Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm	67
Consolidated Balance Sheets	71
Consolidated Statements of Operations	72
Consolidated Statements of Comprehensive Income	73
Consolidated Statements of Stockholders’ Equity	74
Consolidated Statements of Cash Flows	75
Notes to Consolidated Financial Statements	77

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Super Micro Computer, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Super Micro Computer, Inc. and subsidiaries (the "Company") as of June 30, 2019 and 2018, the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows, for each of the three years in the period ended June 30, 2019, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2019, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated December 19, 2019, expressed an adverse opinion on the Company’s internal control over financial reporting because of material weaknesses.

Change in Accounting Principle

As discussed in Note 1 to the financial statements, effective July 1, 2018, the Company has changed its method of accounting for revenue due to adoption of Accounting Standards Codification Topic 606 (ASU No. 2014-09), Revenue from Contracts with Customers, and all subsequent amendments (collectively, “ASC 606”). The Company adopted ASC 606 using the modified retrospective approach.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Related Party Transactions - Variable Interest Entity Primary Beneficiary Determination - Refer to Note 1 to the financial statements

Critical Audit Matter Description

The Company has a variety of business relationships defined by various agreements with Ablecom Technology, Inc. (“Ablecom”) and its affiliate, Compuware Technology, Inc. ("Compuware"). Ablecom is one of the Company’s major contract manufacturers; Compuware is both a distributor of the Company’s products and a contract manufacturer for the Company.

Purchases from Ablecom and Compuware were $144.5 million and $139.6 million, respectively, for the fiscal year ended June 30, 2019. Net sales to Compuware as a distributor were $17.7 million for the fiscal year ended June 30, 2019.

The Company concluded that Ablecom and Compuware are variable interest entities (VIEs) and that it is not the primary beneficiary as it does not have the power to direct the activities that are most significant to Ablecom and Compuware. Therefore, the Company does not consolidate Ablecom and Compuware. The Company considered its explicit arrangements with Ablecom and Compuware, including its supplier arrangements, and as a result of the substantial related party relationships between the Company, Ablecom and Compuware, the Company also considered whether any implicit arrangements exist that would cause the Company to protect those related parties’ interests from suffering losses. The Company determined that no material implicit arrangements exist with Ablecom, Compuware, or their shareholders.

We identified management’s conclusion that it is not the primary beneficiary as a critical audit matter because of the judgments necessary for management to determine whether any explicit and implicit arrangements exist that would cause the Company to protect those related parties’ interest from absorbing losses, as well as the material weaknesses identified by the Company in all five components of Internal Control - Integrated Framework (2013) issued by COSO. This required extensive audit effort due to the complexity and variety of related party relationships with Ablecom and Compuware and required a high degree of auditor judgment when performing audit procedures to audit the Company’s conclusion that it is not the primary beneficiary.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to management’s conclusion that it is not the primary beneficiary included the following, among others:

•	We evaluated and tested whether the arrangements are accurately considered and that arrangements have been included in the consideration by comparing those related parties we had identified during our audit procedures for proper inclusion in the Company’s evaluation and performed inspection of source documents on a sample basis.

•	We tested management’s assertion that it does not have the power to direct the activities that are most significant to, or obligation to absorb the losses of, Ablecom and Compuware by reviewing all agreements and transactions between the parties.

•	We obtained confirmations directly from Ablecom and Compuware regarding the nature of their business relationships with the Company, the extent of power, if any, held by the Company over the most significant activities of Ablecom and Compuware’s businesses, and the existence of any implicit arrangements that may have a bearing on the Company’s ability to have power over Ablecom and Compuware.

As a result of the material weaknesses identified by the Company in all five components of Internal Control - Integrated Framework (2013) issued by COSO, we increased the extent of testing around the Company’s procedures for assessing whether the arrangements with Ablecom and Compuware are off market or whether they force Ablecom and Compuware to absorb losses. We also increased the extent of testing to determine if there are any agreements that provide the Company with power to direct the activities that are most significant to Ablecom and Compuware.

Inventories - Excess and Obsolescence Reserve - Refer to Notes 1 and 5 to the financial statements

Critical Audit Matter Description

The Company’s inventories are stated at weighted average cost, subject to lower of cost or net realizable value, and as necessary, the Company writes down the valuation of inventories for excess and obsolescence. The provision for excess and obsolete inventory for the fiscal year ended June 30, 2019, was $28.5 million.

We identified the excess and obsolescence reserve as a critical audit matter because of the judgments management makes to estimate the excess and obsolescence reserve, as well as the material weaknesses identified by the Company in all five components of Internal Control - Integrated Framework (2013) issued by COSO. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the methodology and the reasonableness of the excess and obsolescence reserve.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the Company’s excess and obsolescence reserve included the following procedures, among others:

•	We gained an understanding and evaluated the Company’s methodology for determining inventory that is excess or obsolete and the key assumptions and judgments made as part of the process.

•	We evaluated the assumptions used by the Company to define what is considered aged inventory by assessing historical trends in the Company’s product life cycle as well as evaluating the underlying calculations applied to the aged inventory.

•	We evaluated the inventory valuation utilizing the methodology above to assess the inventory reserve rate applied to different aging buckets.

As a result of the Company’s material weaknesses identified by the Company in all five components of Internal Control - Integrated Framework (2013) issued by COSO, we increased the extent of testing on reports derived from the Company’s systems and applications.

Revenue - Refer to Note 3 to the financial statements

Critical Audit Matter Description

The Company recognizes revenue from sales of products as control is transferred to customers, which generally happens at the point of shipment or upon delivery, unless customer acceptance is uncertain. Revenue from distributors is recognized when the distributor obtains control of the product, which generally happens at the point of shipment or upon delivery, unless customer acceptance is uncertain. Net sales for the fiscal year ended June 30, 2019 was $3.5 billion, which principally consist of product sales.

We identified the timing of revenue recognition for product sales (i.e., whether the Company recorded product sales in the appropriate fiscal year) as a critical audit matter because of the material weaknesses identified by the Company associated with revenue recognition accounting controls and the material weaknesses in all five components of Internal Control - Integrated Framework (2013) issued by COSO. This made auditing the timing of revenue recognition for product sales more challenging and required an increased extent of audit effort, including the need for us to involve specialists and modify the nature and extent of our audit procedures and the evidence obtained.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the timing of revenue recognition for product sales included the following, among others:

•	We selected a sample of product sales from the period immediately preceding the Company’s fiscal year end and obtained the invoice, purchase order, customer contract or agreement, packing list, bill of lading, proof of delivery, and evidence of cash collection, in order to evaluate whether revenue was recognized in the appropriate fiscal year.

•	We selected a sample of product sales for the year and obtained the related contract to identify whether customer acceptance clauses existed that delayed the timing of revenue recognition.

•

We selected a sample of credit memos from the period immediately subsequent to the Company’s fiscal year end and obtained the credit memo and the related invoice, return merchandise authorization form, and shipping documents, as applicable and among others, to evaluate whether revenue was recognized in the fiscal year ended June 30, 2019 before control was transferred to the customer or customer acceptance was certain.

•	We obtained and evaluated internal certifications provided by the Company’s employees related to sales transactions in order to identify the existence of side agreements that could impact the timing of revenue recognition. We also selected a sample of employees and conducted interviews to corroborate the accuracy and completeness of the information provided in the certifications.

•	We selected a sample of the Company’s top customers and confirmed the terms and conditions of the master sales

agreement or purchase orders directly with the customer.

As a result of the material weaknesses, among other modifications to the nature and extent of our audit procedures and the evidence obtained, we involved forensic specialists, increased the number of selections we would have otherwise made if the Company’s controls were designed and operating effectively. With the assistance of information technology and data analytics specialists, we also performed data extraction procedures to test the accuracy and completeness of the revenue information generated from the Company’s systems and applications.

/s/ Deloitte & Touche LLP

San Jose, California

December 19, 2019

We have served as the Company's auditor since fiscal 2003.

SUPER MICRO COMPUTER, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

	June 30,				June 30,
	2019				2018
ASSETS
Current assets:
Cash and cash equivalents	$	248,164			$	115,377
Accounts receivable, net of allowances of $8,906 and $1,945 at June 30, 2019 and 2018, respectively (including amounts receivable from related parties of $13,439 and $3,082 at June 30, 2019 and 2018, respectively)	393,624				451,393
Inventories	670,188				853,252
Prepaid expenses and other current assets (including receivables from related parties of $21,302 and $24,016 at June 30, 2019 and 2018, respectively)	109,795				110,856
Total current assets	1,421,771				1,530,878
Investment in equity investee	1,701				2,376
Property, plant and equipment, net	207,337				196,631
Deferred income taxes, net	41,126				25,583
Other assets	10,659				14,037
Total assets	$	1,682,594			$	1,769,505
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable (including amounts due to related parties of $59,809 and $77,810 at June 30, 2019 and 2018, respectively)	$	360,470			$	527,158
Accrued liabilities (including amounts due to related parties of $10,536 and $18,394 at June 30, 2019 and 2018, respectively)	114,678				102,478
Income taxes payable	13,021				7,191
Short-term debt	23,647				116,181
Deferred revenue	94,153				58,549
Total current liabilities	605,969				811,557
Deferred revenue, non-current	109,266				89,731
Other long-term liabilities (including related party balance of $3,000 and $3,500 at June 30, 2019 and 2018, respectively)	26,183				24,565
Total liabilities	741,418				925,853
Commitments and contingencies (Note 15)
Stockholders’ equity:
Common stock and additional paid-in capital, $0.001 par value
Authorized shares: 100,000,000
Issued shares: 51,289,413 and 50,914,571 at June 30, 2019 and 2018, respectively	349,683				331,550
Treasury stock (at cost), 1,333,125 shares at June 30, 2019 and 2018	(20,491		)		(20,491		)
Accumulated other comprehensive (loss) income	(80		)		165
Retained earnings	611,903				532,271
Total Super Micro Computer, Inc. stockholders’ equity	941,015				843,495
Noncontrolling interest	161				157
Total stockholders’ equity	941,176				843,652
Total liabilities and stockholders’ equity	$	1,682,594			$	1,769,505

See accompanying notes to consolidated financial statements.

SUPER MICRO COMPUTER, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

	Years Ended June 30,
	2019				2018				2017
Net sales (including related party sales of $69,906, $68,637 and $33,821 in fiscal years 2019, 2018 and 2017, respectively)	$	3,500,360			$	3,360,492			$	2,484,929
Cost of sales (including related party purchases of $276,843, $262,747, and $236,062 in fiscal years 2019, 2018 and 2017, respectively)	3,004,838				2,930,498				2,134,971
Gross profit	495,522				429,994				349,958
Operating expenses:
Research and development	179,907				165,104				143,992
Sales and marketing	77,154				71,579				66,445
General and administrative	141,228				98,597				44,646
Total operating expenses	398,289				335,280				255,083
Income from operations	97,233				94,714				94,875
Other expense, net	(1,020		)		(773		)		(984		)
Interest expense	(6,690		)		(5,726		)		(2,300		)
Income before income tax provision	89,523				88,215				91,591
Income tax provision	(14,884		)		(38,443		)		(24,434		)
Share of loss from equity investee, net of taxes	(2,721		)		(3,607		)		(303		)
Net income	$	71,918			$	46,165			$	66,854
Net income per common share:
Basic	$	1.44			$	0.94			$	1.38
Diluted	$	1.39			$	0.89			$	1.29
Weighted-average shares used in calculation of net income per common share:
Basic	49,917				49,345				48,383
Diluted	51,716				52,151				51,679

See accompanying notes to consolidated financial statements.

SUPER MICRO COMPUTER, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

	Years Ended June 30,
	2019				2018				2017
Net income	$	71,918			$	46,165			$	66,854
Other comprehensive (loss) income, net of tax:
Foreign currency translation (loss) gain	(245		)		280				19
Net changes in unrealized loss on investments	—				(38		)		(11		)
Total other comprehensive (loss) income	(245		)		242				8
Total comprehensive income	$	71,673			$	46,407			$	66,862

See accompanying notes to consolidated financial statements.

SUPER MICRO COMPUTER, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share amounts)

	Common Stock and Additional Paid-In Capital							Treasury Stock							Accumulated Other Comprehensive (Loss) Income				Retained Earnings				Non-controlling Interest				Total Stockholders’ Equity
	Shares			Amount				Shares			Amount
Balance at June 30, 2016	48,999,717			$	279,465			(445,028	)		$	(2,030	)		$	(85	)		$	419,119			$	184			$	696,653
Exercise of stock options, net of taxes	1,007,065			10,878				—			—				—				—				—				10,878
Release of common stock shares upon vesting of restricted stock units	411,739			—				—			—				—				—				—				—
Shares withheld for the withholding tax on vesting of restricted stock units	(144,994	)		(3,554		)		—			—				—				—				—				(3,554		)
Purchase of treasury stock	—			—				(888,097	)		(18,461		)		—				—				—				(18,461		)
Stock-based compensation	—			19,665				—			—				—				—				—				19,665
Tax benefit resulting from stock option and restricted stock unit transactions	—			1,817				—			—				—				—				—				1,817
Net changes in unrealized loss on investments, net of taxes	—			—				—			—				(11		)		—				—				(11		)
Foreign currency translation gain	—			—				—			—				19				—				—				19
Net income (loss)	—			—				—			—				—				66,854				(14		)		66,840
Balance at June 30, 2017	50,273,527			$	308,271			(1,333,125	)		$	(20,491	)		$	(77	)		$	485,973			$	170			$	773,846
Cumulative effect of adjustment from adoption of new accounting standard, net of taxes	—			52				—			—				—				133				—				185
Exercise of stock options, net of taxes	267,970			3,043				—			—				—				—				—				3,043
Release of common stock shares upon vesting of restricted stock units	572,789			—				—			—				—				—				—				—
Shares withheld for the withholding tax on vesting of restricted stock units	(199,715	)		(4,472		)		—			—				—				—				—				(4,472		)
Stock-based compensation	—			24,656				—			—				—				—				—				24,656
Net changes in unrealized loss on investments, net of taxes	—			—				—			—				(38		)		—				—				(38		)
Foreign currency translation gain	—			—				—			—				280				—				—				280
Net income (loss)	—			—				—			—				—				46,165				(13		)		46,152
Balance at June 30, 2018	50,914,571			$	331,550			(1,333,125	)		$	(20,491	)		$	165			$	532,271			$	157			$	843,652
Cumulative effect of adjustment from adoption of new accounting standards, net of taxes	—			—				—			—				—				7,714				—				7,714
Release of common stock shares upon vesting of restricted stock units	549,886			—				—			—				—				—				—				—
Shares withheld for the withholding tax on vesting of restricted stock units	(175,044	)		(3,051		)		—			—				—				—				—				(3,051		)
Stock-based compensation	—			21,184				—			—				—				—				—				21,184
Foreign currency translation loss	—			—				—			—				(245		)		—				—				(245		)
Net income	—			—				—			—				—				71,918				4				71,922
Balance at June 30, 2019	51,289,413			$	349,683			(1,333,125	)		$	(20,491	)		$	(80	)		$	611,903			$	161			$	941,176

See accompanying notes to consolidated financial statements.

SUPER MICRO COMPUTER, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Years Ended June 30,
	2019				2018				2017
OPERATING ACTIVITIES:
Net income	$	71,918			$	46,165			$	66,854
Reconciliation of net income to net cash provided by (used in) operating activities:
Depreciation and amortization	24,202				21,846				16,357
Stock-based compensation expense	21,184				24,656				19,665
Excess tax benefits from stock-based compensation	—				—				(2,310		)
Allowance (recoveries) for doubtful accounts	7,058				(96		)		334
Provision for excess and obsolete inventories	32,946				9,649				15,729
Other	733				909				—
Impairment of investments	2,661				—				—
Share of loss from equity investee	2,721				3,607				303
Foreign currency exchange (gain) loss	(313		)		171				1,274
Deferred income taxes, net	(17,100		)		13,570				(5,434		)
Changes in operating assets and liabilities:
Accounts receivable, net (including changes in related party balances of $(10,357), $3,795, and $(6,828) in fiscal years 2019, 2018, and 2017, respectively)	85,027				(127,082		)		(149,455		)
Inventories	119,314				(126,232		)		(235,590		)
Prepaid expenses and other assets (including changes in related party balances of $2,714, $(10,689), and $(3,705) in fiscal years 2019, 2018, and 2017, respectively)	8,410				(15,714		)		(2,856		)
Accounts payable (including changes in related party balances of $(18,001), $21,882, and $10,987 in fiscal years 2019, 2018, and 2017, respectively)	(173,410		)		132,533				135,320
Income taxes payable	5,831				5,827				(1,873		)
Accrued liabilities (including changes in related party balances of $(7,858), $9,944, and $3,096 in fiscal years 2019, 2018, and 2017, respectively)	11,456				23,238				17,329
Deferred revenue	59,800				67,775				31,236
Other long-term liabilities (including changes in related party balances of $(500), $(1,400), and $4,900 in fiscal years 2019, 2018, and 2017, respectively)	116				3,525				(3,071		)
Net cash provided by (used in) operating activities	262,554				84,347				(96,188		)
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (including payments to related parties of $4,472, $6,005, and $4,570 in fiscal years 2019, 2018, and 2017, respectively)	(24,849		)		(24,824		)		(29,365		)
Proceeds from redemption of auction rate security	—				1,000				—
Investments in privately held companies	—				(2,100		)		—
Net cash used in investing activities	(24,849		)		(25,924		)		(29,365		)
FINANCING ACTIVITIES:
Proceeds from borrowings, net of debt issuance costs	41,760				107,337				207,029
Repayment of debt	(67,700		)		(220,299		)		(140,452		)
Net (repayment) borrowings on asset-backed revolving line of credit, net of costs	(65,945		)		64,226				—
Payment of other fees for debt financing	(625		)		(414		)		—
Advances under receivables financing arrangement	—				—				227
Proceeds from exercise of stock options	—				3,043				10,878
Excess tax benefits from stock-based compensation	—				—				2,310
Payments of obligations under capital leases	(267		)		(253		)		(253		)
Payment of withholding tax on vesting of restricted stock units	(3,051		)		(4,472		)		(3,554		)
Payments to acquire treasury stock	—				—				(18,461		)
Net cash (used in) provided by financing activities	(95,828		)		(50,832		)		57,724
Effect of exchange rate fluctuations on cash	(119		)		(6		)		(45		)
Net increase (decrease) in cash, cash equivalents, and restricted cash	141,758				7,585				(67,874		)
Cash, cash equivalents and restricted cash at beginning of year	120,382				112,797				180,671
Cash, cash equivalents and restricted cash at end of year	$	262,140			$	120,382			$	112,797

Supplemental disclosure of cash flow information:
Cash paid for interest	$	3,861			$	4,541			$	2,082
Cash paid for taxes, net of refunds	$	23,604			$	14,734			$	30,809
Non-cash investing and financing activities:
Equipment purchased under capital leases	$	—			$	—			$	314
Unpaid property, plant and equipment purchases (including due to related parties of $1,609, $654 and $1,168 as of June 30, 2019, 2018 and 2017, respectively)	$	9,232			$	2,285			$	5,056
Contribution of certain technology rights to equity investee	$	3,000			$	—			$	7,000

See accompanying notes to consolidated financial statements.

SUPER MICRO COMPUTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization and Summary of Significant Accounting Policies

Organization

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

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The consolidated financial statements of Super Micro Computer include the accounts of Super Micro Computer and entities consolidated under the variable interest model or the voting interest model. Noncontrolling interests are not presented separately in the consolidated statements of operations, and consolidated statements of comprehensive income as the amounts are immaterial. All intercompany accounts and transactions of Super Micro Computer and its consolidated entities (collectively, the "Company") have been eliminated in consolidation. For equity investments over which the Company is able to exercise significant influence over the investee but does not control the investee, and is not the primary beneficiary of the investee’s activities are accounted for using the equity method. Investments in equity securities which do not have readily determinable fair values and for which the Company is not able to exercise significant influence over the investee are accounted for under the measurement alternative which is the cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar securities of the same investee. Prior to July 1, 2018, investments for which the Company was not able to exercise significant influence over the investee were accounted for under the cost method.

Certain reclassifications have been made to the amounts for the fiscal year 2017 consolidated statement of operations and consolidated statement of cash flows in order to conform to the current year’s presentation.

Use of Estimates

U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Such estimates include, but are not limited to: allowances for doubtful accounts and sales returns, inventory valuation, useful lives of property, plant and equipment, product warranty accruals, stock-based compensation, impairment of investments and long-lived assets, and income taxes. The Company’s estimates are evaluated on an ongoing basis and changes in the estimates are recognized prospectively. Actual results could differ from those estimates.

Fair Value of Financial Instruments

The Company accounts for certain assets and liabilities at fair value, which is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly arms-length transaction between market participants. When measuring fair value, the Company takes into account the characteristics of the asset or liability that a market participant would consider when pricing the asset or liability at the measurement date. The Company considers one or more techniques for measuring fair value: market approach, income approach, and cost approach. The valuation techniques include inputs that are based on three different levels of observability to the market. The Company categorizes each of its fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

•	Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

•	Level 2 - Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and

SUPER MICRO COMPUTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

•	Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

Accounts receivable and accounts payable are carried at cost, which approximates fair value due to the short maturity of these instruments. Cash equivalents, certificates of deposit and investments in auction rate securities are carried at fair value. Short-term debt is carried at amortized cost, which approximates its fair value based on borrowing rates currently available to the Company for loans with similar terms.

Cash and Cash Equivalents

The Company considers all highly liquid instruments with an original maturity of three months or less from the date of purchase to be cash equivalents. Cash equivalents consist primarily of money market funds and certificates of deposit with original maturities of less than three months.

Restricted Cash and Cash Equivalents

Restricted cash is comprised of amounts held in bank accounts which are controlled by the lenders pursuant to the terms of certain debt agreements, certificates of deposit primarily related to leases and customs requirements, and money market accounts held in escrow pursuant to the Company’s workers’ compensation program. These restricted cash balances have been excluded from the Company's cash and cash equivalents balance.

Investments in Auction Rate Securities

The Company classifies its investments in auction rate securities ("auction rate securities") as non-current available-for-sale investments. The auction rate securities consist of municipal securities, which are debt securities. The Company uses discounted cash flow to estimate the fair value of any auction rate securities. These auction rate securities are recorded within other assets in the consolidated balance sheets at fair value. Unrealized gains and losses on auction rate securities are included as a component of accumulated other comprehensive (loss) income, net of tax.

Inventories

Inventories are stated at weighted average cost, subject to lower of cost or net realizable value. Net realizable value is the estimated selling price of our products in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Inventories consist of purchased parts and raw materials (principally electronic components), work in process (principally products being assembled) and finished goods. The Company evaluates inventory on a quarterly basis for lower of cost or net realizable value and excess and obsolescence and, as necessary, writes down the valuation of units based upon the Company's forecasted usage and sales, anticipated selling price, product obsolescence and other factors. Once inventory is written down, its new value is maintained until it is sold or scrapped. Prior to July 1, 2017, inventories were stated at weighted-average cost, subject to lower of cost or market.

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

Property, Plant and Equipment

Property, plant and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets as follows:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Software	3 to 5 years
Machinery and equipment	3 to 7 years
Furniture and fixtures	5 years
Buildings	39 years
Building improvements	Up to 20 years
Land improvements	15 years
Leasehold improvements	Shorter of lease term or estimated useful life

For assets acquired and financed under capital leases, the present value of the future minimum lease payments is recorded at the date of acquisition as property, plant and equipment with the corresponding amount recorded as a capital lease obligation, and the amortization is computed on a straight-line basis over the shorter of the lease term or estimated useful life.

Long-Lived Assets

The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount, an impairment loss would be measured based on the fair value of the asset compared to the carrying amount. No impairment charge for long-lived assets has been recorded in any of the periods presented.

Revenue Recognition

The Company’s revenue recognition policy and related disclosures are discussed in Note 3, “Revenue.”

Allowances for Doubtful Accounts

Customers are subjected to a credit review process that evaluates each customer’s financial position and ability to pay. On a quarterly basis, the Company makes estimates of its uncollectible accounts receivable by analyzing the aging of accounts receivable, history of bad debts, customer concentrations, customer-credit-worthiness, and current economic trends to evaluate the adequacy of the allowance for doubtful accounts. The Company's provision for (recovery of) bad debt was $7.1 million, $(0.1) million, and $0.3 million in fiscal years 2019, 2018 and 2017, respectively.

Cost of Sales

Cost of sales primarily consists of the costs of materials, contract manufacturing, in-bound shipping, personnel and related expenses including stock-based compensation, equipment and facility expenses, warranty costs and provision for lower of cost or net realizable value and excess and obsolete inventory.

Product Warranties

The Company offers product warranties ranging from 15 to 39 months against any defective products. These standard warranties are assurance type warranties and the Company does not offer any services beyond the assurance that the product will continue working as specified. Therefore, under recently adopted guidance, Revenue from Contracts with Customers, (“ASC 606”), these warranties are not considered separate performance obligations in the arrangement. Based on historical experience, the Company accrues for estimated returns of defective products at the time revenue is recognized. The Company monitors warranty obligations and may make revisions to its warranty reserve if actual costs of product repair and replacement are significantly higher or lower than estimated. Accruals for anticipated future warranty costs are charged to cost of sales and included in accrued liabilities and other long-term liabilities. Warranty accruals are based on estimates that are updated on an ongoing basis taking into consideration inputs such as new product introductions, changes in the volume of claims compared with the Company's historical experience, and the changes in the cost of servicing warranty claims. The Company accounts for the effect of such changes in estimates prospectively. The following table presents for the fiscal years ended June 30, 2019, 2018 and 2017, the reconciliation of the changes in accrued warranty costs which is included as a component of accrued liabilities and other long-term liabilities (in thousands):

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	Years Ended June 30,
	2019				2018				2017
Balance, beginning of the year	$	9,884			$	7,721			$	7,129
Provision for warranty	22,991				20,868				21,642
Costs utilized	(26,281		)		(19,904		)		(21,256		)
Change in estimated liability for pre-existing warranties	4,440				1,199				206
Balance, end of the year	$	11,034			$	9,884			$	7,721
Current portion	8,661				7,589				5,976
Non-current portion	$	2,373			$	2,295			$	1,745

Research and Development

Research and development expenses consist of personnel expenses including: salaries, benefits, stock-based compensation and incentive bonuses, and related expenses for our research and development personnel, as well as materials and supplies, consulting services, third-party testing services and equipment and facility expenses related to our research and development activities. All research and development costs are expensed as incurred. The Company occasionally receives funding from certain suppliers and customers towards its development efforts. Such amounts are recorded as a reduction of research and development expenses and were $2.8 million, $6.1 million, and $10.3 million for the fiscal years ended June 30, 2019, 2018 and 2017, respectively.

Software development costs, including costs to develop software sold, leased, or otherwise marketed, that are incurred subsequent to the establishment of technological feasibility are capitalized if significant. Costs incurred during the application development stage for internal-use software are capitalized if significant. Capitalized software development costs are amortized using the straight-line amortization method over the estimated useful life of the applicable software. Such software development costs required to be capitalized have not been material to date.

Advertising Costs

Advertising costs, net of reimbursements received under the cooperative marketing arrangements with the Company's vendors, are expensed as incurred. Total advertising and promotional expenses were $2.4 million, $3.5 million, and $5.4 million for the fiscal years ended June 30, 2019, 2018 and 2017, respectively.

Stock-Based Compensation

The Company measures and recognizes compensation expense for all share-based awards made to employees and non-employees, including stock options and restricted stock units ("RSUs"). The share-based awards granted to non-employees have not been material to date. The Company is required to estimate the fair value of share-based awards on the date of grant. The Company recognizes the grant date fair value of all share-based awards over the requisite service period and accounts for forfeitures as they occur. Prior to July 1, 2017, the Company estimated forfeitures and expensed the value of awards that were ultimately expected to vest over the requisite service periods. The fair value of RSUs with service conditions or performance conditions is based on the closing market price of the Company's common stock on the date of grant. The fair value for RSUs with service conditions, or time-based RSUs, is amortized on a straight-line basis over the requisite service period. The fair value for RSUs with performance conditions ("PRSUs") is recognized on a ratable basis over the requisite service period when it is probable the performance conditions of the awards will be met. The Company reassesses the probability of vesting at each reporting period and adjusts the total compensation expense of the award based on this probability assessment.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Leases

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

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

Income Taxes

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

The Company recognizes tax liabilities for uncertain income tax positions on the income tax return based on the two-step process. The first step is to determine whether it is more likely than not that each income tax position would be sustained upon audit. The second step is to estimate and measure the tax benefit as the amount that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority. Estimating these amounts requires the Company to determine the probability of various possible outcomes. The Company evaluates these uncertain tax positions on a quarterly basis. This evaluation is based on the consideration of several factors, including changes in facts or circumstances, changes in applicable tax law, settlement of issues under audit and new exposures. If the Company later determines that its exposure is lower or that the liability is not sufficient to cover its revised expectations, the Company adjusts the liability and effects a related charge in its tax provision during the period in which the Company makes such a determination.

Variable Interest Entities

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

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

The Company and Ablecom jointly established Super Micro Asia Science and Technology Park, Inc. (the "Management Company") in Taiwan to manage the common areas shared by the Company and Ablecom for its separately constructed manufacturing facilities. In fiscal year 2012, each company contributed $0.2 million and owns 50% of the

SUPER MICRO COMPUTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Management Company. The Company has concluded that the Management Company is a VIE, and the Company is the primary beneficiary as it has the power to direct the activities that are most significant to the Management Company. For the fiscal years ended 2019, 2018 and 2017, the accounts of the Management Company have been consolidated with the accounts of Super Micro Computer, and a noncontrolling interest has been recorded for Ablecom's interest in the net assets and operations of the Management Company. Net income (loss) attributable to Ablecom's interest was not material for the periods presented and was included in general and administrative expenses in the Company's consolidated statements of operations.

Foreign Currency Transactions

The functional currency of the Company’s international subsidiaries is the U.S. dollar, with the exception of Super Micro Asia and Technology Park, Inc., a consolidated variable interest entity. Monetary assets and liabilities of the Company's international subsidiaries that are denominated in foreign currency are remeasured into U.S. dollars at period-end exchange rates. Non-monetary assets and liabilities that are denominated in the foreign currency are remeasured into U.S. dollars at the historical rates. Revenue and expenses that are denominated in the foreign currency are remeasured into U.S. dollars at the average exchange rates during the period. Remeasurement of foreign currency accounts and resulting foreign exchange transaction gains and losses, which have not been material, are reflected in the consolidated statements of operations in other expense, net.

The functional currency of Super Micro Asia and Technology Park, Inc. is New Taiwanese Dollar (“NTD$”). Assets and liabilities are translated to U.S. dollars at the period-end exchange rate. Revenues and expenses are translated using the average exchange rate for the period. The effects of foreign currency translation are included in stockholders’ equity as a component of accumulated other comprehensive (loss) income in the accompanying consolidated balance sheets and periodic movements are summarized as a line item in the consolidated statements of comprehensive income.

The functional currency of the Company's equity method investee is the local currency. Adjustments for the Company's share of the effects of foreign currency translation from local currency to U.S. dollars are recorded as increases or decreases to the carrying value of the investment and included in stockholders’ equity as a component of accumulated other comprehensive (loss) income in the accompanying consolidated balance sheets and periodic movements are summarized as a line item in the consolidated statements of comprehensive income.

Net Income Per Common Share

Basic net income per common share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per common share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options and unvested RSUs. Contingently issuable shares are included in computing basic net income per common share as of the date that all necessary conditions, including service vesting conditions have been satisfied. Contingently issuable shares are considered for computing diluted net income per common share as of the beginning of the period in which all necessary conditions have been satisfied and the only remaining vesting condition is a service vesting condition.

Under the treasury stock method, an increase in the fair market value of the Company's common stock results in a greater dilutive effect from outstanding stock options and RSUs. Additionally, the exercise of stock options and the vesting of RSUs results in a further dilutive effect on net income per share.

The computation of basic and diluted net income per common share is as follows (in thousands, except per share amounts):

SUPER MICRO COMPUTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	Years Ended June 30,
	2019				2018				2017
Numerator:
Net income	$	71,918			$	46,165			$	66,854
Denominator:
Weighted-average shares outstanding	49,917				49,345				48,383
Effect of dilutive securities	1,799				2,806				3,296
Weighted-average diluted shares	51,716				52,151				51,679
Basic net income per common share	$	1.44			$	0.94			$	1.38
Diluted net income per common share	$	1.39			$	0.89			$	1.29

For the fiscal years ended June 30, 2019, 2018 and 2017, the Company had stock options, RSUs and PRSUs outstanding that could potentially dilute basic earnings per share in the future, but were excluded from the computation of diluted net income per share in the periods presented, as their effect would have been anti-dilutive. The anti-dilutive common share equivalents resulting from outstanding equity awards were 3,758,000, 2,221,000, and 1,620,000 for the fiscal years ended June 30, 2019, 2018 and 2017, respectively.

Concentration of Supplier Risk

Certain materials used by the Company in the manufacture of its products are available from a limited number of suppliers. Shortages could occur in these materials due to an interruption of supply or increased demand in the industry. One supplier accounted for 21.8%, 26.0%, and 31.0% of total purchases for the fiscal years ended June 30, 2019, 2018 and 2017, respectively. Ablecom and Compuware, related parties of the Company as noted in Note 12, "Related Party Transactions", accounted for 9.2%, 9.0%, and 11.1% of total cost of sales for the fiscal years ended June 30, 2019, 2018 and 2017, respectively.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentration of credit risk consist primarily of cash and cash equivalents, restricted cash, investment in an auction rate security and accounts receivable. No single customer accounted for 10% or more of the net sales in fiscal years 2019, 2018 and 2017. One customer accounted for 17.0% and 11.6% of accounts receivable, net as of June 30, 2019 and 2018, respectively.

Accounting Pronouncements Recently Adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance, ASC 606, that supersedes nearly all U.S. GAAP on revenue recognition and eliminates industry-specific guidance. ASC 606 provides a unified model in determining when and how revenue is recognized with the core principle that revenue should be recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Since its issuance, the FASB has issued several amendments to ASC 606. The Company adopted ASC 606 on July 1, 2018 using the modified retrospective method. In connection with the adoption of ASC 606, the Company recorded a transition adjustment to increase retained earnings by $6.8 million as of July 1, 2018. The comparative information has not been recast and continues to be reported under the accounting standards in effect for those periods.

The primary impact of the adoption of ASC 606 was the acceleration of revenue recognition for (i) sales to distributors where the Company previously accounted for such sales on a sell-through basis and (ii) software arrangements. The following tables summarize the impacts of the adoption of ASC 606 on the Company’s consolidated financial statements. The adoption of ASC 606 did not have any impact on the net cash provided by operating activities.

Selected Captions from the Consolidated Balance Sheet as of June 30, 2019 (in thousands)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	As Reported				Adjustments				Balances without adoption of ASC 606
ASSETS
Accounts receivable, net of allowances	$	393,624			$	(21,404	)		$	372,220
Inventories	670,188				14,823				685,011
Prepaid expenses and other current assets	109,795				(2,478		)		107,317
Deferred income taxes, net	41,126				1,131				42,257
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued liabilities	$	114,678			$	(6,392	)		$	108,286
Deferred revenue	94,153				2,611				96,764
Income taxes payable	13,021				(831		)		12,190
Deferred revenue, non-current	109,266				3,992				113,258
Retained earnings	611,903				(7,308		)		604,595

Selected Captions from the Consolidated Statement of Operations for the year ended June 30, 2019 (in thousands)

	As reported				Adjustments				Balances without adoption of ASC 606
Net sales	$	3,500,360			$	12,591			$	3,512,951
Cost of sales	3,004,838				15,981				3,020,819
Gross profit	495,522				(3,390		)		492,132
General and administrative	141,228				(2,491		)		138,737
Income before income tax provision	89,523				(899		)		88,624
Income tax provision	14,884				(404		)		14,480
Net income	71,918				(495		)		71,423

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 existing guidance under which an entity must measure inventory at the lower of cost or market. The Company adopted the accounting guidance on July 1, 2017. The effect of the adoption had no impact on the consolidated financial statements and related disclosures.

In January 2016, the FASB issued new guidance, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. This guidance changes the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. The most significant impact of this accounting standard update is that it requires the remeasurement of equity investments not accounted for under the equity method to be recorded at fair value through the consolidated statement of operations at the end of each reporting period. The Company adopted this accounting standard update as of July 1, 2018. The result of the adoption did not have a material impact on the consolidated financial statements. As a result of the adoption of the new standard, the Company’s equity investments are accounted for as follows:

•	Marketable equity securities that have a readily determinable fair value are measured and recorded at fair value.

•	Non-marketable equity securities that do not have a readily determinable fair value and for which the Company does not control the investee nor is it able to exert significant influence over the investee are measured using a measurement alternative recorded at cost less any impairment, plus or minus changes resulting from qualifying observable price changes.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

•	Equity method investments are equity securities for which the Company does not control the investee but is able to exert significant influence over the investee. These investments are measured at cost less any impairment, plus or minus the Company's share of equity method investee income or loss.

In March 2016, the FASB issued new accounting guidance, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting on the accounting for certain aspects of share-based payment to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements as well as classification in the statement of cash flows. Early adoption is permitted for any interim or annual periods. The Company adopted the accounting guidance on July 1, 2017 that resulted in the recognition of excess tax benefits in the Company's provision for income taxes rather than paid-in capital, as well as the adjustment in stock-based compensation expense as a result of its change in forfeiture policy. The new guidance eliminated the requirement to delay the recognition of excess tax benefits until it reduces current taxes payable. The new guidance also requires the Company to record, subsequent to the adoption, excess tax benefits and tax deficiencies in the period these arise. As a result of the adoption, the Company recorded a reduction in income tax payable of $0.2 million, an increase in common stock and additional paid-in capital of $0.1 million and an increase in retained earnings of $0.1 million.

In March 2016, the FASB issued new accounting guidance Investments - Equity Method and Joint Ventures: Simplifying the Transition to Equity Method of Accounting. The amendments in this update eliminate the requirement that an entity retroactively adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of increase in ownership interest or degree of influence. In accordance with the amendments, an equity method investor will begin to apply the equity method when the investor obtains significant influence without having to retroactively adjust the investment and record a cumulative catch up for the years when the investment did not qualify for the equity method of accounting. The Company adopted the accounting guidance on July 1, 2017. The result of the adoption had no impact on the consolidated financial statements and related disclosures.

In August 2016, the FASB issued an amendment to the accounting guidance, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. This amendment consists of eight provisions that provide guidance on the classification of certain cash receipts and cash payments. If practicable, this amendment should be applied using a retrospective transition method to each period presented. For the provisions that are impracticable to apply retrospectively, those provisions may be applied prospectively as of the earliest date practicable. The Company adopted the accounting guidance on July 1, 2018. The result of the adoption did not have a material impact on the consolidated statements of cash flows.

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. The Company adopted the accounting guidance on July 1, 2018. The result of the adoption did not have a material impact on the consolidated financial statements and related disclosures.

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. The Company adopted the accounting guidance on July 1, 2018 using a retrospective transition method to each period presented. The adoption did not have a material impact on the consolidated statements of cash flows. Presentation of prior period information has been retrospectively adjusted.

In February 2017, the FASB issued new accounting guidance, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets: Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. This guidance clarifies the scope and application on the sale or transfer of nonfinancial assets and in substance nonfinancial assets to noncustomers, including partial sales. The Company adopted this guidance on July 1, 2018. Prior to adoption, the Company had previously contributed certain technology rights in exchange for 30% ownership in a privately-held company (the “Corporate Venture”) and accounted for the transaction in accordance with the guidance related to exchanges of a nonfinancial asset for a noncontrolling ownership interest in ASC 845 - Nonmonetary Transactions, which has been eliminated by the new guidance. As a result of the adoption of the new guidance, the Company recognized

SUPER MICRO COMPUTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

$3.0 million increase in the carrying value of the equity-method investment, a $2.1 million increase in deferred gain, and a $0.9 million increase in retained earnings.

In August 2018, the Securities and Exchange Commission (“SEC”) adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. The amendments became effective on November 5, 2018. The SEC staff subsequently indicated that it would not object if a filer’s first presentation of changes in stockholders’ equity is included in its Form 10-Q for the quarter that begins after the final rule’s effective date. Among the amendments is the requirement to present the changes in stockholders’ equity in the interim financial statements (either in a separate statement or footnote) in Quarterly Reports on Form 10-Q. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a consolidated statement of operations is required to be filed. The Company adopted this guidance in the first quarter of fiscal year 2019, and presented the changes in stockholders’ equity in the Company’s Quarterly Reports on Form 10-Q for the first, second, and third quarters of fiscal year 2019.

Accounting Pronouncements Not Yet Adopted

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. Since its issuance, the FASB has issued several amendments to the new lease standard. The standard is effective for the Company from July 1, 2019 and the Company will apply this standard using the modified retrospective approach and will not restate prior comparative periods. The Company will elect the “package of practical expedients” under the transition guidance of the new standard, which permits it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs, for leases that are in effect as of the date of adoption of the new lease guidance. While the Company is currently finalizing its implementation of new policies, processes and internal controls to comply with the new rules, it is anticipated that the adoption of the new standard will result in the recognition of right-of-use assets and lease liabilities on the Company’s consolidated balance sheet of $14.8 million and $15.2 million, respectively, as of July 1, 2019, primarily related to real estate leases. The adoption of the new standard will not have a material impact on the Company’s consolidated statement of operations or consolidated statement of cash flows.

In June 2016, the FASB issued authoritative guidance, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments, that amends the impairment model for certain financial assets by requiring the use of an expected loss methodology, which will result in more timely recognition of credit losses. The amendment is effective for the Company from July 1, 2020. Early adoption is permitted. The Company is currently evaluating the effect the guidance will have on its consolidated financial statement disclosures, results of operations and financial position.

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

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

In August 2018, the FASB issued amended guidance, Fair Value Measurement: Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, to modify the disclosure requirements on fair value measurements based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The new standard is effective for the Company from July 1, 2020. The Company is currently evaluating the effect the guidance will have on its consolidated financial statement disclosures.

In August 2018, the FASB issued amended guidance to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs

SUPER MICRO COMPUTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments. According to the amendments, the entity shall determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. It requires the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The new standard is effective for the Company from July 1, 2020. The Company is currently evaluating the effect the guidance will have on its consolidated financial statement disclosures, results of operations and financial position.

Note 2. Fair Value Disclosure

The financial assets of the Company measured at fair value on a recurring basis are included in cash equivalents and other assets. The Company classifies its cash equivalents and other assets, except for its investment in an auction rate security, within Level 1 or Level 2 in the fair value hierarchy because the Company uses quoted prices in active markets or alternative pricing sources and models using market observable inputs to determine their fair value. The Company’s investment in an auction rate security is classified within Level 3 of the fair value hierarchy as the determination of its fair value was not based on observable inputs as of June 30, 2019 and 2018. See Note 1, "Organization and Summary of Significant Accounting Policies", for a discussion of the Company’s policies regarding the fair value hierarchy. The Company used discounted cash flows to estimate the fair value of the auction rate security as of June 30, 2019 and 2018. The material factors used in preparing the discounted cash flows are (i) the discount rate utilized to present value the cash flows, (ii) the time period until redemption and (iii) the estimated rate of return.

Financial Assets and Liabilities Measured on a Recurring Basis

The following table sets forth the Company’s cash equivalents, certificates of deposit and investment in auction rate security as of June 30, 2019 and 2018 which are measured at fair value on a recurring basis by level within the fair value hierarchy. These are classified based on the lowest level of input that is significant to the fair value measurement (in thousands):

June 30, 2019	Level 1				Level 2				Level 3				Asset at Fair Value
Money market funds (1)	$	1,162			$	—			$	—			$	1,162
Certificates of deposit (2)	—				1,285				—				1,285
Auction rate security	—				—				1,571				1,571
Total assets measured at fair value	$	1,162			$	1,285			$	1,571			$	4,018
June 30, 2018	Level 1				Level 2				Level 3				Asset at Fair Value
Money market funds (1)	$	1,136			$	—			$	—			$	1,136
Certificates of deposit (2)	—				30,219				—				30,219
Auction rate security	—				—				1,571				1,571
Total assets measured at fair value	$	1,136			$	30,219			$	1,571			$	32,926

(1) $0.4 million and $0.3 million in money market funds are included in cash and cash equivalents and $0.8 million and $0.8 million in money market funds are included in restricted cash, non-current in other assets in the consolidated balance sheets as of June 30, 2019 and 2018, respectively.

(2) $0.2 million and $29.2 million in certificates of deposit are included in cash and cash equivalents and $1.1 million and $1.0 million in certificates of deposit are included in restricted cash, non-current in other assets in the consolidated balance sheets as of June 30, 2019 and 2018, respectively.

The above table excludes $247.6 million and $85.9 million of cash included in cash and cash equivalents, $11.7 million and $2.8 million of restricted cash included in prepaid expenses and other current assets, and $0.4 million and $0.4 million of restricted cash, non-current included in other assets in the consolidated balance sheets as of June 30, 2019 and 2018, respectively. There were no transfers between Level 1, Level 2 or Level 3 securities in fiscal years 2019 and 2018.

SUPER MICRO COMPUTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table provides a reconciliation of the Company’s financial assets measured at fair value on a recurring basis, consisting of auction rate securities, using significant unobservable inputs (Level 3) for fiscal years 2019 and 2018 (in thousands):

	Years Ended June 30,
	2019				2018
Balance as of the beginning of the fiscal year	$	1,571			$	2,625
Sales and settlements at par	—				(1,000		)
Total unrealized loss included in other comprehensive income	—				(54		)
Balance as of the end of the fiscal year	$	1,571			$	1,571

The following is a summary of the Company’s investment in an auction rate security as of June 30, 2019 and 2018 (in thousands):

	June 30, 2019 and 2018
	Cost Basis				Gross Unrealized Holding Gains				Gross Unrealized Holding Losses				Fair Value
Auction rate security	$	1,750			$	—			$	(179	)		$	1,571

The Company measures the fair value of outstanding debt for disclosure purposes on a recurring basis. As of June 30, 2019 and 2018, total debt of $23.6 million and $116.2 million, respectively, are reported at amortized cost. This outstanding debt is classified as Level 2 as it is not actively traded. The amortized cost of the outstanding debt approximates the fair value.

Financial Assets Measured on a Non-recurring Basis

The Company's non-marketable equity securities are investments in privately held companies without readily determinable fair values. Prior to July 1, 2018, the Company accounted for its investment in non-marketable equity securities at cost less impairment. Realized gains and losses on non-marketable equity securities sold or impaired were recognized in other income (expense), net. Upon adoption of the new guidance, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, on July 1, 2018, the Company classifies its investment in non-marketable equity instruments as Level 3 as the fair value is determined using significant unobservable inputs. During the fiscal year ended June 30, 2019 the Company did not record any upward or downward adjustments to the carrying values of the non-marketable equity securities. During fiscal year 2019, the Company recorded impairment charges of $2.7 million for its non-marketable equity securities which had an initial cost basis of $2.7 million as it was determined the carrying value of the investments were not recoverable. During fiscal years 2018 and 2017, the Company did not record any other-than-temporary impairments on financial assets required to be measured at fair value on a non-recurring basis.

There were no transfers of financial assets measured on a non-recurring basis between Level 1, Level 2 or Level 3 securities in fiscal years 2019, 2018 and 2017.

Note 3. Revenue

Revenue recognition for periods after the Company’s adoption of ASC 606 as of July 1, 2018

The Company adopted ASC 606 as of July 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. For contracts that were modified before the effective date, the Company considered the effect of all modifications when identifying performance obligations and allocating transaction price, which did not have a material effect on the adjustment to retained earnings. The Company recognized the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of retained earnings. The comparative information has not been recast and continues to be reported under the accounting standards in effect for those periods.

ASC 606 provides a unified model in determining when and how revenue is recognized with the core principle that revenue should be recognized when a customer obtains control of the promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

The Company generates revenues from the sale of server and storage systems, subsystems, accessories, services, server software management solutions, and support services.

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

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

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

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

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

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

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

Revenue recognition for periods prior to the Company’s adoption of ASC 606 as of July 1, 2018

Product sales. The Company recognizes revenue from sales of products upon meeting all of the following revenue recognition criteria, which is typically met upon shipment or delivery of its products to customers, unless customer acceptance is uncertain or significant obligations to the customer remain: (i) persuasive evidence of an arrangement exists through customer contracts and orders, (ii) the customer takes title and assumes the risks and rewards of ownership, (iii) the sales price charged is fixed or determinable as evidenced by customer contracts and orders and (iv) collectibility is reasonably assured.

The Company estimates reserves for future sales returns based on a review of its history of actual returns for each major product line. The Company also reduces revenue for customer and distributor programs and incentive offerings such as price protection and rebates as well as cooperative marketing arrangements where the fair value of the benefit identified from the costs cannot be reasonably estimated.

The Company may use distributors to sell products to end customers. Revenue from distributors may be recognized on sell-in or sell-through basis depending on the terms of the arrangement between the Company and the distributor.

The Company records costs related to shipping and handling in sales and marketing expenses. Shipping and handling fees billed to customers are included in net sales.

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

Multiple-element arrangements. Certain of the Company’s arrangements contain multiple elements, consisting of both the Company’s products and services. Revenue allocated to each element is recognized when all the revenue recognition criteria are met for that element.

The Company allocates arrangement consideration at the inception of an arrangement to all deliverables, if they represent a separate unit of accounting, based on their relative estimated stand-alone selling prices. A deliverable qualifies as a separate unit of accounting when the delivered element has stand-alone value to the customer. The guidance establishes the following hierarchy to determine the relative estimated stand-alone selling price to be used for allocating arrangement consideration to deliverables: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”) if VSOE is not available, or (iii) the vendor's best estimated selling price (“BESP”) if neither VSOE nor TPE are available.

The Company does not have VSOE for deliverables in its arrangements, and TPE is generally not available because its products are highly differentiated, and the Company is unable to obtain reliable information on the products and pricing practices of the Company’s competitors. BESP reflects the Company’s estimate of what the selling price of a deliverable would be if it were sold regularly on a stand-alone basis.

As such, BESP is generally used to allocate the total arrangement consideration at the arrangement inception. The Company determines BESP for a product by considering multiple factors including, but not limited to, geographies, customer types, internal costs, gross margin objectives and pricing practices.

Disaggregation of Revenue

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

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

	Years Ended June 30,
	2019							2018							2017
	Amount				Percent of Net Sales			Amount				Percent of Net Sales			Amount				Percent of Net Sales
Server and storage systems	$	2,858,644			81.7	%		$	2,663,580			79.3	%		$	1,740,633			70.0	%
Subsystems and accessories	641,716				18.3	%		696,912				20.7	%		744,296				30.0	%
Total	$	3,500,360			100.0	%		$	3,360,492			100.0	%		$	2,484,929			100.0	%

Server and storage systems constitute an assembly and integration of subsystems and accessories, and related services.

Subsystems and accessories are comprised of serverboards, chassis and accessories.

International net sales are based on the country and region to which the products were shipped. The following is a summary for the fiscal years ended June 30, 2019, 2018 and 2017, of net sales by geographic region (in thousands):

	Years Ended June 30,
	2019				2018				2017
United States	$	2,032,948			$	1,902,106			$	1,422,667
Asia	712,211				762,701				500,956
Europe	611,014				547,507				453,798
Other	144,187				148,178				107,508
	$	3,500,360			$	3,360,492			$	2,484,929

The following table presents the percentages of net sales from products sold through the Company's indirect sales channel and to its direct customers and OEMs for fiscal years 2019, 2018 and 2017:

	Years Ended June 30,									2019 over 2018			2018 over 2017
	2019			2018			2017			%			%
Indirect sales channel	39.3	%		41.5	%		47.8	%		(2.2	)%		(6.3	)%
Direct customers and OEMs	60.7	%		58.5	%		52.2	%		2.2	%		6.3	%
Total net sales	100.0	%		100.0	%		100.0	%

Contract Balances

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

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

Contract liabilities consist of deferred revenue and relate to amounts invoiced to or advance consideration received from customers, which precede the Company’s satisfaction of the associated performance obligation(s). The Company’s deferred revenue primarily results from customer payments received upfront for extended warranties and on-site services because these performance obligations are satisfied over time. On July 1, 2018, deferred revenue totaled $143.5 million after recognizing the cumulative effect of initially applying ASC 606. Of that amount, $53.9 million was recognized as revenue during the fiscal year ended June 30, 2019.

Deferred revenue increased during the fiscal year ended June 30, 2019 because the amounts for service contracts invoiced during the period exceeded the recognition of revenue from contracts entered into in prior periods.

Transaction Price Allocated to the Remaining Performance Obligations

Remaining performance obligations represent in aggregate the amount of transaction price that has been allocated to performance obligations not delivered, or only partially undelivered, as of the end of the reporting period. The Company applies the optional exemption to not disclose information about remaining performance obligations that are part of a contract that has an original expected duration of one year or less. These performance obligations generally consist of services, such as on-site integration services that are contracted for one year or less, and products for which control has not yet been transferred. The value of the transaction price allocated to remaining performance obligations as of June 30, 2019 was approximately $203.4 million. The Company expects to recognize approximately 46% of remaining performance obligations as revenue in the next 12 months, and the remainder thereafter.

Capitalized Contract Acquisition Costs and Fulfillment Cost

Contract acquisition costs are those incremental costs that the Company incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained. Contract acquisition costs consist primarily of incentive bonuses. Contract acquisition costs are considered incremental and recoverable costs of obtaining and fulfilling a contract with a customer and are therefore capitalizable. The Company applies the practical expedient to expense incentive bonus costs as incurred if the amortization period would be 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 allocates the incentive bonus cost asset between hardware and service performance obligations and expenses the cost allocated to the hardware performance obligations upon delivery of associated server and storage systems or components and amortizes the cost allocated to service performance obligations over the period the services are expected to be provided. Such contract acquisition costs that are subject to capitalization are insignificant to the Company’s consolidated financial statements.

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

Note 4. Accounts Receivable Allowances

The Company has established an allowance for doubtful accounts. The allowance for doubtful accounts is based upon the age of outstanding receivables, credit risk of specific customers, historical trends related to past losses and other relevant factors. Accounts receivable allowances as of June 30, 2019, 2018 and 2017 consisted of the following (in thousands):

	Beginning Balance				Charged to Cost and Expenses				Additions/ (Deductions)				Ending Balance
Allowance for doubtful accounts:
Year ended June 30, 2019	$	1,945			$	7,058			$	(97	)		$	8,906
Year ended June 30, 2018	2,370				(96		)		(329		)		1,945
Year ended June 30, 2017	2,033				334				3				2,370

Note 5. Inventories

Inventories as of June 30, 2019 and 2018 consisted of the following (in thousands):

	June 30,
	2019				2018
Finished goods	$	492,387			$	633,348
Work in process	43,598				61,162
Purchased parts and raw materials	134,203				158,742
Total inventories	$	670,188			$	853,252

SUPER MICRO COMPUTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

During fiscal years 2019, 2018 and 2017, the Company recorded a provision for excess and obsolete inventory to cost of sales totaling $28.5 million, $9.4 million and $15.7 million, respectively, excluding a provision for adjusting the cost of certain inventories to net realizable value of $4.4 million in fiscal year 2019. The adjustment for lower of cost or net realizable value and lower of cost or market was not material in fiscal years 2018 and 2017.

Note 6. Property, Plant, and Equipment

Property, plant and equipment as of June 30, 2019 and 2018 consisted of the following (in thousands):

	June 30,
	2019				2018
Buildings	$	86,136			$	88,689
Land	74,926				74,919
Machinery and equipment	79,946				71,081
Buildings construction in progress (1)	14,189				1,779
Building and leasehold improvements	22,307				18,760
Software	18,415				15,522
Furniture and fixtures	20,193				18,475
	316,112				289,225
Accumulated depreciation and amortization	(108,775		)		(92,594		)
Property, plant and equipment, net	$	207,337			$	196,631

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(1) Primarily relates to the development and construction costs associated with the Company’s Green Computing Park located in San Jose, California.

Note 7. Prepaid Expenses and Other Assets

Prepaid expenses and other current assets as of June 30, 2019 and 2018 consisted of the following (in thousands):

	June 30,
	2019				2018
Receivables from vendors (1)	$	83,050			$	93,003
Restricted cash	11,673				2,803
Prepaid expenses	7,269				6,321
Deferred service costs	3,374				2,920
Others	4,429				5,809
Total prepaid expenses and other current assets	$	109,795			$	110,856

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(1) Includes receivables from contract manufacturers based on certain buy-sell arrangements of $82.0 million and $87.4 million as of June 30, 2019 and 2018, respectively.

Other assets as of June 30, 2019 and 2018 consisted of the following (in thousands):

SUPER MICRO COMPUTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	June 30,
	2019				2018
Deferred service costs, non-current	$	3,572			$	3,583
Restricted cash, non-current	2,303				2,202
Investment in auction rate security	1,571				1,571
Non-marketable equity securities (1)	878				3,539
Deposits	686				671
Prepaid expense, non-current	1,649				2,471
Total other assets	$	10,659			$	14,037

---

(1) For the fiscal year ended June 30, 2019, the balance represents investment in non-marketable equity securities without readily determinable fair values. For the fiscal year ended June 30, 2018, the balance represents investments in equity securities accounted for under the cost method.

Cash, cash equivalents and restricted cash as of June 30, 2019 and 2018 consisted of the following (in thousands):

	June 30,
	2019				2018
Cash and cash equivalents	$	248,164			$	115,377
Restricted cash included in prepaid expenses and other current assets	11,673				2,803
Restricted cash included in other assets	2,303				2,202
Total cash, cash equivalents and restricted cash	$	262,140			$	120,382

Note 8. Investment in a Corporate Venture

In October 2016, the Company entered into agreements pursuant to which the Company contributed certain technology rights in connection with an investment in a privately-held company (the "Corporate Venture") located in China to expand the Company's presence in China. The Corporate Venture is 30% owned by the Company and 70% owned by another company in China. The transaction was closed in the third fiscal quarter of 2017 and the investment has been accounted for using the equity method. As such, the Corporate Venture is also a related party. As of June 30, 2019 and June 30, 2018, the Company's equity investment in the Corporate Venture was $1.7 million and $2.4 million, respectively, and was recorded under investment in equity investee on the Company's consolidated balance sheet. The Company's share of losses of the Corporate Venture were $2.7 million, $3.6 million, and $0.3 million for the fiscal years ended June 30, 2019, June 30, 2018, and June 30, 2017, respectively.

The Company recorded a deferred gain related to the contribution of certain technology rights of $7.0 million in the third fiscal quarter of 2017. The amortization of the deferred gain is being recognized as a credit to research and development expenses in the Company's consolidated statement of operations over a period of five years which represents the estimated period over which the remaining obligations will be fulfilled.

As a result of the adoption of new accounting guidance as of the beginning of fiscal year 2019, the Company recorded an increase of $3.0 million to the investment in equity investee for the contribution of those technology rights, and corresponding increases in deferred gain and retained earnings of $2.1 million and $0.9 million, respectively. As of June 30, 2019 and 2018, the Company had unamortized deferred gain balance of $2.0 million and $1.4 million, respectively, in accrued liabilities and $3.0 million and $3.5 million, respectively, in other long-term liabilities in the Company’s consolidated balance sheets.

The Company monitors the investment for events or circumstances indicative of potential other-than-temporary impairment and makes appropriate reductions in carrying values if it determines that an impairment charge is required. No impairment charge was recorded for the fiscal years being presented.

Additionally, the Company sold products worth $52.2 million, $21.7 million, $10.9 million to the Corporate Venture in the fiscal years 2019, 2018, 2017, respectively, and the Company's share of intra-entity profits on the products that remained

unsold by the Corporate Venture as of June 30, 2019 and June 30, 2018 have been eliminated and have reduced the Company's investment in the Corporate Venture. The Company had $13.1 million and $2.9 million due from the Corporate Venture in accounts receivable, net as of June 30, 2019 and 2018, respectively, in its consolidated balance sheets.

Note 9. Accrued Liabilities

Accrued liabilities as of June 30, 2019 and 2018 consisted of the following (in thousands):

	June 30,
	2019				2018
Accrued payroll and related expenses	$	25,552			$	25,532
Contract manufacturers liability	25,308				28,754
Accrued professional fees	11,756				6,626
Customer deposits	11,133				14,938
Accrued warranty costs	8,661				7,589
Accrued cooperative marketing expenses	5,830				6,413
Others	26,438				12,626
Total accrued liabilities	$	114,678			$	102,478

Note 10. Short-term Debt

Short-term debt obligations as of June 30, 2019 and 2018 consisted of the following (in thousands):

	June 30,
	2019				2018
Line of credit:
Bank of America	$	1,116			$	67,346
CTBC Bank	—				25,900
Total line of credit	1,116				93,246
Term loan: CTBC Bank	22,531				22,935
Total short-term debt	$	23,647			$	116,181

Activities under Revolving Lines of Credit and Term Loans

Bank of America

2016 Bank of America Credit Facility

In June 2016, the Company entered into a credit agreement with Bank of America (the “2016 Bank of America Credit Facility”). Prior to its maturity in April 2018, the Company repaid and terminated the 2016 Bank of America Credit Facility using the proceeds from its 2018 Bank of America Credit Facility (defined below). Immediately prior to its termination, the 2016 Bank of America Credit Facility (giving effect to all amendments since the inception of the 2016 Bank of America Credit Facility), provided for (i) a $85.0 million revolving line of credit including a $5.0 million letter of credit sublimit (ii) a $20.0 million revolving line of credit for the Company's Taiwan and the Netherlands entities, and (iii) a five-year $50.0 million term loan. The 2016 Bank of America Credit Facility term loan was secured by seven buildings located in San Jose, California and the property, plant and equipment and the inventory in those buildings. The principal and interest of the 2016 Bank of America Credit Facility term loan were payable monthly through June 30, 2021 with an interest rate at the LIBOR rate plus 1.25% per annum. The interest rate for the $85.0 million revolving line of credit was at the LIBOR rate plus 1.25% per annum. The interest rate of the $20.0 million revolving line of credit was equal to a minimum of 0.9% per annum plus the lender's cost of funds, as defined in the agreements.

SUPER MICRO COMPUTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2018 Bank of America Credit Facility

In April 2018, the Company entered into a revolving line of credit with Bank of America (the "2018 Bank of America Credit Facility"), which replaced the 2016 Bank of America Credit Facility. The 2018 Bank of America Credit Facility provides for a revolving credit line and other financial accommodations of up to $250.0 million extended by certain lenders, including a $5.0 million letter of credit sublimit, which was extended to $15.0 million in October 2019. The 2018 Bank of America Credit Facility was originally set to expire after 364 days and has been extended to June 30, 2020 through subsequent amendments. Prior to its maturity, at the Company's option and if certain conditions are satisfied, including the Company being current on all of its delinquent quarterly and annual filings with the SEC, the 2018 Bank of America Credit Facility may convert into a five-year revolving credit facility. If and upon such conversion, the lenders for the 2018 Bank of America Credit Facility shall extend, in aggregate, a principal amount of up to $400.0 million. Prior to the 2018 Bank of America Credit Facility’s conversion to the five-year revolving credit facility, interest shall accrue at the LIBOR rate plus 2.75% per annum. Upon the 2018 Bank of America Credit Facility converting to the five-year revolving credit facility, interest shall accrue at the LIBOR rate plus an amount between 1.50% and 2.00% for loans to both Super Micro Computer and Super Micro Computer B.V. Under the terms of the 2018 Bank of America Credit Facility, the Company is required to grant the lenders a continuing security interest in and lien upon all amounts credited to any of the Company's deposit accounts. Interest accrued on any loans under the 2018 Bank of America Credit Facility is due on the first day of each month, and the loans are due and payable in full on the termination date of the 2018 Bank of America Credit Facility, unless payment is required earlier as determined by the lenders. Voluntary prepayments are permitted without early repayment fees or penalties. The terms of the arrangement require any amounts in the deposit accounts to be applied against the Company's line of credit the next business day. Subject to customary exceptions, the 2018 Bank of America Credit Facility is secured by substantially all of Super Micro Computer’s assets. If converted to the five-year revolving credit facility, Super Micro Computer’s assets, and at the Company's option, Super Micro Computer B.V.'s assets will be used as collateral for the 2018 Bank of America Credit Facility. Under the terms of the 2018 Bank of America Credit Facility, the Company is not permitted to either repurchase its common stock or pay any dividends.

In the fourth fiscal quarter of 2018, the Company paid $3.2 million in fees to the lenders and third parties in connection with the 2018 Bank of America Credit Facility. The replacement of the 2016 Bank of America Credit Facility by the 2018 Bank of America Credit Facility is accounted for as a modification of the existing credit facility to the extent the lenders before and after the modification were the same. Any unamortized fees relating to the 2016 Bank of America Credit Facility and the fees paid for the 2018 Bank of America Credit Facility are amortized over the term of the 2018 Bank of America Credit Facility as interest expense in the Company's consolidated statements of operation and any unamortized amounts are classified within prepaid and other current assets in the Company's consolidated balance sheets.

On January 31, 2019, the Company paid a fee and entered into an amendment of the 2018 Bank of America Credit Facility that resulted in the extension of the maturity date from April 19, 2019 to June 30, 2019. On June 27, 2019, the Company entered into a second amendment of the 2018 Bank of America Credit Facility that extended the maturity date from June 30, 2019 to June 30, 2020.

As of June 30, 2019 and 2018 the total outstanding borrowings under the 2018 Bank of America Credit facility were $1.1 million and $67.3 million, respectively. The interest rates under the 2018 Bank of America Credit Facility as of June 30, 2019 and 2018 were 4.5% per annum and 4.75% per annum, respectively. As of June 30, 2019, a $3.2 million letter of credit was outstanding under the 2018 Bank of America Credit Facility. The balance of debt issuance costs outstanding were $0.3 million and $2.8 million as of June 30, 2019 and 2018, respectively. As of June 30, 2019, the Company's available borrowing capacity under the 2018 Bank of America Credit Facility was $245.7 million, subject to the borrowing base limitation and compliance with other applicable terms.

CTBC Bank

In April 2016, the Company entered into a credit agreement with CTBC Bank Co., Ltd ("CTBC Bank") that provides for (i) a 12-month NTD $700.0 million ($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 was adjusted monthly, the term loan facility also included a 12-month guarantee of up to NTD $100.0 million ($3.1 million U.S. dollar equivalent) with an annual fee equal to 0.50% per annum, and (ii) a 12-month revolving line of credit of 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% per annum which was adjusted monthly (collectively, the “2016 CTBC Credit Facility”). The total borrowings allowed under the 2016 CTBC Credit Facility was capped at $40.0 million. The Company extended the 2016 CTBC Credit Facility to mature on May 31, 2017.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In May 2017, the Company renewed the 2016 CTBC Credit Facility, such that it provided for (i) a 12-month NTD $700.0 million ($23.0 million U.S. dollar equivalent) term loan facility secured by the land and building located in Bade, Taiwan with an interest rate equal to the lender's established NTD interest rate plus 0.25% per annum, which was adjusted monthly, which term loan facility also included a 12-month guarantee of up to NTD $100.0 million ($3.3 million U.S. dollar equivalent) with an annual fee equal to 0.5% per annum, and (ii) a 12-month revolving line of credit of up to 80.0% of eligible accounts receivable in an aggregate amount of up to $50.0 million with an interest rate equal to the lender's established USD interest rate plus an interest rate ranging from 0.40% to 0.45% per annum which was adjusted monthly. The total borrowings allowed under the renewed 2016 CTBC Credit Facility were capped at $50.0 million. The 2016 CTBC Credit Facility was to mature on April 30, 2018 but prior to the maturity, the Company entered into the 2018 CTBC Credit Facility (defined below) with CTBC Bank in January 2018, which replaced the 2016 CTBC Credit Facility.

In January 2018, the Company entered into a credit agreement with CTBC Bank that provided for (i) a 12-month NTD $700.0 million ($23.6 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 was adjusted monthly, which term loan facility also included a 12-month guarantee of up to NTD $100.0 million ($3.4 million U.S. dollar equivalent) with an annual fee equal to 0.50% per annum, and (ii) a 12-month NTD $1,500.0 million ($50.5 million U.S. dollar equivalent) term loan facility with an interest rate equal to the lender's established NTD interest rate plus 0.25% per annum, which was adjusted monthly (collectively, the “2018 CTBC Credit Facility”). The total borrowings allowed under the 2018 CTBC Credit Facility was initially capped at $50.0 million and in August 2018 was reduced to $40.0 million. In June 2019 prior to its maturity, the 2018 CTBC Credit Facility was replaced by the 2019 CTBC Credit Facility (defined below).

In June 2019, the Company entered into a credit agreement with CTBC Bank that provides for (i) a 12-month NTD $700.0 million ($22.5 million U.S. dollar equivalent) term loan facility secured by the land and building located in Bade, Taiwan with an interest rate equal to the lender's established NTD interest rate plus 0.25% per annum which is adjusted monthly, which term loan facility also includes a 12-month guarantee of up to NTD $100.0 million ($3.2 million U.S. dollar equivalent) with an annual fee equal to 0.50% per annum, (ii) a 180-day NTD $1,500.0 million ($48.2 million U.S. dollar equivalent) term loan facility up to 100% of eligible accounts receivable in an aggregate amount with an interest rate equal to the lender's established NTD interest rate ranging from 0.30% to 0.50% per annum which is adjusted monthly, and (ⅲ) a 12-month revolving line of credit of up to 100% of eligible accounts receivable in an aggregate amount of up to $50.0 million with an interest rate equal to the lender's established USD interest rate plus an interest rate ranging from 0.30% to 0.50% per annum which is adjusted monthly (collectively, the “2019 CTBC Credit Facility”). The total borrowings allowed under the 2019 CTBC Credit Facility was capped at $50.0 million. The 2019 CTBC Credit Facility is to mature on June 30, 2020.

The total outstanding borrowings under the 2019 and 2018 CTBC Credit Facility term loan were denominated in NTD and remeasured into U.S. dollars of $22.5 million and $22.9 million at June 30, 2019 and 2018, respectively. At June 30, 2019 , the Company did not have any outstanding balance under the 2019 CTBC Credit Facility revolving line of credit. As of June 30, 2018, the total outstanding borrowings under the 2018 CTBC Credit Facility revolving line of credit were $25.9 million in U.S. dollars. The interest rate for these loans were 0.93% per annum as of June 30, 2019 and 0.95% per annum as of June 30, 2018. At June 30, 2019, the amount available for future borrowing under the 2019 CTBC Credit Facility was $27.5 million. As of June 30, 2019, the net book value of land and building located in Bade, Taiwan collateralizing the 2019 CTBC Credit Facility term loan was $25.8 million.

Covenant Compliance

2018 Bank of America Credit Facility

The credit agreement with Bank of America related to the 2018 Bank of America Credit Facility contains customary representations and warranties and customary affirmative and negative covenants applicable to the Company and its subsidiaries. The credit agreement contains a financial covenant, which requires that the Company maintain a Fixed Charge Coverage Ratio, as defined in the agreement of at least 1.00 for each twelve-month period while a Trigger Period, as defined in the agreement, is in effect. The Company has been in compliance with all the covenants under the 2018 Bank of America Credit Facility.

On September 7, 2018, Bank of America issued an extension letter to the Company in connection with the 2018 Bank of America Credit Facility, which extended the delivery date of the Company's audited consolidated financial statements, compliance certificates and other material reports for the fiscal year ended June 30, 2018 to January 31, 2019. On January 31,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2019, the Company entered into an amendment of the loan and security agreement with respect to the 2018 Bank of America Credit Facility to, among other matters, (a) extend the delivery date of the Company's audited consolidated financial statements, compliance certificates and other material reports for the fiscal year ended June 30, 2018 to June 30, 2019, and (b) require the delivery, by no later than March 31, 2019 of the Company's audited consolidated financial statements for the fiscal year ended June 30, 2019. In April 2019, the Company paid a fee to extend the delivery to June 30, 2019 of its audited consolidated financial statements for the fiscal year ended June 30, 2017. In connection with the second amendment of the 2018 Bank of America Credit Facility to extend the maturity of the 2018 Bank of America Credit Facility, the Company is required to deliver its audited consolidated financial statements for the fiscal year ended June 30, 2018 by December 31, 2019, and deliver its audited consolidated financial statements for the fiscal year ended June 30, 2019 by March 31, 2020. If the Company elects to deliver the audited consolidated financial statements for the fiscal years ended June 30, 2019 and 2018 together in a combined filing with the SEC, the Company is required to deliver its audited financial statements by March 31, 2020.

CTBC Bank

There are no financial covenants associated with the 2018 CTBC Credit Facility or the 2019 CTBC Credit Facility.

Note 11. Other Long-term Liabilities

Other long-term liabilities as of June 30, 2019 and 2018 consisted of the following (in thousands):

	June 30,
	2019				2018
Accrued unrecognized tax benefits including related interest and penalties	$	20,102			$	17,872
Accrued warranty costs, non-current	2,373				2,295
Others	3,708				4,398
Total other long-term liabilities	$	26,183			$	24,565

Note 12. Related Party Transactions

The Company has a variety of business relationships with Ablecom and Compuware. Ablecom and Compuware are both Taiwan corporations. Ablecom is one of the Company’s major contract manufacturers; Compuware is both a distributor of the Company’s products and a contract manufacturer for the Company. Ablecom’s Chief Executive Officer, Steve Liang, is the brother of Charles Liang, the Company’s President, Chief Executive Officer and Chairman of the Board of Directors. Steve Liang owned approximately 0.4% of the Company's common stock as of June 30, 2017, but owned no shares as of June 30, 2018 and thereafter. As of June 30, 2019, Charles Liang and his spouse, Sara Liu, who is also an officer and director of the Company, collectively owned approximately 10.5% of Ablecom’s capital stock. Certain family members of Yih-Shyan (Wally) Liaw, who until January 2018 was the Senior Vice President of International Sales and a director of the Company, owned approximately 11.7% of Ablecom’s capital stock as of June 30, 2019. The Company does not own, nor has it ever owned, any of Ablecom’s capital stock. Steve Liang and his family members owned approximately 28.8% of Ablecom’s stock as of June 30, 2019. Bill Liang, a brother of both Charles Liang and Steve Liang, is a member of the Board of Directors of Ablecom. Bill Liang is also the Chief Executive Officer of Compuware, a member of Compuware’s Board of Directors and a holder of a significant equity interest in Compuware. Steve Liang is also a member of Compuware’s Board of Directors and is an equity holder of Compuware. None of the Company, Charles Liang or Sara Liu own any capital stock of Compuware.

Dealings with Ablecom

The Company has entered into a series of agreements with Ablecom, including multiple product development, production and service agreements, product manufacturing agreements, manufacturing services agreements and lease agreements for warehouse space.

Under these agreements, the Company outsources to Ablecom a portion of its design activities and a significant part of its server chassis manufacturing as well as an immaterial portion of other components. Ablecom manufactured approximately 96.3% and 97.0% of the chassis included in the products sold by the Company during fiscal years 2019 and 2018, respectively. With respect to design activities, Ablecom generally agrees to design certain agreed-upon products according to the Company’s specifications, and further agrees to build the tools needed to manufacture the products. The Company pays Ablecom for the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

design and engineering services, and further agrees to pay Ablecom for the tooling. The Company retains full ownership of any intellectual property resulting from the design of these products and tooling.

With respect to the manufacturing aspects of the relationship, Ablecom purchases most of materials needed to manufacture the chassis from third parties and the Company provides certain components used in the manufacturing process (such as power supplies) to Ablecom through consignment or sales transactions. Ablecom uses these materials and components to manufacture the completed chassis and then sell them back to the Company. For the components purchased from the Company, Ablecom sells the components back to the Company at a price equal to the price at which the Company sold the components to Ablecom. The Company and Ablecom frequently review and negotiate the prices of the chassis the Company purchases from Ablecom. In addition to inventory purchases, the Company also incurs other costs associated with design services, tooling and other miscellaneous costs from Ablecom.

The Company’s exposure to financial loss as a result of its involvement with Ablecom is limited to potential losses on its purchase orders in the event of an unforeseen decline in the market price and/or demand of the Company’s products such that the Company incurs a loss on the sale or cannot sell the products. Outstanding purchase orders from the Company to Ablecom were $31.0 million and $39.3 million at June 30, 2019 and 2018, respectively, representing the maximum exposure to financial loss. The Company does not directly or indirectly guarantee any obligations of Ablecom, or any losses that the equity holders of Ablecom may suffer. Since Ablecom manufactures substantially all the chassis that the Company incorporates into its products, if Ablecom were to suddenly be unable to manufacture chassis for the Company, the Company’s business could suffer if the Company is unable to quickly qualify substitute suppliers who can supply high-quality chassis to the Company in volume and at acceptable prices.

Dealings with Compuware

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

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

Under these agreements, the Company outsources to Compuware a portion of its design activities and a significant part of its power supplies manufacturing as well as an immaterial portion of other components. With respect to design activities, Compuware generally agrees to design certain agreed-upon products according to the Company’s specifications, and further agrees to build the tools needed to manufacture the products. The Company pays Compuware for the design and engineering services, and further agrees to pay Compuware for the tooling. The Company retains full ownership of any intellectual property resulting from the design of these products and tooling. With respect to the manufacturing aspects of the relationship, Compuware purchases most of materials needed to manufacture the power supplies from outside markets and uses these materials to manufacture the products and then sell those products to the Company. The Company and Compuware frequently review and negotiate the prices of the power supplies the Company purchases from Compuware.

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

The Company’s exposure to financial loss as a result of its involvement with Compuware is limited to potential losses on its purchase orders in the event of an unforeseen decline in the market price and/or demand of the Company’s products such that the Company incurs a loss on the sale or cannot sell the products. Outstanding purchase orders from the Company to Compuware were $70.6 million and $111.7 million at June 30, 2019 and 2018, respectively, representing the maximum exposure to financial loss. The Company does not directly or indirectly guarantee any obligations of Compuware, or any losses that the equity holders of Compuware may suffer.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company’s results from transactions with Ablecom and Compuware for each of the fiscal years ended June 30, 2019, 2018, and 2017 are as follows (in thousands):

	Years Ended June 30,
	2019				2018				2017
Ablecom
Purchases (1)	$	145,273			$	152,332			$	123,734
Compuware
Net sales	$	17,651			$	46,921			$	22,959
Purchases (1)	139,579				119,548				118,912

---

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

The Company's net sales to Ablecom were not material for the fiscal years ended June 30, 2019, 2018, and 2017.

The Company had the following balances related to transactions with Ablecom and Compuware as of June 30, 2019 and 2018 (in thousands):

	June 30,
	2019				2018
Ablecom
Accounts receivable and other receivables	$	7,236			$	7,884
Accounts payable and accrued liabilities	33,928				49,187
Compuware
Accounts receivable and other receivables	$	14,396			$	16,295
Accounts payable and accrued liabilities	34,417				45,617

In October 2016, the Company entered into agreements pursuant to which the Company contributed certain technology rights in connection with an investment in the Corporate Venture, which is accounted for using the equity method. See Note 8, "Investment in a Corporate Venture" for a discussion of the investment and the transactions that took place during the fiscal years 2019, 2018, and 2017.

Note 13. 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 $100.0 million of the Company’s common stock in the open market or in private transactions during the following twelve months at prevailing market prices. In fiscal year 2017, 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 $18.5 million. Repurchases were made under the program using the Company’s cash resources. The repurchase program ended in July 2017.

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 equity-based awards. The 2016 Plan was approved by the stockholders of the Company and became effective on March 8, 2016. As of the date the 2016 Plan became effective, 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 have been or will be granted under the 2006 Plan. Up to

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2,800,000 shares subject to awards that remained outstanding under the 2006 Plan at the time the 2016 Plan became effective, if those awards were or are forfeited at any time after the 2016 Plan became effective, will become available for use under the 2016 Plan. At the time the 2016 Plan became effective, all remaining ungranted shares under the 2006 Plan were canceled. 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's outstanding voting stock at the time of grant cannot be less than 110% of the fair value of the underlying shares on the grant date. Nonqualified stock options and incentive stock options granted to all other persons are granted at a price not less than 100% of the fair value. Options generally expire ten years after the date of grant. Stock options and RSUs generally vest over four years; 25% at the end of one year and one sixteenth per quarter thereafter. Under the 2016 Plan, the Company granted PRSUs to its Chief Executive Officer, 50% of which vest based on the achievement of certain performance metrics at the end of the performance period while the remainder vest in equal amounts over the following ten quarters provided he continues to be employed by the Company. As of June 30, 2019, the Company had 843,917 authorized shares available for future issuance under the 2016 Plan.

Determining Fair Value

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

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

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

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

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

The fair value of stock option grants for the fiscal years ended June 30, 2019, 2018 and 2017 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

	Years Ended June 30,
	2019				2018				2017
Risk-free interest rate	2.32% - 2.97%				1.92% - 2.86%				1.12% - 2.03%
Expected term	6.05 years				5.82 years				5.31 - 5.38 years
Dividend yield	—		%		—		%		—		%
Volatility	47.34% - 50.28%				45.32% - 48.07%				43.36% - 49.64%
Weighted-average fair value	$	9.25			$	10.98			$	10.71

The following table shows total stock-based compensation expense included in the consolidated statements of operations for the fiscal years ended June 30, 2019, 2018 and 2017 (in thousands):

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	Years Ended June 30,
	2019				2018				2017
Cost of sales	$	1,663			$	1,812			$	1,382
Research and development	12,981				13,893				12,559
Sales and marketing	1,805				1,980				2,144
General and administrative	4,735				6,971				3,580
Stock-based compensation expense before taxes	21,184				24,656				19,665
Income tax impact	(4,349		)		(6,902		)		(5,946		)
Stock-based compensation expense, net	$	16,835			$	17,754			$	13,719

Prior to adoption of ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, cash flows resulting from the tax benefits for tax deductions resulting from the exercise of stock options and vesting of RSUs and PRSUs in excess of the compensation expense recorded for those options (excess tax benefits) issued or modified since July 1, 2006 are classified as cash from financing activities. Upon adoption of the new guidance on July 1, 2017, the cash flows from excess tax benefits related to such awards are classified as cash from operating activities. Excess tax benefits for stock options issued prior to July 1, 2006 are classified as cash from operating activities. Prior to adoption of ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, the Company had $1.8 million of excess tax benefits recorded in additional paid-in capital in the fiscal year ended June 30, 2017 and had excess tax benefits classified as cash from financing activities of $2.3 million in the fiscal year ended June 30, 2017 for options issued since July 1, 2006. The Company adopted the accounting guidance on July 1, 2017 and as a result of the adoption, the Company recorded $0.5 million of excess tax benefit in income tax expense in the fiscal year ended June 30, 2018.

As of June 30, 2019, $6.9 million of unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 2.58 years, $31.5 million of unrecognized compensation cost related to unvested RSUs is expected to be recognized over a weighted-average period of 2.77 years and $0.3 million of unrecognized compensation cost related to unvested PRSUs is expected to be recognized over a period of 1.5 years.

Stock Option Activity

The following table summarizes stock option activity during the fiscal years ended June 30, 2019, 2018 and 2017 under all plans:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

		Options Outstanding			Weighted Average Exercise Price per Share			Weighted Average Remaining Contractual Term (in Years)		Aggregate Intrinsic Value (in thousands)
Balance as of June 30, 2016 (7,495,131 shares exercisable at weighted average exercise price of $13.35 per share)		8,960,867			14.88
Granted		473,000			24.27
Exercised		(1,007,065	)		10.80
Forfeited/Cancelled		(51,143	)		17.96
Balance as of June 30, 2017 (7,348,320 shares exercisable at weighted average exercise price of $14.58 per share)		8,375,659			15.88
Granted		489,705			23.58
Exercised		(267,970	)		11.36
Forfeited/Cancelled		(296,256	)		15.36
Balance as of June 30, 2018 (7,563,189 shares exercisable at weighted average exercise price of $15.71 per share)		8,301,138			16.50
Granted		434,320			18.58
Forfeited/Cancelled		(1,360,823	)		8.94
Balance as of June 30, 2019 (6,624,009 shares exercisable at weighted average exercise price of $17.65 per share)		7,374,635			18.02			3.82		$	25,798
Options vested and exercisable at June 30, 2019		6,624,009			17.65			3.27		$	24,811

No options were exercised in the fiscal year ended June 30, 2019. The total pretax intrinsic value of options exercised during the fiscal years ended June 30, 2018 and 2017 was $4.0 million and $14.0 million, respectively. Additional information regarding options outstanding as of June 30, 2019, is as follows:

		Options Outstanding									Options Vested and Exercisable
Range of Exercise Prices		Number Outstanding			Weighted- Average Remaining Contractual Term (Years)		Weighted- Average Exercise Price Per Share				Number Exercisable			Weighted- Average Exercise Price Per Share
$7.94 - $10.35		897,340			2.15		$	9.20			897,340			$	9.20
10.68 - 12.50		805,871			2.04		11.79				805,871			11.79
12.68 - 13.67		752,762			2.60		13.34				639,772			13.39
14.23 - 15.22		869,966			3.26		14.69				827,076			14.68
15.54 - 17.96		857,451			3.50		17.47				812,830			17.47
18.59 - 20.54		804,519			3.10		18.95				789,758			18.92
20.70 - 24.70		844,988			7.06		22.12				455,083			21.72
25.40 - 26.75		842,984			4.60		26.00				836,830			26.00
26.95 - 37.06		663,254			6.51		30.29				523,949			31.00
39.19		35,500			4.50		39.19				35,500			39.19
$7.94 - $39.19		7,374,635			3.82		$	18.02			6,624,009			$	17.65

RSU and PRSU Activity

In January 2015, the Company began to grant RSUs to employees. The Company grants RSUs to certain employees as part of its regular employee equity compensation review program as well as to selected new hires. RSUs are share awards that entitle the holder to receive freely tradable shares of the Company's common stock upon vesting.

In August 2017, the Compensation Committee granted two PRSU awards to the Company's Chief Executive Officer, both of which have both performance and service conditions. The first award was a one-year PRSU and the second award was a

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

two-year PRSU. The one-year PRSUs would be earned based on the Company’s performance as it relates to a revenue growth metric and a minimum non-GAAP operating margin metric during the fiscal year ended June 30, 2018 with eligibility up to 200% of the targeted number of units based on revenue growth if the minimum non-GAAP operating margin is achieved. If the performance metrics were met, 50% of the PRSUs would vest at June 30, 2018 while the remainder would vest in equal amounts over the following ten quarters if the Company's Chief Executive Officer continued to be employed during those ten quarters. In December 2019, the Compensation Committee of the Company's Board of Directors determined that the Company achieved the revenue and non-GAAP operating margin metrics for the fiscal year ended June 30, 2018 at a level that entitled the Chief Executive Officer to 200% of the originally targeted number of shares subject to the one-year PRSU. 50% of the PRSUs so earned were vested as of June 30, 2018, and an additional 20% of the PRSUs vested during the four quarters ended June 30, 2019, in accordance with the terms of the grant.

The two-year PRSUs would be earned based on the Company’s performance for the average non-GAAP operating margin metric for the two fiscal years ended June 30, 2019 with eligibility up to 100% of the targeted number of units. If the performance metrics would have been met, 50% of the PRSUs would have vested at June 30, 2019 while the remainder would have been vested in equal amounts over the following ten quarters if the Chief Executive Officer continued to be employed during those ten quarters. In December 2019, the Compensation Committee of the Company's Board of Directors has determined that the Company did not achieve the required performance metrics for these two-year PRSUs to be earned and, consequently, this PRSU terminated in December 2019.

The following table summarizes RSUs and PRSUs activity during the fiscal years ended June 30, 2019 and 2018 under all plans:

		Time-based RSUs Outstanding			Weighted Average Grant-Date Fair Value per Share				PRSUs Outstanding				Weighted Average Grant-Date Fair Value per Share
Balance as of June 30, 2016		926,983			$	30.23			—
Granted		808,020			23.73				—
Released		(411,739	)		27.41				—
Forfeited		(96,907	)		26.40				—
Balance as of June 30, 2017		1,226,357			26.11				—
Granted		986,680			21.90				120,000		(1)		$	27.10
Released (2)		(572,789	)		26.34				—
Forfeited		(159,643	)		24.90				—
Balance as of June 30, 2018		1,480,605			23.34				120,000				27.10
Granted		1,086,911			18.37				—
Released (2)		(549,886	)		24.87				—
Forfeited		(144,528	)		20.25				—
Balance as of June 30, 2019		1,873,102			$	20.25			120,000				$	27.10

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

(2)	The number of shares released excludes 172,857 RSUs that were vested but not released in fiscal year 2019. The number of shares released also excludes 24,000 and 60,000 PRSUs that were vested but not released in fiscal years 2019 and 2018, respectively. These vested RSUs and PRSUs will be released upon the effectiveness of the Company's registration statement on Form S-8.

The total pretax intrinsic value of RSUs and PRSUs vested was $14.3 million, $16.8 million and $11.3 million for the fiscal years ended June 30, 2019, 2018 and 2017, respectively. In fiscal years 2019, 2018 and 2017, upon vesting and release, 549,886, 572,789 and 411,739 shares of RSUs were partially net share-settled such that the Company withheld 175,044, 199,715 and 144,994 shares, respectively, 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. The total shares withheld were based on the value of the RSUs on their respective vesting dates as determined by the Company's closing stock price. Total payments for the employees' tax obligations to tax authorities were$3.1 million, $4.5 million and $3.6 million for

SUPER MICRO COMPUTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

the fiscal years ended June 30, 2019, 2018 and 2017, respectively, and are reflected as a financing activity within the 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 14. Income Taxes

The components of income before income tax provision for the fiscal years ended June 30, 2019, 2018 and 2017 are as follows (in thousands):

	Years Ended June 30,
	2019				2018				2017
United States	$	45,126			$	39,394			$	82,078
Foreign	44,397				48,821				9,513
Income before income tax provision	$	89,523			$	88,215			$	91,591

The income tax provision for the fiscal years ended June 30, 2019, 2018 and 2017, consists of the following (in thousands):

	Years Ended June 30,
	2019				2018				2017
Current:
Federal	$	12,308			$	11,090			$	26,033
State	2,917				815				695
Foreign	16,531				12,984				4,001
	31,756				24,889				30,729
Deferred:
Federal	(13,078		)		14,304				(6,782		)
State	(2,888		)		265				353
Foreign	(906		)		(1,015		)		134
	(16,872		)		13,554				(6,295		)
Income tax provision	$	14,884			$	38,443			$	24,434

SUPER MICRO COMPUTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company’s net deferred tax assets as of June 30, 2019 and 2018 consist of the following (in thousands):

	June 30,
	2019				2018
R&D credit	$	20,858			$	16,281
Deferred revenue	18,963				10,347
Inventory valuation	11,856				7,354
Stock-based compensation	6,080				5,119
Accrued vacation and bonus	2,681				2,276
Warranty accrual	1,948				1,669
Marketing fund accrual	554				678
Other	4,559				3,644
Total deferred income tax assets	67,499				47,368
Deferred tax liabilities-depreciation and other	(5,406		)		(5,504		)
Valuation allowance	(20,967		)		(16,281		)
Deferred income tax assets, net	41,126				25,583

The Company assesses its deferred tax assets for recoverability on a regular basis, and where applicable, a valuation allowance is recorded to reduce the total deferred tax asset to an amount that will, more likely than not, be realized in the future. As of June 30, 2019, the Company believes that most of its deferred tax assets are “more-likely-than not” to be realized with the exception of California R&D tax credits that have not met the “more-likely than not” realization threshold criteria. As a result, at June 30, 2019, the gross excess credits of $26.4 million, or net of federal tax benefit of $20.9 million, are subject to a full valuation allowance. At June 30, 2018, the gross excess credits of $20.5 million, or net of federal tax benefit of $16.2 million, are subject to a full valuation allowance. The change in valuation allowance from 2018 to 2019 is $4.7 million. The Company will continue to review its deferred tax assets in accordance with the applicable accounting standards. The net deferred tax assets balance as of June 30, 2019 and 2018 was $41.1 million and $25.6 million, respectively.

In December 2017, the U.S. federal government enacted the 2017 Tax Reform Act. The 2017 Tax Reform Act reduced the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018 and created a one-time transition tax on foreign earnings of U.S. subsidiaries that were not previously subject to U.S. income tax. Under U.S. GAAP, changes in tax rates and tax law are accounted for in the period of enactment and deferred tax assets and liabilities are measured at the enacted tax rate. As a result, the Company has completed its analysis and has recorded a one-time $12.9 million, net write down of its U.S. deferred tax assets and liabilities resulting from the U.S. federal corporate income tax rate decrease from 35% to 21%, and a one-time transition tax of $2.8 million, in its income tax provision for the fiscal year ended June 30, 2018. The Company expects further guidance may be forthcoming from the federal and state tax agencies, which could result in additional impacts.

The 2017 Tax Reform Act also creates a new requirement that Global Intangible Low-Taxed Income (“GILTI”) earned by controlled foreign corporations (“CFCs”) that must be included currently in the gross income of a CFC’s U.S. stockholder starting in the tax year that begins after 2017. The tax impact from GILTI has been recorded in the Company's income tax provision for the fiscal year ended June 30, 2019, net of foreign tax credit, and is not material to the Company's income tax provision for the fiscal year ended June 30, 2019.

Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (i) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (ii) factoring such amounts into a company’s measurement of its deferred taxes. The Company's selection of an accounting policy for the fiscal year ended June 30, 2018 with respect to the GILTI tax rules is to treat GILTI tax as a current period expense under the period cost method.

Under the 2017 Tax Reform Act, starting on July 1, 2018, the Company is no longer subject to federal income tax on earnings remitted from our foreign subsidiaries. The Company previously asserted that all of its foreign undistributed earnings were indefinitely reinvested. As a result of the 2017 Tax Reform Act, the Company has determined that its foreign undistributed earnings are indefinitely reinvested except for Netherlands. The Company may repatriate foreign earnings from Netherlands which are previously taxed income as a result of the 2017 Tax Reform Act. The tax impact of such repatriation is estimated to be immaterial.

SUPER MICRO COMPUTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following is a reconciliation for the fiscal years ended June 30, 2019, 2018 and 2017, of the statutory rate to the Company’s effective federal tax rate:

		Years Ended June 30,
		2019			2018			2017
Tax at statutory rate		21.0	%		28.1	%		35.0	%
Uncertain tax positions		2.5			6.3			(7.6	)
Stock-based compensation		2.1			1.8			2.5
Settlement with tax authority		1.6			—			2.0
Foreign tax rate differences		1.1			(6.0	)		0.8
State income tax, net of federal tax benefit		0.5			(0.1	)		4.6
Tax reform related		—			17.9			—
Qualified production activity deduction		—			(1.3	)		(3.0	)
Foreign withholding tax		—			—			1.1
Federal provision true-up		(1.6	)		1.5			0.1
Subpart F income inclusion		(2.1	)		0.7			—
Research and development tax credit		(9.5	)		(8.7	)		(9.4	)
Other		1.0			3.4			0.6
Effective tax rate		16.6	%		43.6	%		26.7	%

As of June 30, 2019, the Company had state research and development tax credit carryforwards of $34.3 million. The state research and development tax credits will carryforward indefinitely to offset future state income taxes.

SUPER MICRO COMPUTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes the activity related to the unrecognized tax benefits (in thousands):

	Gross* Unrecognized Income Tax Benefits
Balance at June 30, 2016	$	19,395
Gross increases:
For current year’s tax positions	5,732
For prior years’ tax positions	1,119
Gross decreases:
Settlements and releases due to the lapse of statutes of limitations	(7,029		)
Balance at June 30, 2017	19,217
Gross increases:
For current year’s tax positions	6,864
For prior years’ tax positions	—
Gross decreases:
Settlements and releases due to the lapse of statutes of limitations	(964		)
Balance at June 30, 2018	25,117
Gross increases:
For current year’s tax positions	7,789
For prior years’ tax positions	—
Gross decreases:
Settlements and releases due to the lapse of statutes of limitations	(4,858		)
Balance at June 30, 2019	$	28,048

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*excludes interest, penalties, federal benefit of state reserves

The total amount of unrecognized tax benefits that would affect the effective tax rate, if recognized, was $18.6 million and $16.6 million as of June 30, 2019 and 2018, respectively.

The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the provision for taxes in the consolidated statements of operations. As of June 30, 2019 and 2018, the Company had accrued $1.5 million and $1.3 million for the payment of interest and penalties relating to unrecognized tax benefits, respectively.

In October 2019, the Taiwan tax authority completed its audit in Taiwan for fiscal year 2018 and proposed a transfer pricing adjustment on the Company which resulted in additional tax liability of $1.6 million. The Company accepted the proposed adjustment in October 2019 and intends to pay the $1.6 million tax liability in January 2020. The impact of this adjustment on the income statement will be offset by the release of previously unrecognized tax benefits related to the fiscal year audited in the period in which the proposed adjustment was accepted.

The Company believes that it has adequately provided reserves for all uncertain tax 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 as or the underlying matters are settled or otherwise resolved.

The federal statute of limitations remains open in general for tax years ended June 30, 2016 through 2019. Various states statute of limitations remain open in general for tax years ended June 30, 2015 through 2019. Certain statutes of limitations in major foreign jurisdictions remain open in general for the tax years ended June 30, 2013 through 2019. It is reasonably possible that our gross unrecognized tax benefits will decrease by approximately $4.8 million in the next 12 months, primarily due to the lapse of the statute of limitations. These adjustments, if recognized, would positively impact our effective tax rate, and would be recognized as additional tax benefits.

SUPER MICRO COMPUTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 15. Commitments and Contingencies

Litigation and Claims— In February 2018, the Company became a party to legal proceedings whereby complainants have alleged that it has violated Section 10(b) of the Securities Exchange Act due to alleged misrepresentations and/or omissions. In July 2019, the Company filed a motion to dismiss which remains pending. See Note 19, "Subsequent Events" for further details. From time to time, the Company has been involved in various legal proceedings arising from the normal course of business activities. In management’s opinion, the resolution of any matters will not have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity.

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 inventory and non-inventory items primarily through the next 12 months. As of June 30, 2019, these remaining noncancelable commitments were $299.8 million, including $101.6 million for related parties.

Lease Commitments—The Company leases offices and equipment under noncancelable operating leases which expire at various dates through 2026. In addition, the Company leases certain of its equipment under capital leases. The future minimum lease commitments under all leases are as follows (in thousands):

Year ending:	Capital Leases				Operating Leases
June 30, 2020	$	164			$	6,582
June 30, 2021	103				3,831
June 30, 2022	40				2,439
June 30, 2023	1				1,175
June 30, 2024	—				1,166
Thereafter	—				2,279
Total minimum lease payments	308				$	17,472
Less: Amounts representing interest	14
Present value of minimum lease payments	294
Less: Long-term portion	140
Current portion	$	154

Rent expense for the fiscal years ended June 30, 2019, 2018 and 2017, was $6.7 million, $5.9 million and $5.0 million, respectively.

Standby Letter of Credit - In October 2018, Bank of America issued a standby letter of credit on behalf of the Company to a beneficiary for an initial value of $3.2 million to facilitate the ongoing operations of the Company. The standby letter of credit is automatically extended without amendment for successive one-year periods from the original expiration date of November 1, 2019 and will do so until canceled through written notice from the issuer. In October 2019, upon the Company's request, Bank of America increased the amount under the letter of credit issued to the beneficiary to $6.4 million. No amounts have been drawn under the standby letter of credit.

Note 16. Retirement Plans

SUPER MICRO COMPUTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company sponsors a 401(k) savings plan for eligible United States employees and their beneficiaries. Contributions by the Company are discretionary, and no contributions have been made by the Company for the fiscal years ended June 30, 2019, 2018 and 2017.

Beginning in March 2003, employees of Super Micro Computer, B.V. are required to deduct a portion of their gross wages based on a defined age-dependent premium and invest the amount in a defined contribution plan. The Company is required to match the amount that is deducted monthly from employees’ wages. Similar to contributions into a 401(k) plan, the Company's obligation is limited to the contributions made to the contribution plan. Investment risk and investment rewards are assumed by the employees and not by the Company. For the fiscal years ended June 30, 2019, 2018 and 2017, the Company’s matching contribution was $0.5 million, $0.5 million, and $0.4 million, respectively.

The Company contributes to a defined contribution pension plan administered by the government of Taiwan that covers all eligible employees within Taiwan. Pension plan benefits are based primarily on participants’ compensation and years of service credited as specified under the terms of Taiwan’s plan. The funding policy is consistent with the local requirements of Taiwan. The Company's obligation is limited to the contributions made to the pension plan. The Company has no control over the investment strategy of the assets of the government administered pension plan. For the fiscal years ended June 30, 2019, 2018 and 2017, the Company’s contribution was $1.6 million, $1.5 million and $1.9 million, respectively.

Note 17. Segment Reporting

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

The following is a summary of property, plant and equipment, net (in thousands):

	June 30,
	2019				2018
Long-lived assets:
United States	$	162,835			$	151,567
Asia	41,915				42,533
Europe	2,587				2,531
	$	207,337			$	196,631

The Company’s revenue is presented on a disaggregated basis in Note 3, “Revenue” by type of product, by geographical market, and by products sold through its indirect sales channel or to its direct customers and OEMs.

Note 18. Quarterly Financial Information (Unaudited)

The following table presents the Company’s unaudited consolidated quarterly financial data. This information has been prepared on a basis consistent with that of the audited consolidated financial statements. The Company believes that all necessary adjustments, consisting of normal recurring accruals and adjustments, have been included to present fairly the quarterly financial data. The Company's quarterly results of operations for these periods are not necessary indicative of future results of operations.

	Three Months Ended
	Jun. 30				Mar. 31				Dec. 31				Sep. 30,				Jun. 30				Mar. 31				Dec. 31				Sep. 30,
	2019				2019				2018				2018				2018				2018				2017				2017
	(In thousands, except per share data)
Net sales	$	854,234			$	743,499			$	931,509			$	971,118			$	981,662			$	835,110			$	826,983			$	716,737
Gross Profit	$	132,034			$	112,327			$	127,922			$	123,239			$	132,329			$	105,917			$	105,694			$	86,054
Net income (loss)	$	23,710			$	10,646			$	18,220			$	19,342			$	26,274			$	14,595			$	(783	)		$	6,079
Net income (loss) per common share:
Basic	$	0.47			$	0.21			$	0.37			$	0.39			$	0.53			$	0.30			$	(0.02	)		$	0.12
Diluted	$	0.46			$	0.21			$	0.36			$	0.37			$	0.50			$	0.28			$	(0.02	)		$	0.12

Note 19. Subsequent Events

On February 8, 2018, two putative class action complaints were filed against us, our CEO, and our former CFO in the U.S. District Court for the Northern District of California (Hessefort v. Super Micro Computer, Inc., et al., No. 18-cv-00838 and United Union of Roofers v. Super Micro Computer, Inc., et al., No. 18-cv-00850). The complaints contain similar allegations, claiming that the defendants violated Section 10(b) of the Securities Exchange Act due to alleged misrepresentations and/or omissions in public statements regarding recognition of revenue. The court subsequently appointed New York Hotel Trades Council & Hotel Association of New York City, Inc. Pension Fund as lead plaintiff and it filed an amended complaint naming our Senior Vice President of Investor Relations as an additional defendant. On June 21, 2019, plaintiff filed a further amended complaint naming our former Senior Vice President of International Sales, Corporate Secretary, and Director as an additional defendant. On July 26, 2019, we filed a motion to dismiss which remains pending. We believe the allegations filed are without merit and intend to vigorously defend against the lawsuit.

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