Table of Contents

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 DecemberMarch 31, 20162021
or
¨☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 001-33383

Super Micro Computer, Inc.
(Exact name of registrant as specified in its charter)
Delaware77-0353939
(State or other jurisdiction of

incorporation or organization)
(I.R.S. Employer

Identification No.)
980 Rock Avenue
San Jose, CA 95131
(Address of principal executive offices, including zip code)
(408) 503-8000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, $0.001 par value per shareSMCINASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  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 filerx
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 JanuaryApril 30, 20172021 there were 48,295,89649,934,337 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 SIXTHREE MONTHS ENDED DECEMBERMARCH 31, 20162021


TABLE OF CONTENTS
 
Page
PART I
ITEM 1.
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23
34
5
47
59
ITEM 2.
1934
ITEM 3.
3245
ITEM 4.
3246
PART II
ITEM 1.
3347
ITEM 1A.
3347
ITEM 2.
4647
ITEM 3.
4647
ITEM 4.
4647
ITEM 5.
4647
ITEM 6.
4648
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) 
March 31,June 30,
20212020
ASSETS
Current assets:
Cash and cash equivalents$177,894 $210,533 
Accounts receivable, net of allowances of $2,784 and $4,586 at March 31, 2021 and June 30, 2020, respectively (including accounts receivable from related parties of $12,244 and $8,712 at March 31, 2021 and June 30, 2020, respectively)407,365 403,745 
Inventories903,903 851,498 
Prepaid expenses and other current assets (including other receivables from related parties of $20,298 and $19,791 at March 31, 2021 and June 30, 2020, respectively)150,488 126,985 
Total current assets1,639,650 1,592,761 
Investment in equity investee3,637 2,703 
Property, plant and equipment, net265,566 233,785 
Deferred income taxes, net57,624 54,898 
Other assets32,363 34,499 
Total assets$1,998,840 $1,918,646 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable (including amounts due to related parties of $54,072 and $72,368 at March 31, 2021 and June 30, 2020, respectively)$465,012 $417,673 
Accrued liabilities (including amounts due to related parties of $16,026 and $16,206 at March 31, 2021 and June 30, 2020, respectively)153,742 155,401 
Income taxes payable9,616 4,700 
Short-term debt57,503 23,704 
Deferred revenue96,123 106,157 
Total current liabilities781,996 707,635 
Deferred revenue, non-current93,920 97,612 
Long-term debt, net of debt issuance costs27,867 5,697 
Other long-term liabilities (including related party balance of $0 and $1,699 at March 31, 2021 and June 30, 2020, respectively)41,109 41,995 
Total liabilities944,892 852,939 
Commitments and contingencies (Note 11)00
Stockholders’ equity:
Common stock and additional paid-in capital, $0.001 par value
Authorized shares: 100,000,000; Outstanding shares: 50,036,368 and 52,408,703 at March 31, 2021 and June 30, 2020, respectively
Issued shares: 50,036,368 and 53,741,828 at March 31, 2021 and June 30, 2020, respectively425,489 389,972 
Treasury stock (at cost), 0 and 1,333,125 shares at March 31, 2021 and June 30, 2020, respectively0 (20,491)
Accumulated other comprehensive gain (loss)362 (152)
Retained earnings627,929 696,211 
Total Super Micro Computer, Inc. stockholders’ equity1,053,780 1,065,540 
Noncontrolling interest168 167 
Total stockholders’ equity1,053,948 1,065,707 
Total liabilities and stockholders’ equity$1,998,840 $1,918,646 
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 December 31, June 30,
 2016 2016
ASSETS   
Current assets:   
Cash and cash equivalents$128,752
 $180,964
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
Inventory599,269
 448,980
Prepaid income taxes5,164
 5,682
Prepaid expenses and other current assets13,738
 13,435
Total current assets1,113,808
 938,002
Long-term investments2,643
 2,643
Property, plant and equipment, net193,670
 187,949
Deferred income taxes-noncurrent32,255
 28,460
Other assets7,480
 8,546
Total assets$1,349,856
 $1,165,600
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 liabilities74,331
 55,618
Income taxes payable1,048
 5,172
Short-term debt and current portion of long-term debt, net of debt issuance costs92,443
 53,589
Total current liabilities509,762
 363,618
Long-term debt, net of current portion and debt issuance costs34,732
 40,000
Other long-term liabilities53,001
 40,603
Total liabilities597,495
 444,221
Commitments and contingencies (Note 9)

 

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, respectively291,275
 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)
Accumulated other comprehensive loss(83) (85)
Retained earnings481,499
 445,971
Total Super Micro Computer, Inc. stockholders’ equity752,200
 721,195
Noncontrolling interest161
 184
Total stockholders’ equity752,361
 721,379
Total liabilities and stockholders’ equity$1,349,856
 $1,165,600


See accompanying notes to condensed consolidated financial statements.

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SUPER MICRO COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited) 
 Three Months Ended
March 31,		Nine Months Ended
March 31,
 2021202020212020
Net sales (including related party sales of $20,432 and $21,528 in the three months ended March 31, 2021 and 2020, respectively, and $58,853 and $70,974 in the nine months ended March 31, 2021 and 2020, respectively)$895,881$772,408$2,488,437$2,443,155
Cost of sales (including related party purchases of $64,787 and $60,387 in the three months ended March 31, 2021 and 2020, respectively, and $177,821 and $200,753 in the nine months ended March 31, 2021 and 2020, respectively)772,864639,0482,099,4102,040,462
Gross profit123,017133,360389,027402,693
Operating expenses:
Research and development57,91249,586165,439154,730
Sales and marketing21,82621,88662,85864,057
General and administrative26,22446,34275,864107,680
Total operating expenses105,962117,814304,161326,467
Income from operations17,05515,54684,86676,226
Other (expense) income, net2,017937(1,363)2,110
Interest expense(607)(518)(1,850)(1,630)
Income before income tax provision18,46515,96581,65376,706
Income tax benefit (provision)227899(8,541)(9,782)
Share of (loss) from equity investee, net of taxes(264)(1,057)(409)(1,066)
Net income$18,428$15,807$72,703$65,858
Net income per common share:
Basic$0.36$0.31$1.41$1.30
Diluted$0.35$0.29$1.35$1.26
Weighted-average shares used in calculation of net income per common share:
Basic50,55351,526 51,465 50,591 
Diluted53,21853,693 53,747 52,399 
 Three Months Ended
December 31,		 Six Months Ended
December 31,
 2016 2015 2016 2015
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
Gross profit93,378
 106,362
 173,442
 178,577
Operating expenses:       
Research and development34,033
 30,264
 67,224
 58,590
Sales and marketing18,153
 16,461
 34,069
 30,710
General and administrative9,429
 10,511
 20,184
 18,711
Total operating expenses61,615
 57,236
 121,477
 108,011
Income from operations31,763
 49,126
 51,965
 70,566
Interest and other income, net45
 24
 74
 111
Interest expense(497) (400) (827) (724)
Income before income tax provision31,311
 48,750
 51,212
 69,953
Income tax provision9,315
 14,061
 15,684
 21,565
Net income$21,996
 $34,689
 $35,528
 $48,388
Net income per common share:       
Basic$0.46
 $0.73
 $0.74
 $1.02
Diluted$0.43
 $0.67
 $0.69
 $0.94
Weighted-average shares used in calculation of net income per common share:       
Basic48,124
 47,651
 48,144
 47,584
Diluted51,521
 51,489
 51,352
 51,405



See accompanying notes to condensed consolidated financial statements.

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SUPER MICRO COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited) 
 Three Months Ended
March 31,		Nine Months Ended
March 31,
 2021202020212020
Net income$18,428 $15,807 $72,703 $65,858 
Other comprehensive income (loss), net of tax:
Foreign currency translation gain (loss)(34)(31)514 (86)
Total other comprehensive income (loss)(34)(31)514 (86)
Total comprehensive income$18,394 $15,776 $73,217 $65,772 
 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


See accompanying notes to condensed consolidated financial statements.

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SUPER MICRO COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
(unaudited)
Three Months Ended March 31, 2021Common Stock and
Additional Paid-In
Capital		Treasury StockAccumulated
Other
Comprehensive
(Loss) Gain		Retained
Earnings		Non-controlling InterestTotal
Stockholders’
Equity
SharesAmountSharesAmount
Balance at December 31, 202050,651,054 $410,522 0 $0 $396 $653,129 $173 $1,064,220 
Exercise of stock options, net of taxes511,801 9,577 — — — — — 9,577 
Release of shares of common stock upon vesting of restricted stock units186,034 — — — — — — — 
Shares of common stock withheld for the withholding tax on vesting of restricted stock units(61,982)(2,062)— — — — — (2,062)
Stock repurchases and retirement(1,250,539)(42)0 0 — (43,628)— (43,670)
Stock-based compensation— 7,494 — — — — — 7,494 
Foreign currency translation loss— — — — (34)— (34)
Net income— — — — — 18,428 (5)18,423 
Balance at March 31, 202150,036,368 $425,489 0 $0 $362 $627,929 $168 $1,053,948 

Three Months Ended March 31, 2020Common Stock and
Additional Paid-In
Capital		Treasury StockAccumulated
Other
Comprehensive
(Loss) Gain		Retained
Earnings		Non-controlling InterestTotal
Stockholders’
Equity
SharesAmountSharesAmount
Balance at December 31, 201951,923,260 $360,060 (1,333,125)$(20,491)$(135)$661,954 $165 $1,001,553 
Exercise of stock options, net of taxes1,163,309 19,120 — — — — — 19,120 
Release of shares of common stock upon vesting of restricted stock units262,742 — — — — — — — 
Shares of common stock 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, 202053,248,771 $381,125 (1,333,125)$(20,491)$(166)$677,761 $166 $1,038,395 




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SUPER MICRO COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
(unaudited)
Nine Months Ended March 31, 2021Common Stock and
Additional Paid-In
Capital		Treasury StockAccumulated
Other
Comprehensive
(Loss) Gain		Retained
Earnings		Non-controlling InterestTotal
Stockholders’
Equity
SharesAmountSharesAmount
Balance at June 30, 202053,741,828 $389,972 (1,333,125)$(20,491)$(152)$696,211 $167 $1,065,707 
Exercise of stock options, net of taxes1,195,414 20,344 — — — — — 20,344 
Release of shares of common stock upon vesting of restricted stock units596,570 — — — — — — — 
Shares of common stock withheld for the withholding tax on vesting of restricted stock units(191,279)(5,780)— — — — — (5,780)
Share repurchase and retirement(5,306,165)(164)1,333,125 20,491 (140,985)(120,658)
Stock-based compensation— 21,117 — — — — — 21,117 
Foreign currency translation gain— — — — 514 — — 514 
Net income— — — — — 72,703 1 72,704 
Balance at March 31, 202150,036,368 $425,489 0 $0 $362 $627,929 $168 $1,053,948 

Nine Months Ended March 31, 2020Common Stock and
Additional Paid-In
Capital		Treasury StockAccumulated
Other
Comprehensive
(Loss) Gain		Retained
Earnings		Non-controlling InterestTotal
Stockholders’
Equity
SharesAmountSharesAmount
Balance at June 30, 201951,289,413 $349,683 (1,333,125)$(20,491)$(80)$611,903 $161 $941,176 
Exercise of stock options, net of taxes1,447,296 23,053 — — — — — 23,053 
Release of shares of common stock upon vesting of restricted stock units771,721 — — — — — — — 
Shares of common stock 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, 202053,248,771 $381,125 (1,333,125)$(20,491)$(166)$677,761 $166 $1,038,395 

See accompanying notes to condensed consolidated financial statements.
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SUPER MICRO COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
March 31,
 20212020
OPERATING ACTIVITIES:
Net income$72,703 $65,858 
Reconciliation of net income to net cash provided by operating activities:
Depreciation and amortization21,304 20,972 
Stock-based compensation expense21,117 14,823 
Allowances for (recovery of) doubtful accounts(629)1,544 
Provision for excess and obsolete inventories4,844 18,093 
Share of loss from equity investee409 1,066 
Foreign currency exchange (gain) loss1,097 311 
Deferred income taxes, net(2,726)(4,436)
Other(792)1,105 
Changes in operating assets and liabilities:
Accounts receivable (including changes in related party balances of $(3,532) and $1,612 during the nine months ended March 31, 2021 and 2020, respectively)(3,036)58,935 
Inventories(57,249)(214,131)
Prepaid expenses and other assets (including changes in related party balances of $(507) and $(52) during the nine months ended March 31, 2021 and 2020, respectively)(25,039)(34,790)
Accounts payable (including changes in related party balances of $(18,296) and $(4,685) during the nine months ended March 31, 2021 and 2020, respectively)45,301 103,880 
Income taxes payable4,916 (11,042)
Deferred revenue(13,726)2,063 
Accrued liabilities (including changes in related party balances of $(180) and $9,734 during the nine months ended March 31, 2021 and 2020, respectively)(5,807)49,924 
Other long-term liabilities (including changes in related party balances of $(1,699) and $(129) during the nine months ended March 31, 2021 and 2020, respectively)(3,295)(8,459)
Net cash provided by operating activities59,392 65,716 
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (including payments to related parties of $5,845 and $4,384 during the nine months ended March 31, 2021 and 2020, respectively)(44,627)(34,886)
Proceeds from sale of investment in a privately-held company0 750 
Net cash used in investing activities(44,627)(34,136)
FINANCING ACTIVITIES:
Proceeds from debt62,225 10,000 
Repayment of debt(7,300)0 
Net repayment on asset-backed revolving line of credit0 (1,116)
Proceeds from exercise of stock options20,344 23,053 
Payment of withholding tax on vesting of restricted stock units(5,780)(6,434)
Stock repurchases(117,968)0 
Payments of obligations under finance leases34 (122)
Net cash (used in) provided by financing activities(48,445)25,381 
Effect of exchange rate fluctuations on cash362 163 
Net (decrease) increase in cash, cash equivalents and restricted cash(33,318)57,124 
Cash, cash equivalents and restricted cash at the beginning of the period212,390 262,140 
Cash, cash equivalents and restricted cash at the end of the period$179,072 $319,264 
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 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 amortization7,711
 5,953
Stock-based compensation expense9,213
 7,882
Excess tax benefits from stock-based compensation(745) (355)
Allowance for doubtful accounts356
 805
Provision for inventory6,391
 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 assets941
 (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 liabilities18,234
 9,715
Other long-term liabilities12,442
 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 costs130,116
 14,400
Repayment of debt(96,552) (13,300)
Payment to acquire treasury stock

(18,461) —
Proceeds from exercise of stock options5,873
 2,439
Excess tax benefits from stock-based compensation745
 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 arrangements787
 (18)
Net cash provided by financing activities20,848
 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 period180,964
 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$1,400 $1,651 
Cash paid for taxes, net of refunds2,213 42,516 
Non-cash investing and financing activities:
Unpaid property, plant and equipment purchases (including due to related parties of $1,502 and $215 as of March 31, 2021 and 2020, respectively)$7,662 $12,609 
New operating lease assets obtained in exchange for operating lease liabilities2,715 0 
Unpaid stock repurchases2,690 0 


See accompanying notes to condensed consolidated financial statements.


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


Note 1.        Summary of Significant Accounting Policies


OrganizationSignificant Accounting Policies and Estimates


No material changes have been made to the significant accounting policies of Super Micro Computer, Inc. (“Super Micro Computer”, a corporation incorporated under the laws of Delaware, and its consolidated entities (together, the “Company”), disclosed in Note 1, "Organization and Summary of Significant Accounting Policies", in its Annual Report on Form 10-K, filed on August 28, 2020, for the year ended June 30, 2020. Management's estimates include, as applicable, the anticipated impacts of the coronavirus ("COVID-19") 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 solutions based upon an innovative, modular and open-standard architecture. Super Micro Computer has operations primarily in San Jose, California, the Netherlands, Taiwan, China and Japan.pandemic.


Basis of Presentation
The unaudited condensed consolidated financial statements reflect the condensed consolidated balance sheets, results of operations, comprehensive income and cash flows of Super Micro Computer, Inc. and its wholly-owned subsidiaries (collectively, the “Company”). All intercompany accounts and transactions have been eliminated in consolidation.


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 in the United States of America ("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 sixnine months ended DecemberMarch 31, 20162021 are not necessarily indicative of the results that may be expected for future quarters or for the fiscal year ending June 30, 2017.2021.


Investment in a Corporate Venture
    In October 2016, the Company entered into agreements pursuant to which the Company contributed certain technology rights in connection with an investment in a privately-held company (the "Corporate Venture") located in China to expand the Company's presence in China. The Corporate Venture is 30% owned by the Company and 70% owned by another company in China. The transaction was closed in the third fiscal quarter of 2017 and the investment is accounted for using the equity method. As such, the Corporate Venture is also a related party.
    The Company recorded a deferred gain related to the contribution of certain technology rights. As of March 31, 2021 and June 30, 2020, the Company had unamortized deferred gain balance of $1.5 million and $2.0 million, respectively, in accrued liabilities and $0.0 million and $1.0 million, respectively, in other long-term liabilities in the Company’s condensed
consolidated balance sheets.

    The Company monitors the investment for events or circumstances indicative of potential impairment and makes appropriate reductions in carrying values if it determines that an impairment charge is required. In June 2020, the third-party parent company that controls the Corporate Venture was placed on a U.S. government export control list, along with
several of the parent's related entities and a separate listing for one of its subsidiaries. The Corporate Venture is not itself a restricted party. The Company is working with the Corporate Venture's management to ensure that the Corporate Venture remains in compliance with the new restrictions. The Company does not believe that the equity investment carrying value is impacted as of March 31, 2021. NaN impairment charge was recorded for the three and nine months ended March 31, 2021 and 2020, respectively.
The Company consolidates itssold products worth $16.8 million and $14.0 million to the Corporate Venture in the three months ended March 31, 2021 and 2020, respectively, and $36.4 million and $51.5 million for the nine months ended March 31, 2021 and 2020, respectively. The Company’s share of intra-entity profits on the products that remained unsold by the Corporate Venture as of March 31, 2021 and June 30, 2020 have been eliminated and have reduced the carrying value of the Company’s investment in Super Micro Asia Sciencethe Corporate Venture. To the extent that the elimination of intra-entity profits reduces the investment balance below zero, such amounts are recorded within accrued liabilities. The Company had $11.4 million and Technology Park, Inc. as it is a variable interest entity and the Company is the primary beneficiary. The noncontrolling interest is presented as a separate component$7.8 million due from the Company's equityCorporate Venture in the equity sectionaccounts receivable, net as of the condensed consolidated balance sheets. Net income attributable to the noncontrolling interest is not presented separately in the condensed consolidated statements of operationsMarch 31, 2021 and is included in the general and administrative expenses as the amount is not material for any of the fiscal periods presented.June 30, 2020, respectively.

Fair Value of Financial Instruments

The Company accounts for certain assets and liabilities at fair value. Accounts receivable and accounts payable are carried at cost, which approximates fair value due to the short maturity of these instruments. Cash equivalents 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 observable in the market. The Company categorizes each of its fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 - Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and
Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


Concentration of Supplier Risk


Net Income Per Common Share    Certain materials used by the Company in the manufacturing of its products are available from a limited number of suppliers. Shortages could occur in these materials due to an interruption of supply or increased demand in the industry. One supplier accounted for 21.4% and 26.1% of total purchases for the three months ended March 31, 2021 and 2020, respectively, and 21.1% and 27.9% for the nine months ended March 31, 2021 and 2020, respectively. Purchases from Ablecom and Compuware, related parties of the Company (see Note 8, "Related Party Transactions") accounted for a combined 8.4% and 9.4% of total cost of sales for the three months ended March 31, 2021 and 2020, respectively, and a combined 8.5% and 9.8% for the nine months ended March 31, 2021 and 2020, respectively.


Concentration of Credit Risk

    Financial instruments which potentially subject the Company to concentration of credit risk consist primarily of cash and cash equivalents, restricted cash, investment in an auction rate security and accounts receivable. No single customer accounted for 10% or more of the net sales for the three and nine months ended March 31, 2021 and 2020. No customer accounted for greater than 10% of the Company's accounts receivable, net as of March 31, 2021, whereas one customer accounted for 10.1% of accounts receivable, net as of June 30, 2020.

Treasury Stock

The Company's basic net income per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options and unvested restricted stock units (“RSUs”). Under theCompany accounts for treasury stock method, an increase inunder the fair marketcost method. Upon the retirement of treasury shares, the Company deducts the par value of the Company’sretired treasury shares from common stock results inand allocates the excess of cost over par as a greater dilutive effect from outstanding stock options and RSUs. Additionally,deduction to additional paid-in capital based on the exercisepro-rata portion of employee stock optionsadditional paid-in-capital, and the vestingremaining excess as a deduction to retained earnings. Retired treasury shares revert to the status of restricted stock units results in a further dilutive effect on net income per share.authorized but unissued shares.


Recently Issued Accounting Pronouncements Recently Adopted


In May 2014, 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 consideration to which the entity expects to be entitled in exchange for those goods or services. Further, in MarchJune 2016, the FASB issued authoritative guidance, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. Under this new guidance, a company is required to estimate credit losses on certain types of financial instruments using an amendment toexpected-loss model, replacing the accountingcurrent incurred-loss model, and record the estimate through an allowance for credit losses, which results in more timely recognition of credit losses. The Company adopted this guidance Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net),on July 1, 2020 using the modified retrospective transition method, which clarifies the implementation guidance for principal versus agent considerations. In April 2016, the FASB issued an amendment to the accounting guidance, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, which clarifies the guidance related to identifying performance obligations and accounting for licenses 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 for the transition to the new accounting guidance. This guidance can be applied either retrospectively or asrequires a cumulative-effect adjustment, asif any, to the opening balance of retained earnings to be recognized on the date of adoption. Early adoption is permitted for annualwith prior periods beginning after December 15, 2016.not restated. 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, results of operations and financial position. The Company has not yet selected a transition method nor has it determined the effectadoption of the guidance on its ongoing financial reporting.
     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 washad no material impact on itsthe Company’s condensed consolidated financial statement disclosures, resultsstatements as of operationsJuly 1, 2020.

The Company maintains an allowance for credit losses for accounts receivable and the investment in an auction rate security. The allowance for credit losses is estimated using a loss rate method, considering factors such as customers’ credit risk, historical loss experience, current conditions, and forecasts. The allowance for credit losses is measured on a collective (pool) basis by aggregating customer balances with similar risk characteristics. The Company also records a specific allowance based on an analysis of individual past due balances or customer-specific information, such as a decline in creditworthiness or bankruptcy. The new guidance has no material impact on the Company's condensed consolidated financial position.statements for the three and nine months ended March 31, 2021.


In July 2015,August 2018, the FASB issued an amendmentamended guidance, Fair Value Measurement: Disclosure Framework-Changes to the accountingDisclosure Requirements for Fair Value Measurement, to modify the disclosure requirements on fair value measurements based on the concepts in the FASB Concepts Statements, including the consideration of costs and benefits. The Company adopted this guidanceInventory: 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 Company2020. As of March 31, 2021, the Company’s investment in an auction rate security is currently evaluating the effectonly Level 3 investment measured at fair value on a recurring basis. Changes to the guidance will have on itsdisclosures in the condensed consolidated financial statement disclosures, results of operations and financial position.statements were immaterial. See Note 5, "Fair Value Disclosure".


In February 2016,August 2018, the FASB issued authoritative guidance, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract as well as hosting arrangements that include an amendmentinternal use software license with the requirements for capitalizing implementation costs incurred to thedevelop or obtain internal-use software. The accounting guidance, Leases. The amendment will supersede the existing lease guidance, including on-balance sheet recognition of operating leases for lessees. This amendment should be applied using a modified retrospective approach and is effective for the Company on July 1, 2018. Early adoption is permitted. The Company is currently evaluating the effect the guidance will have on its financial statement disclosures, resultsservice element of operations and financial position.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


a hosting arrangement that is a service contract is not affected by the new guidance. The Company adopted this guidance on July 1, 2020, prospectively. The adoption of this guidance did not have a material impact on the Company's condensed consolidated financial statements and disclosures.

Accounting Pronouncements Not Yet Adopted

In March 2016,December 2019, the FASB issued new accountingamended guidance, Compensation—Stock Compensation: ImprovementsSimplifying the Accounting for Income Taxes, to Employee Share-Based Payment Accounting onremove certain exceptions to the accountinggeneral principles from ASC 740 - Income Taxes, and to improve consistent application of U.S. GAAP for certain aspectsother areas of share-based payment to employees, including the accounting for income taxes, forfeitures,ASC 740 by clarifying and statutory tax withholding requirements as well as classification in the statement of cash flows. Thisamending existing guidance. The guidance is effective for the Company onfrom July 1, 2017.2021; early adoption is permitted. The Company is currently evaluating the effectadoption of the guidance willis not anticipated to have a material impact on its condensed consolidated financial statement disclosures, results of operationsstatements and financial position.disclosures.


In August 2016,March 2020, the FASB issued an amendmentauthoritative 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 the accountingcontract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued.  The guidance Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. This amendment consists of eight provisionsalso establishes (1) a general contract modification principle 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 to each period presented. For the provisionsentities can apply in other areas that are impracticable to apply retrospectively, those provisions may be applied prospectively as of the earliest date practicable. Thisaffected by reference rate reform and (2) certain elective hedge accounting expedients. The amendment is effective for the Company on July 1, 2019. Early adoption is permitted. The Company is currently evaluating the effect the guidance will have on its financial statement disclosures, results of operations and financial position.

all entities through December 15, 2022. In October 2016,January 2021, the FASB issued an amendmentfurther guidance on this topic, which clarified the scope and application of the original guidance. LIBOR is used to calculate the accounting guidance, Intra-Entity Transfersinterest on borrowings under the Company's 2018 Bank of Assets Other Than Inventory. This amendment simplifiesAmerica Credit Facility and E.SUN Credit Facility. The 2018 Bank of America Credit Facility, as amended, will terminate on June 30, 2021 and E.SUN Credit Facility will terminate on September 18, 2021. As both credit facilities will expire before the accounting for income tax consequencesphase out 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 forLIBOR, the Company on July 1, 2018. Early adoption is permitted. The Company is currently evaluating the effect the guidance will have on its financial statement disclosure, results of operations and financial position.

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 impactadoption of adopting thisthe guidance to have an impact on its condensed consolidated financial statements and disclosures.

Note 2. Revenue

Disaggregation of Revenue

The Company disaggregates revenue by type of product and by geographical market in order to depict the nature, amount, and timing of revenue and cash flows. Service revenues, which are less than 10%, are not a significant component of total revenue, and are aggregated within the respective categories.

The following is a summary of net sales by product type (in thousands):
 Three Months Ended
March 31,		Nine Months Ended
March 31,
 2021202020212020
Server and storage systems$693,339 $571,291 $1,953,838 $1,880,043 
Subsystems and accessories202,542 201,117 534,599 563,112 
Total$895,881 $772,408 $2,488,437 $2,443,155 

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

International net sales are based on the country and geographic region to which the products were shipped. The following is a summary for the three and nine months ended March 31, 2021 and 2020, of net sales by geographic region (in thousands):
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SUPER MICRO COMPUTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 Three Months Ended
March 31,		Nine Months Ended
March 31,
 2021202020212020
United States$499,061 $422,872 $1,458,249 $1,419,117 
Asia207,204 160,472 495,326 487,827 
Europe162,285 158,144 429,193 433,767 
Others27,331 30,920 105,669 102,444 
$895,881 $772,408 $2,488,437 $2,443,155 

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

Contract Balances

Generally, the payment terms of the Company’s offerings range from 30 to 60 days. In certain instances, customers may prepay for products and services in advance of delivery. Receivables relate to the Company’s unconditional right to consideration for performance obligations either partially or fully completed.

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

    Contract liabilities consist of deferred revenue and relate to amounts invoiced to or advance consideration received from customers, which precede the Company’s satisfaction of the associated performance obligation(s). The Company’s deferred revenue primarily results from customer payments received upfront for extended warranties and on-site services because these performance obligations are satisfied over time. Revenue recognized during the three and nine months ended March 31, 2021, which was included in the opening deferred revenue balance as of June 30, 2020 of $203.8 million, was $24.1 million and $79.6 million, respectively.

Deferred revenue decreased $13.7 million during the nine months ended March 31, 2021 because the recognition of revenue from contracts entered into in prior periods was greater than the invoiced amounts for service contracts during the period.

Transaction Price Allocated to the Remaining Performance Obligations

Remaining performance obligations represent in aggregate the amount of transaction price that has been allocated to performance obligations not delivered, or only partially undelivered, as of the end of the reporting period. The Company applies the optional exemption to not disclose information about remaining performance obligations that are part of a contract that has an original expected duration of one year or less. These performance obligations generally consist of services, such as on-site services, including integration services and extended warranty services that are contracted for one year or less, and products for which control has not yet been transferred. The value of the transaction price allocated to remaining performance obligations as of March 31, 2021 was $190.0 million. The Company expects to recognize approximately 51% of remaining performance obligations as revenue in the next 12 months, and the remainder thereafter.

Capitalized Contract Acquisition Costs and Fulfillment Cost

Contract acquisition costs are those incremental costs that the Company incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained. Contract acquisition costs consist primarily of incentive bonuses. Contract acquisition costs are considered incremental and recoverable costs of obtaining and fulfilling a contract with a customer and are therefore capitalizable. The Company applies the practical expedient to expense incentive bonus costs as incurred if the amortization period would be significant.one year or less, generally upon delivery of the associated server and storage systems or components. Where the amortization period of the contract cost would be more than a year, the Company applies
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SUPER MICRO COMPUTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
judgment in the allocation of the incentive bonus cost asset between hardware and service performance obligations and expenses the cost allocated to the hardware performance obligations upon delivery of associated server and storage systems or components and amortizes the cost allocated to service performance obligations over the period the services are expected to be provided. Contract acquisition costs allocated to service performance obligations that are subject to capitalization are insignificant to the Company’s condensed consolidated financial statements.

Contract fulfillment costs consist of costs paid in advance for outsourced services provided by third parties to the extent they are not in the scope of other guidance. Fulfillment costs paid in advance for outsourced services provided by third parties are capitalized and amortized over the period the services are expected to be provided. Such fulfillment costs are insignificant to the Company’s condensed consolidated financial statements.

Note 3.        Net Income Per Common Share

    The following table shows the computation of basic and diluted net income per common share for the three and nine months ended March 31, 2021 and 2020 (in thousands, except per share amounts):
 
 Three Months Ended
March 31,		Nine Months Ended
March 31,
 2021202020212020
Numerator:
Net income$18,428 $15,807 $72,703 $65,858 
Denominator:
Weighted-average shares outstanding50,553 51,526 51,465 50,591 
Effect of dilutive securities2,665 2,167 2,282 1,808 
Weighted-average diluted shares53,218 53,693 53,747 52,399 
Basic net income per common share$0.36 $0.31 $1.41 $1.30 
Diluted net income per common share$0.35 $0.29 $1.35 $1.26 

    For the three and nine months ended March 31, 2021 and 2020, the Company had stock options, restricted stock units ("RSUs") and performance based restricted stock units ("PRSUs") outstanding that could potentially dilute basic earnings per share in the future, but were excluded from the computation of diluted net income per share in the periods presented, as their effect would have been anti-dilutive. The anti-dilutive common share equivalents resulting from outstanding equity awards were 578,892 and 1,882,238 for the three months ended March 31, 2021 and 2020, respectively, and 617,807 and 2,305,538 for the nine months ended March 31, 2021 and 2020, respectively.

Note 2.        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 2016, the Board of Directors approved 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 at the time of grant cannot be less than 110% of the fair value of the underlying share on grant date. Nonqualified stock options and incentive stock options granted to all other persons shall be granted at a price not less than 100% of the fair value of the underlying share on grant date. 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)


quarter thereafter. As of December 31, 2016, the Company had 3,525,695 shares available for future issuance under the 2016 Plan.

Determining Fair Value

The Company's fair value of RSUs 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. This fair value is then amortized ratably over the requisite service periods of the awards, which is generally the vesting period.

Expected Term—The Company’s expected term represents the period that the Company’s share-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 months ended December 31, 2016 and 2015 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
 Three Months Ended
December 31,		 Six Months Ended
December 31,
 2016 2015 2016 2015
Risk-free interest rate1.29% - 1.34%
 1.42% 1.12% - 1.34%
 1.42% - 1.57%
Expected term5.32 years
 5.31 years
 5.32 - 5.38 years
 5.31 - 5.33 years
Dividend yield—% —% —% —%
Volatility49.20% - 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 months ended December 31, 2016 and 2015 (in thousands):
 Three Months Ended
December 31,		 Six Months Ended
December 31,
 2016 2015 2016 2015
Cost of sales$325
 $258
 $634
 $498
Research and development3,012
 2,472
 5,920
 4,874
Sales and marketing520
 435
 998
 839
General and administrative852
 841
 1,661
 1,671
Stock-based compensation expense before taxes4,709
 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 of stock options and vesting of RSUs in excess of the compensation expense recorded for those share-based awards (excess tax benefits) issued or

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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 months ended December 31, 2016 under all plans:
  
Options
Outstanding
 
Weighted
Average
Exercise
Price per
Share
 
Weighted
Average
Remaining
Contractual
Term
(in Years)
 
Aggregate
Intrinsic
Value
(in thousands)
Balance as of June 30, 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 Activity

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 share awards that entitle the holder to receive freely tradable shares of the Company's common stock upon vesting and settlement.

The following table summarizes RSUs activity during the six months ended December 31, 2016 under all plans: 
 
RSUs
Outstanding
 
Weighted
Average
Grant-Date Fair Value per Share
 
Aggregate
Intrinsic
Value
(in thousands)
Balance as of June 30, 2016926,983
 $30.23
  
Granted434,410
 $21.36
  
Released(187,645) $27.74
  
Forfeited(57,795) $27.22
  
Balance as of December 31, 20161,115,953
 $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

9

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


partially net share-settled such that 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 six months ended December 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 grants under the 2016 Plan.

Note 3.        Net Income Per Share

The following table shows the computation of basic and diluted net income per share for the three and six months ended December 31, 2016 and 2015 (in thousands, except per share amounts):
 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 outstanding48,124
 47,651
 48,144
 47,584
Effect of dilutive securities3,397
 3,838
 3,208
 3,821
Weighted-average diluted shares51,521
 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 months ended December 31, 2016 and 2015, 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 awards were 1,637,000 and 1,662,000 for the three and six months ended December 31, 2016, respectively, and 1,329,000 and 1,291,000 for the three and six months ended December 31, 2015, respectively.     

Note 4.        Balance Sheet Components


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


Inventory:Inventories:
March 31, 2021June 30, 2020
Finished goods$634,032 $656,817 
Work in process120,374 38,146 
Purchased parts and raw materials149,497 156,535 
Total inventories$903,903 $851,498 
The Company recorded a provision for excess and obsolete inventory to cost of sales totaling $2.9 million and $4.6 million in the three and nine months ended March 31, 2021 and $4.7 million and $21.6 million for the three and nine
13
 December 31,
2016		 June 30,
2016
Finished goods$432,254
 $351,209
Work in process73,473
 19,105
Purchased parts and raw materials93,542
 78,666
Total inventory$599,269
 $448,980


10

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


The Company recordedmonths ended March 31, 2020, respectively. These amounts exclude a provision (recovery) for loweradjusting the cost of cost or marketcertain inventories to net realizable value of $(0.8) million and excess and obsolete inventory totaling $2,498,000 and $6,391,000 in$0.2 million for the three and sixnine months ended DecemberMarch 31, 2016,2021, respectively, and $2,062,000$(0.8) million and $3,780,000 in$(3.5) million for the three and sixnine months ended DecemberMarch 31, 2015,2020, respectively. The recovery is recognized when previously reserved inventories are sold.


Prepaid Expenses and Other Current Assets:
 March 31, 2021June 30, 2020
Other receivables (1)$118,371 $96,669 
Prepaid income tax12,963 14,323 
Prepaid expenses6,612 7,075 
Deferred service costs4,764 4,161 
Restricted cash251 250 
Others7,527 4,507 
Total prepaid expenses and other current assets$150,488 $126,985 
__________________________
(1) Includes other receivables from contract manufacturers based on certain buy-sell arrangements of $73.3 million and $83.8 million as of March 31, 2021 and June 30, 2020, respectively.


Cash, cash equivalents and restricted cash:
 March 31, 2021June 30, 2020
Cash and cash equivalents$177,894 $210,533 
Restricted cash included in prepaid expenses and other current assets251 250 
Restricted cash included in other assets927 1,607 
Total cash, cash equivalents and restricted cash$179,072 $212,390 

Property, Plant, and Equipment:
 March 31, 2021June 30, 2020
Buildings$86,930 $86,930 
Land75,265 75,251 
Machinery and equipment94,735 85,381 
Buildings construction in progress (1)80,217 46,311 
Building and leasehold improvements25,147 24,517 
Software22,855 20,597 
Furniture and fixtures22,107 21,544 
407,256 360,531 
Accumulated depreciation and amortization(141,690)(126,746)
Property, plant and equipment, net$265,566 $233,785 
 December 31,
2016		 June 30,
2016
Land$70,484
 $70,454
Buildings71,665
 71,665
Building and leasehold improvements14,484
 10,941
Buildings construction in progress (1)19,431
 15,803
Machinery and equipment56,431
 53,282
Furniture and fixtures12,917
 10,364
Purchased software14,152
 13,920
Purchased software construction in progress444
 532
 260,008
 246,961
Accumulated depreciation and amortization(66,338) (59,012)
Property, plant and equipment, net$193,670
 $187,949
__________________________
(1) In connectionPrimarily relates to the development and construction costs associated with the purchase of propertyCompany’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 construction of improvements on the property.new building in Taiwan.

Other Assets:
14
 December 31,
2016		 June 30,
2016
Long-term deferred service costs$2,893
 $3,498
Restricted cash2,136
 1,851
Investment in a privately held company1,411
 1,411
Deposits276
 910
Prepaid royalty license623
 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 deposits8,521
 6,265
Accrued warranty costs5,677
 5,816
Accrued cooperative marketing expenses7,594
 7,300
Deferred revenue (1)20,205
 13,418
Others8,472
 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.

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

Other Assets:
 March 31, 2021June 30, 2020
Operating lease right-of-use asset$21,245 $23,784 
Deferred service costs, non-current5,531 4,632 
Prepaid expense, non-current2,007 1,576 
Investment in auction rate security1,571 1,571 
Deposits955 1,201 
Restricted cash, non-current927 1,607 
Non-marketable equity securities128 128 
Total other assets$32,363 $34,499 

Accrued Liabilities:
March 31, 2021June 30, 2020
Accrued payroll and related expenses$43,789 $33,577 
Contract manufacturing liabilities38,176 36,249 
Customer deposits15,744 9,942 
Accrued warranty costs10,813 9,984 
Operating lease liability6,797 6,310 
Accrued cooperative marketing expenses6,436 5,925 
Accrued professional fees2,238 5,661 
Accrued legal liabilities (Note 11)0 18,114 
Others29,749 29,639 
Total accrued liabilities$153,742 $155,401 

Performance Awards Liability

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

The Chief Executive Officer’s aggregate cash bonuses of up to $8.1 million are earned in two tranches. The first 50% is payable if the average closing price for the Company’s common stock equals or exceeds $31.61 for any period of 20 consecutive trading days following the date of the agreement and ending prior to September 30, 2021 and the Chief Executive Officer remains employed with the Company through the date that such common stock price goal is determined to have been achieved. This payment can be reduced at the discretion of the Board to the extent the Company has not made adequate progress in remediating its material weaknesses in its internal control over financial reporting as determined by the Board. The second 50% is payable if the average closing price for the Company’s common stock equals or exceeds $32.99 for any period of 20 consecutive trading days following the date of the agreement and ending prior to June 30, 2022 and the Chief Executive Officer remains employed with the Company through the date that such common stock price goal is achieved. During the quarter ended March 31, 2021, the target average closing prices for both tranches were met but no determination has been made if there has been adequate progress in remediating the Company’s material weaknesses in its internal control over financial reporting. No cash payment had been made for either of the two tranches as of March 31, 2021.

Performance bonuses for a senior executive and 2 members of the Board are earned based on achieving a specified target average closing price for the Company’s common stock over the specified period as determined by the Board at the grant dates and continuous services through the payment dates. A senior executive earned an aggregate cash payment of $0.1 million when the target average closing price was met in the fourth quarter of fiscal year 2020. The 2 members of the Board can earn
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

aggregate cash payments of $0.3 million in 2 tranches if the target average closing price reaches $31.61 for the first tranche and $32.99 per share for the second tranche. During the quarter ended March 31, 2021, the target average closing prices for both tranches were met and the cash payment of $0.15 million for the first tranche was made to the 2 Board members.


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

With the satisfaction of the target average closing price conditions in the quarter ended March 31, 2021, the Company trued up all the unpaid performance bonuses to the cash payment value. As of March 31, 2021, the full cash value of the bonuses, except the Chief Executive Officer's first tranche performance bonus, was recorded as an accrued liability on the Company's condensed consolidated balance sheet. The Company is still remediating its material weaknesses in its internal control over financial reporting, and estimates that it is probable that the performance condition will be met through the expiration date of the award. Therefore, as of March 31, 2021, the Company trued up the accrued liability for the Chief Executive Officer’s first tranche award to the expected payable amount vested through the period end and the unrecognized cash value will be recorded over the remaining service period.

Based on the cash payment value and estimated fair value of these performance bonuses as of March 31, 2021 and June 30, 2020, the Company recorded a $7.1 million and $2.1 million liability, respectively, of which $7.1 million and $1.5 million, respectively, was recorded within accrued liabilities and $0.0 million and $0.6 million, respectively, was recorded within other long-term liabilities on the Company's condensed consolidated balance sheet. An unrecognized compensation expense of $1.1 million will be recorded over the remaining service periods of 0.43 years. The expense recognized during the three months ended March 31, 2021 and 2020 was $2.5 million and $0.2 million, and $5.1 million and $0.2 million for the nine months ended March 31, 2021 and 2020, respectively.
Other Long-term Liabilities:
March 31, 2021June 30, 2020
Operating lease liability, non-current$15,238 $18,102 
Accrued unrecognized tax benefits including related interest and penalties18,088 15,496 
Accrued warranty costs, non-current2,712 2,395 
Others5,071 6,002 
Total other long-term liabilities$41,109 $41,995 

16
 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 portion18,784
 16,056
Accrued warranty costs-net of current portion1,248
 1,313
Others1,204
 1,294
Total other long-term liabilities$53,001
 $40,603
Table of ContentsSUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(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.(Unaudited)

Product Warranties:
Three Months Ended
March 31,		Nine Months Ended
March 31,
 2021202020212020
Balance, beginning of the period$13,503 $11,441 $12,379 $11,034 
Provision for warranty6,791 8,521 22,250 25,627 
Costs utilized(7,441)(8,130)(22,501)(24,907)
Change in estimated liability for pre-existing warranties672 (98)1,397 (20)
Balance, end of the period13,525 11,734 13,525 11,734 
Current portion10,813 9,386 10,813 9,386 
Non-current portion$2,712 $2,348 $2,712 $2,348 

 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 warranty4,772
 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 period6,925
 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

Note 5.        Fair Value Disclosure


The financial assetsinstruments of the Company measured at fair value on a recurring basis are included in cash equivalents, other assets and long-term investments.accrued liabilities. The Company’s money market funds are classifiedCompany 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 onbecause 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-terminvestment in an auction rate securities investments aresecurity is classified within Level 3 of the fair value hierarchy which didas the determination of its fair value was not havebased on observable inputs as of DecemberMarch 31, 20162021 and June 30, 2016. Refer to Note 1 for a discussion of the Company’s policies regarding the fair value hierarchy.2020. The Company has used ais using the discounted cash flow modelmethod to estimate the fair value of the auction rate securities as of December 31, 2016security at each period end and June 30, 2016. The material factors used in preparing the discounted cash flow model arefollowing assumptions: (i) the discountexpected yield based on observable market rate utilized to present value the cash flows,of similar securities, (ii) the time period until redemption andsecurity coupon rate that is reset monthly, (iii) the estimated holding period and (iv) a liquidity discount. The liquidity discount assumption is based on the management estimate of lack of marketability discount of similar securities and is determined based on the analysis of financial market trends over time, recent redemptions of securities and other market activities. The Company performed a sensitivity analysis and applying a change of either plus or minus 100 basis points in the liquidity discount does not result in a significantly higher or lower fair value measurement of the auction rate security as of return.March 31, 2021.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Financial Assets and Liabilities Measured on a Recurring Basis

The following table sets forth the Company’s cash equivalents and long-term investmentsfinancial instruments as of DecemberMarch 31, 20162021 and June 30, 20162020, which are measured at fair value on a recurring basis by level within the fair value hierarchy. These are classified based on the lowest level of input that is significant to the fair value measurement (in thousands):

March 31, 2021Level 1Level 2Level 3Asset at
Fair Value
Assets
Money market funds (1)$151 $0 $0 $151 
Certificates of deposit (2)0 854 0 854 
Auction rate security0 0 1,571 1,571 
Total assets measured at fair value$151 $854 $1,571 $2,575 
Liabilities
Performance awards liability (3)$0 $0 $0 $0 
Total liabilities measured at fair value$0 $0 $0 $0 
June 30, 2020Level 1Level 2Level 3Asset at
Fair Value
Assets
Money market funds (1)$1,163 $0 $0 $1,163 
Certificates of deposit (2)0 836 0 836 
Auction rate security0 0 1,571 1,571 
Total assets measured at fair value$1,163 $836 $1,571 $3,570 
Liabilities
Performance awards liability (3)$0 $2,100 $0 $2,100 
Total liabilities measured at fair value$0 $2,100 $0 $2,100 

__________________________
(1) $0.0 million and $0.4 million in money market funds are included in cash and cash equivalents and $0.2 million and $0.8 million in money market funds are included in restricted cash, non-current in other assets in the condensed consolidated balance sheets as of March 31, 2021 and June 30, 2020, respectively.

(2) $0.2 million and $0.2 million in certificates of deposit are included in cash and cash equivalents, $0.3 million and $0.3 million in certificates of deposit are included in prepaid expenses and other assets, and $0.4 million and $0.3 million in certificates of deposit are included in restricted cash, non-current in other assets in the condensed consolidated balance sheets as of March 31, 2021 and June 30, 2020, respectively.

(3) As of March 31, 2021, the Company no longer measures performance awards liability at fair value because the Company trued up the performance awards liability to the cash payment value. As of June 30, 2020, the current portion of the performance awards liability of $1.5 million is included in accrued liabilities and the non-current portion of $0.6 million is included in other long-term liabilities in the condensed consolidated balance sheets.

On a quarterly basis, the Company also evaluates the current expected credit loss by considering factors such as historical experience, market data, issuer-specific factors, and current economic conditions. For the three and nine months ended March 31, 2021, the credit losses related to the Company’s investments was not significant.

    As of June 30, 2020, the Company estimated the fair value of performance awards using the Monte-Carlo simulation model and classified them within Level 2 of the fair value hierarchy as estimates are based on the observable inputs. The significant inputs used in estimating the fair value of the awards as of June 30, 2020 are as follows:
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SUPER MICRO COMPUTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)



June 30, 2020
Stock Price as of Period EndPerformance PeriodRisk-free RateVolatilityDividend Yield
$28.391.25 - 2.0 years0.16%53.75%0%
December 31, 2016Level 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, 2016Level 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


    There was no movement in the balances of the Company's financial assets measured at fair value on a recurring basis, consisting of investment in an auction rate security, using significant unobservable inputs (Level 3) for the three and nine months ended March 31, 2021 and 2020.
The above table excludes $128,206,000 and $180,426,000 of cash and $2,418,000 and $2,133,000 of certificates of deposit held by the Company as of December 31, 2016 and June 30, 2016, respectively.
There were no transfers between Level 1, Level 2 or Level 3 securitiesfinancial instruments in the three and sixnine months ended DecemberMarch 31, 20162021 and 2015.2020.

The following table provides a reconciliation of the Company’s financial assets measured at fair value on a recurring basis, consisting of long-term auction rate securities, using significant unobservable inputs (Level 3) for the three and six months ended December 31, 2016 and 2015 (in thousands):
    
 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 investmentsinvestment in an auction rate security as of DecemberMarch 31, 20162021 and June 30, 20162020 (in thousands):
 March 31, 2021 and June 30, 2020
 Cost BasisGross
Unrealized
Holding
Gains		Gross
Unrealized
Holding
Losses		Fair Value
Auction rate security$1,750 $0 $(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
NaN gain or loss was recognized in other comprehensive income for the auction rate security for the three and nine months ended March 31, 2021 and 2020.
    
The Company measures the fair value of outstanding debt for disclosure purposes on a recurring basis. As of DecemberMarch 31, 20162021 and June 30, 2016, short-term and long-term2020, total debt of $127,175,000$85.4 million and $93,589,000,$29.4 million, respectively, areis reported at amortized cost. This outstanding debt is classified as Level 2 as it is not actively traded and is valued using a discounted cash flow model that uses observable market inputs. Based on the discounted cash flow model, the fair valuetraded. The amortized cost of the outstanding debt approximates amortized cost.

the fair value.
13
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SUPER MICRO COMPUTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


Note 6.        Short-term and Long-term Debt Obligations


Short-term and long-termdebt obligations as of DecemberMarch 31, 20162021 and June 30, 20162020 consisted of the following (in thousands):
 
 March 31,June 30,
 20212020
Line of credit:
CTBC Bank$18,000 $0 
 E.SUN Bank15,000 0 
Total line of credit33,000 0 
Term loans:
CTBC Bank term loan, due August 31, 2021$24,503 $23,704 
CTBC Bank term loan, due June 4, 203027,867 5,697 
Total term loans52,370 29,401 
Total debt85,370 29,401 
Short-term debt and current portion of long-term debt57,503 23,704 
Debt, Non-current$27,867 $5,697 
 December 31, June 30,
 2016 2016
Line of credit:   
Bank of America$43,199
 $62,199
CTBC Bank20,800
 10,100
Total line of credit63,999
 72,299
Term loans:   
Bank of America45,000
 933
CTBC Bank18,521
 20,357
Total term loans63,521
 21,290
Total debt127,520
 93,589
Less: debt issuance costs(345) —
Total debt, net of debt issuance costs127,175
 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


Activities under Revolving Lines of Credit and Term Loans


Bank of America


In June 2015, the Company entered into an amendment to the existing credit agreement with2018 Bank of America N.A. ("Bank of America") which provided for (i) a $65,000,000 revolving line of credit facility that would have matured on November 15, 2015 and (ii) a five-year $14,000,000 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. The Company extended the revolving line of credit to mature on June 30, 2016.Credit Facility


In June 2016,April 2018, the Company entered into a newrevolving line of credit agreement with Bank of America which provided for (i) a $55,000,000 revolving lineup to $250.0 million (as amended from time to time, the "2018 Bank of credit facility including a $5,000,000 letterAmerica Credit Facility"). On May 12, 2020, the 2018 Bank of credit sublimit that matures onAmerica Credit Facility was amended to, among other items, extend the maturity to June 30, 20172021 and (ii)provide that in the event of default or if outstanding borrowings are in excess of $220.0 million, the Company is required to grant the lenders a five-year $50,000,000 term loan facility. This revolving linecontinuing security interest in and lien upon all amounts credited to any of credit facility replaced the existing revolving lineCompany's deposit accounts. In addition, the amendment released the real property of credit facility withSuper Micro Computer as a collateral. The amendment was accounted for as a modification and the impact was immaterial to the condensed consolidated financial statements. Interest accrued on any loans under the 2018 Bank of America. This additional term loanAmerica Credit Facility is due on the first day of each month, and the loans are due and payable in full on the termination date of the 2018 Bank of America Credit Facility. Voluntary prepayments are permitted without early repayment fees or penalties. Subject to customary exceptions, the 2018 Bank of America Credit Facility is secured by seven buildings located in San Jose, California andsubstantially all of Super Micro Computer’s assets, other than real property assets. Under the property, plant and equipment and the inventory in those buildings. The principal and interestterms 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 with2018 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,Credit Facility, the Company also entered into a separate credit agreement withis not permitted to pay any dividends. The Company is required to pay 0.375% per annum on the 2018 Bank of America which providedCredit Facility for a revolving line of credit of $10,000,000 for the Taiwan and the Netherlands subsidiaries that matures on June 30, 2017.any unused borrowings. 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 with2018 Bank of America Credit Facility contains customary representations and warranties and customary affirmative and negative covenants applicable to reduce the $55,000,000 revolving line of credit facility to $45,000,000Company and increaseits subsidiaries and contains a financial covenant, which requires that the revolving line of creditCompany maintain a certain fixed charge coverage ratio, for each twelve-month period while in a Trigger Period, as defined in the Taiwan and the Netherlands subsidiaries from $10,000,000 to $20,000,000.agreement, is in effect.


As of DecemberMarch 31, 20162021 and June 30, 2016,2020, the totalCompany had 0 outstanding borrowings under the 2018 Bank of America term loan was $45,000,000 and $933,000, respectively.Credit Facility. The total outstanding borrowingsinterest rates under the 2018 Bank of America linesCredit Facility as of March 31, 2021 and June 30, 2020 were 3.00%. In October 2018, a $3.2 million letter of credit was $43,199,000issued under the 2018 Bank of America Credit Facility and $62,199,000in October 2019, the letter of credit amount was increased to $6.4 million. NaN amounts have been drawn under the standby letter of credit. The balance of debt issuance costs outstanding were $0.2 million and $0.6 million as of DecemberMarch 31, 20162021 and June 30, 2016,2020, respectively. The interest rates for these loansCompany has been in compliance with all the covenants under the 2018 Bank of America Credit Facility, and as of March 31, 2021, the Company's available borrowing capacity was $243.6 million, subject to the borrowing base limitation and compliance with other applicable terms.


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(Unaudited)


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, the amount of the unused revolving lines of credit with Bank of America under the credit agreements was $21,801,000.

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


CTBC Credit Facility

In November 2015, the Company entered into an amendment to the existing credit agreement with CTBC Bank Co., Ltd ("CTBC Bank") that provides for (i) a 12-month NTD$700,000,000 or $22,017,000 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 80.00% of eligible accounts receivable in an aggregate amount of up to $17,000,000 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$1,000,000,000 or $30,340,000 U.S. dollar equivalent. In January 2016, the Company extended the revolving line of credit to mature on March 31, 2016.

In April 2016,June 2019, the Company entered into a credit agreement with CTBC Bank, Co., Ltdwhich was amended in August 2020, (collectively, the "CTBC Credit Facility"). The amended credit agreement with CTBC Bank that provides for (i) a 12-month NTD$700,000,000 or $21,620,000NTD 700.0 million ($24.0 million U.S. dollar equivalentequivalent) 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. Thismonthly, which term loan facility also includes a 12-month customs bondguarantee of up to NTD$100,000,000 or $3,089,000NTD 100.0 million ($3.4 million U.S. dollar equivalentequivalent) with an annual fee equal to 0.5%0.50% per annum, (ii) a 180-day NTD 1,500.0 million ($51.5 million U.S. dollar equivalent) term loan facility up to 100% of eligible accounts receivable in an aggregate amount with an interest rate equal to the lender's established NTD interest rate plus an interest rate ranging from 0.30% to 0.50% per annum which is adjusted monthly, and (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 0.80% per annum which is adjusted monthly, or equal to the lender’s established NTD interest rate plus an interest rate ranging from 0.30% to 0.50% per annum which is adjusted monthly if the borrowing is in NTD. In February 2021, CTBC Bank amended the USD interest rate to be the lender's established USD interest rate plus 0.70% to 0.75% per annum which is adjusted monthly. The total borrowings allowed under the credit agreement areCTBC Credit Facility was capped at $40,000,000. The credit agreement matures on March 31, 2017.$50.0 million. There are no financial covenants associated with the CTBC Credit Facility.


The total outstanding borrowings under the CTBC BankCredit Facility term loan waswere denominated in Taiwanese dollarsNTD and was translatedremeasured into U.S. dollars of $18,521,000$24.5 million and $20,357,000$23.7 million at DecemberMarch 31, 20162021 and June 30, 2016,2020, respectively. At December 31, 2016 and June 30, 2016, the total outstanding borrowings under the CTBC Bank revolving line of credit was $20,800,000 and $10,100,000, 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%were 0.74% per annum atas of March 31, 2021 and 0.63% per annum as of June 30, 2016. At December2020. As of March 31, 2016,2021 and June 30, 2020, the outstanding borrowings under the CTBC Credit Facility revolving line of credit were $18.0 million and $0.0 million, respectively. The interest rates were from 1.03% to 1.26% per annum as of March 31, 2021. As of March 31, 2021, the amount available for future borrowing under this credit agreementthe CTBC Credit Facility was $612,000.$7.5 million. As of March 31, 2021, the net book value of land and building located in Bade, Taiwan, collateralizing the CTBC Credit Facility term loan was $25.0 million.


2020 CTBC Term Loan Facility due June 4, 2030

In January 2017,May 2020, the Company drew an additional $8,000,000entered into a ten-year, non-revolving term loan facility (“2020 CTBC Term Loan Facility”) to obtain up to NTD 1.2 billion ($40.7 million in U.S. dollar equivalents) in financing for use in the expansion and renovation of the Company’s Bade Manufacturing Facility located in Taiwan. Drawdowns on the 2020 CTBC Term Loan Facility are based on 80% of balances owed on commercial invoices from the contractor and shall be drawn according to the progress of the renovations. Borrowings under the 2020 CTBC Bank revolving lineTerm Loan Facility are available through June 2022. The Company is required to pay against total outstanding principal and interest in equal monthly installments starting June 2023 and continuing through the maturity date of credit withJune 2030. Interest under the 2020 CTBC Term Loan Facility is the two-year term floating rate of postal saving interest rate plus 0.105% and is established on the date of the drawdown application. If no interest rate is agreed upon, interest shall accrue at 1.55% per annumthe annual base rate for CTBC plus 4.00%. The 2020 CTBC Term Loan Facility is secured by the Bade Manufacturing Facility and its expansion. Fees paid to supportthe lender as debt issuance costs were immaterial. The Company has financial covenants requiring the Company's growthcurrent ratio, debt service coverage ratio, and expansion of its business in the Netherlands.
Covenant Compliance

The credit agreement with Bank of America contains customary representations and warranties and customary affirmative and negative covenants applicable to the Company and its 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,debt ratio, as defined in the agreement, to be maintained at certain levels under the 2020 CTBC Term Loan Facility.

As of March 31, 2021 and June 30, 2020, the amounts outstanding under the 2020 CTBC Term Loan Facility were $27.9 million and $5.7 million, respectively. The interest rates for these loans were 0.45% per annum as of March 31, 2021 and June 30, 2020. The net book value of the endproperty serving as collateral as of any fiscal quarter, measured forMarch 31, 2021 was $38.1 million. As of March 31, 2021, the most recently completed twelve (12) monthsCompany was in compliance with all financial covenants under the 2020 CTBC Term Loan Facility.

E.SUN Bank Credit Facility

In December 2020, Super Micro Computer Inc, Taiwan, a Taiwan subsidiary of the Company shall not be greater than 2.00;
The domestic unencumbered liquid assets, as definedentered into a General Credit Agreement (the “E.SUN Credit Facility”) with E.SUN Bank in Taiwan. Such Credit Facility provides for the agreement, maintained in accounts within the United States shall have an aggregate market valueissuance of not less than $30,000,000, measured quarterly as of 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 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 with Bank of America under the credit agreement were $101,074,000 and $59,258,000, respectively. As of December

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(Unaudited)


loans, advances, acceptances, bills, bank guarantees, overdrafts, letters of credit, and other types of drawdown instruments up to a credit limit of $30.0 million. The term of the E.SUN Credit Facility expires on September 18, 2021.
31, 2016,
Generally, the interest for base rate loans made under the E.SUN Credit Facility is based upon an average interbank overnight call loan rate in the finance industry (such as LIBOR or TAIFX) plus a fixed margin, and is subject to occasional adjustment. Interest for adjustable loan rate loans made under the E.SUN Credit Facility is based upon an average one-year fixed rate time saving deposit rate of a selected reference bank which shall be a well-known domestic bank in Taiwan, and is subject to occasional adjustment. The E.SUN Credit Facility has customary default provisions permitting E.SUN Bank to terminate or reduce the credit limit, shorten the credit period, or deem all liabilities due and payable, including in the event such Taiwan subsidiary of the Company was in compliance with allhas an overdue liability at another financial covenants associated with the credit agreements with Bank of America.
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.organization. There are no financial covenants associated with the E.SUN Credit Facility.

Terms for specific drawdown instruments issued under the E.SUN Credit Facility, such as credit amount, term of use, mode of drawdown, specific lending rate, and other relevant terms, are to be set forth in Notifications and Confirmation of Credit Conditions negotiated with E.SUN Bank. A Notification and Confirmation of Credit Conditions agreement under the E.SUN Credit Facility was entered into on December 2, 2020 for a $30.0 million import loan (the “Import Loan”) with CTBC Bank at Decembera tenor of 120 days and with an interest rate calculated based on the higher of LIBOR plus 0.75% then divided by 0.946 or TAIFX plus 0.55% then divided by 0.946. As of March 31, 2016.2021, the amounts outstanding under the E.SUN Credit Facility were $15.0 million and the interest rates for these loans were approximately 1.0% per annum. At March 31, 2021, the amount available for future borrowing under the E.SUN Credit Facility was $15.0 million.


Note 7.        Related-partyLeases
The Company leases offices, warehouses and Otherother premises, vehicles and certain equipment leased under non-cancelable operating leases. Operating lease expense recognized and supplemental cash flow information related to operating leases for the three and nine months ended March 31, 2021 and 2020 were as follows (in thousands):
Three Months Ended
March 31,		Nine Months Ended
March 31,
2021202020212020
Operating lease expense (including expense for lease agreements with related parties of $347 and $1,040 for the three and nine months ended March 31, 2021, respectively, and $359 and $1,086 for the three and nine months ended March 31, 2020, respectively)$1,952 $1,605 $5,900 $4,909 
Cash payments for operating leases (including payments to related parties of $347 and $1,040 for the three and nine months ended March 31, 2021, respectively, and $369 and $1,106 for the three and nine months ended March 31, 2020, respectively)$1,994 $1,667 $5,951 $5,082 
    During the three and nine months ended March 31, 2021 and 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, 2021 were $0.4 million and $1.2 million, respectively. Variable payments expensed in the three months and nine months ended March 31, 2020 were $0.2 million and $0.9 million, respectively.
    As of March 31, 2021, the weighted average remaining lease term for operating leases was 4.0 years and the weighted average discount rate was 3.5%. Future minimum lease payments under noncancelable operating lease arrangements as of March 31, 2021 were as follows (in thousands):
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(Unaudited)
Fiscal Year:Minimum lease payments
2021 (remainder)$2,010 
20226,795 
20235,125 
20244,326 
20254,367 
2026 and beyond1,002 
Total future lease payments$23,625 
Less: Imputed interest(1,590)
Present value of operating lease liabilities$22,035 
As of March 31, 2021, commitments under short-term lease arrangements, and operating and financing leases that have not yet commenced were immaterial.

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

Note 8.        Related Party Transactions


The Company has a variety of business relationships with Ablecom 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 ofmanufacturers; Compuware is below 50% but Compuware remainsboth 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 BoardBoard. Steve Liang and his family members owned approximately 28.8% of Directors. Ablecom owns approximately 0.4% of the Company’s common stock.Ablecom’s stock and Charles Liang and his wife,spouse, Sara Liu, who is also an officer and director of the Company, collectively ownowned approximately 10.5% of Ablecom, whileAblecom’s capital stock as of March 31, 2021. Bill Liang, a brother of both Charles Liang and Steve Liang, is a member of the Board of Ablecom. Bill Liang is also the Chief Executive Officer of Compuware, a member of Compuware’s Board and other family membersa holder of a significant equity interest in Compuware. Steve Liang is also a member of Compuware’s Board and is an equity holder of Compuware. Charles Liang and Sara Liu do not own approximately 36.0%any capital stock of Compuware and the Company does not own any of Ablecom at December 31, 2016.or Compuware’s capital stock.


Dealings with Ablecom

The Company has entered into a series of agreements with Ablecom, including multiple product designdevelopment, 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 manufacturingthese 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 92.5% and 95.1% of the chassis included in the products sold by the Company during the three months ended March 31, 2021 and 2020, respectively, and 92.5% and 95.3% of the chassis included in the products sold by the Company during the nine months ended March 31, 2021 and 2020, respectively. With respect to Ablecom.design activities, Ablecom generally agrees to design certain agreed-upon products according to the Company’s specifications. Additionally, Ablecomspecifications, and further agrees to build the tools needed to manufacture the products. The Company has agreed to paypays Ablecom for Ablecom's cost of chassis and related product toolingthe design and engineering services, and willfurther 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.


UnderWith respect to the distribution agreement,manufacturing aspects of the relationship, Ablecom purchases server productsmost of materials needed to manufacture the chassis from third parties and the Company for distributionprovides certain components used in Taiwan. The Company believes that the pricingmanufacturing process (such as power supplies) to Ablecom through consignment or sales transactions. Ablecom uses these materials and terms undercomponents to manufacture the distribution agreement are similarcompleted chassis and then sell them back to the pricing and termsCompany. For the components purchased from the
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Table of distribution arrangementsContentsSUPER MICRO COMPUTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Company, Ablecom sells the Company has with similar, third party distributors.

Ablecom’s net salescomponents 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 salesAblecom 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 tochassis the Company by Ablecom as of December 31, 2016 and June 30, 2016 were $12,378,000 and $4,678,000, respectively. Amounts owedpurchases from Ablecom. In addition to Ablecom byinventory purchases, the Company as of December 31, 2016also 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 tofrom 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 $35.5 million and $23.2 million at March 31, 2021 and June 30, 2020, respectively, representing the maximum exposure to financial loss. The Company does not directly or indirectly guarantee any obligations of Ablecom, or any losses that the equity holders of Ablecom may suffer. Since Ablecom manufactures substantially all the chassis that the Company incorporates into its products, if Ablecom were to suddenly be unable to manufacture chassis for the Company, the Company’s business could suffer if the Company is unable to quickly qualify substitute suppliers who can supply high-quality chassis to the Company in volume and at acceptable prices.

Dealings with Compuware

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

The Company also has entered into a series of agreements with Compuware, including 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 Ablecomits purchase orders in the event of an unforeseen deteriorationdecline in the financial conditionmarket price and/or demand of Ablecomthe Company’s products such that Ablecom defaultsthe Company incurs a loss on its payable to the Company.sale or cannot sell the products. Outstanding purchase orders with Ablecomfrom the Company to Compuware were $104,569,000$44.0 million and $62,782,000$45.7 million at DecemberMarch 31, 20162021 and June 30, 2016,2020, respectively, representing the maximum exposure to loss relating to (a) above.financial loss. The Company does not havedirectly or indirectly guarantee any directobligations of Compuware, or indirect guaranteesany losses that the equity holders of losses of Ablecom.Compuware may suffer.


In May 2012, the CompanyThe Company’s results from transactions with Ablecom 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 AblecomCompuware for their separately constructed manufacturing facilities. Each company contributed $168,000 and owns 50%each of the Management Company. Although the operations of the Management Companythree and nine months ended March 31, 2021 and 2020, are independent of the Company, through governance rights, the

as follows (in thousands):
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

 Three Months Ended
March 31,		Nine Months Ended
March 31,
2021202020212020
Ablecom
Purchases (1)$34,924 $37,607 $85,827 $115,295 
Compuware
Net sales$3,580 $7,503 $22,451 $19,456 
Purchases (1)32,340 24,908 100,911 91,662 
__________________________
(1) Includes principally purchases of inventory and other miscellaneous items.

The Company's net sales to Ablecom were not material for the three and nine months ended March 31, 2021 and 2020.

The Company had the following balances related to transactions with Ablecom and Compuware as of March 31, 2021 and June 30, 2020 (in thousands):
 March 31, 2021June 30, 2020
Ablecom
Accounts receivable and other receivables (1)$6,620 $6,379 
Accounts payable and accrued liabilities (2)32,243 40,056 
Other long-term liabilities (3)0 513 
Compuware
Accounts receivable and other receivables (1)$14,486 $14,323 
Accounts payable and accrued liabilities (2)36,355 46,518 
Other long-term liabilities (3)0 186 
____________________________
(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, "Summary of Significant Accounting Policies" for a discussion of the transactions and balances in the Company’s Corporate Venture.

Note 9.        Stock-based Compensation and Stockholders' Equity

Equity Incentive Plan

On June 5, 2020, the stockholders of the Company approved the 2020 Equity and Incentive Compensation Plan (the "2020 Plan"). The maximum number of shares available under the 2020 Plan is 5,000,000 plus 1,045,000 shares of common stock that remained available for future awards under the 2016 Equity Incentive Plan (the “2016 Plan”), at the time of adoption of the 2020 Plan. NaN other awards can be granted under the 2016 Plan. 7,246,000 shares of common stock remain reserved for outstanding awards issued under the 2016 Plan at the time of adoption of the 2020 Plan.

As of March 31, 2021, the Company had 3,100,300 authorized shares available for future issuance under the 2020 Plan.

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(Unaudited)

Common Stock Repurchase and Retirement

On August 9, 2020, the Board approved a share repurchase program to repurchase up to an aggregate of $30.0 million of the Company's common stock at market prices. The program was effective until December 31, 2020 or if earlier, until the maximum amount of common stock is repurchased. During the three months ended September 30, 2020, 1,142,294 shares of common stock were repurchased for $30.0 million and the program ended. Repurchased shares were recorded as treasury shares in the Company's condensed consolidated balance sheet as of September 30, 2020.

On December 11, 2020, the Company hasretired 2,475,419 shares of common stock, which were recorded as treasury stock in the abilityCompany's condensed consolidated balance sheet as of September 30, 2020.

On October 31, 2020, the Board approved a share repurchase program to directrepurchase up to an aggregate of $50.0 million of the Management Company's business strategies. Therefore,common stock at market prices. The program was effective until October 31, 2021 or if earlier, until the maximum amount of common stock was repurchased. As of March 31, 2021, 1,675,746 shares of common stock were repurchased and retired for an aggregate $50.0 million and the program ended.

On January 29, 2021, a duly authorized subcommittee of the Board approved a share repurchase program to repurchase up to an aggregate of $200.0 million of the Company's common stock at market prices. The program is effective until July 31, 2022 or if earlier, until the maximum amount of common stock is repurchased. During the three months ended March 31, 2021, 1,155,000 shares of common stock were repurchased for $40.7 million. All repurchased shares have been retired as of March 31, 2021.

During the three months ended March 31, 2021, the Company repurchased and retired 1,250,539 shares of common stock for an aggregated $43.7 million. During the nine months ended March 31, 2021, the Company repurchased and retired 5,306,165 shares of common stock for an aggregated $120.7 million.
Determining Fair Value

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

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

    Expected Volatility—Expected volatility is based on the Company's historical volatility.

    Expected Dividend—The Black-Scholes valuation model calls for a single expected dividend yield as an input and the Company has concluded thatno plans to pay dividends.

    Risk-Free Interest Rate—The risk-free interest rate used in the Management CompanyBlack-Scholes valuation method is a variable interest entitybased on the United States Treasury zero coupon issues in effect at the time of the Company as the Company is the primary beneficiary of the Management Company. The accounts of the Management Company are consolidatedgrant for periods corresponding with the accountsexpected term of the Company, and a noncontrolling interest has been recordedoption.

    The fair value of stock option grants for the Ablecom's interests in the net assets and operations of the Management Company. In the three and sixnine months ended DecemberMarch 31, 2016, $29,0002021 and $24,0002020 was estimated on the date of net loss attributable to Ablecom's interest wasgrant using the Black-Scholes option pricing model with the following assumptions:
 Three Months Ended
March 31,		Nine Months Ended
March 31,
 2021202020212020
Risk-free interest rate0.58 %0.53% - 1.49%0.27% - 0.58%0.53% - 1.72%
Expected term5.98 years6.27 years5.98 years6.27 years
Dividend yield0 %0 %0 %0 %
Volatility50.32 %49.61% - 50.46%50.32% - 50.43%49.61% - 50.46%
Weighted-average fair value$15.91 $10.15 $13.57 $9.5 
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

    The following table shows total stock-based compensation expense included in the Company's general and administrative expenses in the condensed consolidated statements of operations respectively. Infor the three and sixnine months ended DecemberMarch 31, 2021 and 2020 (in thousands):
 Three Months Ended
March 31,		Nine Months Ended
March 31,
 2021202020212020
Cost of sales$402 $370 $1,312 $1,149 
Research and development3,328 3,043 10,369 9,299 
Sales and marketing503 417 1,517 1,276 
General and administrative3,261 975 7,919 3,099 
Stock-based compensation expense before taxes7,494 4,805 21,117 14,823 
Income tax impact(2,389)(2,978)(6,080)(5,142)
Stock-based compensation expense, net$5,105 $1,827 $15,037 $9,681 
    As of March 31, 2021, $7.2 million of unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 4.13 years, $39.3 million of unrecognized compensation cost related to unvested RSUs is expected to be recognized over a weighted-average period of 2.47 years and $0.3 million of unrecognized compensation cost related to unvested PRSUs is expected to be recognized over a period of 0.36 years.
Stock Option Activity

In March 2021, the Company’s Compensation Committee of the Board of Directors (the “Compensation Committee”) approved the grant of a stock option award for 1,000,000 common stock shares to the Company’s CEO (the “2021 CEO Performance Stock Option”). The 2021 CEO Performance Stock Option has 5 vesting tranches with a vesting schedule based entirely on the attainment of operational milestones (performance conditions) and market conditions, assuming (1) continued employment either as the CEO or in such capacity as agreed upon between the Company’s CEO and the Board of Directors and (2) service through each vesting date. Each of the 5 vesting tranches of the 2021 CEO Performance Stock Option will vest upon certification by the Compensation Committee that both (i) the market price milestone for such tranche, which begins at $45.00 per share for the first tranche and increases up to $120.00 per share thereafter (based on a 60 calendar day trailing average, counting only trading days), has been achieved, and (ii) any one of the following 5 operational milestones focused on total revenue, as reported under U.S. GAAP, have been achieved for the previous 4 consecutive fiscal quarters. Upon vesting and exercise, including the payment of the exercise price of $45.00 per share, prior to March 2, 2024, the Company’s CEO must hold shares that he acquires until March 2, 2024, other than those shares sold pursuant to a cashless exercise where shares are simultaneously sold to pay for the exercise price and any required tax withholding.

The achievement status of the operational and stock price milestones as of March 31, 2021 was as follows:

Annualized Revenue MilestoneAchievement StatusStock Price MilestoneAchievement Status
(in billions)
$4.0Probable$45Not met
$4.8Probable$60Not met
$5.8Probable$75Not met
$6.8Probable$95Not met
$8.0—$120Not met

On the grant date, a Monte Carlo simulation was used to determine for each tranche (i) a fixed expense amount for such tranche and (ii) the future time when the market price milestone for such tranche was expected to be achieved, or its “expected market price milestone achievement time.” Separately, based on a subjective assessment of the Company’s future financial performance, each quarter, the Company will determine whether achievement is probable for each operational
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
milestone that has not previously been achieved or deemed probable of achievement, and, if so, the future time when the Company expects to achieve that operational milestone, or its “expected operational milestone achievement time.” When the Company first determines that an operational milestone has become probable of being achieved, the Company will allocate the entire expense for the related tranche over the number of quarters between the grant date and the then-applicable “expected vesting time.” The “expected vesting time” at any given time is the later of (i) the expected operational milestone achievement time (if the related operational milestone has not yet been achieved) and (ii) the expected market price milestone achievement time (if the related market price milestone has not yet been achieved). The Company will immediately recognize a catch-up expense for all accumulated expenses from the grant date through the quarter in which the operational milestone was first deemed probable of being achieved. Each quarter thereafter, the Company will recognize the prorated portion of the then-remaining expense for the tranche based on the number of quarters between such quarter and the then-applicable expected vesting time, except that upon vesting of a tranche, all remaining expenses for that tranche will be immediately recognized.

During the three and nine months ended March 31, 2021, the Company recognized compensation expense related to the 2021 CEO Performance Stock Option of $0.3 million and $0.3 million, respectively. NaN compensation expense related to the 2021 CEO Performance Stock Option was recognized during the three and nine months ended March 31, 2020. As of March 31, 2021 and June 30, 2020, the Company had $11.3 million and $0, respectively, in unrecognized compensation cost related to the 2021 CEO Performance Stock Option. The unrecognized compensation cost as of March 31, 2021 is expected to be recognized over a period of five years.
The following table summarizes stock option activity during the nine months ended March 31, 2021 under all plans:
Options
Outstanding		Weighted
Average
Exercise
Price per
Share		Weighted
Average
Remaining
Contractual
Term (in Years)
Balance as of June 30, 20205,379,768 $19.38 
Granted1,371,410 $40.68 
Exercised(1,195,414)$17.02 
Forfeited/Cancelled(39,790)$23.97 
Balance as of March 31, 20215,515,974 $25.16 5.22
Options vested and exercisable at March 31, 20213,811,698 $20.10 3.36

RSU and PRSU Activity

    In January 2015, $6,000 and $4,000the Company began to grant RSUs to employees. The Company grants RSUs to certain employees as part of net loss attributableits regular employee equity compensation review program as well as to Ablecom's interest was included inselected new hires. RSUs are typically service based share awards that entitle the holder to receive freely tradable shares of the Company's generalcommon stock upon vesting.

    In August 2017, the Compensation Committee granted 2 PRSU awards to the Company's Chief Executive Officer, both of which have both performance and administrative expensesservice conditions. 50% of the PRSUs vested at June 30, 2018 when performance conditions were achieved, while the remainder vest in equal amounts over the condensed consolidated statementsfollowing ten quarters if the Company's Chief Executive Officer continued to be employed during those ten quarters. As of operations, respectively.March 31, 2021, the remaining 50% of the PRSUs had vested in accordance with the terms of the grant.

In March 2020, the Compensation Committee granted a PRSU award to one of the Company's senior executives. The award vests in 2 tranches and includes service and performance conditions. Each tranche has 15,000 RSUs that vest in May 2021 and November 2021 based on service conditions only. Additional units can be earned based on revenue growth percentage in fiscal year 2020 compared to fiscal year 2019, which units would vest in May 2021, and based on revenue growth percentage in fiscal year 2021 compared to fiscal year 2020, which units would vest in November 2021. NaN additional units were earned for fiscal year 2020 as revenue decreased from fiscal year 2019.

    The following table summarizes RSU and PRSU activity during the nine months ended March 31, 2021 under all plans: 
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
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, 20201,768,027 $20.08 42,000 (1)$22.29 
Granted969,493 $28.99 30,000 $34.27 
Released(584,570)$20.99 (12,000)$27.10 
Forfeited(158,215)$22.88 (30,000)$20.37 
Balance as of March 31, 20211,994,735 $23.91 30,000 $34.27 
__________________________
(1)Reflects the number of PRSUs that have been earned based on the achievement of performance metrics.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Note 8.10.        Income Taxes


The Company recorded provisionsa benefit for income taxes of $9,315,000 and $15,684,000$0.2 million for the three and six months ended DecemberMarch 31, 2016, respectively,2021, and $14,061,000 and $21,565,000a provision for income taxes of $8.5 million for the nine months ended March 31, 2021. The Company recorded a benefit for income taxes of $0.9 million for the three and six months ended DecemberMarch 31, 2015, respectively.2020 and a provision of $9.8 million for the nine months ended March 31, 2020. The effective tax rate was 29.7%(1.2)% and 30.6%10.5% for the three and sixnine months ended DecemberMarch 31, 2016,2021, respectively, and 28.8%(5.6)% and 30.8%12.8% for the three and sixnine months ended DecemberMarch 31, 2015,2020, respectively. The effective tax rate for the three and six months ended DecemberMarch 31, 20162021 is estimated to be lowerhigher than that for the federal statutory ratethree months ended March 31, 2020, primarily due to release of uncertain tax positions after settlement of a Taiwan tax audit in the prior year. The effective tax rate for the nine months ended March 31, 2021 is lower than that for the nine months ended March 31, 2020, primarily due to Company's tax benefit arising from U.S. federal researchadditional employees' exercises of stock options in the current year.

    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 does not 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 does not have a material impact on the Company.

               As of DecemberMarch 31, 2016,2021, the Company had a liability for gross unrecognized tax benefits of $18,784,000, substantially all$41.1 million, of which, $27.0 million, if recognized, would affect the Company's effective tax rate. During the three and sixnine months ended DecemberMarch 31, 2016,2021, there were no material changeswas a $1.7 million increase in the total amount of the liability for gross unrecognized tax benefits.benefits, primarily due to an uncertain tax position in a foreign jurisdiction. 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 DecemberMarch 31, 2016,2021, the Company had accrued $1,507,000$2.6 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 taxeson 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 respondedmay 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 bybe immaterial.

In October 2019, the IRS. No adjustment has been proposed by the IRS as of December 31, 2016. The Company was also underTaiwan tax authority completed its audit in Taiwan for fiscal year 2018 and proposed an adjustment resulting in additional tax liability of $1.6 million. The Company accepted the proposed adjustment in October 2019 and paid the $1.6 million tax liability in February 2020. In February 2020, the Taiwan tax authority completed its audit in Taiwan for fiscal year 20132019 and proposed an adjustment resulting in an 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 these adjustments on the income statement was offset by the release of previously unrecognized tax benefits related to local income taxes. the fiscal years audited in the periods in which the proposed adjustments were accepted.

The audit resulted in minimal tax adjustments. While managementCompany believes that the Companyit 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, 2018 through 2020. Various states statutes of limitations remain open in general for tax years 2012ended June 30, 2017 through 2016. The state statute of limitations remain open in general for tax years 2012 through 2016. The statute2020. Certain statutes of limitations in major foreign jurisdictions remain open for examination in general for the tax years 2010ended June 30, 2015 through 2016. For the third quarter of fiscal year 2017, the Company expects a decrease of approximately $1,890,000 of2020. It is reasonably possible that our gross unrecognized tax benefits will decrease by approximately $1.2 million, in the next 12 months, due to the lapse of the statute of limitations. These adjustments, if recognized, would positively impact our effective tax rate, and would be recognized as additional tax benefits.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Note 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. On June 15, 2020, the Company filed a motion to dismiss the further amended complaint, the hearing for which was calendared for September 23, 2020; however, the Court held a conference on September 15 to discuss how the Court could efficiently address the recent SEC settlement agreement. The parties stipulated to allow plaintiffs to further amend the complaint solely to add allegations relating to the SEC settlement. On October 14, 2020, plaintiffs filed a Fourth Amended Complaint. On October 28, 2020, defendants filed a supplemental motion to dismiss. On March 29, 2021, the Court granted in part and denied in part defendants’ motions to dismiss. Plaintiffs’ claims under Sections 10(b) and 20 of the Exchange Act were dismissed with prejudice as against the Company’s former head of Investor Relations, Perry Hayes. Plaintiffs’ Section 10(b) claim, but not the Section 20 claim, was likewise dismissed as to Wally Liaw, a founder, former director, and former SVP of International Sales. The Court denied the motions to dismiss the Section 10(b) and Section 20 claims against the Company, Charles Liang, and Howard Hideshima, the Company’s former CFO. Discovery has commenced, and the Court has calendared a hearing on class certification for January 22, 2022. The Company intends to defend the lawsuit vigorously.

On October 27, 2020, certain current and former directors and officers of the Company were named as defendants in a putative derivative lawsuit filed in the Superior Court of the State of California, County of Santa Clara (the “Court”), captioned Barry v. Liang, et al., 20-CV-372190. The Company was also named as a nominal defendant. The complaint purports to allege claims for breaches of fiduciary duties, waste of corporate assets, and unjust enrichment arising out of allegations that the Company’s officers and directors caused the Company to issue false and misleading statements about recognition of revenue and the effectiveness of its internal controls, failed to adopt and implement effective internal controls, and failed to timely file various reports with the Securities and Exchange Commission. The plaintiffs seek unspecified compensatory damages and other equitable relief. The parties are in the process of briefing demurrers, which are set for hearing on August 24, 2021. The case is otherwise stayed for the time being. The Company intends to defend the lawsuit vigorously.

On November 13, 2020, Build Group Inc. (“Build Group”) filed a complaint against the Company in the Superior Court for Santa Clara County, seeking damages of approximately $2.0 million. Build Group served the complaint on the Company on December 1, 2020. Build Group alleged that the Company breached the construction contract between the Company and Build Group by failing to approve or reject certain requests for change orders to the scope of work covered by the construction project in a timely manner, or at all. A substantial portion of the amounts covered by the change orders at issue related to foreign uncertain tax positionsdelays in the construction project. Build Group asserted that these delays were beyond its control and that therefore it was entitled to additional payments as a result of the delays in completion of the income tax audit in Taiwan.

Note 9.        Commitments and Contingencies

Litigation and Claims—project. The Company isbelieved that it had meritorious defenses to Build Group’s claims, but nonetheless negotiated a settlement with Build Group. The settlement agreement resolving this dispute was executed effective January 19, 2021. As a result, the Company did not have to respond to the complaint. Per the settlement agreement, Build Group agreed to dismiss the entire action with prejudice once the Company complied with its obligations under the settlement agreement. The Company complied with its obligations and paid $2.0 million in the quarter ended March 31, 2021. Build Group submitted the dismissal, which the court has granted that concludes the matter.

SEC Matter— The Company cooperated with the SEC in its investigation of marketing expenses that contained certain irregularities discovered by Company management, which irregularities were disclosed on August 31, 2015, and the Company cooperated with the SEC in its further investigation of the matters underlying the Company’s inability to timely file its Form 10-K for the fiscal year ended June 30, 2017 and concerning the publication of a false and widely discredited news
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
article in October 2018 concerning the Company’s products. On August 25, 2020, to fully resolve all matters under investigation, the Company consented to entry of an Order Instituting Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order (“Order”), as announced by the SEC. The Company admitted the SEC’s jurisdiction over the Company and the subject matter of the proceedings, but otherwise neither admitted nor denied the SEC’s findings, as described in the Order. The Company agreed to cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) and (3) of the Securities Act and Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B), of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. The Company agreed and paid a civil money penalty of $17,500,000 during the three months ended September 30, 2020, which was recorded to general and administrative expense in the Company's condensed consolidated statement of operations. In addition, the Company’s Chief Executive Officer concluded a settlement with the SEC on August 25, 2020, as announced by the SEC. The Company’s Chief Executive Officer paid the Company the sum of $2,122,000 as reimbursement of profits from certain stock sales during the relevant period, pursuant to Section 304 of the Sarbanes-Oxley Act of 2002. The settlement amount was paid during the first quarter of fiscal 2021 and the Company recorded the payment as a credit to general and administrative expense.

Other legal proceedings and indemnifications

From time to time, the Company has been involved in various legal proceedings arising from the normal course of business activities. The Company defends itself vigorously against any such claims. In management’s opinion, the resolution of any such matters willhave not havehad a material adverse effectimpact on the Company’s consolidated financial condition, results of operations or liquidity.liquidity as of March 31, 2021 and any prior periods.


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

Purchase Commitments— The Company has agreements to purchase certain units of inventory and non-inventory items primarily through fiscal year 2017.the next 12 months. As of DecemberMarch 31, 2016,2021, these remaining non-cancellablenoncancelable commitments were $402,229,000 compared$306.4 million, including $79.5 million for related parties.

Standby Letter of Credit— In October 2018, a $3.2 million letter of credit was issued under the 2018 Bank of America Credit Facility and in October 2019, the letter of credit amount was increased to $334,010,000 as$6.4 million. The standby letter of June 30, 2016.    credit is cancellable upon written notice from the issuer. NaN amounts have been drawn under the standby letter of credit.



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


Note 10.12.        Segment Reporting


The Company operates in one1 operating segment that develops and provides high performance server solutions based upon an innovative, modular and open-standard architecture. The Company’s chief operating decision maker is the Chief Executive Officer.

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
Europe130,076
 114,134
 243,787
 200,960
Asia137,801
 88,394
 234,081
 163,051
Other26,196
 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 assetsproperty, plant and other assetsequipment, net (in thousands):
 March 31,June 30,
20212020
Long-lived assets:
United States$180,917 $178,812 
Asia81,668 51,605 
Europe2,981 3,368 
$265,566 $233,785 

32
 December 31, June 30,
 2016 2016
Long-lived assets:   
United States$149,791
 $142,764
Asia41,132
 42,052
Europe2,747
 3,133
 $193,670
 $187,949
The following is a summary of net sales by product type (in thousands):
 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 accessories207,956
 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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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

The Company’s revenue is presented on a disaggregated basis in Note 2, “Revenue,” by type of product and by geographical market.


Note 13.        Subsequent Event

On May 5, 2021, certain current and former directors and officers were named as defendants in a putative derivative lawsuit filed in the U.S. District Court for the Northern District of California, captioned Stein v. Liang, et al., Case No. 3:21-cv-03357-KAW. The Company was also named as a nominal defendant. The complaint purports to allege claims for breaches of fiduciary duties, waste of corporate assets, unjust enrichment, and contribution for violations of federal securities laws arising out of allegations that the Company's officers and directors caused the Company to issue false and misleading statements about recognition of revenue and the effectiveness of its internal controls, failed to adopt and implement effective internal controls, and failed to timely file various reports with the Securities and Exchange Commission. The plaintiff seeks unspecified compensatory damages and other equitable relief. The Company has not yet been formally served with the complaint, but the Company intends to defend the lawsuit vigorously.
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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-QQuarterly 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 describeddiscussed under “Risk Factors” below and in other partsPart 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 Annual Report on Form 10-K for the fiscal year ended June 30, 2020 (the “2020 10-K”), which includes our condensed consolidated financial statements for the fiscal years ended June 30, 2020 and 2019.

Overview


We are a global leader inand innovator of application-optimized high performance high efficiencyand high-efficiency server technology and innovation. We develop and provide end-to-end green computing solutions to thestorage systems for a variety of markets, including enterprise data centers, cloud computing, data center, enterprise IT, big data, high performance computing (“HPC”),artificial intelligence, 5G and Internet of Things (“IoT”)/embedded markets.edge computing. Our solutions range frominclude complete server,servers, storage systems, modular blade andservers, blades, workstations, to full racks, networking devices, server management software, and technologyserver sub-systems. We also provide global support and services. Our net sales were $652.0 millionservices to help our customers install, upgrade 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 GPUmaintain their 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.infrastructure.


We commenced operations in 1993 and have been profitable every year since inception. Our net income was $22.0for the three months ended March 31, 2021 increased to $18.4 million and $35.5from $15.8 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 incomecorresponding period 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 31, 2016, respectively, and 4.7% and 5.1% of our net sales for the three and six months ended December 31, 2015, respectively.

We use several suppliers and contract manufacturers 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 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 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 facilities in the United States and Europe. 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.

year. In order to continue to increase our net sales and profits, we believe that we must continue to develop flexible and customizableapplication optimized server and storage solutions and be among the first to market with new features and products. We must also continue to expand our software and customer service and support offerings, particularly as we increasingly focus on larger enterprise sales.customers. Additionally, we must focus on development of our sales partners and distribution channels to further expand our market share. We measure our financial success based on various indicators, including growth in net sales, gross profit 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 optimizedapplication-optimized server and storage solutions. In this regard, we work closely with microprocessor and other key component vendors to take advantage of new technologies as they are introduced. Historically, our ability to introduce new products rapidly has allowed us to benefit from technology transitions such as the introduction of new microprocessors and storage technologies, and as a result, we monitor the introduction cycles of NVIDIA Corporation, Intel AMDCorporation, Advanced Micro Devices, Inc., Samsung Electronics Company Limited, Micron Technology, Inc. and Nvidiaothers closely and carefully. This also impacts our research and development expenditures as we continue to invest more in our current and future product development efforts.


Coronavirus (COVID-19) Pandemic Impact

The global spread of the coronavirus (COVID-19) and the various attempts to contain it have created significant volatility, uncertainty and economic disruption for many businesses worldwide. In an effort to contain COVID-19 or slow its spread, governments around the world have enacted various measures, including orders that govern the operations of businesses, require masks be worn and define shelter in place and social distancing protocols. We are an essential critical infrastructure (information technology) business under the relevant federal, state and county regulations. Accordingly, in late March 2020, we responded to the directives from Santa Clara County and the State of California regarding instructions to combat the spread of COVID-19. Our first priority is the safety of our workforce and we have implemented numerous health precautions and work practices to be in compliance with the law and to operate in a safe manner.

We quickly transitioned certain of our indirect labor forces to work from home at the earlier phase of the pandemic and continued to operate our local assembly in Taiwan and, after an initial period of disruption, in the United States and Europe. We operate in the critical industry of IT infrastructure and we assessed our customer base to identify priority customers who operate in critical industries. We continued to see ongoing demand and do not have significant direct exposure to industries such as retail, oil and gas and hospitality, which have been impacted the greatest. As time passes, we may discover greater indirect exposure to distressed industries through our channel partners and OEM customers.
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We have actively managed our supply chain for potential shortage risk by building inventories of critical components required for our motherboards and other system printed circuit boards in response to the early outbreak of COVID-19 in China. Since that time, we have continued to add to our inventories of key components such as CPUs, memory, SSDs and GPUs such that customer orders can be fulfilled as they are received.

Logistics has emerged as a new challenge as globally the transportation industry restricted the frequency of departures and increased logistics costs. We experienced increased costs in freight as well as direct labor costs as we incentivized our employees to continue to work and assist us in serving our customers, many of whom are in critical industries. We expect this trend to continue for the duration of the COVID-19 pandemic.

We monitor the credit profile and payment history of our customers to evaluate risk in specific industries or geographic areas where cash flow may be disrupted. While we believe that we are adequately capitalized, we actively manage our liquidity needs. In May 2020, we negotiated an extension of our credit facility with Bank of America to extend the maturity date to June 2021. In June 2020, we entered into a ten-year, non-revolving term loan facility with China Trust and Bank Corp ("CTBC Bank") to obtain financing for use in the expansion and renovation of the our Bade Manufacturing Facility located in Taiwan. In December 2020, our Taiwan subsidiary entered into a general credit agreement with E.SUN Bank in Taiwan. This general credit agreement provides for the issuance of loans, advances, acceptances, bills, bank guarantees, overdrafts, letters of credit, and other types of drawdown instruments up to a credit limit of $30 million. The term of this general credit agreement is through September 18, 2021. See “- Liquidity and Capital Resources – Other Factors Affecting Liquidity and Capital Resources.”

Our management team is focused on guiding our company through the ongoing challenges presented by COVID-19. Currently, there are positive signs with vaccine availability and reductions in infection rates; however, with the possibility of new virus strains and vaccine supply constraints, we are unable to predict the ultimate extent to which the global COVID-19 pandemic may further impact our business operations, financial performance and results of operations within the next 12 months.


Financial Highlights


The following is a summary of otherour 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 2017,2021:

•Net sales increased by 16.0% in the three months ended March 31, 2021 as compared to the three months ended March 31, 2020.

•Gross margin decreased to 13.7% in the three months ended March 31, 2021 from 17.3% in the three months ended March 31, 2020.

•Operating expenses decreased by 10.1% as compared to the three months ended March 31, 2020, and were equal to 11.8% and 15.3% of net sales in the three months ended March 31, 2021 and 2020, respectively.

•Effective tax rate benefit decreased from 5.6% in the three months ended March 31, 2020 to 1.2% in the three months ended March 31, 2021.


Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with $183.7 million atgenerally accepted accounting principles in the endUnited States. The preparation of fiscal year 2016. The decrease inthese condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales and expenses. We evaluate our cashestimates and cash equivalents, together withassumptions on an ongoing basis, and base our investments atestimates on historical experience and on various other assumptions that we believe to be reasonable under the endcircumstances, the results of which form the second quarterbasis for the judgments we make about the carrying value of fiscal year 2017 was primarily dueassets and liabilities that are not readily apparent from other sources. Because these estimates can vary depending on the situation, actual results may differ from these estimates. Making estimates and judgments about future events is inherently unpredictable and is subject to $54.9 millionsignificant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to have been incorrect, it could have a material impact on our results of operations, financial position and statement of cash used in our operating activities, $18.5 million used to purchase outstanding common stock 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 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, 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.

flows.
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    There have been no material changes to our critical accounting policies and estimates as compared to those disclosed in our 2020 10-K. For a description of our critical accounting policies and estimates, see Part I, Item 1, Note 1, "Summary of Significant Accounting Policies" in our notes to condensed consolidated financial statements in this Quarterly Report.

Revenues and Expenses

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,
 2021202020212020
Net sales100.0 %100.0 %100.0 %100.0 %
Cost of sales86.3 %82.7 %84.4 %83.5 %
Gross profit13.7 %17.3 %15.6 %16.5 %
Operating expenses:
Research and development6.5 %6.4 %6.6 %6.3 %
Sales and marketing2.4 %2.8 %2.5 %2.6 %
General and administrative2.9 %6.0 %3.0 %4.5 %
Total operating expenses11.8 %15.3 %12.2 %13.4 %
Income from operations1.9 %2.0 %3.4 %3.1 %
Other (expense) income, net0.2 %0.1 %(0.1)%0.1 %
Interest expense(0.1)%(0.1)%(0.1)%(0.1)%
Income before income tax provision2.1 %2.1 %3.3 %3.1 %
Income tax provision— %0.1 %(0.3)%(0.4)%
Share of (loss) from equity investee, net of taxes— %(0.1)%— %— %
Net income2.1 %2.0 %2.9 %2.7 %

Net sales. 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 whichthat impact our net sales of our server and storage systems are the number of compute nodes shippedsold and the average selling prices per node fornode. The main factors that impact our server systemnet sales of our subsystems and accessories are units shipped and the average selling price per unit for our subsystem and accessories sales.unit. 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 thememory. The prices for our subsystems and accessories can also vary widely based on the type. whether a customer is purchasing power supplies, server boards, chassis or other accessories.

A compute node is aan independent hardware configuration within a server system capable of having its own CPU, RAMmemory and storage and that is capable of running its own instance of a non-virtualized operating system. The number of compute nodes sold, which can vary by product, is an important metric we use to track our business. Measuring volume using compute nodes enables more consistent measurement across different server form factors and across different vendors. As with most electronics-based products,product life cycles, average selling prices typically are highest at the time of introduction of new products whichthat utilize the latest technology and tend to decrease over time as such products mature in the market and are replaced by next generation products. Additionally, in order to remain competitive throughout all industry cycles, we actively change our selling price per unit in response to changes in costs for key components such as memory and SSDs.


    The following table presents net sales by product type for the three and nine months ended March 31, 2021 and 2020 (dollars in millions):
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Three Months Ended March 31,ChangeNine Months Ended March 31,Change
20212020$%20212020$%
Server and storage systems$693.3 $571.3 $122.0 21.4 %$1,953.8 $1,880.0 $73.8 3.9 %
Percentage of total net sales77.4 %74.0 %78.5 %77.0 %
Subsystems and accessories$202.5 $201.1 $1.4 0.7 %$534.6 $563.1 $(28.5)(5.1)%
Percentage of total net sales22.6 %26.0 %21.5 %23.0 %
Total net sales$895.9 $772.4 $123.5 16.0 %$2,488.5 $2,443.1 $45.4 1.9 %

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

Comparison of Three Months Ended March 31, 2021 and 2020
The period-over-period increase in net sales of our server and storage systems was due to a 5.8% increase in the number of units of compute nodes sold and a 15.4% increase in the average selling price. The increase in the number of units of compute nodes shipped was primarily due to more shipments of multinode systems compared to the same period last year.
    The period-over-period increase in net sales of our subsystems and accessories is primarily due to an increase in the average selling price.

Comparison of Nine Months Ended March 31, 2021 and 2020
The period-over-period increase in net sales of our server and storage systems was due to a 17.4% increase in the average selling price partially offset by a 11.1% decrease in the number of units of compute nodes sold. The decline in the number of units of compute nodes shipped was primarily due to fewer shipments of multinode systems compared to the same period last year.
    The period-over-period decrease in net sales of our subsystems and accessories is primarily due to a decrease in the number of units of subsystems sold.

    The following table presents net sales by geographic region for the three and nine months ended March 31, 2021 and 2020 (dollars in millions):
Three Months Ended March 31,ChangeChangeNine Months Ended March 31,ChangeChange
20212020$%20212020$%
United States$499.1 $422.9 $76.2 18.0 %$1,458.2 $1,419.1 $39.1 2.8 %
Percentage of total net sales55.7 %54.8 %58.6 %58.1 %
Asia207.2 160.5 46.7 29.1 %495.3 487.8 7.5 1.5 %
Percentage of total net sales23.1 %20.8 %19.9 %20.0 %
Europe162.3 158.1 4.2 2.7 %429.2 433.8 (4.6)(1.1)%
Percentage of total net sales18.1 %20.5 %17.2 %17.8 %
Others27.3 30.9 (3.6)(11.7)%105.7 102.4 3.3 3.2 %
Percentage of total net sales3.0 %4.0 %4.2 %4.2 %
Total net sales$895.9 $772.4 $2,488.4 $2,443.2 

Comparison of Three Months Ended March 31, 2021 and 2020

    The period-over-period increase in net sales in the United States for the three months ended March 31, 2021 and 2020 was primarily due to higher sales driven by higher server and storage systems unit volume. The period-over-period increase in net sales in Asia was due primarily to increased sales in China, Japan and India and partially off-set by decreased sales in Singapore and Korea. The increase of net sales in Europe was primarily due to higher sales in France, Germany, the United Kingdom, and Russia, partially offset by lower sales in the Netherlands. The period-over-period decrease in net sales in other
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countries was primarily due to decreased sales in Mexico and South Africa, partially offset by higher sales in Canada, Israel and other Middle East countries.

Comparison of Nine Months Ended March 31, 2021 and 2020

    The period-over-period increase in net sales in the United States for the nine months ended March 31, 2021 and 2020 was primarily due to higher sales driven by higher server and storage systems unit volume. The period-over-period increase in net sales in Asia was due primarily to increased sales in Japan and Singapore, partially offset by decreased sales in China, Taiwan, and Korea. The decrease of net sales in Europe was primarily due to lower sales in the Netherlands, Russia and the rest of Europe, partially offset by increased sales in France and the United Kingdom. The period-over-period increase in net sales in other countries was primarily due to increased sales in Brazil, Canada and Israel and other Middle East countries, partially offset by lower sales in Mexico, South Africa and Australia.

Cost of sales. Sales and Gross Margin

Cost of sales primarily consists of the costs to manufacture our products, including the costs of materials, contract manufacturing, shipping, personnel and related expenses, including stock basedsalaries, benefits, stock-based compensation and incentive bonuses, equipment and facility expenses, warranty costs and inventory excess and obsoleteobsolescence 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 byincrease due to significant component price increases resulting from component shortages.


ResearchWe use several suppliers and development expenses. contract manufacturers to design and manufacture subsystems in accordance with our specifications, with final assembly and testing predominantly performed at our manufacturing facilities in the same region where our products are sold. We work with Ablecom, one of our key contract manufacturers and also a related party to optimize modular designs for our chassis and certain of other components. We also outsource to Compuware, also a related party, a portion of our design activities and a significant part of the manufacturing of components, particularly power supplies.

    Cost of sales and gross margin for the three and nine months ended March 31, 2021 and 2020 are as follows (dollars in millions):
Three Months Ended March 31,ChangeNine Months Ended March 31,Change
20212020$%20212020$%
Cost of sales$772.9 $639.0 $133.9 21.0 %$2,099.4 $2,040.5 $58.9 2.9 %
Gross profit$123.0 $133.4 $(10.4)(7.8)%$389.0 $402.7 $(13.7)(3.4)%
Gross margin13.7 %17.3 %(3.6)%15.6 %16.5 %(0.9)%

Comparison of Three Months Ended March 31, 2021 and 2020

The period-over-period increase in cost of sales was primarily attributed to an increase of $131.9 million in costs of materials and contract manufacturing expenses primarily related to the increase in net sales volume and a $5.5 million increase in freight charges, partially offset by a decrease of excess and obsolete inventory charges of $1.7 million and a decrease of $3.0 million in overhead costs.

    The period-over-period decrease in the gross margin percentage was primarily due to sales prices increasing at a slower rate than the increase in the costs of components purchased and higher freight costs.

Comparison of Nine Months Ended March 31, 2021 and 2020

The period-over-period increase in cost of sales was primarily attributed to an increase of $91.2 million in costs of materials and contract manufacturing expenses primarily related to the increase in net sales volume, an increase of $6.0 million of freight charges and a $1.3 million increase in product service costs, partially offset by a decrease of $24.8 million in overhead costs attributable primarily to a recovery of costs paid in prior periods and a decrease of excess and obsolete inventory charge of $14.0 million.
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    The period-over-period decrease in the gross margin percentage was primarily due to sales prices increasing at a slower rate than the increase in the costs of components we purchased.

Operating Expenses

Research and development expenses consist of the personnel expenses, including salaries, benefits, stock-based compensation and incentive bonuses, and related expenses including stock based compensation offor our research and development teams, andpersonnel, as well as product development costs such as materials and supplies, consulting services, third partythird-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 ofefforts with our suppliers and customers. These amounts offset a portion of the related research and development expenses and have the effect of reducing our reported research and development expenses.


Sales and marketing expenses. Sales and marketing expenses consist primarily of personnel expenses, including salaries, stock basedbenefits, stock-based compensation and incentive bonuses, and related expenses for our sales and marketing personnel, costs for tradeshows,trade-shows, 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 ourthese 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, eitherreimbursed by us or our suppliers, typically increases in connection with significantnew 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 bad debt reserves on accounts receivable.

    Operating expenses for the three and nine months ended March 31, 2021 and 2020 are as follows (dollars in millions):
Three Months Ended March 31,ChangeNine Months Ended March 31,Change
20212020$%20212020$%
Research and development$57.9 $49.6 $8.3 16.7 %$165.4 $154.7 $10.7 6.9 %
Percentage of total net sales6.5 %6.4 %6.6 %6.3 %
Sales and marketing$21.8 $21.9 $(0.1)(0.5)%$62.9 $64.1 $(1.2)(1.9)%
Percentage of total net sales2.4 %2.8 %2.5 %2.6 %
General and administrative$26.2 $46.3 $(20.1)(43.4)%$75.9 $107.7 $(31.8)(29.5)%
Percentage of total net sales2.9 %6.1 %3.0 %4.4 %
Total operating expenses$106.0 $117.8 $(11.8)(10.0)%$304.2 $326.5 $(22.3)(6.8)%
Percentage of total net sales11.8 %15.3 %12.2 %13.4 %

Comparison of Three Months Ended March 31, 2021 and 2020

Research and development expenses. The period-over-period increase in research and development expenses was primarily due to a $13.2 million increase in costs mainly related to materials, supplies and equipment used in product development. During the three months ended March 31, 2020, we recorded a $9.5 million net settlement fee as a reduction in the research and development expenses related to the reimbursement of previously incurred materials, supplies and equipment costs for one canceled joint product development agreement. This increase was partially offset by a $2.8 million increase in research and development credits from certain suppliers and customers towards our development efforts and a decrease of $2.3 million in personnel expenses.

Sales and marketing expenses. The period-over-period sales and marketing expenses decreased primarily due to a $1.0 million decrease in personnel expenses as a result of a decrease in the number of personnel, a $0.2 million decrease in expenses related to participation in trade shows and business travel as a result in a change in our operations in response to the COVID-19
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pandemic, partially offset by an increase of $0.7 million in advertising expenses and a $0.4 million increase in other sales and marketing expenses.

General and administrative expenses. The period-over-period decrease in general and administrative expenses was primarily due to a decrease of $19.1 million in professional fees incurred to investigate, assess and remediate the causes that led to the delay in filing our periodic reports with the SEC and the associated restatement of certain of our previously issued financial statements, a decrease of $1.7 million in bad debt provision expenses and a $1.1 million decrease in other general and administrative expenses, partially offset by an increase of $3.1 million in personnel expenses due to increased full time personnel.

Comparison of Nine Months Ended March 31, 2021 and 2020

Research and development expenses. The period-over-period increase in research and development expenses was primarily due to an increase of $12.9 million in costs mainly related to materials supplies and equipment used in product development. During the three months ended March 31, 2020, we recorded a $9.5 million net settlement fee as a reduction in the research and development expenses related to the reimbursement of previously incurred materials, supplies and equipment costs for one canceled joint product development agreement. Personnel expenses increased $7.4 million as a result of an increase in the number of personnel. These increases were partially offset by an increase of $8.5 million in research and development credits from certain suppliers and customers towards our development efforts and a decrease of $1.4 million in travel expenses as a result in a change in our operations in response to the COVID-19 pandemic.

Sales and marketing expenses. The period-over-period sales and marketing expenses decreased primarily due to a decrease of $2.3 million in    expenses related to participation in trade shows and business travel as a result in a change in our operations in response to the COVID-19 pandemic and a $0.7 million decrease in personal expenses due to decreased full time personnel, partially offset by a $0.7 million increase in facilities costs, an increase of $0.5 million in advertising expenses, and a $0.5 million increase in other sales and marketing expenses.

General and administrative expenses. The period-over-period decrease in general and administrative expenses was primarily due to a decrease of $37.2 million in professional fees incurred to investigate, assess and remediate the causes that led to the delay in filing our periodic reports with the SEC and the associated restatement of certain of our previously issued financial statements, a decrease of $3.1 million in travel expenses as a result in a change in our operations in response to the COVID-19 pandemic, a decrease of $2.2 million in bad debt provision expenses, a decrease of $1.2 million in supplies expenses, a decrease of $0.7 million in sales tax fees.reserve and audit expenses and a $0.6 million decrease in facilities costs, partially offset by an increase of $13.5 million in compensation expense due to increased full time personnel and bonuses.


Interest and otherOther (Expense) Income, Net

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


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


Interest and other (expense) income, net for the three and nine months ended March 31, 2021 and 2020 are as follows (dollars in millions):
Three Months Ended
March 31,		ChangeNine Months Ended
March 31,		Change
20212020$%20212020$%
Other (expense) income, net$2.0 $0.9 $1.1 122.2 %$(1.4)$2.1 $(3.5)(166.7)%
Interest expense(0.6)(0.5)(0.1)20.0 %(1.8)(1.6)(0.2)12.5 %
Interest and other (expense) income, net$1.4 $0.4 $1.0 250.0 %$(3.2)$0.5 $(3.7)(740.0)%

Comparison of Three Months Ended March 31, 2021 and 2020

The change of $1.1 million in other (expense) income, net was attributable to an increase of $1.7 million in foreign exchange gain due to favorable foreign currency fluctuations, partially offset by a decrease of $0.5 million in interest income on our interest-bearing deposits due primarily to lower yields on investments.

40

Comparison of Nine Months Ended March 31, 2021 and 2020

The change of $3.5 million in other (expense) income, net was attributable to a decrease of $2.3 million in interest income on our interest-bearing deposits due primarily to lower yields on investments and an increase of $1.2 million in foreign exchange loss due to unfavorable foreign currency fluctuations.

Provision for Income tax provision. Taxes

Our income tax provision is based on our taxable income generated in the jurisdictions in which we operate, which primarily include the United States, Taiwan, and the Netherlands. Our effective tax rate differs from the statutory rate primarily due to research and development tax credits, and the domestic production activities deduction which were partially offset by state taxes and unrecognizedreleases from uncertain tax positions, tax benefits related to permanent establishment exposures.from foreign derived intangible income and stock based compensation.


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Critical Accounting Policies and Estimates
There have been no material changes in the matters for which we make 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 the fiscal year ended June 30, 2016.

Results of Operations
Net Sales

The following table presents net sales by product type for the three and six months ended December 31, 2016 and 2015 (dollars in millions):
 Three Months Ended
December 31,		 Change Six Months Ended
December 31,		 Change
 2016 2015 $ % 2016 2015 $ %
Server systems$444.0
 $453.7
 $(9.7) (2.1)% $801.5
 $810.0
 $(8.5) (1.0)%
Percentage of total net sales68.1% 71.0%     67.9% 69.9%    
Subsystems and accessories208.0
 185.2
 22.7
 12.3 % 379.4
 348.6
 30.8
 8.8 %
Percentage of total net sales31.9% 29.0%     32.1% 30.1%    
Total net sales$652.0
 $639.0
 $13.0
 2.0 % $1,180.9
 $1,158.6
 $22.3
 1.9 %

The following table presents the number 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):
 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 and storage and that is capable 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 and 2015 (units in thousands):
 Three Months Ended
December 31,		 Change Six Months Ended
December 31,		 Change
 2016 2015 % 2016 2015 %
Subsystems and accessories:           
Unit sales1,214
 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 31, 2016 and 2015

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-year decrease in net sales of our server systems in the three months ended December 31, 2016 was due primarily to a decrease in the average selling price 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 in the number of compute node sales as we sold higher nodes per systems for our Twin family product line of servers.


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The year-over-year 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 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-year decrease in net sales of our server systems in the six months ended December 31, 2016was primarily due to a decrease in the average selling price 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 in the number of compute node sales as we sold higher nodes per systems for our Twin family product line of servers.

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

The following table presents the percentages of net sales from products sold to distributors and direct/OEM customers for the three and six months ended December 31, 2016 and 2015:
 Three Months Ended
December 31,		 Change Six Months Ended
December 31,		 Change
 2016 2015 % 2016 2015 %
Distributors46.2% 41.9% 4.3 % 47.9% 43.6% 4.3 %
Direct/OEM customers53.8% 58.1% (4.3)% 52.1% 56.4% (4.3)%
Total net sales100.0% 100.0%   100.0% 100.0%  

The year-over-year increase in net sales to distributors in the three and six months ended December 31, 2016 as a percentage of total net sales was primarily due to the higher demand for our subsystem and accessories which are typically sold through distributors. The year-over-year decrease in net sales to direct/OEM customers in the three and six months ended December 31, 2016 as a percentage of total net sales was primarily due to the lower demand for our complete server systems from cloud/internet data center computing partially offset by an increase demand for our server systems from storage, enterprise, HPC and IoT/embedded customers.
The following table presents percentages of net sales by geographic region for the three and six months ended December 31, 2016 and 2015:
 Three Months Ended
December 31,		 Change Six Months Ended
December 31,		 Change
 2016 2015 % 2016 2015 %
United States55.0% 63.7% (8.7)% 55.4% 64.4% (9.0)%
Europe19.9% 17.9% 2.0 % 20.6% 17.4% 3.2 %
Asia21.1% 13.8% 7.3 % 19.8% 14.0% 5.8 %
Others4.0% 4.6% (0.6)% 4.2% 4.2% — %
Total net sales100.0% 100.0%   100.0% 100.0%  

The year-over-year decrease in net sales in the United States in the three and six months ended December 31, 2016 as a percentage of total net sales was primarily due to the lower demand for our server systems from cloud/internet data center computing which represents a higher portion of sales in the United States than in other regions. The year-over-year increase in net sales in Asia and Europe in the three and six months ended December 31, 2016 as a percentage of total net sales was primarily due to the higher demand for our server systems in China, the Netherlands and Russian Federation.

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Cost of Sales and Gross Margin

Cost of sales and gross margin for the three and six months ended December 31, 2016 and 2015 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 profit93.4
 106.4
 (13.0) (12.2)% 173.4
 178.6
 (5.1) (2.9)%
Total gross margin14.3% 16.6% 
 (2.3)% 14.7% 15.4%   (0.7)%

Comparison of Three Months Ended December 31, 2016 and 2015

The year-over-year 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 the increase in net sales. In the three months ended December 31, 2016, we recorded a $2.5 million expense, net 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 as a result of new product introductions or change in unit volumes compared with our historical experience, or if 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 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.

Comparison of Six Months Ended December 31, 2016 and 2015

The year-over-year increase 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 in net sales. In the six months ended December 31, 2016, we recorded a $6.4 million expense, net of recovery, or 0.5% of net sales, related to the inventory provision as compared to $3.8 million, or 0.3% of net sales, in the six months ended December 31, 2015.

In the six months ended December 31, 2016, we recorded a $9.7 million expense, or 0.8% of net sales, related to the provision for warranty reserve as compared to a $8.5 million expense, or 0.7% of net sales, in the six months ended December 31, 2015. The increase in the provision for warranty reserve was primarily due to an increase in warranty claims and cost of servicing warranty claims in the six months ended December 31, 2016.

Gross margin percentage was 14.7% and 15.4% for the six months ended December 31, 2016 and 2015, respectively. The decrease was primarily 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.


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Operating Expenses

Operating expenses for the three and six months ended December 31, 2016 and 2015 are as follows (dollars in millions):
 Three Months Ended
December 31,		 Change Six Months Ended
December 31,		 Change
 2016 2015 $ % 2016 2015 $ %
Research and development$34.0
 $30.3
 $3.8
 12.5 % $67.2
 $58.6
 $8.6
 14.7%
Percentage of total net sales5.2% 4.7%     5.7% 5.1%    
Sales and marketing18.2
 16.5
 1.7
 10.3 % 34.1
 30.7
 3.4
 10.9%
Percentage of total net sales2.8% 2.6%     2.9% 2.7%    
General and administrative9.4
 10.5
 (1.1) (10.3)% 20.2
 18.7
 1.5
 7.9%
Percentage of total net sales1.5% 1.6%     1.7% 1.5%    
Total operating expenses$61.6
 $57.2
 $4.4
 7.7 % $121.5
 $108.0
 $13.5
 12.5%
Percentage of total net sales9.5% 8.9%     10.3% 9.3%    
Comparison of Three Months Ended December 31, 2016 and 2015

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 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 million in compensation and benefits including stock-based compensation expense, resulting primarily from growth 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 million in compensation and benefits including stock-based compensation expense, resulting primarily from growth in sales and marketing personnel.

Sales and marketing expenses include stock-based compensation expense of $1.0 million and $0.8 million for the six months ended December 31, 2016 and 2015, respectively.

General and administrative expenses. General and administrative expenses increased by $1.5 million, or 7.9% in the six months ended December 31, 2016 compared to the six months ended December 31, 2015. General and administrative expenses were 1.7% and 1.5% 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 $2.3 million in compensation and benefits including stock-based compensation expense, a $1.4 million foreign currency transaction gain in the six months ended December 31, 2015 as compared to a $0.1 million foreign currency transaction gain in the six months ended December 31, 2016, partially offset by a decrease of $1.8 million in legal expenses.

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, Net

Interest and other expense, net for the three and six months ended December 31, 2016 and 2015 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%

*Not meaningful

Comparison of Three Months Ended December 31, 2016 and 2015
Interest and other expense, net. Interest and other expense, net increased by $0.1 million in the three months ended December 31, 2016 compared to the three months ended December 31, 2015. The increases were primarily due to an increase in interest expense.

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Comparison of Six Months Ended December 31, 2016 and 2015

Interest and other expense, net. Interest and other expense, net increased by $0.2 million in the six months ended December 31, 2016 compared to the six months ended December 31, 2015. The increases were primarily due to an increase in interest expense.


Provision for Income Taxes


Provision for income taxes and effective tax rates for the three and sixnine months ended DecemberMarch 31, 20162021 and 20152020 are as follows (dollars in millions):
Three Months Ended
March 31,		ChangeNine Months Ended
March 31,		Change
20212020$%20212020$%
Income tax (benefit) provision$(0.2)$(0.9)$0.7 (77.8)%$8.5 $9.8 $(1.3)(13.3)%
Percentage of total net sales— %(0.1)%0.3 %0.4 %
Effective tax rate (benefit)(1.2)%(5.6)%10.5 %12.8 %
 Three Months Ended
December 31,		 Change Six Months Ended
December 31,		 Change
 2016 2015 $ % 2016 2015 $ %
Provision for income taxes$9.3
 $14.1
 $(4.7) (33.8)% $15.7
 $21.6
 $(5.9) (27.3)%
Percentage of total net sales1.4% 2.2%     1.3% 1.8%    
Effective tax rate29.7% 28.8%     30.6% 30.8%    


Comparison of Three Months Ended DecemberMarch 31, 20162021 and 20152020


Provision for 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 effective tax rate was 29.7% and 28.8% for the three months ended December 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. Theand effective tax rate for the three months ended DecemberMarch 31, 20162021 was higher primarilythan that for the three months ended March 31, 2020 due to the lower benefits from U.S. federal research and development ("R&D")release of tax credit and foreign rate differentials. Forreserves after the third quartersettlement 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 incomeTaiwan tax audit in Taiwan.the prior year.


Comparison of SixNine Months Ended DecemberMarch 31, 20162021 and 20152020


Provision for income taxes. Provision for income taxes decreased by $5.9 million, or 27.3% 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 (benefit) provision for the six months ended December 31, 2016 was primarily attributable to our lower operating income. Theand effective tax rate for the sixnine months ended DecemberMarch 31, 20162021 was lower than that for the nine months ended March 31, 2020, primarily due to decrease in tax reserves after the benefitssettlement of a Taiwan tax audit and the SEC penalty assessment in 2020.

Share of (Loss) from domestic production activities deductions.Equity Investee, Net of Taxes


Share of (loss) from equity investee, net of taxes represents the Company’s share of loss from the Corporate Venture in which the Company has 30% ownership.

Share of (loss) from equity investee, net of taxes for the three and nine months ended March 31, 2021 and 2020 are as follows (dollars in millions):
 Three Months Ended
March 31,		ChangeNine Months Ended
March 31,		Change
 20212020$%20212020$%
Share of (loss) from equity investee, net of taxes$(0.3)$(1.1)$0.8 (72.7)%$(0.4)$(1.1)$0.7 —%
Percentage of total net sales— %(0.1)%— %— %

Comparison of Three Months Ended March 31, 2021 and 2020

The period-over-period decrease of $0.8 million in share of (loss) from equity investee, net of taxes was primarily due to less net loss recognized by the Corporate Venture.

Comparison of Nine Months Ended March 31, 2021 and 2020

The period-over-period decrease of $0.7 million in share of (loss) from equity investee, net of taxes was primarily due to less net loss recognized by the Corporate Venture.
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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. Inin addition we have utilizedto 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$177.9 million and $181.0$210.5 million as of DecemberMarch 31, 20162021 and June 30, 2016,2020, respectively. Our cash in foreign locations was $54.1$99.0 million and $46.5and $98.0 million at Decemberas of March 31, 20162021 and June 30, 2016,2020, respectively. It
    Amounts held outside of the U.S. are generally utilized to support non-U.S. liquidity needs. Repatriations generally will not be taxable from a U.S. federal tax perspective but may be subject to state income or foreign withholding tax. Where local restrictions prevent an efficient intercompany transfer of funds, our intent is management's intention to reinvestkeep cash balances outside of the undistributed foreign earnings indefinitely in foreignU.S. and to meet liquidity needs through operating cash flows, external borrowings, or both. We do not expect restrictions or potential taxes incurred on repatriation of amounts held outside of the U.S. to have a material effect on our overall liquidity, financial condition or results of operations.

We believe that our current cash, cash equivalents, borrowing capacity available from our credit facilities and internally generated cash flows will be sufficient to support our operating businesses, continued remediation of the material weakness in the financial reporting, and maturing debt and interest payments for the twelve months following the issuance of these condensed consolidated financial statements. We expect to pay a special performance bonus of approximately $8.1 million to our CEO within the next year in two equal tranches. During the quarter ended March 31, 2021, the target average closing prices for both tranches were met but no determination has been made if the specified performance condition for the first tranche is met.

On August 9, 2020, the Board approved a share repurchase program to repurchase shares of common stock for up to an aggregate of $30.0 million at market prices. The program was effective until December 31, 2020 or if earlier, until the maximum amount of common stock is repurchased. During the three months ended September 30, 2020, 1,142,294 shares of common stock were repurchased for $30.0 million and the program ended.

On October 31, 2020, the Board approved a share repurchase program to repurchase up to an aggregate of $50.0 million of the Company’s common stock at market prices. The program was effective until October 31, 2021 or if earlier, until the maximum amount of common stock was repurchased. As of March 31, 2021, 1,675,746 shares of common stock were repurchased and retired for $50.0 million and the program ended.

On January 29, 2021, a duly authorized subcommittee of the Board approved a share repurchase program to repurchase up to an aggregate of $200.0 million of the Company’s common stock at market prices. The program is effective until July 31, 2022 or if earlier, until the maximum amount of common stock is repurchased. During the three months ended March 31 2021, 1,155,000 shares of common stock were repurchased for $40.7 million. All repurchased shares have been retired as of March 31, 2021. We repurchased 236,171 shares of our common stock for $9.3 million subsequent to March 31, 2021.

    Our key cash flow metrics were as follows (dollars in millions):
Nine Months Ended
March 31,		Change
20212020
Net cash provided by operating activities$59.4 $65.7 $(6.3)
Net cash used in investing activities$(44.6)$(34.1)$(10.5)
Net cash used in financing activities$(48.4)$25.4 $(73.8)
Net increase in cash, cash equivalents and restricted cash$(33.3)$57.1 $(90.4)

Operating Activities. Activities

Net cash provided by (used in) operating activities was $(54.9) million and $86.9decreased by $6.3 million for the sixnine months ended DecemberMarch 31, 20162021 as compared to the nine months ended March 31, 2020. The decrease was due primarily to a decrease of $13.2 million in the non-cash charges related to excess and 2015, respectively.obsolete inventories, an increase of cash used for net working capital of $4.3 million primarily driven by increased accounts receivable as a result of increased revenue and higher cash payments for inventory purchases to meet expected customer demands, and a $2.2 million decrease in the non-cash charges related to allowances for doubtful accounts. These decreases were partially offset by a $6.8 million increase in net income and a $6.3 million increase in non-cash charges related to stock-based compensation expenses.

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Investing Activities

Net cash used in our operating activities for the six months ended December 31, 2016 was primarily due to an increase in inventory 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 in the last month of the second quarter of fiscal year 2017 as compared to the last month of the fourth quarter of fiscal year 2016. The increase for the six months ended December 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 as compared to the last month of the fourth quarter of fiscal year 2015. The increase 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 of February 2016 and higher sales in the six months ended December 31, 2015.
Investing activities. Net cash used in our investing activities was $17.7$44.6 million and $15.6$34.1 million for the sixnine months ended DecemberMarch 31, 20162021 and 2015, respectively. In2020, respectively, as we continued to invest in expanding our manufacturing 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 the construction of a secondand Bade manufacturing facility in Taiwan.

Financing Activities

Net cash used by financing activities for the Green Computing Park. We plan to finance this development through our operating cash flows and additional borrowings from banks. In the sixnine months ended DecemberMarch 31, 2015, $15.22021 was $48.4 million was related to the purchase of property, plant and equipment.
Financing activities. Netwhile net cash provided by ourfinancing activities for the nine months ended March 31, 2020 was $25.4 million. The change in cash flows from financing activities was $20.8primarily due to stock repurchases of $118.0 million, a $6.2 million increase in debt repayment, and $3.3a $2.7 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 milliondecrease in loans. Wecash received $5.9 million related to the proceeds from the exercise of stock options net of taxes, partially offset by a $52.2 million increase in the six months ended December 31, 2016. Further, we used $18.5 million to repurchasedebt proceeds from draws on our outstanding common stock.CTBC credit and term loan facilities and E.SUN credit facility.


In the six months ended December 31, 2015, we borrowed an additional $14.4 million under our revolving line of credit fromOther Factors Affecting Liquidity and Capital Resources

2018 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.    Credit Facility

We expect our net cash provided by financing activities will increase throughout fiscal year 2017 as we intend to obtain additional financing from banks for our working capital requirements.

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 and capital resources

Activities under Revolving Lines of Credit and Term Loans

Bank of America


In June 2015,April 2018, we entered into an amendment to the existing credit agreement with Bank of America, which provided for (i) 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 with Bank of $10.0America for up to $250.0 million for our Taiwan subsidiary that matures on(as amended from time to time, the "2018 Bank of America Credit Facility"). On May 12, 2020, the 2018 Bank of America Credit Facility was amended to, among other things, extend the maturity to June 30, 2017.2021, release the real property as a collateral, modify certain payments and covenants provisions, specify that LIBOR cannot be less than 1% for purposes of determining interest rates, and increase the unused line fee from 0.25% per annum to 0.375% per annum. Interest shall accrue at LIBOR plus 2.00% on outstanding borrowings less than $125.0 million and LIBOR plus 2.25% on outstanding borrowings in excess of $125.0 million. As of March 31, 2021, we had no outstanding borrowings and we had a $6.4 million letter of credit outstanding under this facility. Our available borrowing capacity was $243.6 million, subject to the borrowing base limitation and compliance with other applicable terms. In the event of default or if outstanding borrowings are in excess of $220.0 million, we are required to grant the lenders a continuing security interest in and lien upon all amounts credited to any of our 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. Voluntary prepayments are permitted without early repayment fees or penalties. The interest rate2018 Bank of America Credit Facility is secured by substantially all of Super Micro Computer’s assets, other than real property assets. In addition, we are not permitted to pay any dividends. Under the terms of the 2018 Bank of America Credit Facility agreement, we are required to maintain a certain fixed charge ratio and we have been in compliance with all covenants under the 2018 Bank of America Credit Facility.

CTBC Bank

2020 CTBC Credit Facility

In August 2020, we entered into a credit agreement with CTBC Bank in Taiwan that provides for term loans of up to $50.0 million (the "2020 CTBC Credit Facility") and expires in August 2021. As of March 31, 2021, the outstanding borrowings under the CTBC Credit Facility 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 $45.0were $18.0 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 rangedwere from 1.19%1.03% to 2.14%1.26% 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.

annum. The total outstanding borrowings under the CTBC BankCredit Facility term loan waswere denominated in Taiwanese dollarsNTD and was translatedremeasured into U.S. dollars of $18.5 million and $20.4$24.5 million at DecemberMarch 31, 20162021 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 raterates for these loans ranged from 0.95% and 2.15% at December 31, 2016 and 0.90% and 1.25%were 0.74% per annum at June 30, 2016. At December 31, 2016,annum. The amount available for future borrowing under this credit agreement was $0.6 million.

In January 2017, we drew an additional $8.0$7.5 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 endMarch 31, 2021. The term loans are secured by certain of any fiscal quarter, measured for the most recently completed twelve (12) months, shall not be greater than 2.00;
The domestic unencumbered liquidour 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 andincluding certain property, plant, and equipmentequipment. There are no financial covenants under the 2020 CTBC Credit Facility.

2020 CTBC Term Loan Facility due June 4, 2030

In May 2020, we entered into a ten-year, non-revolving term loan facility (the “2020 CTBC Term Loan Facility”) to obtain up to NTD 1.2 billion ($40.7 million in U.S. dollar equivalents) in financing for use in the expansion and inventoryrenovation of our Bade Manufacturing Facility located in those buildings.Taiwan. Draw downs on the 2020 CTBC Term Loan Facility are based on 80% of balances owed on commercial invoices from the contractor and are drawn according to the progress of the renovations. Borrowings under the 2020 CTBC Term Loan Facility are available through June 2022. We are required to pay against total outstanding principal and interest in equal monthly installments starting June 2023 and continuing through the maturity date of June 2030. The 2020 CTBC Term Loan Facility is secured by the Bade Manufacturing Facility, including any expansion. Fees paid to the lender as debt issuance costs were immaterial. We borrowed $7.3 million in the three months ended March 31, 2021
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with a rate of 0.45% per annum. As of DecemberMarch 31, 2016, total assets collateralizing2021, the term loan with Bankamount outstanding under the 2020 CTBC Term Loan Facility was $27.9 million and the net book value of America were $101.1the property serving as collateral was $38.1 million. We have financial covenants requiring our current ratio, debt service coverage ratio, and financial debt ratio, to be maintained at certain levels. As of DecemberMarch 31, 2016,2021, we werehave been in compliance with all financial covenants associatedunder the 2020 CTBC Term Loan Facility.

E.SUN Credit Facility

In December 2020, Super Micro Computer Inc, Taiwan, a Taiwan subsidiary of the Company entered into a General Credit Agreement (the “E.SUN Credit Facility”) with E.SUN Bank in Taiwan. Such Credit Facility provides for the term loan and linesissuance of loans, advances, acceptances, bills, bank guarantees, overdrafts, letters of credit, and other types of drawdown instruments up to a credit limit of $30.0 million. Terms for specific drawdowns are set forth in separate Notification and Confirmation of Credit Conditions negotiated with BankE. SUN Bank. The term of America under the credit agreement.

As of December 31, 2016, the net book value of land and building located in Bade, Taiwan collateralizing the term loan with CTBC Bank was $26.6 million.E.SUN Credit Facility is until September 18, 2021. There are no financial covenants associated with the termE.SUN Credit Facility. A Notification and Confirmation agreement was entered into on December 2, 2020 for a $30.0 million import loan (the “Import Loan”) under the E. SUN Credit facility with CTBC Bank.

Contract Manufacturers
In the threea tenor of 120 days 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 andwith an interest rate calculated based on LIBOR or TAIFX plus a related party.fixed margin. As of DecemberMarch 31, 20162021, the amounts outstanding under the E.SUN Credit Facility were $15.0 million and June 30, 2016 amounts owed to Ablecom by usthe interest rates for these loans 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 in1.0% per annum. At March 31, 2021, the open market or in private transactions during the following twelve months at prevailing market prices. Repurchases will be madeamount available for future borrowing under the program usingE.SUN Credit Facility was $15 million.

Refer to Part I, Item 1, Note 6, “Short-term and Long-term Debt,” in our own cash resources. This share repurchase program does not obligate usnotes to acquire any particular amount of common stock, and it may be suspended at any time atcondensed 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 interest271
 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 of Significant Accounting Policies,” of the Notesin our 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 includeinvestment in an auction rate securities, which havesecurity has been classified as long-termnon-current due to the lack of a liquid market for these securities. Since our results of operations are not dependent on investments, the risk associated with fluctuating interest rates is limited to our investment portfolio, and we believe that a 10% change in interest rates would not have a significant impact on our results of operations. As of DecemberMarch 31, 2016,2021, our investments were in money market funds, certificates of deposits and auction rate securities.


We are exposed to changes in interest rates as a result of our borrowings under our term loanloans and revolving lines of credit. The interest rates for the term loans and the revolving lines of credit ranged from 0.95%0.45% to 2.15%3.00% at DecemberMarch 31, 20162021 and 0.90% to 1.96% at June 30, 2016, respectively.2020. Based on the outstanding principal indebtedness of $127.2$85.4 million under our credit facilities as of DecemberMarch 31, 2016,2021, we believe that a 10% change in interest rates would not have a significant impact on our results of operations.


Foreign Currency Risk


To date, our international customer and supplier agreements have been denominated primarily in U.S. dollars and accordingly, we have limited exposure to foreign currency exchange rate fluctuations from customer agreements, and do not currently engage in foreign currency hedging transactions. However, theThe functional currency of our operationssubsidiaries in the Netherlands and Taiwan is the U.S. dollar and our local accounts including financing arrangementsdollar. 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 (loss) gain (loss) for the three and sixnine months ended DecemberMarch 31, 20162021 was $0.6$2.0 million and $0.1$(1.6) million, respectively, and for the three and sixnine months ended DecemberMarch 31, 20152020 was $0.3 million and $(0.5) million, and $1.4 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 RuleRules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act. The evaluation considered the procedures designed to ensure that information required to be disclosed by us in the reports filed or submitted by us under theSecurities 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, including our Chief Executive Officer and Chief Financial Officer,of 1934, as appropriate to allow timely decisions regarding required disclosure.amended (the “Exchange Act”), as of March 31, 2021. Based on thatthis evaluation of our Chief Executive Officerdisclosure controls and procedures, our Chief Financial OfficerCEO and CFO have concluded that our disclosure controls and procedures were not effective at a reasonable assurance level as of DecemberMarch 31, 2016.2021 because of a material weakness 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 as of March 31, 2021 were not effective, and notwithstanding the material weakness 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”).

Remediation Plans & Status

As discussed in Part II, Item 9A, "Controls and Procedures," of our 2020 10-K, we have undertaken remedial procedures to address the IT General Control (ITGC) material weakness in our internal control over financial reporting. During the quarter ended March 31, 2021, management continued to re-design processes and controls related to IT privileged access for our primary accounting system and boundary systems. While some testing of the re-designed IT privileged access controls continued during the quarter ended March 31, 2021, assessing the effectiveness of internal control requires a period of repeatable execution. The re-designed control activities have not been in place for a sufficient period of time for management to determine operating effectiveness. Management's testing of ITGCs and the remediation of this material weakness will depend on management’s ability to ensure properly designed ITGC’s are operating effectively as of June 30, 2021.

Changes in Internal Control over Financial Reporting


ThereUnder applicable SEC rules (Exchange Act Rules 13a-15(d) and 15d-15(d)), management is required to evaluate, with the participation of our CEO and CFO, any changes in internal control over financial reporting that occurred during each fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Other than the remediation actions described above, 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 DecemberMarch 31, 20162021, that have materially affected, or are reasonably likely to materially affect, 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    The information required by this item is incorporated herein by reference to time, we have been involvedthe information set forth under the captions “Litigation and Claims” in variousNote 11 “Commitments and Contingencies” and in Note 13 “Subsequent Event” of our notes to condensed consolidated financial statements included in this quarterly report.

    Due to the inherent uncertainties of such legal proceedings, arising fromwe cannot predict the normal courseoutcome of business activities. We defend ourselves vigorously against any such claims. In management's opinion, the resolution of any pending mattersproceedings 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


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 followingImportant risk factors as well as the other information in this Form 10-Q. If any of the following risks actually occurs, our business, financial condition and results of operations would suffer. In this case, the trading price of our common stock would likely decline and you might lose all or part of your investment in our common stock. Additional risks that we currently do not know about or that we currently believe to be immaterial may also impair our business operations.

Risks Related to Our Business and Industry
Our quarterly operating results will likely fluctuate in the future, which could cause rapid declines in our stock price.
As 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 results in the future include:
Fluctuations based upon seasonality, with the quarters ending March 31 and September 30 typically being weaker;
Fluctuations in the timing and size of large customer orders as larger customers and larger orders become an increasing percentage of our net sales;
Variability of our margins based on our manufacturing capacity utilization, the mix of server systems, subsystems and accessories we sell and the percentage of our sales to internet data center cloud customers or certain geographical regions;
Fluctuations in availability and costs associated with key components and other materials needed to satisfy customer requirements;
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 of sales may increase, our margins may be lower and our sales may be less predictable.

As 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 rapidly in recent periods as we have sold more products including additional components such as more memory 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 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 commitments 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, 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 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-attacksand 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 informationperformance, or that of third parties, create system disruptionscould cause results or cause shutdowns. Computer programmers and hackers also may be ableevents to develop and deploy viruses, worms, and other malicious software programs that attack our products or otherwise exploit any security vulnerabilitiesdiffer from current expectations, are described in Part I, Item 1A “Risk Factors” 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,2020 10-K.


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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 number and scope of our relationships with suppliers, distributors and end customers. If we fail to manage these additional responsibilities and relationships successfully, we may incur significant costs, which may negatively impact our operating results. Additionally, in our efforts to be first to market with new products with innovative functionality and features, we may devote significant research and development resources to products and product features for which a market does not develop quickly, or at all. If we are not able to predict market trends accurately, we may not benefit from such research and development activities, and our results of operations may suffer.

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 could be adversely affected if tax authorities challenge our international tax structure or if the relative mix of our United States and international income changes for any reason, or if United 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 which could have an 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 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 impact on our ability to sell 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 of our efforts to protect our proprietary technology and our brand. Our patents and other intellectual property rights may be challenged by others or invalidated through administrative process or litigation, and we may initiate claims or litigation against third parties for infringement of our proprietary rights. Such administrative proceedings and litigation are inherently uncertain and divert resources that could be put towards other business priorities. We may not be able to obtain a favorable outcome and may spend considerable resources in our efforts to defend and protect our intellectual property.

Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain. Effective patent, trademark, copyright and trade secret protection may not be available to us in every country in which our products are available. The laws of some foreign countries may not be as protective of intellectual

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property rights as those in the United States, and mechanisms for enforcement of intellectual property rights may be inadequate.

Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property and using our technology for their competitive advantage. Any such infringement or misappropriation could have a material adverse effect on our business, results of operations and financial condition.

Resolution of claims that we have violated or may violate the intellectual property rights of others could require us to indemnify our customers, 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 could result in significant financial liability or prevent us from operating our business or portions of our business as we currently conduct it or as we may later conduct it. In addition, resolution of claims may require us to redesign our technology, to obtain licenses to use intellectual property belonging to third parties, which we may not be able to obtain on reasonable terms, to cease using the technology covered by those rights, and to indemnify our customers, 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 our products and technologies. Our employment arrangements with our executives and employees do not require them to provide services to us for any specific length of time, and they can terminate their employment with us at any time, with or without notice, without penalty. The loss of services of any of these executives or of one or more other key members of our team could seriously harm our business.

To execute our growth plan, we must attract additional highly qualified personnel, including additional engineers and executive staff. Competition for qualified personnel is intense, especially in Silicon Valley, where we are headquartered. We have experienced in the past and may continue to experience difficulty in hiring and retaining highly skilled employees with appropriate qualifications. In particular, we are currently working to add personnel in our finance, accounting and general administration departments, which have historically had limited budgets and staffing. If we are unable to attract and integrate additional key employees in a manner that enables us to scale our business and operations effectively, or if we do not maintain competitive compensation policies to retain our employees, our ability to operate effectively and efficiently could be limited.

Backlog does not provide a substantial portion of our net sales in any quarter.

Our net sales are difficult to forecast because we do not have sufficient backlog of unfilled orders to meet our quarterly net sales targets at the beginning of a quarter. Rather, a majority of our net sales in any quarter depend upon customer orders that we receive and fulfill in that quarter. Because our expense levels are based in part on our expectations as to future net sales and to a large extent are fixed in the short term, we might be unable to adjust spending in time to compensate for any shortfall in net sales. Accordingly, any significant shortfall of revenues in relation to our expectations would harm our operating results.

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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

Recent Sales of Unregistered Securities

None.

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.
During the three months ended DecemberMarch 31, 2016,2021, we did not repurchase anyrepurchased the following shares of our common stock. Asstock:

Period
Total Number
of Shares
Purchased(1)
Average Price Paid per Share(1)Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2)Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs(2)
Month 1 (January 1, 2021 to January 31, 2021)95,539 $31.54 95,539 $—
Month 2 (February 1, 2021 to February 28, 2021)411,982 $32.42 350,000 $188.7 million
Month 3 (March 1, 2021 to March 31, 2021)805,000 $36.48 805,000 $159.3 million
Total1,312,521 $34.84 1,250,539 
__________________________
(1)Includes shares withheld from delivery to satisfy tax withholding obligations of December 31, 2016,recipients that occur upon the approximate dollar valuevesting of shares that may yet be purchasedrestricted stock units granted under our equity incentive plans.
(2)On January 29, 2021, a duly authorized subcommittee of the Company's Board approved a share repurchase program was $81.5 million.to repurchase up to $200 million of our common stock at prevailing prices in the open market. The share repurchase program is effective until July 31, 2022 or until the maximum amount of common stock is repurchased, whichever occurs first.

Item 3.    Defaults uponUpon 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
31.110.1


10.2
31.1
31.2
32.1
32.2
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
104The cover page from this Quarterly Report on Form 10-Q, formatted in Inline XBRL.



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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:FebruaryMay 7, 20172021
/s/    CHARLES LIANG        
CHARLES LIANG
Charles Liang

President, Chief Executive Officer and Chairman of the

Board

(Principal Executive Officer)



Date:FebruaryMay 7, 20172021
/s/ Howard Hideshima
DAVID WEIGAND
Howard Hideshima
David Weigand
Senior Vice President, Chief Financial Officer

(Principal Financial and Accounting Officer)



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