UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q



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

For the quarterly period ended ~~December 31, 2016~~September 30, 2023



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

For the transition period from to

Commission File Number 001-33383

Super Micro Computer, Inc.

(Exact name of registrant as specified in its charter)



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

980 Rock Avenue

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

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

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

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

Large accelerated filer

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

~~Large accelerated filer~~ x

Emerging growth company

~~Accelerated filer~~ ¨

~~Non-accelerated filer~~ ¨ ~~(Do not check if a smaller reporting company)~~

~~Smaller reporting company~~ ¨

☐

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

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

As of ~~January 30, 2017~~October 31, 2023 there ~~were 48,295,896~~were 53,313,542 shares of the registrant’s common stock, $0.001 par value, outstanding, which is the only class of common stock of the registrant issued.

SUPER MICRO COMPUTER, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE ~~SIX~~THREE MONTHS ENDED ~~DECEMBER 31, 2016~~SEPTEMBER 30, 2023

TABLE OF CONTENTS



		Page
PART I	FINANCIAL INFORMATION
ITEM 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets as of ~~December 31, 2016~~September 30 , 2023 and June 30, ~~2016~~202 3	1
	Condensed Consolidated Statements of Operations for the Three ~~and Six~~ Months Ended ~~December 31, 2016~~September 30 , 2023 and ~~2015~~2022	2
	Condensed Consolidated Statements of Comprehensive Income for the Three ~~and Six~~ Months Ended ~~December 31, 2016~~September 30 , 2023 and ~~2015~~2022	3
	Condensed Consolidated Statements of Stockholders' Equity for the Three Months Ended September 30 , 2023 and 2022	4
	Condensed Consolidated Statements of Cash Flows for the ~~Six~~ Three Months Ended ~~December 31, 2016~~September 30 , 2023 and ~~2015~~2022	45
	Notes to Condensed Consolidated Financial Statements	57
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1927
ITEM 3.	Quantitative and Qualitative Disclosures ~~about~~About Market Risk	3235
ITEM 4.	Controls and Procedures	3236

PART II	OTHER INFORMATION
ITEM 1.	Legal Proceedings	3337
ITEM 1A.	Risk Factors	3337
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4637
ITEM 3.	Defaults ~~upon~~Upon Senior Securities	4637
ITEM 4.	Mine Safety Disclosures	4637
ITEM 5.	Other Information	4637
ITEM 6.	Exhibits	4639
	Signatures	4740

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.

The information contained on our website, or available by hyperlink from our website, is not incorporated into this Quarterly Report on Form 10-Q or other documents we file with, or furnish to, the SEC. We intend to use our website as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Such disclosures will be included in the "Investor Relations" section of our website. Accordingly, investors should monitor that section of our website, in addition to following our press releases, investor presentations, SEC filings and public conference calls and webcasts.

Table of Contents

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

SUPER MICRO COMPUTER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except ~~share and~~par value per share amounts)

(unaudited)


	September 30,		June 30,
	2023		2023
ASSETS
Current assets:
Cash and cash equivalents	$	543,156	$	440,459
Accounts receivable, net of allowance for credit losses of $79 and $82 at September 30, 2023 and June 30, 2023, respectively (including accounts receivable from related parties of $1,335 and $5,473 at September 30, 2023 and June 30, 2023, respectively)	845,729		1,148,259
Inventories	2,052,805		1,445,564

Prepaid expenses and other current assets (including receivables from related parties of $24,905 and $27,732 at September 30, 2023 and June 30, 2023, respectively)	129,144		145,144
Total current assets	3,570,834		3,179,426


Property, plant and equipment, net	291,669		290,240
Deferred income taxes, net	185,675		162,654
Other assets	47,786		42,409
Total assets	$	4,095,964	$	3,674,729
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable (including amounts due to related parties of $92,115 and $89,134 at September 30, 2023 and June 30, 2023, respectively)	$	1,084,058	$	776,831
Accrued liabilities (including amounts due to related parties of $16,504 and $14,017 at September 30, 2023 and June 30, 2023, respectively)	152,500		163,865
Income taxes payable	161,395		129,166
Short-term debt	40,843		170,123
Deferred revenue	166,025		134,667
Total current liabilities	1,604,821		1,374,652
Deferred revenue, non-current	174,478		169,781
Long-term debt	105,389		120,179
Other long-term liabilities	45,737		37,947
Total liabilities	1,930,425		1,702,559
Commitments and contingencies (Note 11)
Stockholders’ equity:
Common stock and additional paid-in capital, $0.001 par value
Authorized shares: 100,000; Issued and outstanding shares: 53,295 and 52,901 at September 30, 2023 and June 30, 2023, respectively	574,718		538,352


Accumulated other comprehensive income	651		639
Retained earnings	1,590,009		1,433,014
Total Super Micro Computer, Inc. stockholders’ equity	2,165,378		1,972,005
Noncontrolling interest	161		165
Total stockholders’ equity	2,165,539		1,972,170
Total liabilities and stockholders’ equity	$	4,095,964	$	3,674,729

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
Inventory 599,269
448,980
Prepaid income taxes 5,164
5,682
Prepaid expenses and other current assets 13,738
13,435
Total current assets 1,113,808
938,002
Long-term investments 2,643
2,643
Property, plant and equipment, net 193,670
187,949
Deferred income taxes-noncurrent 32,255
28,460
Other assets 7,480
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 liabilities 74,331
55,618
Income taxes payable 1,048
5,172
Short-term debt and current portion of long-term debt, net of debt issuance costs 92,443
53,589
Total current liabilities 509,762
363,618
Long-term debt, net of current portion and debt issuance costs 34,732
40,000
Other long-term liabilities 53,001
40,603
Total liabilities 597,495
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, respectively 291,275
277,339
Treasury stock (at cost), 1,333,125 and 445,028 shares at December 31, 2016 and June 30, 2016, respectively (20,491 ) (2,030 )
Accumulated other comprehensive loss (83 ) (85 )
Retained earnings 481,499
445,971
Total Super Micro Computer, Inc. stockholders’ equity 752,200
721,195
Noncontrolling interest 161
184
Total stockholders’ equity 752,361
721,379
Total liabilities and stockholders’ equity $ 1,349,856
$ 1,165,600

See accompanying notes to condensed consolidated financial statements.

SMCI | Q1 2024 Form 10-Q | 1

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SUPER MICRO COMPUTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)


	Three Months Ended September 30,
	2023		2022
Net sales (including related party sales of $17,396 and $25,055 in the three months ended September 30, 2023 and 2022, respectively)	$	2,119,672	$	1,852,130
Cost of sales (including related party purchases of $113,107 and $96,536 in the three months ended September 30, 2023 and 2022, respectively)	1,765,981		1,504,595
Gross profit	353,691		347,535
Operating expenses:
Research and development	111,027		74,243
Sales and marketing	37,230		29,363
General and administrative	32,924		23,806
Total operating expenses	181,181		127,412
Income from operations	172,510		220,123
Other income, net	6,613		8,054
Interest expense	(1,863)		(3,938)
Income before income tax provision	177,260		224,239
Income tax provision	(20,215)		(38,934)
Share of loss from equity investee, net of taxes	(50)		(889)
Net income	$	156,995	$	184,416
Net income per common share:
Basic	$	2.96	$	3.51
Diluted	$	2.75	$	3.35
Weighted-average shares used in the calculation of net income per common share:
Basic	53,093		52,598
Diluted	57,185		55,017

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 profit 93,378
106,362
173,442
178,577
Operating expenses:
Research and development 34,033
30,264
67,224
58,590
Sales and marketing 18,153
16,461
34,069
30,710
General and administrative 9,429
10,511
20,184
18,711
Total operating expenses 61,615
57,236
121,477
108,011
Income from operations 31,763
49,126
51,965
70,566
Interest and other income, net 45
24
74
111
Interest expense (497 ) (400 ) (827 ) (724 )
Income before income tax provision 31,311
48,750
51,212
69,953
Income tax provision 9,315
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:
Basic 48,124
47,651
48,144
47,584
Diluted 51,521
51,489
51,352
51,405

See accompanying notes to condensed consolidated financial statements.

SMCI | Q1 2024 Form 10-Q | 2

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SUPER MICRO COMPUTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)


	Three Months Ended September 30,
	2023		2022
Net income	$	156,995	$	184,416
Other comprehensive income (loss), net of tax:

Foreign currency translation gain (loss)	12		(397)
Total other comprehensive income (loss), net of tax	12		(397)
Total comprehensive income	$	157,007	$	184,019

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.

SMCI | Q1 2024 Form 10-Q | 3

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SUPER MICRO COMPUTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share amounts)

(unaudited)


Three Months Ended September 30, 2023	Common Stock and Additional Paid-In Capital			Accumulated Other Comprehensive Income	Retained Earnings		Non-controlling Interest		Total Stockholders’ Equity
	Shares	Amount
Balance at June 30, 2023	52,901,358	$	538,352		$	639	$	1,433,014	$	165	$	1,972,170
Exercise of stock options, net of taxes	188,957	4,288			—		—		—		4,288
Release of common stock shares upon vesting of restricted stock units	297,656	—			—		—		—		—
Shares withheld for the withholding tax on vesting of restricted stock units	(92,973)	(25,301)			—		—		—		(25,301)

Stock-based compensation	—	57,379			—		—		—		57,379



Other comprehensive income	—	—			12		—		—		12
Net income	—	—			—		156,995		(4)		156,991
Balance at September 30, 2023	53,294,998	$	574,718		$	651	$	1,590,009	$	161	$	2,165,539


Three Months Ended September 30, 2022	Common Stock and Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)	Retained Earnings		Non-controlling Interest		Total Stockholders’ Equity
	Shares	Amount
Balance at June 30, 2022	52,311,014	$	481,741		$	911	$	942,923	$	172	$	1,425,747
Exercise of stock options, net of taxes	405,226	8,144			—		—		—		8,144
Release of common stock shares upon vesting of restricted stock units	193,532	—			—		—		—		—
Shares withheld for the withholding tax on vesting of restricted stock units	(58,303)	(3,716)			—		—		—		(3,716)

Stock-based compensation	—	11,014			—		—		—		11,014



Other comprehensive loss	—	—			(397)		—		—		(397)
Net income (loss)	—	—			—		184,416		(5)		184,411
Balance at September 30, 2022	52,851,469	$	497,183		$	514	$	1,127,339	$	167	$	1,625,203

See accompanying notes to condensed consolidated financial statements.

SMCI | Q1 2024 Form 10-Q | 4

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SUPER MICRO COMPUTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Three Months Ended September 30,
	2023		2022
OPERATING ACTIVITIES:
Net income	$	156,995	$	184,416
Reconciliation of net income to net cash provided by operating activities:
Depreciation and amortization	9,155		8,547
Stock-based compensation expense	57,379		11,014





Share of loss from equity investee	50		889
Foreign currency exchange gain	(6,192)		(9,203)
Deferred income taxes, net	(23,021)		(19,226)
Other	2,657		(306)
Changes in operating assets and liabilities:
Accounts receivable, net (including changes in related party balances of $4,138 and $(1,851) during the three months ended September 30, 2023 and 2022, respectively)	302,501		95,088
Inventories	(607,241)		(190,449)
Prepaid expenses and other assets (including changes in related party balances of $2,827 and $(10,139) during the three months ended September 30, 2023 and 2022, respectively)	19,990		(11,991)
Accounts payable (including changes in related party balances of $2,981 and $6,674 during the three months ended September 30, 2023 and 2022, respectively)	302,973		132,302
Income taxes payable	32,229		26,668
Accrued liabilities (including changes in related party balances of $2,487 and $9,585 during the three months ended September 30, 2023 and 2022, respectively)	(13,019)		8
Deferred revenue	36,055		85,989
Other long-term liabilities (including changes in related party balances of $(80) and $(105) during the three months ended September 30, 2023 and 2022, respectively)	(46)		(159)
Net cash provided by operating activities	270,465		313,587
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (including payments to related parties of $826 and $729 during the three months ended September 30, 2023 and 2022, respectively)	(2,631)		(10,746)



Investment in marketable securities	(5,000)		—
Net cash used in investing activities	(7,631)		(10,746)
FINANCING ACTIVITIES:
Proceeds from borrowings	—		79,141
Repayment of debt	(138,938)		(414,737)


Proceeds from exercise of stock options, net of taxes	4,288		8,144
Payment of withholding tax on vesting of restricted stock units	(25,301)		(3,716)

Other	10		(15)
Net cash used in financing activities	(159,941)		(331,183)
Effect of exchange rate fluctuations on cash	(203)		(1,472)
Net increase (decrease) in cash, cash equivalents and restricted cash	102,690		(29,813)
Cash, cash equivalents and restricted cash at the beginning of the period	440,960		268,559
Cash, cash equivalents and restricted cash at the end of the period	$	543,650	$	238,746

Supplemental disclosure of cash flow information:
Cash paid for interest	$	2,214	$	4,076
Cash paid for taxes, net of refunds	$	8,999	$	27,274

SMCI | Q1 2024 Form 10-Q | 5

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

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


Non-cash investing and financing activities:
Unpaid property, plant and equipment purchases (including due to related parties of $3,672 and $3,782 as of September 30, 2023 and 2022, respectively)	$	8,032	$	6,599
Right of use ("ROU") assets obtained in exchange for operating lease commitments	$	9,177	$	750

See accompanying notes to condensed consolidated financial statements.

SMCI | Q1 2024 Form 10-Q | 6

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Summary of Significant Accounting Policies

~~Organization~~Significant Accounting Policies and Estimates

No material changes have been made to the significant accounting policies of Super Micro Computer, Inc. ~~(“Super Micro Computer”) was~~, a corporation incorporated under the laws of Delaware, and its consolidated entities (together, the “Company”), disclosed in ~~1993. Super Micro Computer is a global leader~~Part II, Item 8, Note 1, "Organization and Summary of Significant Accounting Policies," in ~~server technology~~its Annual Report on Form 10-K, filed on August 28, 2023, for the year ended June 30, 2023. Management's estimates take into consideration, as applicable, general macroeconomic conditions, inflation, changes in interest rates 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.geopolitical events.

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 six~~ months ended ~~December 31, 2016~~September 30, 2023 are not necessarily indicative of the results that may be expected for future quarters or for the fiscal year ending June 30, ~~2017.~~2024.

The Company consolidates its investment in Super Micro Asia Science 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 componentCertain prior year amounts within cash from ~~the Company's equity in the equity section of the condensed consolidated balance sheets. Net income attributable to the noncontrolling interest is not presented separately~~operating activities in the condensed consolidated statements of ~~operations and is included~~cash flows have been reclassified to conform to current year presentation. These changes in presentation do not affect previously reported results.

Concentration of Supplier Risk

Certain materials used by the Company in the ~~general~~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. Two suppliers accounted for 55.1% and ~~administrative expenses as~~10.3% of total purchases for the ~~amount is not material~~three months ended September 30, 2023, and the same two suppliers accounted for ~~any~~25.7% and 16.1% of total purchases for the three months ended September 30, 2022. The increase in concentration of total purchases to one of the ~~fiscal periods presented.~~Company's suppliers to 55.1% of total purchases for the three months ended September 30, 2023 is as a result of the purchase of GPUs to build its solutions for the Company's customers. Purchases from Ablecom, and Compuware, related parties of the Company (see Part I, Item 1, Note 8, "Related Party Transactions") accounted for a combined 6.4% of total cost of sales for both the three months ended September 30, 2023 and 2022.

~~Fair Value~~Concentration of Credit and Customer Risk

Financial ~~Instruments~~

~~The~~instruments which potentially subject the Company ~~accounts for certain assets~~to concentration of credit risk consist primarily of cash and ~~liabilities at fair value. Accounts receivable~~cash equivalents, restricted cash and accounts ~~payable are carried at cost, which approximates fair value due~~receivable.

Three customers accounted for 15.7%, 14.5% and 10.3% of accounts receivable, net as of September 30, 2023. Two customers accounted for 22.9% and 19.3% of accounts receivable, net as of June 30, 2023. These accounts receivable represent a concentration of credit risk to the ~~short maturity~~Company.

One customer accounted for 25.0% 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~~net sales for ~~loans with similar terms. The hierarchy below lists~~the three ~~levels~~months ended September 30, 2023. One customer accounted for 21.9% of ~~fair value based on~~ the ~~extent to which inputs used in measuring fair value are observable in~~net sales for 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:~~months ended September 30, 2022.

~~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.~~

SMCI | Q1 2024 Form 10-Q | 7

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Note 2. Revenue

~~Net Income Per Common Share~~Disaggregation of Revenue

The ~~Company's basic net income per share is computed~~Company disaggregates revenue by ~~dividing net income~~type of product and by the ~~weighted-average number~~geographical market. Service revenues, which are less than 10%, are not a significant component of ~~shares~~total revenue, and are aggregated within the respective categories.

The following is a summary of ~~common stock outstanding during~~net sales by product type (in thousands):


	Three Months Ended September 30,
	2023		2022
Server and storage systems	$	1,966,608	$	1,713,056
Subsystems and accessories	153,064		139,074
Total	$	2,119,672	$	1,852,130

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 ~~period. Diluted~~country and geographic region to which the products were shipped. The following is a summary for the three months ended September 30, 2023 and 2022, of net ~~income per share is computed~~sales by ~~dividing net income by~~geographic region (in thousands):


	Three Months Ended September 30,
	2023		2022
United States	$	1,619,514	$	1,295,504
Asia	225,468		270,024
Europe	190,848		235,074
Other	83,842		51,528
Total	$	2,119,672	$	1,852,130

Contract Balances

Generally, 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 the treasury stock method, an increase in the fair market valuepayment terms of the Company’s ~~common stock results~~offerings range from 30 to 60 days. In certain instances, customers may prepay for products and services in ~~a greater dilutive effect from outstanding stock options and RSUs. Additionally,~~advance of delivery. Receivables relate to the ~~exercise of employee stock options and the vesting of restricted stock units results~~Company’s unconditional right to consideration for performance obligations either partially or fully completed.

Contract assets are rights to consideration in ~~a further dilutive effect on net income per share.~~

~~Recently Issued Accounting Pronouncements~~

~~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 promisedexchange for goods or services that the Company has transferred to ~~customers in an amount that reflects~~a customer when such right is conditional on something other than the ~~consideration to which the entity expects to be entitled in exchange for those goods or services. Further, in March 2016, the FASB issued an amendment~~passage of time. Such contract assets are insignificant to the ~~accounting guidance,~~ ~~Revenue~~Company’s condensed consolidated financial statements.

Contract liabilities consist of deferred revenue and relate to amounts invoiced to or advance consideration received from ~~Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net)~~,customers, which ~~clarifies~~precede the ~~implementation guidance~~Company’s satisfaction of the associated performance obligations. The Company’s deferred revenue primarily results from customer payments received upfront for ~~principal versus agent considerations. In April 2016, the FASB issued an amendment~~extended warranties and on-site services because these performance obligations are satisfied over time. Additionally, at times, deferred revenue may fluctuate due to the ~~accounting guidance,~~ ~~Revenue~~timing of advance consideration received 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~~non-cancellable non-refundable contract liabilities relating to the ~~accounting guidance,~~ sale of future products. Revenue ~~from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients~~,recognized during the three months ended September 30, 2023, which ~~clarifies~~was included in 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 as a cumulative-effect adjustmentopening deferred revenue balance as of ~~the date~~June 30, 2023, of adoption. Early adoption is permitted for annual periods beginning after December 15, 2016. The new standard is effective for the Company on July 1, 2018. The Company is currently evaluating the effect the guidance will have on its financial statement disclosures, results of operations and financial position. The Company has not yet selected a transition method nor has it determined the effect of the guidance on its ongoing financial reporting.$304.4 million, was $43.7 million.

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

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

~~In February 2016, the FASB issued an amendment to 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, results of operations and financial position.

SMCI | Q1 2024 Form 10-Q | 8

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

~~In March 2016,~~Deferred revenue increased $36.1 million as of September 30, 2023 as compared to the ~~FASB issued new accounting guidance,~~ ~~Compensation—Stock Compensation: Improvements~~fiscal year ended June 30, 2023. This increase was mainly due to ~~Employee Share-Based Payment Accounting~~ ona $21.1 million increase in non-cancellable non-refundable advance consideration or cash consideration received from customers which preceded the ~~accounting for certain aspects~~Company's satisfaction of ~~share-based payment~~the associated performance obligations relating to ~~employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements as well as classification~~product sales expected to be fulfilled in the statement of cash flows. This guidance is effective for the Company on July 1, 2017. The Company is currently evaluating the effect the guidance will have on its financial statement disclosures, results of operations and financial position.next 12 months.

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

Remaining performance obligations represent in aggregate the amount of ~~Cash Flows: Classification of Certain Cash Receipts and Cash Payments.~~ ~~This amendment consists of eight provisions~~transaction price that ~~provide guidance on the classification of certain cash receipts and cash payments. If practicable, this amendment should be applied using a retrospective transition method~~has been allocated to ~~each period presented. For the provisions that are impracticable to apply retrospectively, those provisions may be applied prospectively~~performance obligations not delivered, or only partially delivered, as of the ~~earliest date practicable. This amendment is effective~~end of the reporting period. The Company applies the exemption to not disclose information about remaining performance obligations that are part of a contract that has an original expected duration of one year or less. These performance obligations generally consist of services, such as on-site services, including integration services and extended warranty services that are contracted for one year or less, and products for which control has not yet been transferred. The value of the transaction price allocated to remaining performance obligations as of September 30, 2023 was approximately $340.5 million. The Company expects to recognize approximately 49% 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 paid to Company employees. Contract acquisition costs are considered incremental and recoverable costs of obtaining and fulfilling a contract with a customer and are therefore capitalizable. The Company applies the practical expedient to expense incentive bonus costs as incurred if the amortization period would be one year or less, generally upon delivery of the associated server and storage systems or components. Where the amortization period of the contract cost would be more than a year, the Company applies judgment in the allocation of the incentive bonus cost asset between hardware and service performance obligations and expenses the cost allocated to the hardware performance obligations upon delivery of associated server and storage systems or components and amortizes the cost allocated to service performance obligations over the period the services are expected to be provided. 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.

SMCI | Q1 2024 Form 10-Q | 9

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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 months ended September 30, 2023 and 2022 (in thousands, except per share amounts):


	Three Months Ended September 30,
	2023		2022
Numerator:
Net income	$	156,995	$	184,416

Denominator:
Weighted-average shares outstanding	53,093		52,598
Effect of dilutive securities	4,092		2,419
Weighted-average diluted shares	57,185		55,017

Basic net income per common share	$	2.96	$	3.51
Diluted net income per common share	$	2.75	$	3.35

For the three months ended September 30, 2023 and 2022, the Company ~~on July 1, 2019. Early adoption is permitted.~~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 ~~Company is currently evaluating the effect the guidance will have on its financial statement disclosures, results of operations~~anti-dilutive common share equivalents resulting from outstanding equity awards were 337,730 and ~~financial position.~~

~~In October 2016, the FASB issued an amendment to the accounting guidance,~~ ~~Intra-Entity Transfers of Assets Other Than Inventory~~. This amendment simplifies the accounting for income tax consequences of intra-entity transfers of assets other than inventory by requiring recognition of current and deferred income tax consequences when such transfers occur. This amendment is effective307,395 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 disclosure, results of operations~~three months ended September 30, 2023 and ~~financial position.~~2022, respectively.

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

~~Note 2. 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

~~Table of Contents~~

~~SUPER MICRO COMPUTER, INC.~~

~~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 rate 1.29% - 1.34%
1.42 % 1.12% - 1.34%
1.42% - 1.57%
Expected term 5.32 years
5.31 years
5.32 - 5.38 years
5.31 - 5.33 years
Dividend yield — % — % — % — %
Volatility 49.20% - 49.43%
49.46 % 49.20% - 49.64%
47.06% - 49.46%
Weighted-average fair value $ 9.95
$ 11.50
$ 9.52
$ 11.54

The following table shows total stock-based compensation expense included in the condensed consolidated statements of operations for the three and six 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 development 3,012
2,472
5,920
4,874
Sales and marketing 520
435
998
839
General and administrative 852
841
1,661
1,671
Stock-based compensation expense before taxes 4,709
4,006
9,213
7,882
Income tax impact (1,435 ) (1,814 ) (2,721 ) (2,099 )
Stock-based compensation expense, net $ 3,274
$ 2,192
$ 6,492
$ 5,783

The cash flows resulting from the tax benefits for tax deductions resulting from the exercise of stock options and vesting of RSUs in excess of the compensation expense recorded for those share-based awards (excess tax benefits) issued or

~~Table of Contents~~

~~SUPER MICRO COMPUTER, INC.~~

~~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, 2016 926,983
$ 30.23

Granted 434,410
$ 21.36

Released (187,645 ) $ 27.74

Forfeited (57,795 ) $ 27.22

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

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

~~Table of Contents~~

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

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

For the three and six 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:~~Cash, Cash Equivalents and Restricted Cash:


	September 30, 2023		June 30, 2023
Cash and cash equivalents	$	543,156	$	440,459

Restricted cash included in other assets	494		501
Total cash, cash equivalents and restricted cash	$	543,650	$	440,960

Inventories:


	September 30, 2023		June 30, 2023
Finished goods	$	1,364,995	$	1,045,177
Work in process	333,689		71,874
Purchased parts and raw materials	354,121		328,513
Total inventories	$	2,052,805	$	1,445,564

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

SMCI | Q1 2024 Form 10-Q | 10

Table of Contents

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The Company recorded a provision for lower of cost or market and excess and obsolete inventory totaling $2,498,000 and $6,391,000 in the three and six months ended December 31, 2016, respectively, and $2,062,000 and $3,780,000 in the three and six months ended December 31, 2015, respectively.

Property, Plant, and Equipment:


	September 30, 2023		June 30, 2023
Buildings	$	143,496	$	143,496
Machinery and equipment	133,600		130,151
Land	87,217		86,642
Building and leasehold improvements	59,984		59,634
Furniture and fixtures	38,345		36,303
Software	23,680		23,098
Building construction in progress	303		303
	486,625		479,627
Accumulated depreciation and amortization	(194,956)		(189,387)
Property, plant and equipment, net	$	291,669	$	290,240

December 31,
2016 June 30,
2016
Land $ 70,484
$ 70,454
Buildings 71,665
71,665
Building and leasehold improvements 14,484
10,941
Buildings construction in progress (1) 19,431
15,803
Machinery and equipment 56,431
53,282
Furniture and fixtures 12,917
10,364
Purchased software 14,152
13,920
Purchased software construction in progress 444
532
260,008
246,961
Accumulated depreciation and amortization (66,338 ) (59,012 )
Property, plant and equipment, net $ 193,670
$ 187,949

(1) In connection with the purchase of property 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.

~~Other Assets:~~

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

Accrued Liabilities:


	December 31, 2016		June 30, 2016			September 30, 2023		June 30, 2023
Accrued payroll and related expenses	$	23,862	$	16,015	Accrued payroll and related expenses	$	38,658	$	53,439
Contract manufacturers liabilities					Contract manufacturers liabilities	23,741		23,634
Customer deposits	8,521		6,265		Customer deposits	19,722		16,577
Accrued cooperative marketing expenses					Accrued cooperative marketing expenses	10,764		9,744
Accrued warranty costs	5,677		5,816		Accrued warranty costs	9,107		9,079
Accrued cooperative marketing expenses	7,594		7,300
Deferred revenue (1)	20,205		13,418
Others	8,472		6,804

Operating lease liability					Operating lease liability	8,473		7,292
Accrued professional fees					Accrued professional fees	813		2,363

Other					Other	41,222		41,737
Total accrued liabilities	$	74,331	$	55,618	Total accrued liabilities	$	152,500	$	163,865

~~(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.~~

~~Table of Contents~~

~~SUPER MICRO COMPUTER, INC.~~

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

~~(Unaudited)~~

~~Other Long-term Liabilities:~~

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

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

Product Warranties:


	Three Months Ended September 30,
	2023		2022
Balance, beginning of the period	$	14,859	$	12,136
Provision for warranty	12,529		8,617
Costs utilized	(11,804)		(8,473)
Change in estimated liability for pre-existing warranties	45		423
Balance, end of the period	15,629		12,703
Current portion	9,107		8,540
Non-current portion	$	6,522	$	4,163

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

Note 5. Fair Value Disclosure

The financial ~~assets~~instruments of the Company measured at fair value on a recurring basis are included in cash equivalents, other assets and ~~long-term investments.~~accrued liabilities. The ~~Company’s money market funds are classified~~Company classifies its financial instruments, except for its investment in an auction rate security, within Level 1 ofor Level 2 in the fair value hierarchy ~~which is based on~~because the Company uses quoted ~~market~~ prices ~~for the identical underlying securities~~ in active ~~markets.~~ markets or alternative pricing sources and models using market observable inputs to determine their fair value.

SMCI | Q1 2024 Form 10-Q | 11

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The Company’s ~~long-term~~investment in an auction rate ~~securities investments are~~security is classified within Level 3 of the fair value hierarchy ~~which did~~as the determination of its fair value was not ~~have~~based on observable inputs as of ~~December 31, 2016~~September 30, 2023 and June 30, ~~2016. Refer to Note 1 for a discussion of the Company’s policies regarding the fair value hierarchy.~~2023. The Company ~~has used a~~is using the discounted cash flow ~~model~~method to estimate the fair value of the auction rate ~~securities as of December 31, 2016~~security at each period end and ~~June 30, 2016. The material factors used in preparing~~ the ~~discounted cash flow model are~~following assumptions: (i) the ~~discount~~expected yield based on observable market rate ~~utilized to present value the cash flows,~~of similar securities, (ii) the ~~time period until redemption and~~security coupon rate that is reset monthly, (iii) the estimated ~~rate~~holding period and (iv) a liquidity discount. The liquidity discount assumption is based on the management estimate of ~~return.~~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.

Financial Assets and Liabilities Measured on a Recurring Basis

The following table sets forth the Company’s ~~cash equivalents and long-term investments~~financial instruments as of ~~December 31, 2016~~September 30, 2023 and June 30, ~~2016~~2023, 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):


September 30, 2023	Level 1		Level 2		Level 3		Asset at Fair Value
Assets
Money market funds (1)	$	21,075	$	—	$	—	$	21,075
Certificates of deposit (2)	—		126,951		—		126,951
Investment in marketable securities	3,866		—		—		3,866
Auction rate security	—		—		1,843		1,843
Total assets measured at fair value	$	24,941	$	126,951	$	1,843	$	153,735


June 30, 2023	Level 1		Level 2		Level 3		Asset at Fair Value
Assets
Money market funds (1)	$	20,823	$	—	$	—	$	20,823
Certificates of deposit (2)	—		462		—		462
Auction rate security	—		—		1,843		1,843
Total assets measured at fair value	$	20,823	$	462	$	1,843	$	23,128

(1) $20.9 million and $20.6 million in money market funds are included cash and cash equivalents and $0.2 million and $0.2 million in money market funds are included in restricted cash, non-current in other assets in the condensed consolidated balance sheets as of September 30, 2023 and June 30, 2023, respectively.

(2) $126.7 million and $0.2 million in certificates of deposit are included in cash and cash equivalents, $0.1 million and $0.1 million in certificates of deposit are included in prepaid expenses and other assets, and $0.2 million and $0.2 million in certificates of deposit are included in restricted cash, non-current in other assets in the condensed consolidated balance sheets as of September 30, 2023 and June 30, 2023, respectively.

The carrying amounts reported in the condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, other assets, accounts payable and accrued liabilities approximate their fair values. The investment in marketable securities is carried at fair value using values available on a public exchange and is based on a Level 1 input. The investment is accounted for as an equity security, with unrealized gains and losses included in earnings. Unrealized loss of $1.1 million has been recorded in Other income, net in the condensed consolidated statement of operations for the three months ended September 30, 2023.

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 months ended September 30, 2023, the credit losses related to the Company’s investments were not material.

SMCI | Q1 2024 Form 10-Q | 12

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

There was immaterial movement in the balances of the Company's financial assets measured at fair value on a recurring basis, consisting of investment in an auction rate security, using significant unobservable inputs (Level 3) for the three months ended September 30, 2023 and 2022.

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

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

~~The above table excludes $128,206,000 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 ~~securities~~financial instruments in the three ~~and six~~ months ended ~~December 31, 2016~~September 30, 2023 and ~~2015.~~2022.

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 investments~~investment in an auction rate security as of ~~December 31, 2016~~September 30, 2023 and June 30, ~~2016~~2023 (in thousands):


	Cost Basis		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses		Fair Value
Auction rate security	$	1,750	$	287	$	(194)	$	1,843

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
No gain or loss was recognized in other comprehensive income for the auction rate security for the three months ended September 30, 2023 and 2022.

The Company measures the fair value of outstanding debt for disclosure purposes on a recurring basis. As of ~~December 31, 2016~~September 30, 2023 and June 30, ~~2016, short-term and long-term~~2023, total debt of ~~$127,175,000~~$146.2 million and ~~$93,589,000,~~$290.3 million, respectively, ~~are~~was reported at amortized cost. This outstanding debt iswas classified as Level 2 as it iswas not actively ~~traded and is valued using a discounted cash flow model that uses observable market inputs. Based on the discounted cash flow model, the fair value~~traded. The amortized cost of the outstanding debt approximates ~~amortized cost.~~the fair value.

Other Financial Assets - Investments into Non-Marketable Equity Securities

The Company's non-marketable equity securities are investments in privately held companies without readily determinable fair values in the amount of $0.1 million and $1.7 million as of September 30, 2023 and June 30, 2023, respectively. The Company accounts for these investments at cost less impairment, if any, plus or minus changes from observable price changes in orderly transactions for the identical or similar investments by the same issuer. During the three months ended September 30, 2023, the Company performed a qualitative assessment and identified impairment indicators. The Company recorded a $1.6 million impairment during the three months ended September 30, 2023 in Other income, net on the condensed consolidated statement of operations. The Company did not have any impairment to the carrying values of the non-marketable equity securities during the three months ended September 30, 2022.

SMCI | Q1 2024 Form 10-Q | 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-term debt obligations as of ~~December 31, 2016~~September 30, 2023 and June 30, ~~2016~~2023 consisted of the following (in thousands):


	September 30,		June 30,
	2023		2023
Line of credit:
2018 Bank of America Credit Facility	$	—	$	—
2022 Bank of America Credit Facility	—		—
Cathay Bank Line of Credit	—		131,583
2021 CTBC Credit Lines	—		—

HSBC Bank Credit Facility	—		—

Mega Bank Credit Facility	—		—
Total line of credit	—		131,583
Term loan facilities:
Chang Hwa Bank Credit Facility due October 15, 2026	23,892		26,853
CTBC Term Loan Facility, due June 4, 2030	35,424		38,208
2021 CTBC Credit Lines, due August 15, 2026	4,183		4,721
2021 E.SUN Bank Credit Facility, due September 15, 2026	29,756		33,513
2022 ESUN Bank Credit Facility, due August 15, 2027	15,782		16,756
Mega Bank Credit Facility, due September 15, 2026	37,195		38,668
Total term loans	146,232		158,719
Total debt	146,232		290,302
Short-term debt and current portion of long-term debt	40,843		170,123
Debt, non-current	$	105,389	$	120,179

SMCI | Q1 2024 Form 10-Q | 14

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

Table of Contents

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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 with 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 principalAvailable borrowings and interest ~~were payable monthly through~~rates as of 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~~2023 and June 30, ~~2016.~~2023 consisted of the following (in thousands except for percentages):


	September 30, 2023			June 30, 2023
	Available borrowings		Interest rate	Available borrowings		Interest rate
Line of credit:
2018 Bank of America Credit Facility	$	350,000	6.80%	$	350,000	6.57%
2022 Bank of America Credit Facility	$	20,000	3.36%	$	20,000	3.36%
Cathay Bank Line of Credit	$	132,000	7.50%	$	417	7.08%
2022 CTBC Credit Lines	$	—	—	$	105,000	3.33%
2023 CTBC Credit Line	$	105,000	3.33%	$	—	—
Chang Hwa Bank Credit Facility	$	20,000	6.51%	$	20,000	6.58%
HSBC Bank Credit Facility	$	50,000	4.50%	$	50,000	4.50%

2022 E.SUN Bank Credit Facility	$	30,000	4.18%	$	30,000	4.18%
Mega Bank Credit Facility	$	20,000	2.55%	$	20,000	2.55%

Term loan facilities:
Chang Hwa Bank Credit Facility due October 15, 2026	$	—	1.55%	$	—	1.55%
CTBC Term Loan Facility, due June 4, 2030	$	—	1.20%	$	—	1.20%
2021 CTBC Credit Lines, due August 15, 2026	$	—	1.40%	$	—	1.40%
2021 E.SUN Bank Credit Facility, due September 15, 2026	$	—	1.75%	$	7,734	1.75%
2022 ESUN Bank Credit Facility, due August 15, 2027	$	—	1.75%	$	—	1.75%
Mega Bank Credit Facility, due September 15, 2026	$	—	1.40% - 1.60%	$	—	1.40% - 1.60%

See “Part II. Item 8. Financial Statements and Supplementary Data – Note 7. Short-term and Long-term Debt” of the Company’s Annual Report on Form 10-K for the fiscal year ended June ~~2016,~~30, 2023 for a more complete description of the Company's credit facilities.

The Company entered into a new ~~credit agreement~~General Credit Agreement with CTBC Bank ~~of America, which provided for (i) a $55,000,000 revolving line of credit facility including a $5,000,000 letter of credit sublimit that matures on June~~during the three months ended September 30, ~~2017 and (ii) a five-year $50,000,000 term loan facility. This revolving line of credit facility replaced~~2023 with the ~~existing revolving line of credit facility with~~following terms:

CTBC Bank ~~of America. This additional term loan is secured by seven buildings located in San Jose, California and~~

2023 CTBC Bank Credit Lines

On September 28, 2023 (the “Effective Date”), the property, plant and equipment and the inventory in those buildings. The principal and interest of the term loan are payable monthly through June 30, 2021 with an interest rate at the LIBOR rate plus 1.25% per annum.

The interest rate for the revolving line of credit 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, the Company also~~Company's Taiwan subsidiary entered into a ~~separate~~new general agreement for omnibus credit ~~agreement~~lines with CTBC Bank, which replaces the prior CTBC credit lines in their entirety and permits for borrowings, from time to time, thereunder pursuant to various individual credit arrangements and includes the previously issued long and medium term loan facility of ~~America, which provided for~~NTD 1,550.0 million entered in 2021 and 2020 (the “Long and Medium Loan Facility”), and each of (i) a ~~revolving~~short-term loan and guarantee line providing credit of up to NTD1,250.0 million and NTD100.0 million, respectively (the “NTD Short Term Loan/Guarantee Line”), (ii) a short-term loan providing a line of credit of ~~$10,000,000 for the Taiwan~~up to $40.0 million (the “USD Short Term Loan Line”), and ~~the Netherlands subsidiaries that matures on June 30, 2017. The interest rate of the revolving~~(iii) an export/import o/a loan line providing a line of credit ~~is equal~~of up to ~~a minimum of 0.9% per annum plus~~$105.0 million for exports and $50.0 million for imports (the “Export/Import Line,” and, together with the ~~lender's cost of funds.~~

In December 2016, the Company entered into an amendment to the credit agreement with Bank of America to reduce the $55,000,000 revolving line of credit facility to $45,000,000 and increase the revolving line of credit for the TaiwanNTD Short Term Loan/Guarantee Line and the ~~Netherlands subsidiaries from $10,000,000 to $20,000,000.~~

~~As of December 31, 2016 and June 30, 2016,~~USD Short Term Loan Line, the ~~total outstanding~~“New CTBC Credit Lines”). Aggregate borrowings under the ~~Bank~~New CTBC Credit Lines together is subject to a cap of America term loan was $45,000,000 and $933,000, respectively. The total outstanding borrowings under the Bank of America lines of credit was $43,199,000 and $62,199,000 as of December 31, 2016 and June 30, 2016, respectively. The interest rates for these loans$105.0 million.

SMCI | Q1 2024 Form 10-Q | 15

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(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~~Interest rates under each of the ~~unused revolving lines~~individual New CTBC Credit Lines are to be established according to individual credit arrangements, which interest rates shall be subject to adjustment depending on the satisfaction of certain conditions. Each of the NTD Short Term Loan/Guarantee Line and USD Short Term Loan Line are secured by certain of the Company's Taiwan subsidiary’s assets, including certain property, land, and plant. The tenor for each of the individual New CTBC Credit Lines is one year. For the Long and Medium Loan Facility, the Taiwan subsidiary is subject to various financial covenants, including current ratio, debt service coverage ratio, and financial debt ratio requirements. In the event the Taiwan subsidiary does not satisfy such financial covenants, CTBC Bank is permitted to, among other things, reduce the permitted total borrowings to a cap of $70.0 million from $105.0 million. Additional covenants require, among other things, the Company to maintain ownership of all of the capital stock of its Taiwan subsidiary and prohibit secondary mortgages on certain assets securing various of the New CTBC Credit Lines. The New CTBC Credit Lines have customary default provisions permitting CTBC Bank to suspend the extension of credit, ~~with Bank~~reduce the credit line, shorten the credit extension term, or declare all principal and interest amounts immediately due and payable upon the occurrence of ~~America~~an event of default.

The Company's Taiwan subsidiary intends to use borrowings 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~~New CTBC Credit Lines in connection 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, 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%financing of eligible accounts receivable ~~in an aggregate amount of up~~and accounts payable (vendor invoices) and to ~~$17,000,000 with an interest rate equal~~finance additional improvements 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, the Company entered into a credit agreement with CTBC Bank Co., Ltd that provides for (i) a 12-month NTD$700,000,000 or $21,620,000 U.S. dollar equivalent term loan facility secured by the land and buildingCompany’s Bade Manufacturing Facility 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$100,000,000 or $3,089,000 U.S. dollar equivalent with an annual fee equal to 0.5% per annum,Taiwan.

Principal payments on short-term and (ii) a 12-month revolving line of credit up to 80.00% of eligible accounts receivable in an aggregate amount of up to $40,000,000 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 agreementlong-term obligations are ~~capped at $40,000,000. The credit agreement matures on March 31, 2017.~~due as follows (in thousands):

Fiscal Year Principal Payments


Remainder of 2024	$	30,632
2025	40,843
2026	40,843
2027	17,744
2028	5,985
2029 and thereafter	10,185
Total short-term and long-term debt	$	146,232

The ~~total~~Company is in compliance with all the covenants for the outstanding ~~borrowings~~debt.

Note 7. Leases

The Company leases offices, warehouses and other premises, vehicles and certain equipment leased under non-cancelable operating leases. Operating lease expense recognized and supplemental cash flow information related to operating leases for the ~~CTBC Bank term loan was denominated in Taiwanese dollars~~three months ended September 30, 2023 and ~~was translated into U.S. dollars of $18,521,000~~2022 were as follows (in thousands):


	Three Months Ended September 30,
	2023		2022
Operating lease expense (including expense for lease agreements with related parties of $139 and $143 for the three months ended September 30, 2023 and 2022, respectively)	$	2,184	$	2,110
Cash payments for operating leases (including payments to related parties of $128 and $130 for the three months ended September 30, 2023 and 2022, respectively)	$	2,083	$	2,038
New operating lease assets obtained in exchange for operating lease liabilities	$	9,177	$	750

During the three months ended September 30, 2023 and ~~$20,357,000 at December 31, 2016~~2022, the Company’s costs related to short-term lease arrangements for real estate 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 $20,800,000 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% per annum at June 30, 2016. At December 31, 2016, available for future borrowing under this credit agreement was $612,000.

In January 2017, the Company drew an additional $8,000,000 from CTBC Bank revolving line of credit with the interest rate at 1.55% per annum to support the Company's growth and expansion of its businessnon-real estate assets were immaterial. Non-lease variable payments expensed in the ~~Netherlands.~~

~~Covenant Compliance~~

~~The credit agreement with Bank of America contains customary representations~~three months ended September 30, 2023 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, as defined in the agreement, as of the end of any fiscal quarter, measured for the most recently completed twelve (12) months of the Company, shall not be greater than 2.00;

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

As of December 31, 2016 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 agreement2022 were ~~$101,074,000 and $59,258,000, respectively. As of December~~

immaterial.

SMCI | Q1 2024 Form 10-Q | 16

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

~~31, 2016, the Company was in compliance with all financial covenants associated with the credit agreements with Bank of America.~~

As of ~~December 31, 2016~~September 30, 2023, the weighted average remaining lease term for operating leases was 3.5 years and ~~June~~the weighted average discount rate was 4.1%. Maturities of operating lease liabilities under noncancelable operating lease arrangements as of September 30, ~~2016, the land and building located in Bade, Taiwan~~2023 were as follows (in thousands):


Fiscal Year:	Maturities of operating leases
Remainder of 2024	$	6,942
2025	9,248
2026	5,226
2027	3,737
2028	2,735
2029 and beyond	364
Total future lease payments	28,252
Less: Imputed interest	(2,183)
Present value of operating lease liabilities	$	26,069

The Company has entered into lease agreements with related parties. See Part I, Item 1, Note 8, “Related Party Transactions,” for a ~~value of $26,623,000 and $26,804,000, respectively, collateralized the term loan with CTBC Bank. There are no financial covenants associated with the term loan with CTBC Bank at December 31, 2016.~~further discussion.

Note ~~7. Related-party~~8. Related Party Transactions

The Company has a variety of business relationships with Ablecom and ~~Other Transactions~~

Compuware. Ablecom ~~Technology Inc.—Ablecom, a~~and Compuware are both Taiwan ~~corporation, together with one of its subsidiaries, Compuware (collectively “Ablecom”),~~corporations. Ablecom is one of the Company’s major contract ~~manufacturers. Ablecom’s ownership of~~manufacturers; Compuware is ~~below~~ ~~50%~~ ~~but Compuware remains~~both a ~~related party as Ablecom still has significant influence over its operations.~~distributor of the Company’s products and a contract manufacturer for the Company. Ablecom’s ~~chief executive officer,~~Chief Executive Officer, Steve Liang, is the brother of Charles Liang, the Company’s President, Chief Executive Officer and Chairman of the ~~Board~~Board. Steve Liang and his family members owned approximately 36.0% 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 ~~own~~owned approximately 10.5% of ~~Ablecom, while~~Ablecom’s capital stock as of September 30, 2023. Bill Liang, a brother of both Charles Liang and Steve Liang, is a member of the Board of Directors of Ablecom. Bill Liang is also the Chief Executive Officer of Compuware, a member of Compuware’s Board of Directors and ~~other family members~~a holder of a significant equity interest in Compuware. Steve Liang is also a member of Compuware’s Board of Directors and is an equity holder of Compuware. Neither Charles Liang nor Sara Liu 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 ~~design~~development, production and service agreements, product manufacturing agreements, manufacturing services agreements ~~(“product design~~ and ~~manufacturing agreements”) and a distribution agreement (“distribution agreement”) with Ablecom.~~lease agreements for warehouse space.

Under ~~the product design and manufacturing~~these agreements, the Company outsources to Ablecom a portion of its design activities and a significant part of its ~~manufacturing of components such as~~ server chassis manufacturing as well as an immaterial portion of other components. Ablecom manufactured approximately 85.5% and 88.4% of the chassis included in the products sold by the Company during the three months ended September 30, 2023 and 2022, respectively. With respect to ~~Ablecom.~~design activities, Ablecom generally agrees to design certain agreed-upon products according to the Company’s ~~specifications. Additionally, Ablecom~~specifications, and further agrees to build the tools needed to manufacture the products. The Company ~~has agreed to pay~~pays Ablecom for ~~Ablecom's cost of chassis and related product tooling~~the design and engineering services, and ~~will~~further agrees to pay Ablecom for ~~those items when~~ the ~~work has been completed.~~tooling. The Company retains full ownership of any intellectual property resulting from the design of these products and tooling.

~~Under~~

SMCI | Q1 2024 Form 10-Q | 17

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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

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

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

The Company’s exposure to financial loss as a result of its involvement with Ablecom is limited to ~~(a)~~ potential losses on its purchase orders in the event of an unforeseen decline in the market price and/or demand of the Company’s products such that the Company incurs a loss on the sale or cannot sell the ~~products~~products. Outstanding cancellable and (b) potential losses on outstanding accounts receivable from Ablecom in the event of an unforeseen deterioration in the financial condition of Ablecom such that Ablecom defaults on its payable to the Company. Outstandingnon-cancellable purchase orders ~~with~~from the Company to Ablecom on September 30, 2023 were ~~$104,569,000~~$49.5 million and ~~$62,782,000 at December 31, 2016~~$27.7 million, respectively, and outstanding cancellable and non-cancellable purchase orders from the Company to Ablecom on June 30, ~~2016,~~2023 were $37.4 million and $23.7 million, respectively, effectively representing the ~~maximum~~ exposure to ~~loss relating to (a) above.~~financial loss. The Company does not ~~have~~directly or indirectly guarantee any ~~direct~~obligations of Ablecom, or ~~indirect guarantees~~any losses that the equity holders of ~~losses of Ablecom.~~

~~In May 2012,~~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 ~~Ablecom jointly established Super Micro Asia Science and Technology Park, Inc. ("Management Company")~~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 ~~manage~~install the ~~common areas shared by~~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 ~~Ablecom~~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 ~~their separately constructed~~the design and engineering services, and further agrees to pay Compuware for the tooling. The Company retains full ownership of any intellectual property resulting from the design of these products and tooling. With respect to the manufacturing ~~facilities. Each company contributed~~ ~~$168,000~~ ~~and owns~~ ~~50%~~aspects of the ~~Management~~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. ~~Although~~The Company and Compuware frequently review and negotiate the ~~operations~~prices of the ~~Management~~power supplies the Company ~~are independent~~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 ~~through governance rights,~~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 including overhead and labor. The Company and Compuware frequently review and negotiate the amount of the “manufacturing value added” fee that will be included in the price of the products the Company purchases from Compuware. In addition to the inventory purchases, the Company also incurs costs associated with design services, tooling assets, and miscellaneous costs.

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The Company’s exposure to financial loss as a result of its involvement with Compuware is limited to potential losses on its purchase orders in the event of an unforeseen decline in the market price and/or demand of the Company’s products such that the Company incurs a loss on the sale or cannot sell the products. Outstanding cancellable and non-cancellable purchase orders from the Company to Compuware on September 30, 2023 were $138.2 million and $38.8 million, respectively, and outstanding cancellable and non-cancellable purchase orders from the Company to Compuware on June 30, 2023 were $156.2 million and $46.8 million, respectively, effectively representing the exposure to financial loss. The Company does not directly or indirectly guarantee any obligations of Compuware, or any losses that the equity holders of Compuware may suffer.

Dealings with Investment in a Corporate Venture

In October 2016, the Company ~~has~~entered into agreements pursuant to which the ~~ability~~Company contributed certain technology rights in connection with an investment in a privately-held company (the “Corporate Venture”) located in China to ~~direct~~expand the ~~Management Company's business strategies. Therefore,~~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. There was no balance in the deferred gain in the consolidated balance sheets as of September 30, 2023 and June 30, 2023.

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 such third-party parent’s related entities and a separate listing for one of its subsidiaries. The Corporate Venture is not itself a restricted party. The Company has concluded that the ~~Management~~Corporate Venture is in compliance with the new restrictions. The Company does not believe that the equity investment carrying value is ~~a variable interest entity~~impacted as of September 30, 2023. No impairment charge was recorded for the three months ended September 30, 2023 or 2022.

The Company sold products worth $0.8 million and $11.3 million to the Corporate Venture during the three months ended September 30, 2023 and 2022, respectively. The Company’s share of intra-entity profits on the products that remained unsold by the Corporate Venture as of September 30, 2023 and June 30, 2023 have been eliminated and have reduced the carrying value of the Company’s investment in the Corporate Venture. To the extent that the elimination of intra-entity profits reduces the investment balance below zero, such amounts are recorded within accrued liabilities. The Company had $0.2 million and $1.9 million due from the Corporate Venture in accounts receivable, net as of September 30, 2023 and June 30, 2023, respectively.

SMCI | Q1 2024 Form 10-Q | 19

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The Company had the following balances related to transactions with its related parties as of September 30, 2023 and June 30, 2023 (in thousands):


	Ablecom				Compuware				Corporate Venture				Total
	September 30, 2023		June 30, 2023		September 30, 2023		June 30, 2023		September 30, 2023		June 30, 2023			September 30, 2023		June 30, 2023

Accounts receivable	$	4	$	2	$	1,092	$	3,528	$	239	$	1,943		$	1,335	$	5,473
Other receivable (1)	$	2,283	$	2,841	$	22,622	$	24,891	$	—	$	—		$	24,905	$	27,732
Accounts payable	$	44,476	$	35,711	$	47,639	$	53,423	$	—	$	—		$	92,115	$	89,134
Accrued liabilities (2)	$	485	$	1,230	$	16,019	$	12,787	$	—	$	—		$	16,504	$	14,017


(1) Other receivables include receivables from vendors included in prepaid and other current assets.
(2) Includes current portion of operating lease liabilities included in other current liabilities.

The Company’s results from transactions with its related parties for each of the three months ended September 30, 2023 and 2022, are as follows (in thousands):


	Ablecom				Compuware				Corporate Venture				Total
	Three months ended September 30,				Three months ended September 30,				Three months ended September 30,				Three months ended September 30,
	2023		2022		2023		2022		2023		2022			2023		2022

Net sales	$	2	$	2	$	16,606	$	13,760	$	788	$	11,293		$	17,396	$	25,055
Purchases - inventory	$	46,614	$	47,847	$	66,493	$	48,689	$	—	$	—		113,107		96,536
Purchases - other miscellaneous items	$	4,759	$	4,763	$	417	$	258	$	—	$	—		$	5,176	$	5,021

The Company’s cash flow impact from transactions with its related parties for each of the three months ended September 30, 2023 and 2022, are as follows (in thousands):


	Ablecom				Compuware				Corporate Venture				Total
	Three months ended September 30,				Three months ended September 30,				Three months ended September 30,				Three months ended September 30,
	2023		2022		2023		2022		2023		2022			2023		2022

Changes in accounts receivable	$	(2)	$	—	$	2,436	$	(478)	$	1,704	$	(1,373)		$	4,138	$	(1,851)
Changes in other receivable	$	558	$	1,276	$	2,269	$	(11,415)	$	—	$	—		$	2,827	$	(10,139)
Changes in accounts payable	$	8,765	$	664	$	(5,784)	$	6,010	$	—	$	—		$	2,981	$	6,674
Changes in accrued liabilities	$	(745)	$	(1,532)	$	3,232	$	11,117	$	—	$	—		$	2,487	$	9,585
Changes in other long-term liabilities	$	—	$	—	$	(80)	$	(105)	$	—	$	—		$	(80)	$	(105)
Purchases of property, plant and equipment	$	782	$	583	$	44	$	146	$	—	$	—		$	826	$	729
Unpaid property, plant and equipment	$	3,672	$	3,782	$	—	$	—	$	—	$	—		$	3,672	$	3,782

SMCI | Q1 2024 Form 10-Q | 20

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Note 9. Stock-based Compensation and Stockholders’ Equity

Equity Incentive Plan

On June 5, 2020, the stockholders of the Company asapproved the ~~Company~~2020 Equity and Incentive Compensation Plan (the “Original 2020 Plan”). The maximum number of shares available under the Original 2020 Plan is 5,000,000 plus 1,045,000 shares of common stock that remained available for future awards under the ~~primary beneficiary~~2016 Equity Incentive Plan (the “2016 Plan”), at the time of adoption of the ~~Management Company. The accounts~~Original 2020 Plan. No other awards can be granted under the 2016 Plan and 7,246,000 shares of common stock remain reserved for outstanding awards issued under the Original 2016 Plan at the time of adoption of the ~~Management Company are consolidated with~~Original 2020 Plan. On May 18, 2022, the ~~accounts~~stockholders of the Company approved an amendment and restatement of the Original 2020 Plan (as amended and restated, the “2020 Plan”) which, among other things, increased the number of shares available for award under the 2020 Plan by an additional 2,000,000 shares.

Under the 2020 Plan, the Company can grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, dividend equivalents, and certain other awards, including those denominated or payable in, or otherwise based on, the Company’s common stock. The exercise price per share for incentive stock options granted to employees owning shares representing more than 10% of the Company’s outstanding voting stock at the time of grant cannot be less than 110% of the fair value of the underlying shares on the grant date. Nonqualified stock options and incentive stock options granted to all other persons are granted at a ~~noncontrolling~~price not less than 100% of the fair value. Options generally expire ten years after the date of grant. Stock options and RSUs generally vest over four years; 25% at the end of one year and one sixteenth per quarter thereafter.

As of September 30, 2023, the Company had 1,324,299 authorized shares available for future issuance under the 2020 Plan.

Common Stock Repurchase and Retirement

On August 3, 2022, after the expiration of a prior share repurchase program on July 31, 2022, a duly authorized subcommittee of the Company’s Board approved a new share repurchase program to repurchase shares of the Company’s common stock for up to $200 million at prevailing prices in the open market. The share repurchase program is effective until January 31, 2024 or until the maximum amount of common stock is repurchased, whichever occurs first. Under the common stock repurchase program, shares may be purchased from time to time in open market transactions, block trades, through plans established under the Securities Exchange Act Rule 10b5-1, or otherwise. The number of shares purchased and the timing of such purchases are based on working capital requirements, market and general business conditions, and other factors, including alternative investment opportunities.

No shares were repurchased under the share repurchase program during the three months ended September 30, 2023. As of September 30, 2023, $50.0 million was available for additional repurchases of common stock.

Determining Fair Value

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

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

Expected Volatility—Expected volatility is based on the Company’s implied and historical volatility.

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

SMCI | Q1 2024 Form 10-Q | 21

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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

The fair value of stock option grants for the ~~Ablecom's interests in the net assets and operations of the Management Company. In the~~ three ~~and six~~ months ended ~~December 31, 2016, $29,000~~September 30, 2023 and ~~$24,000~~2022 was estimated on the date of ~~net loss attributable to Ablecom's interest was~~grant using the Black-Scholes option pricing model with the following assumptions:


	Three Months Ended September 30,
	2023	2022
Risk-free interest rate	4.15% - 4.32%	2.81% - 4.06%
Expected term	3.00 years - 5.99 years	6.07 years
Dividend yield	—%	—%
Volatility	56.87% - 58.27%	50.62% - 51.30%
Weighted-average fair value	$188.29	$28.67

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. In~~for the three ~~and six~~ months ended ~~December 31, 2015, $6,000~~September 30, 2023 and ~~$4,000~~2022 (in thousands):


	Three Months Ended September 30,
	2023		2022
Cost of sales	$	5,904	$	884
Research and development	35,710		6,118
Sales and marketing	5,665		809
General and administrative	10,100		3,203
Stock-based compensation expense before taxes	57,379		11,014
Income tax impact	(16,049)		(1,339)
Stock-based compensation expense, net	$	41,330	$	9,675

As of ~~net loss attributable~~September 30, 2023, $65.4 million of unrecognized compensation cost related to ~~Ablecom's interest~~stock options is expected to be recognized over a weighted-average period of 2.65 years and $203.1 million of unrecognized compensation cost related to unvested RSUs is expected to be recognized over a weighted-average period of 2.67 years. Additionally, as described below, $0.5 million of unrecognized compensation cost related to the 2021 CEO Performance Stock Option is expected to be recognized over a period of 0.5 years.

Stock Option Activity

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

SMCI | Q1 2024 Form 10-Q | 22

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The achievement status of the operational and stock price milestones as of September 30, 2023 was ~~included~~as follows:


Annualized Revenue Milestone (in billions)	Achievement Status	Stock Price Milestone	Achievement Status
$4.0	Achieved	$45	Achieved (1)
$4.8	Achieved	$60	Achieved (2)
$5.8	Achieved	$75	Achieved (3)
$6.8	Achieved	$95	Achieved (4)
$8.0	Probable	$120	Achieved (5)

(1)The vesting of the first tranche of 200,000 option shares under the 2021 CEO Performance Stock Option, representing one-fifth of such award, was certified by the Company’s Compensation Committee in August 2022.

(2)The vesting of the ~~Company's general~~second tranche of 200,000 option shares under the 2021 CEO Performance Stock Option representing one-fifth of such award was certified by the Company’s Compensation Committee in October 2022.

(3)The vesting of the third tranche of 200,000 option shares under the 2021 CEO Performance Stock Option representing one-fifth of such award was certified by the Company’s Compensation Committee in January 2023.

(4)The vesting of the fourth tranche of 200,000 option shares under the 2021 CEO Performance Stock Option representing one-fifth of such award was certified by the Company’s Compensation Committee in September 2023.

(5)On June 19, 2023, the Compensation Committee certified achievement of the $120 stock price milestone based upon the 60 trading day average stock price from March 6, 2023 through May 30, 2023.

On the grant date, a Monte Carlo simulation was used to determine for each tranche (i) a fixed expense amount for such tranche and ~~administrative~~(ii) the future time when the market price milestone for such tranche was expected to be achieved, or its “expected market price milestone achievement time.” Separately, based on a subjective assessment of the Company’s future financial performance, each quarter, the Company will determine whether achievement is probable for each operational milestone that has not previously been achieved or deemed probable of achievement, and, if so, the future time when the Company expects to achieve that operational milestone, or its “expected operational milestone achievement time.” When the Company first determines that an operational milestone has become probable of being achieved, the Company will allocate the entire expense for the related tranche over the number of quarters between the grant date and the then-applicable “expected vesting time.” The “expected vesting time” at any given time is the later of (i) the expected operational milestone achievement time (if the related operational milestone has not yet been achieved) and (ii) the expected market price milestone achievement time (if the related market price milestone has not yet been achieved). The Company will immediately recognize a catch-up expense for all accumulated expenses from the grant date through the quarter in which the ~~condensed consolidated statements~~operational milestone was first deemed probable of ~~operations,~~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 months ended September 30, 2023 and 2022, the Company recognized compensation expense related to the 2021 CEO Performance Stock Option of $0.2 million and $1.3 million, respectively. As of September 30, 2023 and June 30, 2023, the Company had $0.5 million and $0.7 million, respectively, in unrecognized compensation cost related to the 2021 CEO Performance Stock Option. The unrecognized compensation cost as of September 30, 2023 is expected to be recognized over a period of 0.5 years.

SMCI | Q1 2024 Form 10-Q | 23

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table summarizes stock option activity during the three months ended September 30, 2023 under all plans:


	Options Outstanding	Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (in Years)
Balance as of June 30, 2023	3,302,533	$	40.47
Granted	246,612	$	330.42
Exercised	(188,957)	$	23.87
Forfeited/Cancelled	(4,041)	$	50.83
Balance as of September 30, 2023	3,356,147	$	62.71	6.66

Options vested and exercisable at September 30, 2023	2,092,330	$	34.42	5.47

RSU and PRSU Activity

The following table summarizes RSU and PRSU activity during the three months ended September 30, 2023 under all plans:


	Time-Based RSUs Outstanding	Weighted Average Grant-Date Fair Value per Share
Balance as of June 30, 2023	2,042,986	$	55.94
Granted	464,468	$	334.93
Released	(297,656)	$	262.41
Forfeited	(31,724)	$	91.38
Balance as of September 30, 2023	2,178,074	$	104.49

SMCI | Q1 2024 Form 10-Q | 24

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Note 8.10. Income Taxes

The Company recorded ~~provisions~~a provision for income taxes of ~~$9,315,000~~$20.2 million and ~~$15,684,000~~$38.9 million for the three ~~and six~~ months ended ~~December 31, 2016, respectively,~~September 30, 2023 and ~~$14,061,000 and $21,565,000 for the three and six months ended December 31, 2015,~~2022, respectively. The effective tax rate was ~~29.7%~~11.4% and ~~30.6%~~17.4% for the three ~~and six~~ months ended ~~December 31, 2016, respectively,~~September 30, 2023 and ~~28.8% and 30.8% for the three and six months ended December 31, 2015,~~2022, respectively. The effective tax rate for the three ~~and six~~ months ended ~~December 31, 2016~~September 30, 2023 is ~~estimated to be~~ lower than that for the ~~federal statutory rate~~three months ended September 30, 2022, primarily due to an increase in the ~~benefit from U.S. federal~~tax deduction for stock compensation in the three months ended September 30, 2023.

The Tax Cuts and Jobs Act of 2017 eliminated the option to deduct research and development ("(“R~~&D"~~&D”) ~~tax credits~~expenses in the year incurred and ~~domestic production~~instead requires taxpayers to capitalize R&D expenses, including software development cost, and subsequently amortize such expenses over five years for R&D activities ~~deductions.~~

Asconducted in the United States and over fifteen years for R&D activities conducted outside of ~~December 31, 2016,~~ the ~~Company had a liability for gross unrecognized tax benefits of $18,784,000, substantially all of which, if recognized, would affect~~United States beginning in the Company's ~~effective tax rate. During~~fiscal year 2023. Although Congress has considered legislation that would defer, modify, and repeal the ~~three~~capitalization and ~~six months ended December 31, 2016,~~amortization requirement, there ~~were~~is no ~~material changes in the total amount of the liability for gross unrecognized tax benefits. The Company’s policy is to include interest and penalties related to unrecognized tax benefits within~~assurance the provision ~~for taxes on the condensed consolidated statements of operations. As of December 31, 2016, the Company had accrued $1,507,000 of interest and penalties relating to unrecognized tax benefits.~~will be deferred, repealed, or otherwise modified.

The Company is subject to United States federal income tax as well as income taxes in many state and foreign jurisdictions. The Company's 2012 and 2013 federal tax returns are currently under the Internal Revenue Service ("IRS") examination. The Company has responded to Information Document Requests ("IDRs"), issued by the IRS. No adjustment has been proposed by the IRS as of December 31, 2016. The Company was also under audit in Taiwan for tax year 2013 related to local income taxes. The audit resulted in minimal tax adjustments. While management believes that ~~the Company~~it has adequately provided reserves for all uncertain tax ~~positions,~~positions; however, amounts asserted by tax authorities could be greater or less than the Company’s current position. Accordingly, the Company’s provision on federal, state and foreign tax related matters to be recorded in the future may change as revised estimates are made or as the underlying matters are settled or otherwise resolved.

~~The~~In general, the federal statute of limitations remains open for tax years ended June 30, 2020 through 2023. Various states’ statutes of limitations remain open in general for tax years ~~2012~~ended June 30, 2019 through ~~2016. The state statute of limitations remain open in general for tax years 2012 through 2016. The statute~~2023. Certain statutes of limitations in major foreign jurisdictions remain open for ~~examination in general for~~the tax years ~~2010~~ended June 30, 2018 through ~~2016. For~~2023. It is reasonably possible that the ~~third quarter of fiscal year 2017, the Company expects a decrease of approximately $1,890,000 of~~Company’s gross unrecognized tax benefits ~~related~~will decrease by approximately $3.2 million, in the next 12 months, due to ~~foreign uncertain tax positions as a result~~the lapse of the ~~completion~~statute of limitations. These adjustments, if recognized, would positively impact the ~~income~~Company’s effective tax ~~audit in Taiwan.~~rate, and would be recognized as additional tax benefits.

Note 9.11. Commitments and Contingencies

~~Litigation~~Legal proceedings and ~~Claims— The~~indemnifications

From time to time, the Company ishas been involved in various legal proceedings arising from the normal course of business activities. The ~~Company defends itself vigorously against any such claims. In management’s opinion, the~~ resolution of any such matters ~~will~~have not ~~have~~had a material ~~adverse effect~~impact on the Company’s consolidated financial condition, results of operations or ~~liquidity.~~liquidity as of September 30, 2023 and any prior periods.

The Company has entered into indemnification agreements with its current and former directors and executive officers.

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

Purchase Commitments— The Company has agreements to purchase ~~certain units of~~ inventory and non-inventory items primarily through ~~fiscal year 2017.~~the next 12 months. As of ~~December 31, 2016,~~September 30, 2023, these remaining ~~non-cancellable~~noncancelable commitments were ~~$402,229,000 compared to $334,010,000 as of June 30, 2016.~~ $1.4 billion, including $66.4 million for related parties.

~~Table of Contents~~

~~SUPER MICRO COMPUTER, INC.~~

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

~~(Unaudited)~~

Note ~~10.~~12. Segment Reporting

The Company operates in one operating segment that develops and provides ~~high performance~~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):

SMCI | Q1 2024 Form 10-Q | 25

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

Table of Contents

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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


	September 30,		June 30,
	2023		2023
Long-lived assets:
United States	$	183,685	$	183,485
Asia	105,405		104,094
Europe	2,579		2,661
	$	291,669	$	290,240

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

The ~~following~~Company’s revenue is presented on a ~~summary~~disaggregated basis in Part I, Item 1, Note 2, “Revenue,” by type of ~~net sales~~product and by ~~product type (in thousands):~~

geographical market.

SMCI | Q1 2024 Form 10-Q | 26

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

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

Table of Contents

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

This section and other parts of this ~~Form 10-Q~~Quarterly Report contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that involve risks and uncertainties. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology including “would,” “could,” “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “probable of achievement,” or “continue,” the negative of these terms or other comparable terminology. In evaluating these statements, you should specifically consider various factors, including the risks ~~described~~discussed under “Risk Factors” ~~below and~~ in ~~other parts~~Part II, Item 1A of this ~~Form 10-Q as well as in our other filings with the SEC.~~filing. These factors may cause our actual results to differ materially from those anticipated or implied in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. We cannot guarantee future results, levels of activity, performance or achievements.

The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with our condensed consolidated financial statements and related footnotes included elsewhere in this Quarterly Report and included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023 (the “2023 10-K”), which includes our condensed consolidated financial statements for the fiscal years ended June 30, 2023 and 2022.

Overview

We are a ~~global leader in~~Silicon Valley-based provider of accelerated compute platforms that are comprised of application-optimized high performance ~~high efficiency~~and high-efficiency server ~~technology~~ and ~~innovation. We develop and provide end-to-end green computing solutions to the~~storage systems for a variety of markets, including enterprise data centers, cloud computing, ~~data center, enterprise~~artificial intelligence (“AI”), 5G and edge computing. Our Total IT ~~big data, high performance computing (“HPC”), and Internet of Things (“IoT”)/embedded markets. Our~~Solutions include complete servers, storage systems, modular blade servers, blades, workstations, full rack scale solutions, ~~range from complete server, storage, blade and workstations to full racks,~~ networking devices, server sub-systems, server management ~~software~~ and ~~technology~~security software. We also provide global support and ~~services. Our net sales were $652.0 million~~services 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 $22.0 million and $35.5 million for the three and six months ended December 31, 2016, respectively, and $34.7 million and $48.4 million for the three and six months ended December 31, 2015, respectively. Our decrease in net income in the three and six months ended December 31, 2016 was primarily attributable to lower gross margins from sales of our complete server systems due to higher costs related to shortages of memory and solid state drives ("SSD") and higher operating expenses from headcount and annual salary increases to support our business growth.

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

We perform the majority of our research and development efforts in-house. Research and development expenses represented 5.2% and 5.7% of our net sales for the three and six months ended December 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.

In order to ~~continue to~~ increase our ~~net~~ sales and profits, we believe that we must continue to develop ~~flexible~~customized and ~~customizable~~application optimized server and storage solutions and be among the first to market with new features and products. We ~~must also~~ continue to expand our software, ~~and~~ customer service and support offerings, ~~particularly~~ as we increasingly focus on larger enterprise ~~sales.~~customers. We measure our financial success based on various indicators, including growth in net sales, gross profit ~~as a percentage of net sales,~~margin and operating ~~income as a percentage of net sales, levels of inventory, and days sales outstanding (“DSOs”). In connection with these efforts, we monitor daily and weekly sales and shipment reports.~~margin. Among the key non-financial indicators of our success is our ability to rapidly introduce new products and deliver the latest ~~application optimized~~application-optimized server and storage solutions. In this regard, we work closely with microprocessor, GPU 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, accelerators and storage technologies, and as a result, we monitor the product introduction cycles of Intel ~~AMD~~Corporation, NVIDIA Corporation, Advanced Micro Devices, Inc., Samsung Electronics Company Limited, Micron Technology, Inc. and ~~Nvidia~~others closely and carefully. This also impacts our research and development expenditures as we continue to invest more in our current and future product development efforts.

~~Other~~ Financial Highlights

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

Net cash provided by (used in) operating activities was $(54.9) million and $86.9 million during the six months ended December 31, 2016 and 2015, respectively. Our cash and cash equivalents, together with our investments, were $131.5 million at the end of the secondfirst quarter of fiscal year ~~2017,~~2024:

•Net sales increased by 14.4% in the three months ended September 30, 2023 as compared with $183.7 million at the end of fiscal year 2016. The decrease in our cash and cash equivalents, together with our investments at the end of the second quarter of fiscal year 2017 was primarily due to $54.9 million 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~~three months ended September 30, ~~2017.~~2022.

•Gross margin decreased to16.7% in the three months ended September 30, 2023 from 18.8% in the three months ended September 30, 2022.

•Operating expenses increased by 42.2% as compared to the three months ended September 30, 2022 and were equal to 8.5% and 6.9% of net sales in the three months ended September 30, 2023 and 2022, respectively.

•Effective tax rate decreased to 11.4% in the three months ended September 30, 2023 from 17.4% in the three months ended September 30, 2022.

SMCI | Q1 2024 Form 10-Q | 27

Table of Contents

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 generally accepted accounting principles in the United States. The preparation of these 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 estimates on an on-going basis based on a) historical experience, and b) assumptions we believe to be reasonable under the circumstances and are not readily apparent from other sources, the results of which form the basis for making judgments about the carrying values of assets and liabilities. 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 significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to have been incorrect, it could have a material impact on our results of operations, financial position and statement of cash flows.

~~Revenues~~

There have been no material changes to our critical accounting policies and ~~Expenses~~estimates as compared to those disclosed in our 2023 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.

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 September 30,
	2023		2022
Net sales	100.0	%	100.0	%
Cost of sales	83.3	%	81.2	%
Gross profit	16.7	%	18.8	%
Operating expenses:
Research and development	5.2	%	4.0	%
Sales and marketing	1.7	%	1.6	%
General and administrative	1.6	%	1.3	%
Total operating expenses	8.5	%	6.9	%
Income from operations	8.2	%	11.9	%
Other income, net	0.3	%	0.4	%
Interest expense	(0.1)	%	(0.2)	%
Income before income tax provision	8.4	%	12.1	%
Income tax provision	(1.0)	%	(2.1)	%
Share of loss from equity investee, net of taxes	—	%	—	%
Net income	7.4	%	10.0	%

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 which impact our net sales are the number of compute nodes shipped and average selling~~ prices ~~per node~~ for our server ~~system sales~~ and ~~units shipped and average selling price per unit for our subsystem and accessories sales. The prices for server~~storage systems range widely depending upon the configuration, ~~including~~as well as the ~~number~~level of ~~compute nodes on a server system,~~integration of key components such as CPUs, GPUs, SSDs and ~~the~~memory. The prices for our subsystems and accessories can also vary widely based on ~~the type. A compute node~~whether a customer 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. Measuring volume using compute nodes enables more consistent measurement across differentpurchasing power supplies, server ~~form factors and across different vendors.~~ boards, chassis or other accessories.

As with most electronics-based ~~products,~~product life cycles, average selling prices typically are highest at the time of introduction of new products ~~which~~that utilize the latest technology and tend to decrease over time as such products mature in the market and are replaced by next generation products. Additionally, in order to remain competitive throughout all industry cycles, we actively change our selling price per unit in response to changes in costs for key components such as CPUs, GPUs, SSDs and memory.

SMCI | Q1 2024 Form 10-Q | 28

Table of Contents

The following table presents net sales by product type for the three months ended September 30, 2023 and 2022 (dollars in millions):


	Three Months Ended September 30,						Change
	2023			2022			$		%
Server and storage systems	$	1,966.6		$	1,713.1		$	253.5	14.8	%
Percentage of total net sales	92.8		%	92.5		%
Subsystems and accessories	$	153.1		$	139.0		$	14.1	10.1	%
Percentage of total net sales	7.2		%	7.5		%
Total net sales	$	2,119.7		$	1,852.1		$	267.6	14.4	%

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.

The period-over-period increase in net sales of our server and storage systems was primarily due to the strong demand from customers for GPU, high performance computing (“HPC"), and rack-scale solutions which are generally more complex and of higher value, resulting in an increase of average selling price ("ASP").

The period-over-period increase in net sales for our subsystems and accessories of 10.1% is primarily due to increased demand of accessories sold to data center customers as more accessories and spares were purchased in conjunction with the strong sales of full systems and servers.

The following table presents net sales by geographic region for the three months ended September 30, 2023 and 2022 (dollars in millions):


	Three Months Ended September 30,						Change		Change
	2023			2022			$		%
United States	$	1,619.5		$	1,295.5		$	324.0	25.0	%
Percentage of total net sales	76.4		%	69.9		%
Asia	$	225.5		$	270.0		$	(44.5)	(16.5)	%
Percentage of total net sales	10.6		%	14.6		%
Europe	$	190.9		$	235.1		$	(44.2)	(18.8)	%
Percentage of total net sales	9.0		%	12.7		%
Others	$	83.8		$	51.5		$	32.3	62.7	%
Percentage of total net sales	4.0		%	2.8		%
Total net sales	$	2,119.7		$	1,852.1

The period-over-period increase in overall net sales is the result of higher ASP's, especially to large enterprise and data center customers. United States sales experienced significant growth due to increased demand from data center customers for GPU, HPC, and rack-scale solutions. The period-over-period decrease in Asia and Europe is mainly due to macro economic concerns and slower adoption of new product introductions, which has persisted in the three months ended September 30, 2023.

One customer accounted for 25.0% of the net sales for the three months ended September 30, 2023. One customer accounted for 21.9% of the net sales for the three months ended September 30, 2022. We had no customers with net sales over 10% for the year ended June 30, 2023, however, we expect to continue to have customers exceed 10% of net sales in future quarters.

SMCI | Q1 2024 Form 10-Q | 29

Table of Contents

Cost of ~~sales.~~ Sales and Gross Margin

Cost of sales primarily consists of the costs to manufacture our products, ~~including~~which includes: the costs of materials, contract manufacturing, shipping, personnel expenses (salaries, benefits, stock-based compensation and ~~related expenses including stock based compensation,~~incentive bonuses), equipment and facility expenses, warranty costs and inventory ~~excess and obsolete provisions.~~reserve charges. The primary factors that impact our cost of sales are the mix of products sold, ~~and~~changes in the cost of ~~materials, which include raw material~~components, changes in logistic costs, ~~shipping costs and~~changes in salary and benefits and overhead costs related to ~~production.~~production as well as economies of scale gained from higher production volume in our facilities. Cost of sales as a percentage of net sales may increase or decrease over time if ~~decreases~~the changes in ~~average selling prices~~our costs are not ~~offset~~matched by corresponding ~~decreases~~changes in our ~~costs.~~ASP's. Our cost of sales as a percentage of net sales is also impacted by the timing and extent to which we add to, and 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 frequent change based on the availability of materials and other market conditions. As

We use several suppliers and contract manufacturers to design and manufacture subsystems in accordance with our specifications, with most final assembly and testing generally 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 ~~result,~~related party to optimize modular designs for our chassis and certain 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 certain components, particularly power supplies.

Cost of sales and gross margin for the three months ended September 30, 2023 and 2022 are as follows (dollars in millions):


	Three Months Ended September 30,						Change
	2023			2022			$		%
Cost of sales	$	1,766.0		$	1,504.6		$	261.4	17.4	%
Gross profit	$	353.7		$	347.5		$	6.2	1.8	%
Gross margin	16.7		%	18.8		%			(2.1)	%

The period-over-period increase in cost of sales was primarily attributed to an increase of $279.4 million in costs of materials and contract manufacturing expenses primarily related to the increase in net sales volume, partially offset by a $11.0 million decrease in freight costs due to an improved supply chain, a $5.3 million decrease in inventory reserve charges and a $1.7 million decrease in overhead costs due to greater absorption of overhead in the ending inventory.

Certain materials used by us in the manufacturing of our products are available from a limited number of suppliers. Shortages could occur in these materials due to an interruption of supply or increased demand in the industry. The increase in concentration of total purchases from one of our suppliers to 55.1% of total purchases for the three months ended September 30, 2023 is as a result of the increase in the number of purchases of GPUs from such supplier to build our solutions for our customers. We expect that this concentration in total purchases from this supplier will continue in the future.

The period-over-period decrease in the gross margin percentage was primarily due to product and customer mix, partially offset by an increase in capitalization of ~~sales in any period can be negatively impacted by significant component price increases~~manufacturing overhead resulting from ~~component shortages.~~higher inventory level and mix, lower costs related to freight due to an improved supply chain, and inventory reserve charges.

~~Research and development expenses.~~ Operating Expenses

Research and development expenses consist of ~~the~~ personnel ~~and related~~ expenses including ~~stock based~~salaries, benefits, stock-based compensation ofand incentive bonuses for our research and development ~~teams, and~~personnel, as well as product development costs such as materials and supplies, consulting services, ~~third party~~third-party testing services and equipment and facility expenses related to our research and development activities. All research and development costs are expensed as incurred. We occasionally receive non-recurring engineering ~~(“NRE”),~~ funding from certain suppliers and ~~customers.~~customers for joint development. Under these ~~programs,~~arrangements, we are reimbursed for certain research and development costs that we incur as part of the joint development ~~of our products and those of~~efforts with our suppliers and customers. These ~~amounts~~reimbursed costs offset a portion of the related research and development expenses and have the effect of reducing our reported research and development expenses.

~~Sales and marketing expenses.~~ Sales and marketing expenses consist primarily of personnel expenses including salaries, ~~stock based~~benefits, stock-based compensation and incentive bonuses for our sales and marketing personnel, ~~costs~~cost for ~~tradeshows,~~trade shows, independent sales

SMCI | Q1 2024 Form 10-Q | 30

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representative fees and marketing programs. From time to time, we receive ~~cooperative~~ marketing development 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~~reimbursed costs offset a portion of the related expenses and have the effect of reducing our reported sales and marketing expenses. ~~Similarly, we from time to time offer our distributors cooperative marketing funding. To the extent the funding is not recorded as contra-revenue, it has the effect of increasing our expenses.~~ The timing, magnitude and estimated usage of ~~our~~these programs ~~and those of our suppliers~~ can result in significant variations in reported sales and marketing expenses from period to period. Spending on cooperative marketing, ~~either~~reimbursed by ~~us or~~ our suppliers, typically increases in connection with ~~significant~~new product releases by ~~us or~~ our suppliers.

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

Operating expenses for the three months ended September 30, 2023 and 2022 are as follows (dollars in millions):


	Three Months Ended September 30,						Change
	2023			2022			$		%
Research and development	$	111.0		$	74.2		$	36.8	49.6	%
Percentage of total net sales	5.2		%	4.0		%
Sales and marketing	$	37.2		$	29.4		$	7.8	26.5	%
Percentage of total net sales	1.7		%	1.6		%
General and administrative	$	32.9		$	23.8		$	9.1	38.2	%
Percentage of total net sales	1.6		%	1.3		%
Total operating expenses	$	181.1		$	127.4		$	53.7	42.2	%
Percentage of total net sales	8.5		%	6.9		%

Research and development expenses. The period-over-period increase in research and development expenses was primarily driven by a $39.1 million increase in compensation expenses due to salary increases, higher headcount and the cost of equity awards as we expanded our workforce and invested in key talent, and a $0.9 million increase in product development costs to support the development of next generation products and technologies, offset by a $3.2 million increase in research and development credits received from certain suppliers and customers. We believe that research and development expenses will continue to increase as we continue to expand our workforce and invest in key talent.

Sales and marketing expenses. The period-over-period increase in sales and marketing expenses was primarily driven by a $9.1 million increase in compensation expenses due to salary increases, higher headcount and the cost of equity awards offset by a $1.3 million decrease primarily due to an increase in marketing development funds to drive new sales opportunities for our products and customer support. We believe that sales and marketing expenses will continue to increase as we continue to expand our workforce and invest in key talent.

General and administrative expenses. The period-over-period increase in general and administrative expenses was primarily due to a $8.5 million increase in compensation expenses associated with higher headcount and the cost of equity awards and a $0.6 million increase in professional and service fees. We believe that general and administrative expenses will continue to increase as we continue to expand our workforce and invest in key talent.

Interest Expense and ~~other~~Other Income, Net

Other 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.

SMCI | Q1 2024 Form 10-Q | 31

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Interest expense and other income, net for the three months ended September 30, 2023 and 2022 are as follows (dollars in millions):


	Three Months Ended September 30,				Change
	2023		2022		$		%
Other income, net	$	6.6	$	8.1	$	(1.5)	(18.5)	%
Interest expense	(1.9)		(3.9)		2.0		(51.3)	%
Interest expense and other income, net	$	4.7	$	4.2	$	0.5	11.9	%

The change of $0.5 million in interest expense and other income, net was primarily attributable to a $1.5 million decrease in other income driven by $2.7 million investment impairment and unrealized losses, offset by $1.2 million interest income and favorable foreign exchange gain. The decrease in interest expense of $2.0 million was due to a decrease in outstanding loan balances.

Income ~~tax provision.~~ Tax Provision

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 unrecognized~~certain non-deductible expenses, 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 sales 68.1 % 71.0 % 67.9 % 69.9 %
Subsystems and accessories 208.0
185.2
22.7
12.3 % 379.4
348.6
30.8
8.8 %
Percentage of total net sales 31.9 % 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 sales 1,214
1,092
11.2 % 2,358
2,008
17.4 %
Average selling price per unit $ 171
$ 169
1.2 % $ 161
$ 173
(6.9 )%

~~Comparison of Three Months Ended December 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.

~~Table of Contents~~

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 %
Distributors 46.2 % 41.9 % 4.3 % 47.9 % 43.6 % 4.3 %
Direct/OEM customers 53.8 % 58.1 % (4.3 )% 52.1 % 56.4 % (4.3 )%
Total net sales 100.0 % 100.0 % 100.0 % 100.0 %

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 States 55.0 % 63.7 % (8.7 )% 55.4 % 64.4 % (9.0 )%
Europe 19.9 % 17.9 % 2.0 % 20.6 % 17.4 % 3.2 %
Asia 21.1 % 13.8 % 7.3 % 19.8 % 14.0 % 5.8 %
Others 4.0 % 4.6 % (0.6 )% 4.2 % 4.2 % — %
Total net sales 100.0 % 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 profit 93.4
106.4
(13.0 ) (12.2 )% 173.4
178.6
(5.1 ) (2.9 )%
Total gross margin 14.3 % 16.6 %
(2.3 )% 14.7 % 15.4 % (0.7 )%

~~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 sales 5.2 % 4.7 % 5.7 % 5.1 %
Sales and marketing 18.2
16.5
1.7
10.3 % 34.1
30.7
3.4
10.9 %
Percentage of total net sales 2.8 % 2.6 % 2.9 % 2.7 %
General and administrative 9.4
10.5
(1.1 ) (10.3 )% 20.2
18.7
1.5
7.9 %
Percentage of total net sales 1.5 % 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 sales 9.5 % 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.~~

~~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 six~~ months ended ~~December 31, 2016~~September 30, 2023 and ~~2015~~2022 are as follows (dollars in millions):


	Three Months Ended September 30,						Change
	2023			2022			$		%
Income tax provision	$	20.2		$	38.9		$	(18.7)	(48.1)	%
Percentage of total net sales	1.0		%	2.1		%
Effective tax rate	11.4		%	17.4		%

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 sales 1.4 % 2.2 % 1.3 % 1.8 %
Effective tax rate 29.7 % 28.8 % 30.6 % 30.8 %

~~Comparison of Three Months Ended December 31, 2016~~Our quarterly effective income tax rate is based on the estimated annual income tax rate forecast and ~~2015~~

~~Provision for income taxes.~~ ~~Provision for income taxes decreased by $4.7 million, or 33.8%~~discrete tax items recognized 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.period. The effective tax rate for the three months ended ~~December 31, 2016 was higher~~September 30, 2023, is lower than that for the three months ended September 30, 2022, primarily due to a significant increase in tax-deductible stock compensation expense in the ~~lower benefits~~three months ended September 30, 2023.

Share of Loss from ~~U.S. federal research~~Equity Investee, Net of Taxes

Share of loss from equity investee, net of taxes represents our share of loss from the Corporate Venture in which we have 30% ownership.

Share of loss from equity investee, net of taxes for the three months ended September 30, 2023 and ~~development ("R&D") tax credit and foreign rate differentials. For the third quarter~~2022 are as follows (dollars in millions):


	Three Months Ended September 30,						Change
	2023			2022			$		%
Share of loss from equity investee, net of taxes	$	—		$	(0.9)		$	0.9	n/m (1)
Percentage of total net sales	—		%	—		%

(1) n/m - Not meaningful

SMCI | Q1 2024 Form 10-Q | 32

Table of ~~fiscal year 2017, we expect a~~Contents

The period-over-period decrease of ~~approximately $1.9~~$0.9 million in share of ~~unrecognized tax benefits related to foreign uncertain tax positions resulting~~loss from ~~the completion~~equity investee, net of ~~the income tax audit in Taiwan.~~

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

~~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 provision for the six months ended December 31, 2016 was primarily attributable to our lower operating income. The effective tax rate for the six months ended December 31, 2016 was lower primarily due to a smaller net loss recognized by the ~~benefits from domestic production activities deductions.~~Corporate Venture.

Liquidity and Capital Resources

~~Since our inception, we~~We have financed our growth primarily with funds generated from operations, in addition to utilizing borrowing facilities. Our recent drivers of liquidity changes have included an increase in the need for working capital due to higher levels of inventory required by growing revenues and ~~from the proceeds of our initial public offering. In addition, we have utilized borrowing facilities, particularly in relation~~ to ~~the financing of real property acquisitions.~~a lesser extent, longer supply chain lead times on certain key components. Our cash and cash equivalents ~~and short-term investments~~ were ~~$128.8~~$543.2 million and ~~$181.0~~$440.5 million as of ~~December 31, 2016~~September 30, 2023 and June 30, ~~2016,~~2023, respectively. Our cash and cash equivalents in foreign locations was ~~$54.1~~$263.2 million ~~and $46.5~~ and $192.3 million ~~at December 31, 2016~~as of September 30, 2023 and June 30, ~~2016,~~2023, respectively. It

Amounts held outside of the U.S. are generally utilized to support non-U.S. liquidity needs. Repatriations generally will not be taxable from a U.S. federal tax perspective but may be subject to state income or foreign withholding tax. Where local restrictions prevent an efficient intercompany transfer of funds, our intent is ~~management's intention~~ to ~~reinvest~~keep cash balances outside of the ~~undistributed foreign earnings indefinitely in foreign~~U.S. and to meet liquidity needs through operating cash flows, external borrowings, or both. We do not expect restrictions or potential taxes incurred on repatriation of amounts held outside of the U.S. to have a material effect on our overall liquidity, financial condition or results of operations.

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 and maturing debt and interest payments for the 12 months following the filing of this Quarterly Report on Form 10-Q. On September 28, 2023, our company through our Taiwan subsidiary, entered into a new agreement pursuant to which our Taiwan subsidiary and CTBC Bank agreed to aggregate borrowings under all the New CTBC Credit Lines of up to $105.0 million. We continue to evaluate financing options that may be required to support the growth of our business, if it occurs more rapidly than anticipated.

On August 3, 2022, after the expiration of a prior share repurchase program on July 31, 2022, a duly authorized subcommittee of our Board approved a new share repurchase program to repurchase shares of our common stock for up to $200 million at prevailing prices in the open market. The share repurchase program is effective until January 31, 2024 or until the maximum amount of common stock is repurchased, whichever occurs first. We repurchased 1,553,350 shares of common stock for $150 million during the fiscal year ended June 30, 2023 under this program and have $50.0 million of remaining availability as of September 30, 2023.

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


	Three Months Ended September 30,				Change
	2023		2022
Net cash provided by operating activities	$	270.5	$	313.6	$	(43.1)
Net cash used in investing activities	$	(7.6)	$	(10.7)	$	3.1
Net cash used in financing activities	$	(159.9)	$	(331.2)	$	171.3
Net increase (decrease) in cash, cash equivalents and restricted cash	$	102.7	$	(29.8)	$	132.5

Operating ~~Activities.~~ Activities

Net cash provided by ~~(used in)~~ operating activities ~~was $(54.9) million and $86.9~~decreased by $43.1 million for the ~~six~~three months ended ~~December 31, 2016~~September 30, 2023 as compared to the three months ended September 30, 2022.The decrease was primarily due to higher cash used to purchase inventory by $416.8 million, a decrease in net income of $27.4 million, offset by an increase of $207.4 million from the collection of accounts receivables, an increase of $145.4 million from other working capital items, an increase of $46.4 million in stock based compensation expense and ~~2015, respectively.~~an increase of $1.9 million in various other non-cash items.

Investing Activities

Net cash used in ~~our operating~~investing activities decreased by $3.1 million for the ~~six~~three months ended ~~December 31, 2016 was~~September 30, 2023 as compared to the three months ended September 30, 2022 primarily due to ~~an increase~~a decrease of $8.1 million in ~~inventory~~purchases of ~~$156.7 million~~property, plant and ~~an increase in accounts receivable of $78.3 million, which were partially~~equipment offset by an ~~increase~~investment of $5.0 million made 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.the three months ended September 30, 2023.

SMCI | Q1 2024 Form 10-Q | 33

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Financing Activities

Net cash ~~provided by our operating~~used in financing activities ~~for~~was $171.3 million lower in the ~~six~~three months ended ~~December 31, 2015 was~~September 30, 2023 as compared to the three months ended September 30, 2022 primarily due to ~~our net income~~a lower repayment of ~~$48.4~~borrowings of $196.7 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~~a higher withholding tax payment for equity compensation related activities of $25.4 million in ~~inventory of $26.8 million, an increase~~the three months ended September 30, 2023.

Other Factors Affecting Liquidity and Capital Resources

Refer to Part I, Item 1, Note 6, “Short-term and Long-term Debt,” in ~~deferred income taxes assets of $4.4 million, and an increase~~our notes to condensed consolidated financial statements in ~~prepaid expenses and other assets of $4.3 million.~~this Quarterly Report on Form 10-Q for further information on our outstanding debt.

~~The increase~~Capital Expenditure Requirements

We anticipate our capital expenditures for the ~~six months ended December 31, 2016~~remainder of fiscal year 2024 will be in ~~accounts receivable was~~range of $102.0 million to $112.0 million, relating primarily ~~due~~ to ~~higher sales in the last month of~~costs associated with our manufacturing capabilities, including tooling for new products, new information technology investments, and facilities upgrades. During the second quarter of fiscal year ~~2017 as compared~~2023, we entered into a letter of understanding to acquire land in Malaysia to expand our manufacturing operations. A definitive agreement to acquire such land, subject to various conditions, was subsequently executed in January 2023. We are obtaining early access to such land prior to the ~~last month of~~acquisition, and we anticipate additional capital expenditures for the ~~fourth quarter~~remainder of fiscal year ~~2016. The increase~~2024 of $31.0 million (included in the above range) for such initiative. In addition, we will continue to evaluate new business opportunities and new markets. As a result, our future growth within the ~~six months ended December 31, 2016 in inventory~~existing business or new opportunities and ~~accounts payable was due to higher purchases~~markets may dictate the need for additional facilities and capital expenditures to support ~~memory~~that growth. We evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and ~~SSD component shortages as well as the lunar new year holiday shutdown in Asia at the end of January 2017.~~ customer retention) and our expected return on investment.

We ~~anticipate that accounts receivable, inventory and accounts payable will increase~~intend to ~~the extent we~~ continue to ~~grow~~focus our ~~product lines and our business.~~

~~The decrease for the six months ended December 31, 2015~~capital expenditures 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 purchases2024 to support the ~~lunar new year holiday shutdown in Asia in the beginning~~growth 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 million and $15.6 million for the six months ended December 31, 2016 and 2015, respectively. In the six months ended December 31, 2016, 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 second manufacturing facility in the Green Computing Park. We plan to finance this development through our operating cash flows and additional borrowings from banks. In the six months ended December 31, 2015, $15.2 million was related to the purchase of property, plant and equipment.

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

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

~~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.~~operations. Our ~~long-term~~ future capital requirements will depend on many factors including our ~~level of revenues,~~growth rate, the timing and extent of spending to support ~~our product~~ development efforts, the expansion of sales and marketing activities, the ~~timing of our introductions~~introduction of new ~~products, the costs to ensure access to adequate manufacturing capacity~~ and ~~the continuing market acceptance of~~enhanced software and services offerings and investments in 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, 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.

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

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

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

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

~~CTBC Bank~~

In November 2015, we entered into an amendment to the existing credit agreement with CTBC Bank Co., Ltd ("CTBC Bank") that provides for (i) a 12-month NTD$700.0 million or $22.0 million U.S. dollar equivalent term loan secured by the land and building located in Bade, Taiwan with an interest rate equal to the lender's established NTD interest rate plus 0.25% per annum which is adjusted monthly and (ii) a 12-month revolving line of credit up to 80.0% of eligible accounts receivable in an aggregate amount of up to $17.0 million with an interest rate equal to the lender's established USD interest rate plus 0.30% per annum which is adjusted monthly. The total borrowings allowed under the credit agreement are capped at NTD$1.0 billion or $30.3 million U.S. dollar equivalent. In January 2016, we extended the revolving line of credit to mature on March 31, 2016.

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

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

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

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

~~Covenant Compliance~~

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

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

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

As of December 31, 2016, our total assets of $998.3 million collateralized the line of credit with Bank of America under the new credit agreement, which represent the total assets of the United States headquarters company except for seven buildings located in San Jose, California and property, plant and equipment and inventory in those buildings. As of December 31, 2016, total assets collateralizing the term loan with Bank of America were $101.1 million. As of December 31, 2016, we were in compliance with all financial covenants associated with the term loan and lines of credit with Bank 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. There are no financial covenants associated with the term loan with CTBC Bank.

~~Contract Manufacturers~~

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

~~Share Repurchase Program~~

In July 2016, our Board of Directors adopted a program to repurchase from time to time at management’s discretion up to $100,000,000 of our common stock in the open market or in private transactions during the following twelve months at prevailing market prices. Repurchases will be made under the program using our own cash resources. This share repurchase program does not obligate us to acquire any particular amount of common stock, and it may be suspended at any time at 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.

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~~Contractual Obligations~~

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

Payments Due by Period

Less Than
1 Year

1 to 3
Years

3 to 5
Years

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

~~__________________________~~


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


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

~~(3)~~

The table above excludes liabilities for deferred revenue of $52.0 million and unrecognized tax benefits and related interest and penalties accrual of $18.8 million. We have not provided a detailed estimate of the payment timing of unrecognized tax benefits due to the uncertainty of when the related tax settlements will become due. See Note 8 of Notes to our Condensed Consolidated Financial Statements for a discussion of income taxes.

~~We expect to fund our remaining contractual obligations from our ongoing operations and existing cash and cash equivalents on hand.~~

Recent Accounting Pronouncements

For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our ~~Condensed Consolidated Financial Statements,~~condensed consolidated financial statements, see Part I, Item 1, Note 1, “Summary of Significant Accounting Policies,” ofto the ~~Notes to Condensed Consolidated Financial Statements.~~condensed consolidated financial statements in this Quarterly Report on Form 10-Q.

~~Off-Balance Sheet Arrangements~~

~~We do not have any off-balance sheet arrangements.~~

SMCI | Q1 2024 Form 10-Q | 34

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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.~~deposit, all of which are held for purposes other than trading. Our ~~long-term investments include~~investment in an auction rate ~~securities, which have~~security has been classified as ~~long-term~~non-current due to the lack of a liquid market for these securities. Since our results of operations are not dependent on investments, the risk associated with fluctuating interest rates is limited to our investment portfolio, and we believe that a 10% change in interest rates would not have a significant impact on our results of operations. As of ~~December 31, 2016,~~September 30, 2023, our investments were in money market funds, certificates of deposits and auction rate securities.

We are exposed to changes in interest rates as a result of our borrowings under our term ~~loan~~loans and revolving lines of credit. The interest rates for the term loans and the revolving lines of credit ranged from ~~0.95%~~1.2% to ~~2.15%~~7.5% at ~~December 31, 2016~~September 30, 2023 and ~~0.90%~~1.20% to ~~1.96%~~7.08% at June 30, ~~2016, respectively.~~2023. Based on the outstanding principal indebtedness of ~~$127.2~~$146.2 million under our credit facilities as of ~~December 31, 2016,~~September 30, 2023, 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, the~~The functional currency of our ~~operations~~subsidiaries in the Netherlands and Taiwan is the U.S. ~~dollar~~dollar. However, certain loans and ~~our local accounts including financing arrangements~~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~~Realized and unrealized foreign exchange gain ~~(loss)~~ for the three ~~and six~~ months ended ~~December 31, 2016~~September 30, 2023 and 2022 was ~~$0.6~~$7.5 million and ~~$0.1 million, respectively, and for the three and six months ended December 31, 2015 was $(0.5) million and $1.4~~$7.8 million, respectively.

SMCI | Q1 2024 Form 10-Q | 35

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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 management, including our Chief Executive Officer ("CEO") and ~~our~~ Chief Financial Officer ("CFO"), we evaluated the effectiveness of our disclosure controls and procedures as ~~such term is~~ defined in ~~Rule~~Rules 13a-15(e) and 15d-15(e) ~~promulgated~~ under the ~~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 the~~Securities 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 September 30, 2023. Based on ~~that~~this evaluation, our ~~Chief Executive Officer~~CEO and ~~our Chief Financial Officer~~CFO have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of ~~December 31, 2016.~~September 30, 2023.

Changes in Internal Control over Financial Reporting

Under applicable SEC rules (Exchange Act Rules 13a-15(d) and 15d-15(d)), management is required to 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. There were no changes in our internal control over financial reporting ~~(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation described in this Item 9A that occurred~~ during the quarter ended ~~December 31, 2016~~September 30, 2023, 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.

SMCI | Q1 2024 Form 10-Q | 36

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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 involved~~the information set forth under the caption “Legal proceedings and indemnifications” in ~~various~~Part I, Item 1, Note 11 “Commitments and Contingencies” of our notes to condensed consolidated financial statements included in this quarterly report.

Due to the inherent uncertainties of legal proceedings, ~~arising from~~we cannot predict the ~~normal course~~outcome of ~~business activities. We defend ourselves vigorously against any such claims. In management's opinion,~~ the ~~resolution of any pending matters~~proceedings at this time, and we can give no assurance that they will not have a material adverse effect on our ~~consolidated~~ financial ~~condition,~~position or results of ~~operations, or liquidity.~~operations.

Item 1A. Risk Factors

~~The Risk Factors included in our Annual Report on Form 10-K for the year ended June 30, 2016 have not materially changed. You should carefully consider the following~~Important 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-attacks~~and other related cyber-security issues could disrupt our internal operations or interfere with our products, and any such disruption could reduce our expected revenues, increase our expenses, damage our reputation and adversely affect our stock price.

~~Experienced computer programmers and hackers may be able to penetrate our network and misappropriate or compromise our confidential information~~performance, or that ~~of third parties, create system disruptions~~could cause results or ~~cause shutdowns. Computer programmers and hackers also may be able~~events to ~~develop and deploy viruses, worms, and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities~~differ 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,2023 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.

~~Table of Contents~~

~~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

~~Table of Contents~~

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 ~~December 31, 2016,~~September 30, 2023, we did not repurchase ~~any~~ shares of our common stock. As

On August 3, 2022, after the expiration of ~~December 31, 2016, the approximate dollar value of shares that may yet be purchased under our~~a prior share repurchase program ~~was $81.5 million.~~on July 31, 2022, a duly authorized subcommittee of our Board approved a new share repurchase program to repurchase shares of our common stock for up to $200 million at prevailing prices in the open market. The share repurchase program is effective until January 31, 2024 or until the maximum amount of common stock is repurchased, whichever occurs first. We repurchased 1,553,350 shares of common stock for $150 million during the fiscal year ended June 30, 2023 under this program and had $50.0 million of remaining availability as of September 30, 2023.

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

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

~~None.~~Rule 10b5-1 Trading Plans

Certain of the Company’s directors have entered into trading plans pursuant to Rule 10b5-1(c) of the Securities Exchange Act of 1934, as amended. The following table summarizes the adoption of trading plans intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) during the three months ended September 30, 2023:


Name and Title	Adoption Date	End Date	Aggregate Number of Shares of the Company’s Common Stock to be Sold
Daniel Fairfax, non-employee director	August 30, 2023	June 28, 2024	2,100

SMCI | Q1 2024 Form 10-Q | 37

Table of Contents

During the three months ended September 30, 2023, no pre-existing trading plans intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) were terminated or modified by the Company’s executive officers and directors, and no other written trading arrangements not intended to qualify for the Rule 10b5-1(c) affirmative defense were adopted, modified, or terminated by the Company’s executive officers and directors.

SMCI | Q1 2024 Form 10-Q | 38

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Item 6. Exhibits

(a) Exhibits.

Exhibit
Number

Description

10.1

General Agreement for Omnibus Credit Lines dated as of September 28 , 2023 between Super Micro Computer, Inc. Taiwan and CTBC Bank Co., Ltd. (Incorporated by reference to Exhibit 10.1 from the Company’s Current Report on 8-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on October 2, 2023)

~~Exhibit~~

~~Number~~

~~Description~~

~~31.1~~

10.2

Agreement for Individually Negotiated Terms and Conditions dated as of September 28 , 2023 between Super Micro Computer, Inc. Taiwan and CTBC Bank Co., Ltd. (Incorporated by reference to Exhibit 10.2 from the Company’s Current Report on 8-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on October 2, 2023)

10.3

Summary of Short-Term Credit Facilities dated as of August 21, 2023 (Incorporated by reference to Exhibit 10.3 from the Company’s Current Report on 8-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on October 2, 2023)

10.4

Form of Restricted Stock Units Notice of Grant and Agreement (Associated with the Director Compensation Plan adopted in August 2023) (Incorporated by reference to Exhibit 10.57 from the Company’s Annual Report on 10-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on August 28, 2023)

10.5

Form of Notice of Grant of Stock Option and Nonqualified Stock Option Award Agreement (Associated with the Director Compensation Plan adopted in August 2023) (Incorporated by reference to Exhibit 10.58 from the Company’s Annual Report on 10-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on August 28, 2023)

31.1+

Certification of Charles Liang, President and Chief Executive Officer of the Registrant pursuant to Section 302, as adopted pursuant to the Sarbanes-Oxley Act of 2002

~~31.2~~

31.2+

Certification of ~~Howard Hideshima,~~David Weigand, Chief Financial Officer of the Registrant pursuant to Section 302, as adopted pursuant to the Sarbanes-Oxley Act of 2002

~~32.1~~

32.1+

Certification of Charles Liang, President and Chief Executive Officer of the Registrant pursuant to Section 906, as adopted pursuant to the Sarbanes-Oxley Act of 2002

~~32.2~~

32.2+

Certification of ~~Howard Hideshima,~~David Weigand, Chief Financial Officer of the Registrant pursuant to Section 906, as adopted pursuant to the Sarbanes-Oxley Act of 2002

~~101.INS~~

101.INS+

XBRL Instance Document

~~101.SCH~~

101.SCH+

XBRL Taxonomy Extension Schema Document

~~101.CAL~~

101.CAL+

XBRL Taxonomy Extension Calculation Linkbase Document

~~101.DEF~~

101.DEF+

XBRL Taxonomy Extension Definition Linkbase Document

~~101.LAB~~

101.LAB+

XBRL Taxonomy Extension Label Linkbase Document

~~101.PRE~~

101.PRE+

XBRL Taxonomy Extension Presentation Linkbase Document

104+

The cover page from this Quarterly Report on Form 10-Q, formatted in Inline XBRL

+ Filed herewith

SMCI | Q1 2024 Form 10-Q | 39

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SIGNATURES

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

SUPER MICRO COMPUTER, INC.



Date:	~~February 7, 2017~~November 3, 2023	/s/ C~~HARLES~~ L~~IANG~~ CHARLES LIANG
		Charles Liang President, Chief Executive Officer and Chairman of the Board (Principal Executive Officer)



Date:	~~February 7, 2017~~November 3, 2023	/s/ ~~Howard Hideshima~~ DAVID WEIGAND
		~~Howard Hideshima~~ David Weigand Senior Vice President, Chief Financial Officer (Principal Financial and Accounting Officer)

SMCI | Q1 2024 Form 10-Q | 40



	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
Inventory	599,269			448,980
Prepaid income taxes	5,164			5,682
Prepaid expenses and other current assets	13,738			13,435
Total current assets	1,113,808			938,002
Long-term investments	2,643			2,643
Property, plant and equipment, net	193,670			187,949
Deferred income taxes-noncurrent	32,255			28,460
Other assets	7,480			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 liabilities	74,331			55,618
Income taxes payable	1,048			5,172
Short-term debt and current portion of long-term debt, net of debt issuance costs	92,443			53,589
Total current liabilities	509,762			363,618
Long-term debt, net of current portion and debt issuance costs	34,732			40,000
Other long-term liabilities	53,001			40,603
Total liabilities	597,495			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, respectively	291,275			277,339
Treasury stock (at cost), 1,333,125 and 445,028 shares at December 31, 2016 and June 30, 2016, respectively	(20,491		)	(2,030		)
Accumulated other comprehensive loss	(83		)	(85		)
Retained earnings	481,499			445,971
Total Super Micro Computer, Inc. stockholders’ equity	752,200			721,195
Noncontrolling interest	161			184
Total stockholders’ equity	752,361			721,379
Total liabilities and stockholders’ equity	$	1,349,856		$	1,165,600



	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 profit	93,378			106,362			173,442			178,577
Operating expenses:
Research and development	34,033			30,264			67,224			58,590
Sales and marketing	18,153			16,461			34,069			30,710
General and administrative	9,429			10,511			20,184			18,711
Total operating expenses	61,615			57,236			121,477			108,011
Income from operations	31,763			49,126			51,965			70,566
Interest and other income, net	45			24			74			111
Interest expense	(497		)	(400		)	(827		)	(724		)
Income before income tax provision	31,311			48,750			51,212			69,953
Income tax provision	9,315			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:
Basic	48,124			47,651			48,144			47,584
Diluted	51,521			51,489			51,352			51,405



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



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



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



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

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



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

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



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