~~2020 and ~~2015:~~2019 (dollars in millions):

Three Months Ended
December 31, Change Six Months Ended
December 31, Change
2016 2015 % 2016 2015 %
Distributors 46.2 % 41.9 % 4.3 % 47.9 % 43.6 % 4.3 %
Direct/OEM customers 53.8 % 58.1 % (4.3 )% 52.1 % 56.4 % (4.3 )%
Total net sales 100.0 % 100.0 % 100.0 % 100.0 %



	Three Months Ended March 31,						Change			Change		Nine Months Ended March 31,						Change			Change
	2020			2019			$			%		2020			2019			$			%
Indirect sales channel	$	446.0		$	284.2		$	161.8		56.9	%	$	1,292.5		$	998.0		$	294.5		29.5	%
Percentage of total net sales	57.7		%	38.2		%						52.9		%	37.7		%
Direct customers and OEMs	326.4			459.3			(132.9		)	(28.9	)%	1,150.7			1,648.1			(497.4		)	(30.2	)%
Percentage of total net sales	42.3		%	61.8		%						47.1		%	62.3		%
Total net sales	$	772.4		$	743.5		$	28.9		3.9	%	$	2,443.2		$	2,646.1		$	(202.9	)	(7.7	)%

Comparison of Three Months Ended March 31, 2020 and 2019

The ~~year-over-year~~period-over-period increase in net sales ~~to distributors in the three and six months ended December 31, 2016 as a percentage of total net~~through our indirect sales channel was primarily due to increased demand from indirect sales channel partners supporting large end users and the ~~higher demand~~lower average selling prices for our ~~subsystem~~server and ~~accessories which are typically sold through distributors.~~storage systems, caused by fewer multimode systems shipped and slightly lower component pricing. The ~~year-over-year~~period-over-period decrease in net sales to ~~direct/OEM~~our direct customers ~~in the three~~ and ~~six months ended December 31, 2016 as a percentage of total net sales~~OEMs was primarily due to a decline in demand from our internet datacenter and cloud customers and our enterprise datacenter customers.

Comparison of Nine Months Ended March 31, 2020 and 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 the lower ~~demand for our complete server systems from cloud/internet data center computing partially offset by an increase demand~~average selling prices for our server and storage systems, caused by lower component pricing. The period-over-period decrease in net sales to our direct customers and OEMs was primarily due to a decline in demand from ~~storage,~~our internet datacenter and cloud customers and our enterprise ~~HPC and IoT/embedded~~datacenter customers.

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The following table presents ~~percentages of~~ net sales by geographic region for the three and ~~six~~nine months ended ~~December~~March 31, ~~2016~~2020 and ~~2015:~~2019 (dollars in millions):


	Three Months Ended December 31,				Change		Six Months Ended December 31,				Change		Three Months Ended March 31,						Change			Change		Nine Months Ended March 31,						Change			Change
	2016		2015		%		2016		2015		%		2020			2019			$			%		2020			2019			$			%
United States	55.0	%	63.7	%	(8.7	)%	55.4	%	64.4	%	(9.0	)%	$	422.9		$	436.7		$	(13.8	)	(3.2	)%	$	1,419.1		$	1,516.3		$	(97.2	)	(6.4	)%
Percentage of total net sales													54.8		%	58.7		%						58.1		%	57.3		%
Europe	19.9	%	17.9	%	2.0	%	20.6	%	17.4	%	3.2	%	158.1			128.8			29.3			22.7	%	433.8			472.3			(38.5		)	(8.2	)%
Percentage of total net sales													20.5		%	17.3		%						17.8		%	17.8		%
Asia	21.1	%	13.8	%	7.3	%	19.8	%	14.0	%	5.8	%	160.5			146.1			14.4			9.9	%	487.8			549.3			(61.5		)	(11.2	)%
Percentage of total net sales													20.8		%	19.7		%						20.0		%	20.8		%
Others	4.0	%	4.6	%	(0.6	)%	4.2	%	4.2	%	—	%	30.9			31.9			(1.0		)	(3.1	)%	102.5			108.2			(5.7		)	(5.3	)%
Percentage of total net sales													4.0		%	4.3		%						4.2		%	4.1		%
Total net sales	100.0	%	100.0	%			100.0	%	100.0	%			$	772.4		$	743.5							$	2,443.2		$	2,646.1

Comparison of Three Months Ended March 31, 2020 and 2019

The ~~year-over-year~~period-over-period decrease in net sales in the United States infor the three ~~and six~~ months ended ~~December~~March 31, ~~2016 as a percentage of total net sales~~2020 and 2019 was primarily due to ~~the~~ lower ~~demand for~~sales of our server and storage systems ~~from cloud/internet data center computing which represents a higher portion of sales in the United States than in other regions.~~to our direct customers and OEMs. The ~~year-over-year~~period-over-period increase in net sales in Asia was due primarily to increased sales in Singapore, Taiwan and ~~Europe~~Korea, partially offset by decreased sales in ~~the three~~Japan and ~~six months ended December 31, 2016 as a percentage~~China. The increase of ~~total~~ net sales in Europe was primarily due to higher sales in the ~~higher demand~~United Kingdom, Germany, Hungary and the Netherlands, partially offset by decreased sales in France and Turkey.

Comparison of Nine Months Ended March 31, 2020 and 2019

The period-over-period decrease in net sales in the United States for the three months ended March 31, 2020 and 2019 was primarily due to lower sales of our server and storage systems to our direct customers and OEMs and decreased sales through our indirect sales channel. The period-over-period decrease in net sales in Asia was due primarily to decreased sales in China, Indonesia and Japan, partially offset by increased sales in Taiwan, Korea and Vietnam. The decrease in net sales in Europe was primarily due to lower sales in the Netherlands, United Kingdom and ~~Russian Federation.~~France, partially offset by increased sales in Russia, Germany and Hungary. The period-over-period decrease in net sales in other countries was due to decreased sales in Australia and Israel, partially offset by increased sales in Mexico and Saudi Arabia.

23We determined that COVID-19 has impacted certain of our customers’ ability to pay on a timely basis. Our collectibility assessment resulted in delaying revenue recognition of $3.4 million for certain orders shipped during the three months ended March 31, 2020. The impact of COVID-19 on future revenue may be more significant.

~~Table of Contents~~

Cost of Sales and Gross Margin

Cost of sales and gross margin for the three and ~~six~~nine months ended ~~December~~March 31, ~~2016~~2020 and ~~2015~~2019 are as follows (dollars in millions):

Three Months Ended
December 31, Change Six Months Ended
December 31, Change
2016 2015 $ % 2016 2015 $ %
Total cost of sales $ 558.6
$ 532.6
$ 26.0
4.9 % $ 1,007.5
$ 980.0
$ 27.5
2.8 %
Total gross profit 93.4
106.4
(13.0 ) (12.2 )% 173.4
178.6
(5.1 ) (2.9 )%
Total gross margin 14.3 % 16.6 %
(2.3 )% 14.7 % 15.4 % (0.7 )%



	Three Months Ended March 31,						Change				Nine Months Ended March 31,						Change
	2020			2019			$		%		2020			2019			$			%
Cost of sales	$	639.0		$	631.2		$	7.8	1.2	%	$	2,040.5		$	2,282.6		$	(242.1	)	(10.6	)%
Gross profit	$	133.4		$	112.3		$	21.1	18.8	%	$	402.7		$	363.5		$	39.2		10.8	%
Gross margin	17.3		%	15.1		%			2.2	%	16.5		%	13.7		%				2.8	%

Comparison of Three Months Ended ~~December~~March 31, ~~2016~~2020 and ~~2015~~2019

The ~~year-over-year~~period-over-period increase in ~~absolute dollars of~~ cost of sales ~~in the three months ended December 31, 2016 compared to the three months ended December 31, 2015~~ was primarily attributable to an increase of $6.4 million in costs of materials and contract manufacturing expenses primarily related to the increase in net ~~sales. In the three months ended December 31, 2016, we recorded a $2.5 million expense, net~~sales, an increase of ~~recovery, or 0.4% of net sales, related to the inventory provision as compared to $2.1 million, or 0.3% of net sales, in the three months ended December 31, 2015.~~

~~In the three months ended December 31, 2016, we recorded a~~ $4.8 million ~~expense, or 0.7% of net sales, related to the provision for warranty reserve which was comparable to a $4.7 million expense, or 0.7% of net sales,~~ in ~~the three months ended December 31, 2015. If in future periods we experience or anticipate an increase or decrease in warranty claims~~personnel expenses as a result of ~~new~~an increase in the number of personnel and a one-time performance bonus of $2.9 million, an

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increase of $1.0 million in product ~~introductions or change~~service costs and an increase of $2.0 million in ~~unit volumes compared with our historical experience, or if~~manufacturing and other costs, offset by a decrease of $6.6 million in inventory obsolescence costs.

The period-over-period increase in the ~~cost of servicing warranty claims is greater or lesser than expected, our~~ gross margin ~~would be affected.~~

~~Gross margin~~ percentage ~~was 14.3% and 16.6% for the three months ended December 31, 2016 and 2015, respectively. The decrease~~ was primarily due to ~~higher~~sales prices declining at a slower rate than the decline in the costs ~~related~~of components we purchased. We expect that an increase in logistics costs and additional inducements for employees to ~~shortages of memory and SSD as well as many of~~continue production will negatively impact our ~~server systems being based on mature, late life cycle processors and GPUs at lower prices. Geographically, we had higher sales in Asia where pricing is typically more competitive.~~gross margins due to the COVID-19 pandemic.

Comparison of ~~Six~~Nine Months Ended ~~December~~March 31, ~~2016~~2020 and ~~2015~~2019

The ~~year-over-year increase~~period-over-period decrease in ~~absolute dollars of~~ cost of sales ~~in the six months ended December 31, 2016 compared to the six months ended December 31, 2015~~ was primarily attributable to ~~the increase~~a decrease of $259.5 million in ~~net sales. In the six months ended December 31, 2016, we recorded a $6.4 million expense, net~~costs of ~~recovery, or 0.5% of net sales,~~materials and contract manufacturing expenses primarily related to the ~~inventory provision as compared to $3.8 million, or 0.3% of~~decrease in net sales and the decrease in the ~~six months ended December 31, 2015.~~

~~In the six months ended December 31, 2016, we recorded~~cost of key components primarily associated with server and storage systems and a ~~$9.7~~decrease of $6.5 million ~~expense, or 0.8%~~in inventory obsolescence costs, offset by an increase of ~~net sales, related to the provision for warranty reserve~~$7.2 million in personnel expenses as ~~compared to~~ a ~~$8.5 million expense, or 0.7%~~result of ~~net sales, in the six months ended December 31, 2015. The~~an increase in the ~~provision for~~number of personnel and a one-time performance bonus of $2.9 million, an increase in overhead costs of $10.2 million primarily attributable to increased tariffs, an increase of $1.8 million in product service costs, an increase of $1.4 million in warranty ~~reserve~~expense and an increase of $3.8 million in manufacturing and other costs.

The period-over-period increase in the gross margin percentage was primarily due to sales prices declining at a slower rate than the decline in the costs of components we purchased. We expect that an increase in ~~warranty claims~~logistics costs and ~~cost of servicing warranty claims in the six months ended December 31, 2016.~~

~~Gross margin percentage was 14.7% and 15.4%~~additional inducements for ~~the six months ended December 31, 2016 and 2015, respectively. The decrease was primarily~~employees to continue production will negatively impact our gross margins due to higher costs related to shortages of memory and SSD as well as many of our server systems being based on mature, late life cycle processors and GPUs at lower prices. Geographically, we had higher sales in Asia where pricing is typically more competitive.the COVID-19 pandemic.

~~Table of Contents~~

Operating Expenses

Operating expenses for the three and ~~six~~nine months ended ~~December~~March 31, ~~2016~~2020 and ~~2015~~2019 are as follows (dollars in millions):


	Three Months Ended December 31,						Change					Six Months Ended December 31,						Change				Three Months Ended March 31,						Change				Nine Months Ended March 31,						Change
	2016			2015			$			%		2016			2015			$		%		2020			2019			$		%		2020			2019			$		%
Research and development	$	34.0		$	30.3		$	3.8		12.5	%	$	67.2		$	58.6		$	8.6	14.7	%	$	49.6		$	44.8		$	4.8	10.7	%	$	154.7		$	133.7		$	21.0	15.7	%
Percentage of total net sales	5.2		%	4.7		%						5.7		%	5.1		%					6.4		%	6.0		%					6.3		%	5.1		%
Sales and marketing	18.2			16.5			1.7			10.3	%	34.1			30.7			3.4		10.9	%	$	21.9		$	18.5		$	3.4	18.4	%	$	64.1		$	56.5		$	7.6	13.5	%
Percentage of total net sales	2.8		%	2.6		%						2.9		%	2.7		%					2.8		%	2.5		%					2.6		%	2.1		%
General and administrative	9.4			10.5			(1.1		)	(10.3	)%	20.2			18.7			1.5		7.9	%	$	46.3		$	36.2		$	10.1	27.9	%	$	107.7		$	106.2		$	1.5	1.4	%
Percentage of total net sales	1.5		%	1.6		%						1.7		%	1.5		%					6.0		%	4.9		%					4.4		%	4.0		%
Total operating expenses	$	61.6		$	57.2		$	4.4		7.7	%	$	121.5		$	108.0		$	13.5	12.5	%	$	117.8		$	99.5		$	18.3	18.4	%	$	326.5		$	296.4		$	30.1	10.2	%
Percentage of total net sales	9.5		%	8.9		%						10.3		%	9.3		%					15.3		%	13.4		%					13.4		%	11.2		%

Comparison of Three Months Ended ~~December~~March 31, ~~2016~~2020 and ~~2015~~2019

Research and development expenses. Research and development expenses increased by $3.8 million, or 12.5% in the three months ended December 31, 2016 compared to the three months ended December 31, 2015. Research and development expenses were 5.2% and 4.7% of net sales for the three months ended December 31, 2016 and 2015, respectively. The period-over-period increase in absolute dollars was driven primarily by an increase of $4.4 million in compensation and benefits including stock-based compensation expense, partially offset by an increase of $1.1 million in non-recurring engineering funding from certain suppliers and customers.

~~Research and development expenses include stock-based compensation expense of $3.0 million and $2.5 million for the three months ended December 31, 2016 and 2015, respectively.~~

~~Our compensation and benefit expense~~ in research and development increased from annual salary increases and growth in research and development personnel related to expanded product development initiatives in the United States and in Taiwan. We continue to believe that investments in research and development are critical to our future growth and competitive position in the marketplace. As such, we expect to continue to spend on current and future product development efforts.

~~Sales and marketing expenses.~~ ~~Sales and marketing~~ expenses increased by $1.7 million, or 10.3% in the three months ended December 31, 2016 compared to the three months ended December 31, 2015. Sales and marketing expenses were 2.8% and 2.6% of net sales for the three months ended December 31, 2016 and 2015, respectively. The increase in absolute dollars was primarily due to an increase of ~~$0.7~~$13.0 million in ~~compensation~~personnel expenses as a result of an increase in the number of personnel and ~~benefits including stock-based compensation expense, resulting primarily from growth~~a one-time performance bonus of $5.3 million, a decrease of $0.5 million in reimbursements received for certain research and development costs that we incur as part of the joint product development and an increase of $0.8 million in facilities and other expenses. During the three months ended March 31, 2020, we also recorded a $9.5 million net settlement fee as a reduction in the research and development expenses related to the reimbursement of previously incurred expenses for one canceled joint product development agreement. We expect that research and development costs will increase as a result of additional inducements for employees who must work on-site to further our new product development for the duration of the “shelter in place” directives issued by the local authorities during the COVID-19 pandemic.

Sales and marketing expenses. The period-over-period increase in sales and marketing ~~personnel and an increase of $0.6 million in advertising, marketing promotional and trade show expenses.~~

~~Sales and marketing~~ expenses ~~include stock-based compensation expense of $0.5 million and $0.4 million for the three months ended December 31, 2016 and 2015, respectively.~~

~~General and administrative expenses.~~ General and administrative expenses decreased by $1.1 million, or 10.3% in the three months ended December 31, 2016 compared to the three months ended December 31, 2015. General and administrative expenses were 1.5% and 1.6% of net sales for the three months ended December 31, 2016 and 2015, respectively. The decrease in absolute dollars was primarily due to a $0.6 million foreign currency transaction gain in the three months ended December 31, 2016 as compared to a $0.5 million foreign currency transaction loss in the three months ended December 31, 2015, a decrease of $0.7 million in legal expenses, a decrease of $0.4 million in bad debt expenses, partially offset by an increase of $1.3 million in compensation and benefits including stock-based compensation expense.

~~General and administrative expenses include stock-based compensation expense of $0.9 million and $0.8 million for the three months ended December 31, 2016 and 2015, respectively.~~

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~~Comparison of Six Months Ended December 31, 2016 and 2015~~

~~Research and development expenses.~~ Research and development expenses increased by $8.6 million, or 14.7% in the six months ended December 31, 2016 compared to the six months ended December 31, 2015. Research and development expenses were 5.7% and 5.1% of net sales for the six months ended December 31, 2016 and 2015, respectively. The increase in absolute dollars was driven primarily by an increase of $9.1 million in compensation and benefits including stock-based compensation expense, partially offset by an increase of $1.6 million in non-recurring engineering funding from certain suppliers and customers.

~~Research and development expenses include stock-based compensation expense of $5.9 million and $4.9 million for the six months ended December 31, 2016 and 2015, respectively.~~

Our compensation and benefit expense in research and development increased from annual salary increases and growth in research and development personnel related to expanded product development initiatives in the United States and in Taiwan. We continue to believe that investments in research and development are critical to our future growth and competitive position in the marketplace. As such, we expect to continue to spend on current and future product development efforts.

~~Sales and marketing expenses.~~ Sales and marketing expenses increased by $3.4 million, or 10.9% in the six months ended December 31, 2016 compared to the six months ended December 31, 2015. Sales and marketing expenses were 2.9% and 2.7% of net sales for the six months ended December 31, 2016 and 2015, respectively. The increase in absolute dollars was primarily due to an increase of ~~$2.1~~$3.0 million in ~~compensation~~personnel expenses as a result of an increase in the number of personnel and ~~benefits~~a one-time performance bonus of $1.0 million.

General and administrative expenses. The period-over-period increase in general and administrative expenses was primarily due to the expense accrual in the quarter ended March 31, 2020 for a potential SEC settlement of $17.5 million, an increase of $4.5 million in personnel expenses, including ~~stock-based compensation expense, resulting primarily from growth~~an increase in ~~sales~~the number of personnel and ~~marketing personnel.~~

~~Sales and marketing expenses include stock-based compensation expense~~a one-time performance bonus of $1.1 million, an increase of $1.0 million in insurance expense and ~~$0.8~~an increase of $0.7 million ~~for the six months ended December 31, 2016~~in other general and ~~2015, respectively.~~

~~General and administrative expenses.~~ ~~General and~~

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administrative expenses, ~~increased~~offset by ~~$1.5~~a decrease of $13.8 million ~~or 7.9%~~ in professional fees primarily incurred to investigate, assess and begin remediating the ~~six months ended December 31, 2016 compared~~causes that led to the ~~six months ended December~~delay in filing our periodic reports with the SEC and the associated restatement of certain of our previously issued financial statements.

Comparison of Nine Months Ended March 31, ~~2015. General~~2020 and ~~administrative expenses were 1.7%~~2019

Research and ~~1.5% of net sales for the six months ended December 31, 2016 and 2015, respectively.~~ development expenses. The period-over-period increase in ~~absolute dollars~~research and development expenses was primarily due to an increase of ~~$2.3~~$23.7 million in ~~compensation and benefits including stock-based compensation expense,~~personnel expenses as a ~~$1.4 million foreign currency transaction gain~~result of an increase in the ~~six~~number of personnel and a one-time performance bonus of $5.3 million, a decrease of $1.2 million in reimbursements received for certain research and development costs that we incur as part of joint product development, an increase of $2.8 million in costs mainly related to materials and supplies used in product development, and an increase of $1.9 million in facilities and other expenses. During the three months ended ~~December~~March 31, ~~2015~~2020, we also recorded a $9.5 million net settlement fee as ~~compared to~~ a ~~$0.1 million foreign currency transaction gain~~reduction in the ~~six months~~research and development expenses related to the reimbursement of previously incurred expenses for one canceled joint product development agreement. We expect that research and development costs will increase as a result of additional inducements for employees who must work on-site to further our new product development for the duration of the “shelter in place” directives issued by the local authorities during the COVID-19 pandemic.

Sales and marketing expenses. The period-over-period increase in sales and marketing expenses was primarily due to an increase of $5.7 million in personnel expenses as a result of an increase in the number of personnel and a one-time performance bonus of $1.0 million, an increase of $0.8 million related to participation in trade shows and an increase of $1.1 million in expenses related to advertising and promotion activities.

General and administrative expenses. The period-over-period increase in general and administrative expenses was primarily due to the expense accrual in the quarter ended ~~December~~March 31, ~~2016, partially~~2020 for a potential SEC settlement fee of $17.5 million, an increase of $7.7 million in personnel expenses, including an increase in the number of personnel and a one-time performance bonus of $1.1 million and an increase of $2.5 million in insurance expense, offset by a decrease of ~~$1.8~~$26.4 million in ~~legal expenses.~~professional fees 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.

~~General and administrative expenses include stock-based compensation expense of $1.7 million and $1.7 million for the six months ended December 31, 2016 and 2015, respectively.~~

Interest and Other ~~Expense,~~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 ~~expense,~~income (expense), net for the three and ~~six~~nine months ended ~~December~~March 31, ~~2016~~2020 and ~~2015~~2019 are as follows (dollars in millions):

Three Months Ended
December 31, Change Six Months Ended
December 31, Change
2016 2015 $ % 2016 2015 $ %
Interest and other income, net $ —
$ —
$ —
N/M*
$ —
$ 0.1
$ (0.1 ) N/M*
Interest expense (0.5 ) (0.4 ) (0.1 ) 24.3 % (0.8 ) (0.7 ) (0.1 ) 14.2 %
Interest and other expense, net $ (0.5 ) $ (0.4 ) $ (0.1 ) 20.2 % $ (0.8 ) $ (0.6 ) $ (0.2 ) 22.8 %



	Three Months Ended March 31,						Change				Nine Months Ended March 31,						Change
	2020			2019			$		%		2020			2019			$		%
Other income (expense), net	$	0.9		$	(0.1	)	$	1.0	(1,000.0	)%	$	2.1		$	0.7		$	1.4	200.0	%
Interest expense	(0.5		)	(1.3		)	0.8		(61.5	)%	(1.6		)	(5.5		)	3.9		(70.9	)%
Interest and other income (expense), net	$	0.4		$	(1.4	)	$	1.8	(128.6	)%	$	0.5		$	(4.8	)	$	5.3	(110.4	)%

*Not meaningful

Comparison of Three Months Ended ~~December~~March 31, ~~2016~~2020 and ~~2015~~2019

~~Interest and other~~The period-over-period change in interest expense ~~net.~~ ~~Interest and other~~was due to a decrease of $0.8 million in interest expense ~~net increased by $0.1 million~~primarily as a result of lower interest rates in the three months ended ~~December~~March 31, ~~2016~~2020 as compared to the three months ended ~~December~~March 31, ~~2015.~~2019. The ~~increases were primarily due~~change of $1.0 million in other income (expense), net was attributable to an increase of $0.3 million in interest ~~expense.~~income on our interest bearing deposits and a decrease of $0.6 million in other expenses.

Comparison of Nine Months Ended March 31, 2020 and 2019

The period-over-period change in interest expense was due to a decrease of $3.9 million in interest expense primarily as a result of lower interest rates in the nine months ended March 31, 2020 as compared to the nine months ended March 31, 2019. The change of $1.4 million in other income (expense), net was attributable to an increase of $1.6 million in interest

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~~Comparison~~income on our interest bearing deposits and a decrease of ~~Six Months Ended December 31, 2016 and 2015~~

~~Interest and other expense, net.~~ ~~Interest and other expense, net increased by $0.2~~$0.6 million in ~~the six months ended December 31, 2016 compared~~other expenses, offset by change of $(0.9) million related to ~~the six months ended December 31, 2015. The increases were primarily~~foreign exchange losses due to ~~an increase in interest expense.~~unfavorable foreign currency fluctuations.

Provision (Benefit) for Income Taxes

Provision (benefit) for income taxes and effective tax rates for the three and ~~six~~nine months ended ~~December~~March 31, ~~2016~~2020 and ~~2015~~2019 are as follows (dollars in millions):


	Three Months Ended December 31,						Change					Six Months Ended December 31,						Change					Three Months Ended March 31,						Change					Nine Months Ended March 31,						Change
	2016			2015			$			%		2016			2015			$			%		2020			2019			$			%		2020			2019			$			%
Provision for income taxes	$	9.3		$	14.1		$	(4.7	)	(33.8	)%	$	15.7		$	21.6		$	(5.9	)	(27.3	)%
Income tax (benefit) provision																							$	(0.9	)	$	0.5		$	(1.4	)	(280.0	)%	$	9.8		$	10.5		$	(0.7	)	(6.7	)%
Percentage of total net sales	1.4		%	2.2		%						1.3		%	1.8		%						(0.1		)%	0.1		%						0.4		%	0.4		%
Effective tax rate	29.7		%	28.8		%						30.6		%	30.8		%						(5.6		)%	4.3		%						12.8		%	16.9		%

Comparison of Three Months Ended ~~December~~March 31, ~~2016~~2020 and ~~2015~~2019

~~Provision for~~The income ~~taxes.~~ ~~Provision for income taxes decreased by $4.7 million, or 33.8% in the three months ended December 31, 2016 compared to the three months ended December 31, 2015. The~~tax benefit and effective tax rate change was ~~29.7% and 28.8%~~primarily due to a tax benefit from the disqualified disposition of incentive stock options for the three months ended ~~December~~March 31, 2016 and 2015, respectively. The lower income tax provision for the three months ended December 31, 2016 was primarily attributable to our lower operating income. The effective tax rate for the three months ended December 31, 2016 was higher primarily due to the lower benefits from U.S. federal research and development ("R&D") tax credit and foreign rate differentials. For the third quarter of fiscal year 2017, we expect a decrease of approximately $1.9 million of unrecognized tax benefits related to foreign uncertain tax positions resulting from the completion of the income tax audit in Taiwan.2020.

Comparison of ~~Six~~Nine Months Ended ~~December~~March 31, ~~2016~~2020 and ~~2015~~2019

~~Provision for income taxes.~~ ~~Provision for income taxes decreased by $5.9 million, or 27.3%~~The period-over-period decrease in ~~the six months ended December 31, 2016 compared to the six months ended December 31, 2015. The~~ effective tax rate was 30.6% and 30.8% for the six months ended December 31, 2016 and 2015, respectively. The lower income tax provision for the six months ended December 31, 2016 was primarily attributable to our lower operating income. The effective tax rate for the six months ended December 31, 2016 was lower primarily due to a tax benefit from the ~~benefits from domestic production activities deductions.~~disqualified disposition of incentive stock options for the nine months ended March 31, 2020.

Liquidity and Capital Resources

~~Since our inception, we~~We have financed our growth primarily with funds generated from operations, ~~and from the proceeds of our initial public offering. In~~in addition ~~we have utilized~~to utilizing borrowing facilities, particularly in relation to the financing of real property ~~acquisitions.~~acquisitions as well as working capital. Our cash and cash equivalents ~~and short-term investments~~ were ~~$128.8~~$300.9 million and ~~$181.0~~$248.2 million as of ~~December~~March 31, ~~2016~~2020 and June 30, ~~2016,~~2019, respectively. Our cash in foreign locations was ~~$54.1~~$90.2 million and ~~$46.5~~$124.6 million ~~at December~~as of March 31, ~~2016~~2020 and June 30, ~~2016,~~2019, respectively. It

Amounts held outside of the U.S. are generally utilized to support non-U.S. liquidity needs. Repatriations generally will not be taxable from a U.S. federal tax perspective but may be subject to state income or foreign withholding tax. Where local restrictions prevent an efficient intercompany transfer of funds, our intent is ~~management's intention~~ to ~~reinvest~~keep cash balances outside of the ~~undistributed foreign earnings indefinitely in foreign~~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.

~~Operating Activities.~~ ~~Net~~We believe that our current cash, ~~provided by (used in)~~cash equivalents, credit lines and internally generated cash flows will be generally sufficient to support our operating ~~activities was $(54.9) million~~businesses, remediation efforts, maturing debt and ~~$86.9 million~~interest payments for the ~~six~~twelve months ~~ended December 31, 2016 and 2015, respectively.~~

~~Net cash used in our operating activities for~~following the ~~six months ended December 31, 2016 was primarily due to an increase in inventory~~issuance of $156.7 million and an increase in accounts receivable of $78.3 million, which were partially offset by an increase in accounts payable of $96.8 million, our net income of $35.5 million, an increase in accrued liabilities of $18.2 million, an increase in other long-term liabilities of $12.4 million, stock-based compensation expense of $9.2 million, and depreciation and amortization expense of $7.7 million.

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Net cash provided by our operating activities for the six months ended December 31, 2015 was primarily due to our net income of $48.4 million, an increase in accounts payable of $20.7 million, an increase in other long-term liabilities of $18.7 million, an increase in accrued liabilities of $9.7 million, stock-based compensation expense of $7.9 million, a decrease in accounts receivable of $7.6 million, depreciation and amortization expense of $6.0 million, and provision for inventory of $3.8 million, which were partially offset by an increase in inventory of $26.8 million, an increase in deferred income taxes assets of $4.4 million, and an increase in prepaid expenses and other assets of $4.3 million.

~~The increase for the six months ended December 31, 2016 in accounts receivable was primarily due to higher sales~~these condensed consolidated financial statements. We are in the ~~last month~~process of negotiating an extension of our credit facility with Bank of America and expect this process will be completed by the ~~second quarter~~end of ~~fiscal year 2017 as compared~~May, 2020. Expected uses of our cash over the short term include our continued development of our innovative and resource saving products, manufacturing expansion in the United States and Taiwan and ongoing remediation of our material weaknesses in internal controls over financial reporting. We expect to ~~the last month~~pay one-time performance bonuses of approximately $25.3 million to employees in the fourth quarter of fiscal year ~~2016. The increase~~2020 and $8.5 million to other executives and members of the Board of Directors within the next two years when and if specified market and performance conditions will be met. In addition, we expect to make a one-time settlement payment of $17.5 million to the SEC in connection with the conclusion of the ongoing investigations.

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Our key cash flow metrics were as follows (dollars in millions):



	Nine Months Ended March 31,						Change
	2020			2019			Change
Net cash provided by operating activities	$	65.7		$	180.7		$	(115.0	)
Net cash used in investing activities	$	(34.1	)	$	(15.8	)	$	(18.3	)
Net cash provided by (used in) financing activities	$	25.4		$	(95.9	)	$	121.3
Net increase (decrease) in cash, cash equivalents and restricted cash	$	57.1		$	68.9		$	(11.8	)

Operating Activities

Net cash provided by operating activities decreased by $115.0 million for the ~~six~~nine months ended ~~December~~March 31, 2016 in inventory and accounts payable was due to higher purchases to support memory and SSD component shortages as well as the lunar new year holiday shutdown in Asia at the end of January 2017. We anticipate that accounts receivable, inventory and accounts payable will increase to the extent we continue to grow our product lines and our business.

~~The decrease for the six months ended December 31, 2015 in accounts receivable was primarily due to lower sales in the last month of the second quarter of fiscal year 2016~~2020 as compared to the ~~last month~~nine months ended March 31, 2019. The decrease was due primarily to an increase in net working capital of ~~the fourth quarter of fiscal year 2015. The~~$129.7 million driven by increased inventories and prepaid expenses and other current assets, offset by an increase in net income for the ~~six months ended December 31, 2015 in inventory and accounts payable was primarily due to higher purchases to support the lunar new year holiday shutdown in Asia in the beginning~~current period of ~~February 2016 and higher sales in the six months ended December 31, 2015.~~$17.7 million.

Investing ~~activities.~~ Activities

Net cash used in ~~our~~ investing activities was ~~$17.7~~$34.1 million and ~~$15.6~~$15.8 million for the ~~six~~nine months ended ~~December~~March 31, ~~2016~~2020 and ~~2015, respectively. In~~2019, respectively, as we continued to invest in expanding our capacity and office space, including the ~~six months ended December 31, 2016,~~expansion of ~~the net cash used in our investing activities, $17.4 million~~ ~~was related to the purchase of property, plant and equipment, of which $8.2 million was related to the property and equipment for the manufacturing buildings at~~ our Green Computing Park in San Jose ~~California. We anticipate investing approximately $7.0 million through April 2017 to complete~~and offices in Taiwan. During the ~~construction of a second manufacturing facility in the Green Computing Park. We plan to finance this development through our operating cash flows and additional borrowings from banks. In the six~~nine months ended ~~December~~March 31, ~~2015, $15.2~~2020, we received $0.8 million ~~was related to the purchase of property, plant and equipment.~~

~~Financing activities.~~ Net cash provided by our financing activities was $20.8 million and $3.3 million for the six months ended December 31, 2016 and 2015, respectively. In the six months ended December 31, 2016, we borrowed an additional $130.1 million under our term loan and revolving lines of credit from Bank of America and CTBC Bank and repaid $96.6 million in loans. We received $5.9 million related to the proceeds from the ~~exercise~~sale of ~~stock options~~our investment in ~~the six months ended December 31, 2016. Further, we used $18.5 million to repurchase our outstanding common stock.~~a privately held company.

In the six months ended December 31, 2015, we borrowed an additional $14.4 million under our revolving line of credit from Bank of America and CTBC Bank and repaid $13.3 million in loans. Further, we received $2.4 million related to the proceeds from the exercise of stock options in the six months ended December 31, 2015. Financing Activities

~~We expect our net~~Net cash provided by financing activities ~~will increase throughout fiscal year 2017 as we intend~~for the nine months ended March 31, 2020 was $25.4 million while net cash used in financing activities for the nine months ended March 31, 2019 was $95.9 million. The change in cash flows from financing activities was primarily due to ~~obtain additional financing from banks~~decreased debt repayments of $101.9 million and cash received for ~~our working capital requirements.~~exercise of stock options of $23.1 million.

We expect to experience continued growth in our working capital requirements and capital expenditures as we continue to expand our business. Our long-term future capital requirements will depend on many factors, including our level of revenues, the timing and extent of spending to support our product development efforts, the expansion of sales and marketing activities, the timing of our introductions of new products, the costs to ensure access to adequate manufacturing capacity and the continuing market acceptance of our products. We intend to fund this continued expansion through cash generated by operations and by drawing on the revolving credit facility or through other debt financing. However we cannot be certain whether such financing will be available on commercially reasonable or otherwise favorable terms or that such financing will be available at all. We anticipate that working capital and capital expenditures will constitute a material use of our cash resources. We have sufficient cash on hand to continue to operate for at least the next 12 months.

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Other ~~factors affecting liquidity~~Factors Affecting Liquidity and ~~capital resources~~Capital Resources

~~Activities under Revolving Lines of Credit and Term Loans~~

~~Bank of America~~

~~In June 2015, we entered into an amendment to the existing credit agreement with~~2018 Bank of America ~~which provided for (i)~~Credit Facility

We have a ~~$65.0 million~~ revolving line of credit facility and (ii) a five-year $14.0 million term loan facility. The term loan is secured by three buildings located in San Jose, California and the principal and interest were payable monthly through September 30, 2016 with an interest rate at the LIBOR rate plus 1.50% per annum. In May 2016, we extended the revolving line of credit to mature on June 30, 2016.

In June 2016, we entered into a new credit agreement with Bank of America, which provided for (i) a $55.0 million revolving line of credit facility including a $5.0 million letter of credit sublimit that matures on June 30, 2017 and (ii) a five-year $50.0 million term loan facility. This revolving line of credit facility replaced the existing revolving line of credit facility with Bank of America. This additional term loan is secured by seven buildings located in San Jose, California and the property, plant and equipment and inventory in those buildings. The principal and interest of the term loan are payable monthly through June 30, 2021 with an interest rate at the LIBOR rate plus 1.25% per annum.

The interest rate for the revolving line of credit under the above credit agreements with Bank of America is at the LIBOR rate plus 1.25% per annum. The LIBOR rate was 0.61% at December 31, 2016. The letter of credit is charged at 1.25% per annum.

In June 2016, we also entered into a separate credit agreement with Bank of America, which provided for a revolving line of credit of $10.0 million for our Taiwan subsidiary that matures on June 30, 2017. The interest rate of the revolving line of credit is equal to a minimum of 0.9% per annum plus the lender's cost of fund.

In December 2016, we entered into an amendment to the credit agreement with Bank of America to reduce the $55.0 million revolving line of credit facility to $45.0 million and increase the revolving line of credit for the Taiwan and the Netherlands subsidiaries from $10.0 million to $20.0 million.

As of December 31, 2016 and June 30, 2016, the total outstanding borrowings under the Bank of America term loan was $45.0 million and $0.9 million, respectively. The total outstanding borrowings under the Bank of America lines of credit was $43.2 million and $62.2 million as of December 31, 2016 and June 30, 2016, respectively. The interest rates for these loans ranged from 1.19% to 2.14% per annum at December 31, 2016 and from 1.02% to 1.96% per annum at June 30, 2016, respectively. As of December 31, 2016, the unused revolving lines of credit amount with Bank of America under the credit agreements were $21.8 million.

In February 2017, we drew an additional $10.0 million from Bank of America revolving line of credit with interest rate at 1.29% per annum to support the Company's growth and expansion of its business in the Netherlands.

~~CTBC Bank~~

In November 2015, we entered into an amendment to the existing credit agreement with CTBC Bank Co., Ltd ("CTBC Bank") that provides for (i) a 12-month NTD$700.0 million or $22.0 million U.S. dollar equivalent term loan 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 and (ii) a 12-month revolving line of credit up to 80.0% of eligible accounts receivable in an aggregate amount of up to $17.0 million with an interest rate equal to the lender's established USD interest rate plus 0.30% per annum which is adjusted monthly. The total borrowings allowed under the credit agreement are capped at NTD$1.0 billion or $30.3 million U.S. dollar equivalent. In January 2016, we extended the revolving line of credit to mature on March 31, 2016.

In April 2016, we entered into a new credit agreement with CTBC Bank that provides for (i) a 12-month NTD$700.0 million or $21.6 million U.S. dollar equivalent term loan facility secured by the land and building located in Bade, Taiwan with an interest rate equal to the lender's established NTD interest rate plus 0.25% per annum which is adjusted monthly. This term loan facility also includes a 12-month customs bond up to NTD$100.0 million or $3.1 million U.S. dollar equivalent with an annual fee equal to 0.5% per annum, and (ii) a 12-month revolving line of credit up to 80.0% of eligible accounts receivable in an aggregate amount of up to $40.0 million with an interest rate equal to the lender's established USD interest rate plus 0.30%

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~~per annum which is adjusted monthly. The total borrowings allowed under the credit agreement are capped at $40.0 million. The credit agreement matures on March 31, 2017.~~

The total outstanding borrowings under the CTBC Bank term loan was denominated in Taiwanese dollars and was translated into U.S. dollars of $18.5 million and $20.4 million at December 31, 2016 and June 30, 2016, respectively. At December 31, 2016 and June 30, 2016, the total outstanding borrowings under the CTBC Bank revolving line of credit was $20.8 million and $10.1 million, respectively, in U.S. dollars. The interest rate for these loans ranged from 0.95% and 2.15% at December 31, 2016 and 0.90% and 1.25% per annum at June 30, 2016. At December 31, 2016, available for future borrowing under this credit agreement was $0.6 million.

In January 2017, we drew an additional $8.0 million from CTBC Bank revolving line of credit with the interest rate at 1.55% per annum to support the Company's growth and expansion of its business in the Netherlands.

~~Covenant Compliance~~

The credit agreement with Bank of America contain customary representations and warranties and customary affirmative and negative covenants applicable to us and our subsidiaries. The credit agreement contains certain financial covenants, including the following:

~~Not to incur on a consolidated basis, a net loss before taxes and extraordinary items for any two consecutive fiscal quarters;~~

~~The Consolidated Leverage Ratio, as defined in the agreement, as of the end of any fiscal quarter, measured for the most recently completed twelve (12) months, shall not be greater than 2.00;~~

The domestic unencumbered liquid assets, as defined in the agreement, maintained in accounts within the United States shall have an aggregate market value of not less than $30,000,000, measured quarterly as of the last day of each fiscal quarter.

~~As of December 31, 2016, our total assets of $998.3 million collateralized the~~ line of credit with Bank of America under the new credit agreement, which represent the total assets of the United States headquarters company except for seven buildings located in San Jose, California and property, plant and equipment and inventory in those buildings. As of December 31, 2016, total assets collateralizing the term loan with(the "2018 Bank of America ~~were $101.1~~Credit Facility”) for up to $250.0 million, which expires in June 30, 2020. Prior to its maturity, if certain conditions are satisfied, we may convert it into a five-year revolving credit facility for up to $400.0 million. As of ~~December~~March 31, ~~2016,~~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. The 2018 Bank of America Credit Facility is secured by substantially all of Super Micro Computer’s assets and we are not permitted to repurchase our shares or pay any dividends. We were in compliance with all ~~financial~~ covenants ~~associated with~~as of March 31, 2020. We are in the ~~term loan and lines~~process of negotiating an extension of our credit facility with Bank of America ~~under~~and expect this process will be completed by the end of May, 2020.

2019 CTBC Credit Facility

In June 2019, we entered into a credit ~~agreement.~~

~~As of December 31, 2016, the net book value of land and building located in Bade, Taiwan collateralizing the term loan~~agreement with CTBC Bank in Taiwan that provides for term loans denominated in NTD of up to $50.0 million and expires in June 2020. During the three months ended March 31, 2020, we borrowed $10.0 million under the revolving line of credit. The total outstanding borrowings under the 2019 CTBC Credit Facility were $33.2 million with maturity on June 30, 2020. The amount available for future borrowing was ~~$26.6 million.~~$16.8 million as of March 31, 2020. The interest rate for these outstanding term loans was 0.91% per annum as of March 31, 2020. Term loans are secured by various Company’s assets, including certain property, plant, and equipment. There are no financial covenants ~~associated with the term loan with CTBC Bank.~~

~~Contract Manufacturers~~

In the three and six months ended December 31, 2016, we paid our contract manufacturers within 34 to 76 days of invoice and Ablecom between 48 to 83 days of invoice. Ablecom is one of our major contract manufacturers and a related party. As of December 31, 2016 and June 30, 2016 amounts owed to Ablecom by us were approximately $54.3 million and $39.2 million, respectively.

~~Share Repurchase Program~~

In July 2016, our Board of Directors adopted a program to repurchase from time to time at management’s discretion up to $100,000,000 of our common stock in the open market or in private transactions during the following twelve months at prevailing market prices. Repurchases will be made under the ~~program using~~2019 CTBC Credit Facility.

Refer to Part I, Item 1, Note 7, “Short-term Debt,” in our ~~own cash resources. This share repurchase program does not obligate us~~notes to ~~acquire any particular amount of common stock, and it may be suspended at any time at~~the condensed consolidated financial statements in this Quarterly Report on Form 10-Q for further information on our discretion. During the three months ended December 31, 2016, we did not purchase any shares of our common stock in the open market. During the six months ended December 31, 2016, we purchased 888,097 shares of our common stock in the open market at a weighted average price of $20.79 per share for approximately $18.5 million.outstanding debt.

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~~Contractual Obligations~~

~~The following table describes our contractual obligations as of December 31, 2016:~~

Payments Due by Period

Less Than
1 Year

1 to 3
Years

3 to 5
Years

More Than
5 Years
Total
(in thousands)
Operating leases $ 4,468
$ 7,665
$ 4,084
$ 1,921
$ 18,138
Capital leases, including interest 271
417
99
—
787
Debt, including interest (1) 93,347
20,956
15,223
—
129,526
Purchase commitments (2) 402,229
—
—
—
402,229
Total (3) $ 500,315
$ 29,038
$ 19,406
$ 1,921
$ 550,680

~~__________________________~~


~~(1)~~	~~Amount reflects total anticipated cash payments, including anticipated interest payments based on the interest rate at December 31, 2016.~~


~~(2)~~	Amount reflects total gross purchase commitments under our manufacturing arrangements with third-party contract manufacturers or vendors. See Note 9 of Notes to our Condensed Consolidated Financial Statements for a discussion of purchase commitments.

~~(3)~~

The table above excludes liabilities for deferred revenue of $52.0 million and unrecognized tax benefits and related interest and penalties accrual of $18.8 million. 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 Note 8 of Notes to our Condensed Consolidated Financial Statements 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 ~~Condensed Consolidated Financial Statements,~~condensed consolidated financial statements, see Part I, Item 1, Note 1, ~~“Summary~~“Organization and Summary of Significant Accounting Policies,” ofin our notes to the ~~Notes to Condensed Consolidated Financial Statements.~~condensed consolidated financial statements in this Quarterly Report on Form 10-Q.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

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Item 3. Quantitative and Qualitative Disclosure About Market Risk

Interest Rate Risk

The primary objectives of our investment activities are to preserve principal, provide liquidity and maximize income without significantly increasing the risk. Some of the securities we invest in are subject to market risk. This means that a change in prevailing interest rates may cause the fair value of the investment to fluctuate. To minimize this risk, we maintain ~~our portfolio of cash equivalents and short-term~~ investments in money market funds and certificates of deposit. Our ~~long-term investments include~~investment in an auction rate ~~securities, which have~~security has been classified as ~~long-term~~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 ~~December~~March 31, ~~2016,~~2020, 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 ~~0.95%~~0.91% to ~~2.15%~~3.63% at ~~December~~March 31, ~~2016~~2020 and ~~0.90%~~0.93% to ~~1.96%~~4.50% at June 30, ~~2016, respectively.~~2019. Based on the outstanding principal indebtedness of ~~$127.2~~$33.2 million under our credit facilities as of ~~December~~March 31, ~~2016,~~2020, 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~~these agreements, and do not currently engage in foreign currency hedging transactions. ~~However, the~~The functional currency of our ~~operations~~subsidiaries in the Netherlands and Taiwan is the U.S. ~~dollar and our local accounts including financing arrangements~~dollar. However, certain transactions in these entities are denominated in a currency other than the ~~local currency in the Netherlands and Taiwan, respectively,~~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) for the three and ~~six~~nine months ended ~~December~~March 31, ~~2016~~2020 was ~~$0.6~~$0.3 million and ~~$0.1~~$(0.5) million, respectively, and for the three and ~~six~~nine months ended ~~December~~March 31, ~~2015~~2019 was ~~$(0.5)~~$0.3 million and ~~$1.4~~$0.5 million, respectively.

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Item 4. Controls and Procedures

Evaluation ~~of Effectiveness~~ of Disclosure Controls and Procedures

We are committed to maintaining disclosure controls and procedures designed to ensure that information required to be disclosed in our periodic reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

Under the supervision, and with the participation, of our current management, including our Chief Executive Officer ("CEO") and ~~our~~ Chief Financial Officer ("CFO"), we evaluated the effectiveness of our disclosure controls and procedures as ~~such term is~~ defined in ~~Rule~~Rules 13a-15(e) and 15d-15(e) ~~promulgated~~ under the Securities Exchange ~~Act. The~~Act of 1934, as amended (the “Exchange Act”), as of March 31, 2020. Based on this evaluation ~~considered~~of our disclosure controls and procedures, our CEO and CFO have concluded that our disclosure controls and procedures were not effective as of March 31, 2020 because of certain material weaknesses in our internal control over financial reporting, as further described below.

Notwithstanding the conclusion by our CEO and CFO that our disclosure controls and procedures ~~designed to ensure~~as of March 31, 2020 were not effective, and notwithstanding the material weaknesses in our internal control over financial reporting described below, management believes that the condensed consolidated financial statements and related financial information included in this Quarterly Report fairly present in all material respects our financial condition, results of operations and cash flows as of the dates presented, and for the periods ended on such dates, in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Changes in Internal Control over Financial Reporting

Under applicable SEC rules (Exchange Act Rules 13a-15(d) and 15d-15(d)), management is required to ~~be disclosed by us in~~evaluate, with the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, includingparticipation of our Chief Executive Officer and Chief Financial Officer, ~~as appropriate~~any changes in internal control over financial reporting that occurred during each fiscal quarter that materially affected, or are reasonably likely to ~~allow timely decisions regarding required disclosure. Based on that evaluation,~~materially affect, our ~~Chief Executive Officer~~internal control over financial reporting. Other than the remediation actions disclosed in Part II, Item 9A, "Controls and Procedures," of our ~~Chief Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2016.~~

~~Changes in Internal Control over Financial Reporting~~

~~There~~2019 Comprehensive 10-K, there were no changes in our internal control over financial reporting ~~(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation described in this Item 9A that occurred~~ during the quarter ended ~~December~~March 31, ~~2016~~2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As discussed in Part II, Item 9A, "Controls and Procedures," of our 2019 Comprehensive 10-K, we have undertaken a broad range of remedial procedures to address the material weaknesses in our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

The effectiveness of any system of internal control over financial reporting is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting can only provide reasonable, not absolute, assurances that its objectives will be met. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but we cannot assure that such improvements will be sufficient to provide us with effective internal control over financial reporting.

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PART II: OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we have been involved in various legal proceedings arising from the ~~normal~~ course of business activities.

Litigation and Claims— On February 8, 2018, two putative class action complaints were filed against us, our Chief Executive Officer, and our former Chief Financial Officer in the U.S. District Court for the Northern District of California (Hessefort v. Super Micro Computer, Inc., et al., No. 18-cv-00838 and United Union of Roofers v. Super Micro Computer, Inc., et al., No. 18-cv-00850). The complaints contain similar allegations, claiming that the defendants violated Section 10(b) of the Securities Exchange Act due 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. We believe the claims are without merit and intend to vigorously defend ~~ourselves vigorously~~ against the lawsuit.

SEC Matter— We have 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. In addition, we have received subpoenas from the SEC in connection with the matters underlying our inability to timely file our Form 10-K for the fiscal year ended June 30, 2017. We also received a subpoena from the SEC following the publication of a false and widely discredited news article in October 2018 concerning our products. We have cooperated fully to comply with these government requests. We have reached an agreement in principle regarding a proposed settlement of these matters with the staff of the SEC, subject to final approval by the Commissioners of the SEC. Under the terms of the proposed resolution, we will pay a penalty of $17.5 million. In addition, our Chief Executive Officer has reached an agreement in principle regarding a proposed settlement of these matters with the staff of the SEC, subject to final approval by the Commissioners of the SEC. Under the terms of the proposed resolution, 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 March 31, 2020, we recorded a liability of $17.5 million for our potential SEC settlement included in general and administrative expenses and accrued liabilities in the condensed consolidated financial statements. Our Chief Executive Officer’s potential payment of $2,122,000 to us is a contingent gain and will be recorded if and when it is realized. Our Chief Executive Officer and we have not reached final resolutions of these matters with the SEC and we cannot predict when settlements, if finally agreed, would become final, nor whether any ~~such claims. In management's opinion,~~of the ~~resolution~~proposed terms may change in connection with final resolutions.

Due to the inherent uncertainties of ~~any pending matters~~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 ~~consolidated~~ financial ~~condition,~~position or results of ~~operations, or liquidity.~~operations.

Item 1A. Risk Factors

Important risk factors that could affect our operations and financial performance, or that could cause results or events to differ from current expectations, are described in Part I, Item 1A “Risk Factors” of our 2019 Comprehensive 10-K. In addition to the risk factors disclosed therein, we identified an additional risk factor, as described below.

The Risk Factors included in our Annual Report on Form 10-K for the year ended June 30, 2016 have not materially changed. You should carefully consider the following risk factors, as well as the other information in this Form 10-Q. If anyeffects of the ~~following risks actually occurs,~~COVID-19 pandemic has, and will continue to an increasing degree, to adversely affect our business operations, financial condition and results of operations, ~~would suffer. In this case,~~and severity of which remains uncertain.

The novel strain of the ~~trading price~~coronavirus identified in Wuhan, China in late 2019 (COVID-19) has spread throughout the world and has resulted in authorities imposing, and businesses and individuals implementing, numerous unprecedented measures to try to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place/stay-at-home and social distancing orders, and shutdowns. These measures have impacted and may further impact our workforce and operations, the operations of our ~~common stock would likely decline~~customers, and ~~you might lose all or part~~those of ~~your investment in~~ our ~~common stock. Additional risks that we currently do not know about or that we currently believe~~respective vendors, suppliers, and partners.

We have taken steps to ~~be immaterial may also impair~~protect our ~~business operations.~~

~~Risks Related to Our Business and Industry~~

~~Our quarterly operating results will likely fluctuate~~employees, including temporarily closing our offices in the ~~future, which could cause rapid declines~~United States, the Netherlands and to a lesser extent in Taiwan. We continue our ~~stock price.~~

Asmanufacturing operations and customers’ orders processing and services at each location, although our business continues to grow, we believe that our quarterly operating results will be subject to greater fluctuation due to various factors, many of which are beyond our control. Factors that may affect quarterly operating resultsproductivity has slowed especially in the ~~future include:~~

~~Fluctuations based upon seasonality, with the quarters ending March 31~~United States and ~~September 30 typically being weaker;~~

~~Fluctuations~~ in the ~~timing~~Netherlands. Travel restrictions and ~~size of large customer orders as larger customers~~schedules’ disruptions have impacted our supply chain and ~~larger orders become an increasing percentage of~~shipments to our ~~net sales;~~

~~Variability of~~customers. We have invested our ~~margins based on our manufacturing capacity utilization, the mix of server systems, subsystems and accessories we sell and the percentage of our sales~~capital to ~~internet data center cloud customers or certain geographical regions;~~

~~Fluctuations in availability and costs associated with~~procure key components ~~and other materials needed~~so we can maintain reasonable lead times to ~~satisfy customer requirements;~~fulfill orders for our customers. The extent to

~~The timing of the introduction of new products by leading microprocessor vendors and other suppliers;~~

~~Fluctuations based upon changes in demand for and cost of storage solutions as such solutions become an increasing percentage of our net sales;~~

~~Changes in our product pricing policies, including those made in response to new product announcements and pricing changes of our competitors;~~

~~Mix of whether customer purchases are of full systems or subsystems and accessories and whether made directly or through indirect sales channels;~~

~~The effect of mergers and acquisitions among our competitors, suppliers or partners;~~

~~General economic conditions in our geographic markets; and~~

~~Impact of regulatory changes on our cost of doing business.~~

Accordingly, it is difficult to accurately forecast our growth and results of operations on a quarterly basis. If we fail to meet expectations of investors or analysts, our stock price may fall rapidly and without notice. Furthermore, the fluctuation of quarterly operating results may render less meaningful period-to-period comparisons of our operating results, and you should not rely upon them as an indication of future performance.

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~~As we increasingly target larger customers and larger sales opportunities, our customer base may become more concentrated, our cost~~which the effects of ~~sales may increase, our margins may be lower and our sales may be less predictable.~~

Asthe pandemic will impact our business, continues to grow, we have become increasingly dependent upon larger sales to maintain our rate of growth. In particular, in recent years, we have completed larger sales to leading cloud computing and data center companies. Although no customer represented greater than 10% of our total net sales in the three and six months ended December 31, 2016, one of our customers accounted for 15.0% and 12.8% of our net sales in the three and six months ended December 31, 2015, respectively. As customers buy our products in greater volumes and their business becomes a larger percentage of our net sales, we may grow increasingly dependent on those customers to maintain our growth. If our largest customers do not purchase our products at the levels, timeframes or geographies that we expect, our ability to maintain or grow our net sales will be adversely affected.

Increased sales to larger customers may also cause fluctuations in results of operations. Large orders are generally subject to intense competition and pricing pressure which can have an adverse impact on our margins and results of operations. Likewise, larger customers may seek to fulfill all or substantially all of their requirements in a single or a few orders, and not make another significant purchase for a substantial period of time. Accordingly, a significant increase in revenue during the period in which we recognize the revenue from a large customer may be followed by a period of time during which the customer purchases none or few of our products.

Additionally, as we and our partners focus increasingly on selling to larger customers and attracting larger orders, we expect greater costs of sales. Our sales cycle may become longer and more expensive, as larger customers typically spend more time negotiating contracts than smaller customers. Larger customers often seek greater levels of support in the implementation and use of our server solutions.

~~As a result of the above factors, our quarter-to-quarter results of~~ operations, ~~may be subject to greater fluctuation and our stock price may be adversely affected.~~

~~We may fail to meet publicly announced financial guidance or other expectations about our business, which would cause our stock to decline in value.~~

We typically provide forward looking financial guidance when we announce our financial results from the prior quarter. We undertake no obligation to update such guidance at any time. Frequently in the past, our financial results have failed to meet the guidance we provided. There are a number of reasons why we have failed to meet guidance in the past and might fail again in the future, including, but not limited to, the factors described in these Risk Factors.

If we are unable to favorably assess the effectiveness of our internal control over financial reporting, or if our independent auditors are unable to provide an unqualified attestation report on our internal control over financial reporting, our stock price could be adversely affected.

In November 2015, our management determined, and the Audit Committee of our Board of Directors concurred, that a material weakness existed in our internal control over financial reporting related to the revenue recognition of contracts with extended product warranties. We identified errors related to revenue recognized prior to meeting the U.S. GAAP revenue recognition criteria that impacted prior periods, including fiscal years 2013, 2014 and 2015 which were corrected in the three months ended September 30, 2015. We have improved our controls on revenue recognition of contracts with extended product warranties and remediated this material weakness as of June 30, 2016. While we have put controls in place to remediate the material weakness, we cannot assure that there will not be additional material weaknesses or significant deficiencies that we or our independent registered public accounting firm may identify. If we identify such issues or if we are unable to produce accurate and timely financial statements, our stock price may be adversely affected and we may be unable to maintain compliance with Nasdaq listing requirements.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, (“Section 404”), our management is required to report on the effectiveness of our internal control over financial reporting in our annual reports. In addition, our independent auditors must attest to and report on the effectiveness of our internal control over financial reporting. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex, and require significant documentation, testing and possible remediation. As a result, our efforts to comply with Section 404 have required the commitment of significant managerial and financial resources. As we are committed to maintaining high standards of public disclosure, our efforts to comply with Section 404 are ongoing, and we are continuously in the process of reviewing, documenting and testing our internal control over financial reporting, which will result in continued commitment of significant

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financial and managerial resources. Although we strive to maintain effective internal controls over financial reporting in order to prevent and detect material misstatements in our annual and quarterly financial statements and prevent fraud, we cannot assure that such efforts will be effective. If we fail to maintain effective internal controls in future periods, our operating results, financial position and stock price could be adversely affected.

Increases in average selling prices for our server solutions have significantly contributed to our increases in net sales. Such prices are subject to decline if customers do not continue to purchase our latest generation products or additional components, which could harm our results of operations.

Increases in average selling prices for our server solutions have significantly contributed to our increases in net sales. As with most electronics based products, average selling prices of servers typically are highest at the time of introduction of new products, which utilize the latest technology, and tend to decrease over time as such products become commoditized and are ultimately replaced by even newer generation products. As our business continues to grow, we may increasingly be subject to this industry risk. We cannot predict the timing or amount of any decline in the average selling prices of our server solutions that we may experience in the future. In some instances, our agreements with our distributors limit our ability to reduce prices unless we make such price reductions available to them, or price protect their inventory. If we are unable to decrease per unit manufacturing costs faster than the rate at which average selling prices continue to decline, our business, financial condition and results of operations ~~will be harmed. In addition, our average selling prices for our server solutions have increased~~is uncertain, rapidly ~~in recent periods as we have sold more products including additional components such as more memory~~changing and hard disk drive capacity. There is no assurance that our average selling prices will continue to increase and may decline due to decreased demand for, or lower prices of, the additional components that we sell with our server solutions.

~~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 materials for our products.~~

Prices of materials and core components utilized in the manufacture of our server solutions, such as serverboards, chassis, central processing units (“CPUs”), memory and hard drives represent a significant portion of our cost of sales. We generally do not enter into long-term supply contracts for these materials and core components, but instead purchase these materials and components on a purchase order basis. Prices of these core components and materials are volatile, and, as a result, it is difficult to predict, ~~expense levels~~ and operating results. In addition, if our business growth renders it necessary or appropriate to transition to longer term contracts with materials and core component suppliers, our costs may increase and our gross margins could correspondingly decrease.

~~Because we often acquire materials and core components~~will depend on an as needed basis, we may be limited in our ability to effectively and efficiently respond to customer orders because of the then-current availability or the terms and pricing of materials and core components. Our industry has experienced materials shortages and delivery delays in the past, and we may experience shortages or delays of critical materials in the future. From time to time, we have been forced to delay the introduction of certain of our products or the fulfillment of customer orders as a result of shortages of materials and core components which can adversely impact our revenue. For example, our net sales were adversely impacted in fiscal year 2013 and 2012 by disk drive shortages resulting from flooding in Thailand. In other periods, our cost of sales as a percentage of revenue have been adversely impacted by higher component prices resulting from shortages. For example, our gross margin was adversely impacted in the quarter ended December 31, 2016 due to higher costs related to shortages of memory and SSD. If shortages or delays arise, the prices of these materials and core components may increase or the materials and core components may not be available at all. In addition, in the event of shortages, some of our larger competitors may have greater abilities to obtain materials and core components due to their larger purchasing power. We may not be able to secure enough core components or materials at reasonable prices or of acceptable quality to build new products to meet customer demand, which could adversely affect our business and financial results.

If we were to lose any of our current supply or contract manufacturing relationships, the process of identifying and qualifying a new supplier or contract manufacturer who will meet our quality and delivery requirements, and who will appropriately safeguard our intellectual property, may require a significant investment of time and resources, adversely affecting our ability to satisfy customer purchase orders and delaying our ability to rapidly introduce new products to market. Similarly, if any of our suppliers were to cancel, materially change contracts or commitments to us or fail to meet the quality or delivery requirements needed to satisfy customer demand for our products, whether due to shortages or other reasons, our reputation and relationships with customers could be damaged. We could lose orders, be unable to develop or sell some products cost-effectively or on a timely basis, if at all, and have significantly decreased revenues, margins and earnings, which would have a material adverse effect on our business.

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~~We may incur additional expenses and suffer lower margins if our expectations regarding long term hard disk drive commitments prove incorrect.~~

Notwithstanding our general practice of not entering into long term supply contracts, as a result of severe flooding in Thailand during the first quarter of fiscal year 2012, we have entered into purchase agreements with selected suppliers of hard disk drives in order to ensure continuity of supply for these components. The hard disk drive purchase commitments totaled approximately $110.5 million as of June 30, 2016 and have been paid through December 2016. Higher costs compared to the lower selling prices for these components incurred under these agreements contributed to our lower gross profit in fiscal year 2013 and if a similar event occurs in the future, our gross profit will likely be impacted. Our existing and any other similar future supply commitmentsnumerous evolving factors that we may enter into expose us to risk for lower margins or loss on disposal of such inventory if our expectations of customer demand are incorrect and the market price of the material or component inventory decline. Likewise if we fail to enter into commitments we may be exposed to limited availability of supply or higher inventory costs which could result in lower net sales and adversely impact gross margin and net income.

~~We may lose sales or incur unexpected expenses relating to insufficient, excess or obsolete inventory.~~

As a result of our strategy to provide greater choice and customization of our products to our customers, we are required to maintain a high level of inventory. If we fail to maintain sufficient inventory, we may not be able to meet demand for our products on a timely basis, and our sales may suffer. If we overestimate customer demand for our products, we could experience excess inventory of our products and be unable to sell those products at a reasonable price,control or ~~at all. As a result, we may need to record higher inventory reserves. In addition, from time to time we assume greater inventory risk in connection with~~ predict, including:

the purchase or manufacture of more specialized components in connection with higher volume sales opportunities. We have from time to time experienced inventory write downs associated with higher volume sales that were not completed as anticipated. We expect that we will experience such write downs from time to time in the future related to existing and future commitments. If we are later able to sell inventory with respect to which we have taken a reserve at a profit, it may increase the quarterly variances in our operating results. Additionally, the rapid pace of innovation in our industry could render significant portions of our existing inventory obsolete. Certain of our distributors and OEMs have rights to return products, limited to purchases over a specified period of time, generally within 60 to 90 days of the purchase, or to products in the distributor's or OEM's inventory at certain times, such as termination of the agreement or product obsolescence. Any returns under these arrangements could result in additional obsolete inventory. In addition, server systems, subsystems and accessories that have been customized and later returned by those of our customers and partners who have return rights or stock rotation rights may be unusable for other purposes or may require reformation at additional cost to be made ready for sale to other customers. Excess or obsolete inventory levels for these or other reasons could result in unexpected expenses or increases in our reserves against potential future charges which would adversely affect our business and financial results.

~~We may encounter difficulties with our ERP systems.~~

We have implemented a new enterprise resource planning, or ERP, system and have commenced using the new system in the United States in July 2015 and in Taiwan and the Netherlands in January 2016. We have incurred and expect to continue to incur additional expenses related to our implementation as we continue to enhance and develop our ERP system. Many companies have experienced delays and difficulties with the implementation of new or changed ERP systems that have had a negative effect on their business. Any future disruptions, delays or deficiencies in the design and implementation of our ERP system could result in potentially much higher costs than we currently anticipate and could adversely affect our ability to provide services, fulfill contractual obligations, file reports with the SEC in a timely manner and/or otherwise operate our business, or otherwise impact our controls environment. Any of these consequences could have an adverse effect on our results of operations and financial condition.

~~System security risks, data protection breaches, cyber-attacks~~and other related cyber-security issues could disrupt our internal operations or interfere with our products, and any such disruption could reduce our expected revenues, increase our expenses, damage our reputation and adversely affect our stock price.

Experienced computer programmers and hackers may be able to penetrate our network and misappropriate or compromise our confidential information or that of third parties, create system disruptions or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities of our products. In addition, our hardware and software or third party components and software that we utilize in our products may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of the products. The costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant and, if our efforts to address these problems are not successful, this could result in interruptions, delays,

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cessation of service and loss of existing or potential customers that may impede our sales, manufacturing, distribution or other critical functions. Any claim that our products or systems are subject to a cyber-security risk, whether valid or not, could damage our reputation and adversely impact our revenues and results of operations.

We manage and store various proprietary information and sensitive or confidential data relating to our business as well as information from our suppliers and customers. Breaches of our or any of our third party suppliers’ security measures or the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive or confidential data about us or our customers or suppliers, including the potential loss or disclosure of such information or data as a result of fraud, trickery or other forms of deception, could expose us or our customers or suppliers to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our brand and reputation or otherwise harm our business. In addition, the cost and operational consequences of implementing further data protection measures could be significant.

~~If we do not successfully manage the expansion of our international manufacturing operations, our business could be harmed.~~

Since inception we have conducted a substantial majority of our manufacturing operations in San Jose. We are continuing to work on increasing our utilization of manufacturing operations in Taiwan and in the Netherlands. The commencement or scaling of new manufacturing operations in new locations, particularly in other jurisdictions, entails additional risks and challenges. Difficulties associated with our implementation of a new global operating structure adversely impacted our results of operations and tax expenses in the quarter ended June 30, 2016. If we are unable to successfully ramp up these operations we may incur unanticipated costs, difficulties in making timely delivery of products or suffer other business disruptions which could adversely impact our results of operations.

~~We may not be able to successfully manage our planned growth and expansion.~~

Over time we expect to continue to make investments to pursue new customers and expand our product offerings to grow our business rapidly. We expect that our annual operating expenses will continue to increase as we invest in sales and marketing, research and development, manufacturing and production infrastructure, and strengthen customer service and support resources for our customers. Our failure to expand operational and financial systems timely or efficiently could result in additional operating inefficiencies, which could increase our costs and expenses more than we had planned and prevent us from successfully executing our business plan. We may not be able to offset the costs of operation expansion by leveraging the economies of scale from our growth in negotiations with our suppliers and contract manufacturers. Additionally, if we increase our operating expenses in anticipation of the growth of our business and this growth does not meet our expectations, our financial results will be negatively impacted.

If our business grows, we will have to manage additional product design projects, materials procurement processes, and sales efforts and marketing for an increasing number of SKUs, as well as expand the numberduration and scope of the COVID-19 pandemic;

the extent and effectiveness of responsive actions by authorities and the impact of these and other factors on our ~~relationships with~~employees, customers and vendors;

the rate of spending on server and storage solutions, including delays in prospective customers’ purchasing decisions, delays the provisioning of our products;

the rate at which our suppliers ~~distributors~~develop and release new components such as microprocessors and memory;

the length of heightened unemployment and economic recession pressures;

the health impact of the pandemic on our employees, including key personnel;

the impact on the liquidity of our sales partners and end ~~customers. If we fail~~customers, including lengthening of customers payment terms and potential bankruptcies;

our continued ability to ~~manage~~execute on business continuity plans for the maintenance of our critical business processes and managing our liquidity and access to credit facilities on terms acceptable to us.

The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, the extent and effectiveness of containment actions and the impact of these ~~additional responsibilities~~ and ~~relationships successfully, we may incur significant costs, which may negatively impact~~other factors on our ~~operating results. Additionally, in our efforts to be first to market with new products with innovative functionality~~employees, customers, partners and ~~features, we may devote significant research and development resources to products and product features for which a market does not develop quickly, or at all.~~suppliers. If we are not able to ~~predict market trends accurately, we may not benefit from~~respond to and manage the impact of such ~~research~~events effectively, our business will be harmed.

We have significant international sales and ~~development activities,~~operations and face risks related to health epidemics, including the recent coronavirus outbreak, that could adversely impact the operations of our ~~results of operations may suffer.~~company, our manufacturers or our customers, as well as our sales and financial results.

Our future effective income tax rates could be affected by changes in the relative mix of our operations and income among different geographic regions and by proposed and enacted United States federal income tax legislation, which could affect our future operating results, financial condition and cash flows.

~~We seek to structure our worldwide operations to take advantage of certain international tax planning opportunities and incentives. Our future effective income tax rates~~business could be adversely affected ~~if tax authorities challenge our international tax structure or if~~by the ~~relative mix~~effects of ~~our United States~~a widespread outbreak of contagious disease, including the recent outbreak of respiratory illness caused by a novel coronavirus first identified in Wuhan, China (COVID-19). Any outbreak of contagious diseases, and international income changes for any reason, or if United States or international tax laws were to change in the future. In particular, a substantial portion of our revenue is generated from customers located outside the United States. Foreign withholding taxes and United States income taxes have not been provided on undistributed earnings for certain non-United States subsidiaries, because such earnings are intended to be indefinitely reinvested in the operations of those subsidiaries. President Trump has called for comprehensive tax reform. We cannot predict the impact, if any, of these changes to our business. However, it is possible that the proposed changes could adversely affect our business. We cannot assure you that we will be able to lower our effective tax rate as a result of these activities nor that such rate will not increase in the future.

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~~If President Trump imposes significant tariffs or~~ other ~~restrictions on foreign imports, our revenues and results of operations may be materially harmed.~~

Donald Trump’s victory in the U.S. presidential election, as well as the Republican Party maintaining control of both the House of Representatives and Senate of the United States in the congressional election, has created uncertainty regarding trade policy. President Trump has called for the imposition of tariffs or other restrictions on foreign imports. If any such tariffs are imposed on products or components that we import, we could experience reduced revenues or may have to raise our prices, either of whichadverse public health developments, could have ana material and adverse effect on our business ~~results of operations and financial condition.~~

~~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~~operations. These could include disruptions or ~~improve our gross margins.~~

The market for server solutions is intensely competitive and rapidly changing. 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 solutions aggressively to increase our market share with respect to those products or geographies, particularly for internet data center customers and other large sale opportunities. If we are unable to maintain the margins on our server 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 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 Dell, Inc., Hewlett-Packard Enterprise, Lenovo and Cisco. In addition, we also compete with a number of other vendors who also sell application optimized servers, contract manufacturers and original design manufacturers (“ODMs”), such as Quanta Computer Incorporated. ODMs sell server solutions marketed or sold under a third party brand.

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

~~Greater name recognition and deeper market penetration;~~

~~Longer operating histories;~~

~~Larger sales and marketing organizations and research and development teams and budgets;~~

~~More established relationships with customers, contract manufacturers and suppliers and better channels to reach larger customer bases and larger sales volume allowing for better costs;~~

~~Larger customer service and support organizations with greater geographic scope;~~

~~A broader and more diversified array of products and services; and~~

~~Substantially greater financial, technical and other resources.~~

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

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

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~~Any failure to adequately expand or retain our sales force will impede our growth.~~

We expect that our direct sales force will continue to grow as larger customers increasingly require a direct sales approach. Competition for direct sales personnel with the advanced sales skills and technical knowledge we need is intense. 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, 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 core 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.

~~Our suppliers’ failure to improve the functionality and performance of materials and core components for our products may impair or delay our ability to deliver innovative products to our customers.~~

We need our material and core 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 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 core 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.

~~As our business grows, we expect that we may be exposed to greater customer credit risks.~~

Historically, we have offered limited credit terms to our customers. As our customer base expands, as our orders increase in size, and as we obtain more direct customers, we expect to offer increased credit terms and flexible payment programs to our customers. Doing so may subject us to increased credit risk, higher accounts receivable with longer days outstanding, and increases in charges or reserves, which could have a material adverse effect on our business, results of operations and financial condition.

~~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 resellers accounted for 46.2% and 47.9% of our net sales in the three and six months ended December 31, 2016, respectively, and 41.9% and 43.6% in the three and six months ended December 31, 2015, respectively. We depend on our distributors 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 expand our existing distribution relationships as well as develop new distribution relationships. Our distributors also sell products offered by our competitors and may elect to focus their efforts on these sales. If our competitors offer our distributors 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 distributors, those distributors may de-emphasize or decline to carry our products. In addition, our distributors’ order decision-making process 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 distributors to end customers. To maintain our participation in distributors’ marketing programs, in the past we have provided cooperative marketing arrangements or made short-term pricing concessions.

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The discontinuation of cooperative marketing arrangements or pricing concessions could have a negative effect on our business. Our distributors could also modify their business practices, such as payment terms, inventory levels or order patterns. If we are unable to maintain successful relationships with distributors or expand our distribution channels or we experience unexpected changes in payment terms, inventory levels or other practices by our distributors, our business will suffer.

~~Our direct sales efforts may create confusion for our end customers and harm our relationships with our distributors and 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 with our distributors and OEMs, who may view our direct sales efforts as undermining their efforts to sell our products. If a distributor or OEM deems our direct sales efforts to be inappropriate, the distributor or OEM may not effectively market our products, may emphasize alternative products from competitors, or may seek to terminate our business relationship. Disruptions in our distribution 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 with our distributors and OEMs could lead to a decline in sales and adversely affect our results of operations.

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 rapid-to-market with flexible and customizable server 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 solutions could damage our reputation and diminish demand for our products.~~

Our server solutions are critical to our customers’ business operations. Our customers require our server solutions to perform at a high level, contain valuable features and be extremely reliable. The design of our server 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 vendor provided us with a defective capacitor that failed under certain heavy use applications. As a result, our product needed to be repaired. Though the vendor agreed to pay for a large percentage of the costs of the repairs, we incurred costs in connection with the recall and diverted resources from other projects.

New flaws or limitations in our server 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 solutions, request remedial action, terminate contracts for untimely delivery, or elect not to order additional server solutions, which could result in an increase in our provision for doubtful accounts, an increase 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. 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 those conflicts may adversely affect our operations.~~

We use Ablecom, a related party, for contract design and manufacturing coordination support. We work with Ablecom to optimize modular designs for our chassis and certain of other components. Our purchases from Ablecom represented 11.6% and 11.4% of our cost of sales for the three and six months ended December 31, 2016, respectively, and 13.4% and 13.3% in the three and six months ended December 31, 2015, respectively. Ablecom’s sales to us constitute a substantial majority of Ablecom’s net sales. Ablecom is a privately-held Taiwan-based company.

Steve Liang, Ablecom’s Chief Executive Officer and largest shareholder, is the brother of Charles Liang, our President, Chief Executive Officer and Chairman of the Board. Charles Liang, and his spouse, Chiu-Chu (Sara) Liu Liang, our Vice President of Operations, Treasurer and director, jointly own 10.5% of Ablecom’s outstanding common stock, while

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Mr. Steve Liang and other family members own 36.0% of Ablecom’s outstanding common stock. Mr. and Mrs. Charles Liang, as directors, officers and significant stockholders of the Company, have considerable influence over the management of our business relationships. Accordingly, we may be disadvantaged by their economic interests as stockholders of Ablecom and their personal relationship with Ablecom’s Chief Executive Officer. We may not negotiate or enforce contractual terms as aggressively with Ablecom 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 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 shares of Ablecom cease to have a significant amount of the outstanding shares of Ablecom, the terms and conditions of our agreements with Ablecom may not be as favorable as those in our existing contracts. As a result, our costs could increase and adversely affect our margins and results of operations.

~~Our relationship with Ablecom may allow us to benefit from favorable pricing which may result in reported results more favorable than we might report in the absence of our relationship.~~

Although we generally re-negotiate the price of products that we purchase from Ablecom on a quarterly basis, pursuant to our agreements with Ablecom either party may re-negotiate the price of products for each order. As a result of our relationship with Ablecom, it is possible that Ablecom may in the future sell products to us at a price lower than we could obtain from an unrelated third party supplier. This may result in future reporting of gross profit as a percentage of net sales that is in excess of what we might have obtained absent our relationship with Ablecom.

~~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 continue to maintain our manufacturing relationship with Ablecom in Asia. In order to provide a larger volume of contract manufacturing services for us, 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 the research and development efforts we are undertaking and continue to 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 or Ablecom fail to manage the contract manufacturing services and warehouse operations in Asia, 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 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.

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

We market and sell our systems and components both domestically and outside the United States. We intend to expand our international sales efforts, especially into Asia and are expanding our business operations in Europe and Asia, particularly in Taiwan, the Netherlands, China and Japan. In particular, we have and continue to make substantial investments for the purchase of land and the development of new facilities in Taiwan to accommodate our expected growth. 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 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 distributors;~~

~~Laws favoring local competitors;~~

~~Weaker legal protections of intellectual property rights and mechanisms for enforcing those rights;~~

~~Market disruptions created by public health crises in regions outside the United States, such as Avian flu, SARS and other diseases;~~

~~Difficulties in staffing and 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.~~

We have in the past entered into plea and settlement agreements with the government relating to violations of export control and related laws; if we fail to comply with laws and regulations restricting dealings with sanctioned countries, 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.

In 2006, we entered into certain plea and settlement agreement with government agencies relating to export control and related law violations for activities that occurred in the 2001 to 2003 time frame. We believe we are currently in compliance in all material respects with applicable export related laws and regulations. However, if our export compliance program is not effective, or if we are subject to any future claims regarding violation of export control and economic sanctions laws, we could be subject to civil or criminal penalties, which could lead to a material fine or other sanctions, including loss of export privileges, that may have a material adverse effect on our business, financial condition, results of operation and future prospects. In addition, these plea and settlement agreements and any future violations could have an adverse impactrestrictions on our ability to ~~sell~~travel or to distribute our products, ~~to United States federal, state and local government and related entities.~~

~~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~~temporary closures of our ~~efforts to protect our proprietary technology and our brand. Our patents and other intellectual property rights may be challenged by others~~facilities, or ~~invalidated through administrative process or litigation, and we may initiate claims or litigation against third parties for infringement~~the facilities of our ~~proprietary rights. Such administrative proceedings~~manufacturers or customers. Any disruption of our manufacturers or customers would likely impact our sales and ~~litigation are inherently uncertain and divert resources that could be put towards other business priorities. We may not be able to obtain~~operating results. In addition, 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~~significant outbreak 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

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~~property rights as those~~contagious diseases 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, resellers 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~~human population could result in ~~significant~~a widespread health crisis that could adversely affect the economies and financial ~~liability or prevent us from operating~~markets of many countries, resulting in an economic downturn that could affect demand for 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, resellers 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 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 executive management team and other key employees. In particular, Charles Liang, our President, Chief Executive Officer and Chairman of the Board, is critical to the overall management of our company as well as to 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 ourend customers’ 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 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 harmlikely impact our operating results.

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~~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 currently have a comprehensive disaster recovery program and as a result, a significant natural disaster, such as an earthquake, could have a material adverse impact on our business, operating results, and financial condition. Although we are in the process of preparing such a program, there is no assurance that it will be effective in the event of such a disaster.

~~Our operations involve the use of hazardous and toxic materials, and we must comply with environmental laws and regulations, which can be expensive, and may affect our business and operating results.~~

We are subject to federal, state and local regulations relating to the use, handling, storage, disposal and human exposure to 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. 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.

We also face increasing complexity in our product design as we adjust to new and future requirements relating to the materials composition of our products, including the restrictions on lead and other hazardous substances applicable to specified electronic 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). 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.

We are also subject to the regulations concerning the supply of 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 these requirements could affect the sourcing and availability of minerals used in the manufacture of semiconductor or other devices. As a result, 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 and 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:

~~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;~~

~~The loss of a key customer;~~

~~The loss of key personnel;~~

~~Technological advancements rendering our products less valuable;~~

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~~Lawsuits filed against us;~~

~~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 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 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.

~~If securities analysts do not publish research or reports about our business or if they downgrade our stock, the price of our stock could decline.~~

The research and reports that industry or financial analysts publish about us or our business likely have an effect on the trading price of our common stock. If an industry analyst decides not to cover our company, or if an industry analyst decides to cease covering our company at some point in the future, we could lose visibility in the market, which in turn could cause our stock price to decline. If an industry analyst downgrades our stock, our stock price would likely decline rapidly in response.

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

As of January 30, 2017, our executive officers, directors, current five percent or greater stockholders and affiliated entities together beneficially owned 44.6% 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:

~~establish a classified board of directors so that not all members of our board are 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 the board of directors is expressly authorized to adopt, or to 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

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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. 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 2. Unregistered Sales of Equity Securities and Use of Proceeds

~~Issuer Purchases of Equity Securities~~

In July 2016, our Board of Directors adopted a program to repurchase from time to time at management’s discretion up to $100.0 million of our common stock in the open market or in private transactions during the next twelve months at prevailing market prices. We started repurchases under the program in July 2016.None.

During the three months ended December 31, 2016, we did not repurchase any shares of our common stock. As of December 31, 2016, the approximate dollar value of shares that may yet be purchased under our share repurchase program was $81.5 million.

Item 3. Defaults ~~upon~~Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits

(a) Exhibits.



Exhibit Number		Description
31.1		Certification of Charles Liang, President and Chief Executive Officer of the Registrant pursuant to Section 302, as adopted pursuant to the Sarbanes-Oxley Act of 2002
31.2		Certification of ~~Howard Hideshima,~~Kevin Bauer, Chief Financial Officer of the Registrant pursuant to Section 302, as adopted pursuant to the Sarbanes-Oxley Act of 2002
32.1		Certification of Charles Liang, President and Chief Executive Officer of the Registrant pursuant to Section 906, as adopted pursuant to the Sarbanes-Oxley Act of 2002
32.2		Certification of ~~Howard Hideshima,~~Kevin Bauer, Chief Financial Officer of the Registrant pursuant to Section 906, as adopted pursuant to the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document
104		The cover page from this Quarterly Report on Form 10-Q, formatted in Inline XBRL.


(1)	Incorporated by reference to the same number exhibit filed with the Registrant’s Registration Statement on Form S-1 (Registration No. 333-138370), declared effective by the Securities and Exchange Commission on March 28, 2007.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SUPER MICRO COMPUTER, INC.



Date:	~~February 7, 2017~~May 8, 2020	/s/ C~~HARLES~~ L~~IANG~~ CHARLES LIANG
		Charles Liang President, Chief Executive Officer and Chairman of the Board (Principal Executive Officer)



Date:	~~February 7, 2017~~May 8, 2020	/s/ ~~Howard Hideshima~~ KEVIN BAUER
		~~Howard Hideshima~~Kevin Bauer Senior Vice President, Chief Financial Officer (Principal Financial and Accounting Officer)



	RSUs Outstanding		Weighted Average Grant-Date Fair Value per Share		Aggregate Intrinsic Value (in thousands)
Balance as of June 30, 2016	926,983		$	30.23
Granted	434,410		$	21.36
Released	(187,645	)	$	27.74
Forfeited	(57,795	)	$	27.22
Balance as of December 31, 2016	1,115,953		$	27.35	$	31,302



	December 31, 2016		June 30, 2016
Long-term deferred service costs	$	2,893	$	3,498
Restricted cash	2,136		1,851
Investment in a privately held company	1,411		1,411
Deposits	276		910
Prepaid royalty license	623		748
Others	$	141	$	128
Total other assets	$	7,480	$	8,546



	December 31, 2016		June 30, 2016
Deferred revenue-net of current portion (1)	$	31,765	$	21,940
Accrued unrecognized tax benefits including related interests and penalties-net of current portion	18,784		16,056
Accrued warranty costs-net of current portion	1,248		1,313
Others	1,204		1,294
Total other long-term liabilities	$	53,001	$	40,603



December 31, 2016	Level 1		Level 2		Level 3		Asset at Fair Value
Money market funds	$	323	$	—	$	—	$	323
Auction rate securities	—		—		2,643		2,643
Total	$	323	$	—	$	2,643	$	2,966

June 30, 2016	Level 1		Level 2		Level 3		Asset at Fair Value
Money market funds	$	315	$	—	$	—	$	315
Auction rate securities	—		—		2,643		2,643
Total	$	315	$	—	$	2,643	$	2,958



	December 31, 2016
	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Fair Value
Auction rate securities	$	2,750	$	—	$	(107	)	$	2,643

	June 30, 2016
	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Fair Value
Auction rate securities	$	2,750	$	—	$	(107	)	$	2,643



	Payments Due by Period
	Less Than 1 Year		1 to 3 Years		3 to 5 Years		More Than 5 Years		Total
	(in thousands)
Operating leases	$	4,468	$	7,665	$	4,084	$	1,921	$	18,138
Capital leases, including interest	271		417		99		—		787
Debt, including interest (1)	93,347		20,956		15,223		—		129,526
Purchase commitments (2)	402,229		—		—		—		402,229
Total (3)	$	500,315	$	29,038	$	19,406	$	1,921	$	550,680