Super Micro Computer (SMCI) 10-K risk factor changes: FY2020 vs FY2019

[removed: Following this filing, our only delinquent report will be] [added: On December 20, 2019, we filed] our Quarterly [removed: Report] [added: report] on Form 10-Q for the quarterly period ended September 30, [removed: 2019.][added: 2019 (the “Q1 2020 10-Q”).]

[removed: We] [added: We] have identified [added: a] material [removed: weaknesses] [added: weakness] in our internal control over financial reporting, which could, if not remediated, adversely affect our ability to report our financial condition and results of operations in a timely and accurate [removed: manner.][added: manner.]

We have concluded that our internal control over financial reporting was not effective as of June 30, [removed: 2019] [added: 2020] due to the existence of [added: a] material [removed: weaknesses] [added: weakness] in such controls, and we have also concluded that our disclosure controls and procedures were not effective as of June 30, [removed: 2019] [added: 2020] due to [added: a] material [removed: weaknesses] [added: weakness] in our internal control over financial reporting, all as described in Part II, Item 9A, “Controls and Procedures” of this Annual Report.

While we have initiated remediation measures to address the identified material [removed: weaknesses,] [added: weakness,] we cannot provide assurance that our remediation efforts will be adequate to allow us to conclude that such controls will be effective in the future.

If we are unable to successfully complete our remediation efforts [removed: or] [added: in a timely manner and are, therefore, not able to] favorably assess the effectiveness of our internal control over financial reporting, [added: this could further cause investors to lose confidence, and] our operating results, financial position, ability to accurately report our financial results and timely file our SEC reports, and stock price could be adversely affected.

Restated financial statements and failures in internal controls may also cause us to fail to meet reporting obligations, negatively affect investor and customer confidence in our management or result in adverse publicity and concerns from investors and customers, any of which could have a negative effect on the price of [added: our common stock, subject us to further regulatory investigations, potential penalties or stockholder litigation, and have a material adverse impact on our business and financial condition.]

[removed: | • |] The [removed: liquidity] [added: trading price] of our common [removed: stock; |][added: stock]

[removed: The] [added: The] outcome of litigation [removed: and other claims as well as regulatory examinations, investigations, proceedings and orders] arising out of the matters that led to the delay in the filing of our 2017 10-K and our other SEC reports are unpredictable, and any orders, actions or rulings not in our favor could have a material adverse effect on our business, results of operations and financial [removed: condition.][added: condition.]

In addition, the circumstances that led to the delay in the filing of our 2017 10-K [added: have created,] and [added: any additional future delay in making] our [removed: continued] SEC filing [removed: delays have created] [added: may create,] the risk of additional litigation and claims by investors and examinations, investigations, proceedings and orders by regulatory authorities.

These include a broad range of potential actions that may be taken against us by the SEC or other regulatory agencies, including a cease and desist order, suspension of trading [added: of our securities, deregistration of our securities, sanctioning of our officers and directors and/or the assessment of possible civil monetary penalties.]

[removed: We have] [added: We] incurred significant expenses related to the matters that led to the delay in the filing of our 2017 10-K and [removed: expect to continue to] [added: may] incur [removed: significant] expenses related to the remediation of [added: remaining] deficiencies in our internal control over financial reporting and disclosure controls and procedures, and any resulting [removed: litigation.][added: litigation.]

We [removed: have] devoted substantial internal and external resources towards investigating, discovering, understanding and remediating the matters that led to the delay in the filing of our 2017 10-K (all as described in the 2017 10-K).

As a result of these efforts, we [removed: have] incurred substantial incremental fees and expenses for additional accounting, financial and other consulting and professional services, as well as the implementation and maintenance of systems and processes that will need to be updated, supplemented or replaced.

Specifically, in connection with these efforts, we incurred professional fees of approximately [added: $14 million in fiscal year 2020,] $67 million in fiscal year 2019 and $42 million in fiscal year 2018, and we continue to incur additional fees [added: related to remediation] in the current fiscal year.

Even if these steps are successful, we [removed: expect to continue to] [added: may] incur significant legal fees in future periods as we address litigation and regulatory action arising from the matters that led to the delay in the filing our 2017 10-K.

[removed: The expenses we are incurring in this regard,] as [removed: well as] the substantial time devoted by our management to identify and address the internal control deficiencies, could have a material adverse effect on our business, results of operations and financial condition.

[removed: The] [added: The] matters leading to the delay in the filing of our 2017 10-K and our lack of effective internal control over financial reporting, including adverse publicity and potential concerns from our customers, have had and could continue to have an adverse effect on our business and financial [removed: condition.][added: condition.]

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, our management is required to report on the effectiveness of our internal control over financial reporting in our annual reports, and annually our independent auditors must attest to and [added: report on the effectiveness of our internal control over financial reporting.]

[removed: It is necessary for us to maintain effective internal] control over financial reporting to prevent fraud and errors and to maintain effective disclosure controls and procedures so that we can provide timely and reliable financial and other information.

[removed: Risks] [added: Risks] Related to Our Business and [removed: Industry][added: Industry]

[removed: Our] [added: Our] quarterly operating results [added: have fluctuated and] will likely fluctuate in the future, which could cause rapid declines in our stock [removed: price.][added: price.]

In addition, customers may hesitate to purchase, or not continue to purchase, our products based upon [removed: our delay in the filing of our reports with the SEC and/or] past unwarranted reports about security risks associated with the use of our products.

Accordingly, [removed: it is difficult to accurately forecast] our growth and results of operations [added: may fluctuate] on a quarterly basis.

[removed: As] [added: As] we increasingly target larger customers and larger sales opportunities, our customer base may become more concentrated, our cost of sales may increase, our margins may be lower and our sales may be less [removed: predictable.][added: predictable.]

In particular, in recent years, we have completed larger sales to leading internet data center and cloud [removed: customers and] [added: customers,] large enterprise [removed: customers.][added: customers and OEMs.]

No single customer accounted for 10% or more of net sales in fiscal years [removed: 2019, 2018] [added: 2020, 2019] or [removed: 2017.][added: 2018.]

If customers buy our products in greater volumes and their business becomes a larger percentage of our net sales, we may grow increasingly dependent on those [removed: customers to maintain our growth.]

If our largest customers do not purchase our [removed: products] [added: products, or we are unable to supply such customers with products,] at the levels, in the timeframes or within the geographies that we expect, [added: including as a result of the impact of COVID-19 on their businesses,] our ability to maintain or grow our net sales will be adversely affected.

[removed: Likewise,] [added: For instance, our] larger customers may seek to fulfill all or substantially all of their requirements in a single or a few orders, and not make another significant purchase for a substantial period of time.

Larger customers [added: also] often seek greater levels of support in the implementation and use of our server solutions.

[removed: We may] [added: If we] fail to meet [added: any] publicly announced financial guidance or other expectations about our business, [removed: which would] [added: it could] cause our stock to decline in [removed: value.][added: value.]

We [removed: typically provide] [added: provided] forward looking financial guidance when we [removed: announce] [added: announced] our financial results [removed: from] [added: for] the prior quarter.

[removed: We] [added: If issued, we] undertake no obligation to update [removed: such] [added: any forward looking] guidance at any time.

[removed: Frequently in] [added: In] the past, our financial results have failed to meet the guidance we provided.

[removed: Increases] [added: Increases] in average selling prices for our server solutions have [added: historically] significantly contributed to increases in net sales in some of the periods covered by this Annual Report.

Such prices are subject to decline if customers do not continue to purchase our latest generation products or additional [removed: components,] [added: components or as a result of factors related to the COVID-19 pandemic,] which could harm our results of [removed: operations.][added: operations.]

We cannot predict the timing or amount of any decline in the average selling prices of our server solutions that we may experience in the [removed: future.][added: future, which may be exacerbated by continued customer uncertainty related to the COVID-19 pandemic.]

[removed: Our] [added: Our] cost structure and ability to deliver server solutions to customers in a timely manner may be adversely affected by volatility of the market for core components and certain materials for our [removed: products.][added: products.]

[removed: We] [added: While we have increased our purchases of certain critical materials and core components in response to the demand uncertainties associated with the COVID-19 pandemic, we] generally do not enter into long-term supply contracts for these materials and core components, but instead purchase these materials and components on a purchase order basis.

[removed: In addition, if our] business growth renders it necessary or appropriate to transition to longer term contracts with materials and core component suppliers, our costs may increase and our gross margins could correspondingly decrease.

The effects of the COVID-19 pandemic has, and will continue to an increasing degree, adversely affect our business operations, financial condition and results of operations, the severity of which remains uncertain.

The novel strain of the coronavirus identified in Wuhan, China in late 2019 (COVID-19) has spread throughout the world and has resulted in authorities imposing, and businesses and individuals implementing, numerous unprecedented measures to try to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place/stay-at-home and social distancing orders, and shutdowns.

These measures have impacted and may further impact our workforce and operations, the operations of our customers, and those of our respective vendors, suppliers, and partners.

We have taken steps to protect our employees, including temporarily closing our offices in the United States, the Netherlands and to a lesser extent in Taiwan.

We continue our manufacturing operations and customers’ orders processing and services at each location, although our productivity at times slowed especially in the United States and in the Netherlands.

Travel restrictions and logistics challenges have impacted our supply chain, shipments to our customers, and our ability to provide services and support to our customers.

We have invested capital to procure key components so we can maintain reasonable lead times to fulfill orders for our customers.

The extent to which the effects of the COVID-19 pandemic will continue to impact our business, operations, financial condition and results of operations is uncertain, rapidly changing and hard to predict, and will depend on numerous evolving factors that we may not be able to control or predict, including:

| • | the duration and scope of the COVID-19 pandemic; |

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

| • | difficulty in adding new customers due to inability to gain direct access; |

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

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

| • | the rate at which our customers can perform acceptance testing or qualify our products, particularly if they contain new technologies; |

| • | the length of heightened unemployment and economic recession pressures; |

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

| • | the impact on the liquidity of our sales partners and end customers, including lengthening of customers payment terms and potential bankruptcies; |

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

| • | availability of and fluctuations in the cost of materials, logistics and labor; and |

| • | erosion of economic activity by small and medium size business or sectors to which we are exposed through OEMs and indirect sales channels. |

The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, the extent and effectiveness of containment actions and the impact of these and other factors on our employees, customers, partners and suppliers.

If we are not able to respond to and manage the impact of such events effectively, our business may be harmed.

| • | Fluctuations in demand for our products, in part due to changes in the global economic environment; |

| • | The occurrence of global pandemics, including COVID-19, and other events that impact the global economy or one or more sectors of the global economy; |

| • | The ability of our customers and suppliers to obtain financing or fund capital expenditures, especially during a period of global credit market disruption, and, in particular, the impact of the extended duration of the COVID-19 pandemic on our smaller customers' ability to access financing and the related disruption of the demand from these customers; |

| • | Fluctuations in the timing and size of large customer orders, including with respect to changes in sales and implementation cycles of our products into our customers’ spending plans and associated revenue; |

| • | The introduction and market acceptance of new technologies and products, and our success in new and evolving markets, and incorporating emerging technologies in our products, as well as the adoption of new standards; |

| • | Costs associated with remediation of our material weaknesses and preparation of our restated financial statements, as well as related legal proceedings. |

Our revenue and margins for a particular period are difficult to predict, and a shortfall in revenue or decline in margins may harm our operating results.

As a result of a variety of factors discussed in this Annual Report, our revenue and margins for a particular quarter are difficult to predict, especially in light of a challenging and inconsistent global macroeconomic environment, the significant impacts of the COVID-19 pandemic, steps we are taking in response to the COVID-19 pandemic, increased competition, the effects of the ongoing trade disputes between the United States and China and related market uncertainty.

Our revenue may grow at a slower rate than in past periods or decline.

Our ability to meet financial expectations could also be adversely affected if the nonlinear sales pattern seen in some of our past quarters recurs in future periods.

The timing of large orders can also have a significant effect on our business and operating results from quarter to quarter.

From time to time, we receive large orders that have a significant effect on our operating results in the period in which the order is recognized as revenue.

The timing of such orders is difficult to predict, and the timing of revenue recognition from such orders may affect period to period changes in revenue.

As a result, our operating results could vary materially from quarter to quarter based on the receipt of such orders and their ultimate recognition as revenue.

We plan our operating expense levels based primarily on forecasted revenue levels.

These expenses and the impact of long-term commitments are relatively fixed in the short term.

A shortfall in revenue could lead to operating results being below expectations because we may not be able to quickly reduce these fixed expenses in response to short-term business changes.

Any of the above factors could have a material adverse impact on our operations and financial results.

Risks Related to Our Material Weaknesses in Internal Control Over Financial Reporting and Related Matters

We face risks related to being delinquent in our SEC reporting obligations.

Primarily due to the matters that led to our restatement of prior financial statements and the material weaknesses identified in connection therewith, which are more fully detailed in our 2017 10-K, immediately prior to the filing of this Annual Report, our SEC filings, including our Annual Reports on Form 10-K for the fiscal years ended June 30, 2018 and 2019 and our Quarterly Reports on Form 10-Q for the quarterly periods ended September 30, 2017, December 31, 2017, March 31, 2018, September 30, 2018, December 31, 2018, March 31, 2019 and September 30, 2019, were delinquent.

While we cannot give assurance as to when we will file this outstanding quarterly report, our current intention is to file it in or before January 2020, and thereafter resume a timely filing schedule with respect to our future SEC reports.

We expect to continue to face many of the risks and challenges related to the matters that led to the delay in the filing of our 2017 10-K, including the following:

| • | We may fail to remediate material weaknesses in our internal control over financial reporting and other material weaknesses may be identified in the future, which would adversely affect the accuracy and timing of our financial reporting; |

| • | Failure to timely file our SEC reports and make our current financial information available, has placed, and will continue to place, downward pressure on our stock price and result in the continued inability of our employees to sell the shares of our common stock underlying their awards granted pursuant to our equity compensation plans, which has adversely affected, and may continue to adversely affect, hiring and employee retention; |

| • | Further delay in the filing of our SEC reports will delay our ability to seek the relisting of our common stock on a national securities exchange, and as a result, may continue to reduce the liquidity of our common stock; |

| • | Litigation and claims as well as regulatory examinations, investigations, proceedings and orders arising out of our failure to file SEC reports on a timely basis, including the reasons and causes for such failure to file, will continue to divert management attention and resources from the operation of our business; |

| • | We may not be able to recapture lost business or business opportunities due to ongoing reputational harm; and |

| • | Negative reports or actions on our commercial credit ratings would increase our costs of, or reduce our access to, future commercial credit arrangements and limit our ability to refinance existing indebtedness. |

If one or more of the foregoing risks or challenges persist, our business, operations and financial condition are likely to be materially and adversely affected.

our common stock, subject us to further regulatory investigations, potential penalties or stockholder litigation, and have a material adverse impact on our business and financial condition.

The circumstances that led to the delay in the filing of our 2017 10-K, and our efforts to investigate, assess and remediate those matters have also caused substantial delays in the preparation and filing of our annual and quarterly reports for periods after June 30, 2017, including this Annual Report.

Our ability to resume a timely filing schedule with respect to our SEC reporting is subject to a number of contingencies, including whether and how quickly we are able to effectively remediate the identified material weaknesses in our internal control over financial reporting.

We cannot give assurances as to when we will file our Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, our current intention is to file it in or before January 2020, and thereafter resume a timely filing schedule with respect to our future SEC reports.

Investors will need to evaluate certain decisions with respect to our common stock in light of our lack of current financial information due to our inability to file our Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, on a timely basis.

Accordingly, any investment in our common stock involves a greater degree of risk.

Our lack of current public information may have an adverse impact on investor confidence, which could lead to a reduction in our stock price.

In addition, for so long as we are not current in our SEC filings, we are precluded from registering our securities with the SEC for offer and sale.

This precludes us from raising debt or equity financing in the public markets, limits our access to the private markets and also limits our ability to use stock options and other equity-based awards to attract, retain and provide incentives to our employees.

The delisting of our common stock may continue to have a material adverse effect on the trading and price of our common stock, and we cannot assure you that our common stock will be relisted, or that once relisted, it will remain listed.

As a result of the delay in the filing of our periodic reports with the SEC, we were unable to comply with Nasdaq’s listing standards and our common stock was suspended from trading on The Nasdaq Global Select Market effective August 23, 2018 and formally delisted effective March 22, 2019.

The delisting of our common stock from Nasdaq has had and may continue to have a material adverse effect on us by, among other things, causing investors to dispose of our shares and limiting:

| • | The market price of our common stock; |

| • | The number of institutional and other investors that will consider investing in our common stock; |

| • | The availability of information concerning the trading prices and volume of our common stock; |

| • | The number of broker-dealers willing to execute trades in shares of our common stock; and |

| • | Our ability to obtain equity or debt financing for the continuation of our operations. |

Following the filing of our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019 and any other required filings with the SEC, and compliance with any other prerequisite requirements, we intend to apply to relist our common stock on a national securities exchange.

However, while we are working expeditiously to relist our common stock, no assurances can be provided that we will be able to do so in a timely manner or at all.

If we are unable to relist our common stock, or even if our common stock is relisted, no assurance can be provided that an active trading market will develop or, if one develops, that it will continue.

The lack of an active trading market may limit the liquidity of an investment in our common stock, meaning you may not be able to sell any shares of common stock you own at times, or at prices, attractive to you.

Any of these factors may materially adversely affect the price of our common stock.

of our securities, deregistration of our securities, sanctioning of our officers and directors and/or the assessment of possible civil monetary penalties.

If we are unable to become current in our SEC reports by June 30, 2020, we may lose the right to convert our existing credit facility into a five-year revolving credit facility, and may be unable to access outside financing.

Under the terms of the credit agreement with Bank of America, N.A. (“Bank of America”), dated April 19, 2018, as amended in June 2019, we are required to deliver our audited financial statements for the fiscal years ended June 30, 2018 and 2019 by March 31, 2020.

With the filing of this Annual Report, we have satisfied that requirement.

The credit facility expires on June 30, 2020, although we have the right to convert it to a five-year revolving credit facility if we are current in all SEC filing obligations and meet certain other conditions.

If we are unable to become current in our SEC filing obligations by that date, we may lose the ability to elect for such a conversion, and any amounts then outstanding under the existing credit facility could become due and payable.

[removed: The] [added: *The] following discussion should be read in conjunction with the consolidated financial statements and related notes which appear elsewhere in this Annual Report.

Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report, particularly under the heading "Risk [removed: Factors."][added: Factors."*]

[removed: Nasdaq Delisting] [added: Nasdaq Relisting] of our Common [removed: Stock][added: Stock]

[removed: Following the suspension of trading, our common stock has been quoted on the OTC Market and is currently traded under the symbol “SMCI.”] For further information regarding trading in our common stock, refer to Part II, Item 5, “Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” in this Annual Report.

[removed: Overview][added: Overview]

Our solutions [removed: range from] [added: include] complete [removed: server, storage,] [added: servers, storage systems,] modular blade servers, [removed: blades and workstations to] [added: blades, workstations,] full racks, networking devices, server management software, [removed: server sub-systems] and [removed: global support and services.][added: server sub-systems.]

For fiscal years [removed: 2019, 2018] [added: 2020, 2019] and [removed: 2017,] [added: 2018,] our net income was [removed: $71.9] [added: $84.3] million, [removed: $46.2] [added: $71.9] million and [removed: $66.9] [added: $46.2] million, respectively.

Historically, our ability to introduce new products rapidly has allowed us to benefit from technology transitions such as the introduction of new microprocessors and storage technologies, and as a result, we monitor the introduction cycles of Intel Corporation, Advanced Micro Devices, Inc., Nvidia Corporation, Samsung Electronics Company Limited, Micron Technology, Inc. and others [added: closely and] carefully.

[removed: Financial Highlights][added: *Financial Highlights*]

The following is a summary of financial highlights of fiscal years [removed: 2019] [added: 2020] and [removed: 2018:][added: 2019:]

[removed: | • | Operating expenses increased by 18.8% and 31.4% in fiscal years 2019 and 2018, respectively, as compared to fiscal years 2018 and 2017, respectively.] The [added: year-over-year] increase in [removed: both fiscal years] [added: general and administrative expenses] was [removed: primarily due] [added: attributable] to an increase [added: of $31.7 million] in professional fees [added: that were primarily] incurred to investigate, assess and begin remediating the causes that led to the delay in filing our periodic reports with the SEC and the associated restatement of certain of our previously issued financial statements, [removed: as well as] an increase [added: of $7.2 million] in [removed: the number] [added: bad debt provision expenses primarily as a result] of [removed: employees to support] our [removed: growth. |][added: inability to collect receivables from]

[removed: Subsequent Events][added: Subsequent Events]

For details, see Part II, Item 8, Note [removed: 19,] [added: 20,] “Subsequent Events” in our notes to the consolidated financial statements in this Annual Report.

[removed: Critical] [added: Critical] Accounting [removed: Policies][added: Policies]

[removed: General][added: General]

We evaluate our estimates on an on-going basis, and base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making the judgments we make about the carrying values of assets and liabilities that are [removed: not readily apparent from other sources.]

Revenue from distributors is recognized when the distributor obtains control of the product, which generally happens at the point of shipment or upon [removed: delivery, unless customer acceptance is uncertain, and in the amount of consideration to which we expect to be entitled.][added: delivery.]

[added: *Services sales.*] Our sale of services mainly consists of extended warranty and on-site services.

[removed: Contracts] [added: *Contracts] with multiple promised goods and [added: services.* Certain of our contracts contain multiple promised goods and] services.

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 [added: of sales.]

Taxes imposed by governmental authorities on our revenue producing activities with customers, such as sales taxes and value added taxes, are excluded from net [removed: sales.][added: sales and included in operating expenses.]

[removed: Product Warranties][added: Product Warranties]

We offer product warranties [added: typically] ranging from 15 to 39 months against any defective products.

Therefore, [removed: under recently adopted guidance, ASC 606,] these warranties are not considered separate performance obligations in the arrangement.

We monitor warranty obligations and may make revisions to [removed: its] [added: our] warranty reserve if actual costs of product repair and replacement are significantly higher or lower than estimated.

Accruals for anticipated future warranty costs are [removed: charged] [added: recorded] to cost of sales and included in accrued liabilities and other long-term liabilities.

[added: 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 our historical experience, and the changes in the cost of servicing warranty claims.

[removed: Inventories][added: Inventories]

Inventories are stated at [removed: weighted average cost, subject to] lower of [added: cost, using weighted average] cost [added: method,] or net realizable value.

We evaluate inventory on a quarterly basis for lower of cost or net realizable value and excess and obsolescence and, as necessary, write down the valuation of [removed: units] [added: inventories] based upon our [added: inventory aging,] forecasted usage and sales, anticipated selling price, product obsolescence and other factors.

[removed: Income Taxes][added: Income Taxes]

[removed: Stock-Based Compensation][added: Stock-Based Compensation]

We measure and recognize compensation expense for all share-based awards made to employees and non-employees, including stock [removed: options] [added: options, restricted stock units ("RSUs")] and [added: performance-based] restricted stock units [removed: ("RSUs").][added: (“PRSUs”).]

The fair value of RSUs [removed: with service conditions or performance conditions] [added: and PRSUs] is based on the closing market price of our common stock on the date of grant.

We estimate the fair value of stock options granted using a Black-Scholes option pricing [removed: model and a single option award approach.][added: model.]

The expected volatility is based on the [removed: implied and] historical volatility of our common stock.

[removed: Variable] [added: Variable] Interest [removed: Entities][added: Entities]

We have concluded that Ablecom Technology, Inc. ("Ablecom") and its affiliate, Compuware Technology, Inc. [removed: ("Compuware")] [added: ("Compuware"),] are [removed: VIEs in accordance with applicable accounting standards and guidance;] [added: VIEs;] however, we are not the primary beneficiary as we do not have the power to direct the activities that are most significant to the entities and therefore, we do not consolidate these entities.

In performing this analysis, we considered our explicit arrangements with Ablecom and Compuware, including [removed: the supplier arrangements.][added: all contractual arrangements with these entities.]

Also, as a result of the substantial related party relationships between us and these two companies, we considered whether any implicit arrangements exist that would cause us to protect [removed: those] [added: these] related parties’ interests from suffering losses.

Following the suspension of trading, our common stock was quoted on the OTC Market and traded under the symbol “SMCI.” On January 14, 2020, our common stock was relisted on the NASDAQ Global Select Market under the symbol “SMCI".

We are a global leader and innovator of application-optimized high performance and high-efficiency server and storage systems for a variety of markets, including enterprise data centers, cloud computing, artificial intelligence, 5G and edge computing.

We also provide global support and services to help our customers install, upgrade and maintain their computing infrastructure.

Additionally, we must focus on development of our sales partners and distribution channels to further expand our market share.

Coronavirus (COVID-19) Pandemic Impact

The global spread of the coronavirus (COVID-19) and the various attempts to contain it have created significant volatility, uncertainty and economic disruption for many businesses worldwide.

In an effort to contain COVID-19 or slow its spread, governments around the world have enacted various measures, including orders to close all businesses not deemed “essential,” shelter in place, and practice social distancing when engaging in essential activities.

We are an essential critical infrastructure (information technology) business under the relevant Federal, State and County regulations.

In late March, we responded to the directives from Santa Clara County and the State of California regarding shelter in place instructions to combat the spread of COVID-19.

Our first priority is the safety of our workforce and we immediately began to implement numerous health precautions and work practices to operate in a safe manner.

We quickly transitioned most of our indirect labor forces to work from home and continued to operate our local assembly in Taiwan and, after an initial period of disruption, in the United States and Europe.

We operate in the critical industry of IT infrastructure and we assessed our customer base to identify priority customers who operate in critical industries.

We continue to see ongoing demand as we enter the first quarter of fiscal year 2021 and do not have significant direct exposure to industries such as retail and oil and gas, which have been impacted the greatest.

As time passes, we may discover greater indirect exposure to distressed industries through our channel partners and OEM customers.

We have actively managed our supply chain for potential shortage risk by first building inventories of critical components required for our motherboards and other system printed circuit boards in response to the early outbreak of COVID-19 in China.

Since that time, we have continued to add to our inventories of key components such as CPUs, memory, SSDs and to a lesser extent GPUs such that customer orders can be fulfilled as they are received.

Logistics has emerged as a new challenge as globally the transportation industry restricted the frequency of departures and increased logistics costs.

We experienced increased costs in freight as well as direct labor costs as we incentivized our employees to continue to work and assist us in serving our customers, many of whom are in critical industries.

We expect this trend to continue for the duration of the uncertainties related to the COVID-19 pandemic.

We monitor the credit profile and payment history of our customers to evaluate risk in specific industries or geographic areas where cash flow may be disrupted.

While we believe that we are adequately capitalized, we actively manage our liquidity needs.

In May 2020, we negotiated an extension of our credit facility with Bank of America to extend the maturity date to June 2021.

In June 2020, we entered into a ten-year, non-revolving term loan facility with China Trust and Bank Corp ("CTBC Bank") to obtain financing for use in the expansion and renovation of the our Bade Manufacturing Facility located in Taiwan.

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

Currently, we are unable to predict the ultimate extent to which the global COVID-19 pandemic may further impact our business operations, financial performance and results of operations within the next 12 months.

| • | Net sales declined by 4.6% in fiscal year 2020 as compared to fiscal year 2019. |

| • | Gross margin increased to 15.8% in fiscal year 2020 from 14.2% in fiscal year 2019, primarily due to lower prices for key components and increased services and software revenues that have higher margins. |

| • | Operating expenses increased by 10.6% in fiscal year 2020 as compared to fiscal year 2019, primarily due to the special performance bonuses to our employees and the accrual for our settlement with the SEC. |

| • | Net income increased to $84.3 million in fiscal year 2020 as compared to $71.9 million in fiscal year 2019, which was primarily due to a reduction in our effective tax rate to 3.4% in fiscal year 2020 as compared to 16.6% in fiscal year 2019. |

| • | Our cash and cash equivalents were $210.5 million and $248.2 million at the end of fiscal years 2020 and 2019, respectively. In fiscal year 2020, we used net cash of $49.8 million, of which $30.3 million was used in operating activities related primarily to additional working capital requirements such as building increased inventories of critical components. We also invested $44.3 million in purchases of property and equipment, including construction of a new facility in San Jose, California, and generated $23.8 million in financing activities primarily from the proceeds from exercises of stock options. |

not readily apparent from other sources.

Revenue Recognition

*Product sales*.

Stock option and RSU awards are recognized to expense on a straight-line basis over the requisite service period.

PRSU awards are recognized to expense using an accelerated method only when it is probable that a performance condition is met during the vesting period.

If it is not probable, no expense is recognized and the previously recognized expense is reversed.

We base initial accrual of compensation expense on the estimated number of PRSUs that are expected to vest over the requisite service period.

That estimate is revised if subsequent information indicates that the actual number of PRSUs is likely to differ from previous estimates.

The cumulative effect on current and prior periods of a change in the estimated number of PRSUs expected to vest is recognized in stock-based compensation expense in the period of the change.

Previously recognized compensation expense is not reversed if vested stock options, RSUs or PRSUs for which the requisite service has been rendered and the performance condition has been met expire unexercised or are not settled.

We are a global leader and innovator of high-performance, high-efficiency server and storage technology.

We develop and provide end-to-end green computing solutions to the cloud computing, data centers, enterprise, big data, AI, HPC, edge computing and IoT markets.

During fiscal years 2018 and 2019, we continued to concentrate our efforts on selling server and storage systems to larger customers such as enterprise and data center customers.

As a result of these efforts, sales of server and storage systems represented sequentially greater percentages of our net sales over the course of the two fiscal years, rising from 70.0% of net sales in fiscal year 2017 to 79.3% in fiscal year 2018 and 81.7% in fiscal year 2019.

Server and storage systems generally have higher average selling prices and provide an opportunity to sell services.

The substantial increase in our net sales from fiscal year 2017 to fiscal year 2018 reflected both this concentration on selling server and storage systems and an increased demand for our products.

The further increase in our net sales from fiscal year 2018 to fiscal year 2019, which was less substantial than the prior year’s increase in net sales, reflected our continued concentration on selling server and storage systems, but also reflected a softening demand for our products due to an overall market slowdown in the second half of fiscal year 2019.

In addition, adverse publicity associated with false assertions made against our company in a news article published in October 2018 and the unrelated suspension of trading in our common stock on NASDAQ in August 2018 may have been factors contributing to the slower growth in our net sales for fiscal year 2019.

| • | Net sales increased by 4.2% and 35.2% in fiscal years 2019 and 2018, respectively, as compared to fiscal years 2018 and 2017, respectively. |

| • | Gross margin increased to 14.2% in fiscal year 2019 from 12.8% in fiscal year 2018, primarily due to lower prices for key components, a favorable geographic mix with less competitive pricing, and increased service revenues that have higher margins. Gross margin in fiscal year 2018 decreased by 130 basis points from 14.1% in fiscal year 2017 primarily due to higher costs of key components resulting from shortages of memory and SSDs, higher volume of server and storage systems sales configured with these key components and a less favorable geographical mix of sales resulting in a higher cost of sales. |

| • | Net income increased to $71.9 million as compared to $46.2 million in fiscal year 2018, which was primarily due to a reduction in our effective tax rate to 16.6% as compared to 43.6% in fiscal year 2018 and a $1.3 million increase in income before taxes. Net income in fiscal year 2018 decreased by $20.7 million from $66.9 million in fiscal year 2017 primarily due to an increase in our effective tax rate to 43.6% in fiscal year 2018, in part due to the remeasurement of our deferred tax assets under the 2017 Tax Reform Act, as compared to 26.7% in fiscal year 2017. |

| • | Our cash and cash equivalents were $248.2 million, $115.4 million and $110.6 million at the end of fiscal years 2019, 2018, and 2017, respectively. In fiscal year 2019, we generated net cash of $141.8 million, of which $262.6 million was generated from operating activities related to increased net income and improved working capital management while we invested $24.8 million primarily in new manufacturing capacity and used $95.8 million in financing activities primarily to repay outstanding loans. In fiscal year 2018, we generated net cash of $7.6 million, of which $84.3 million was generated from operating activities related to improved working capital management while we invested $25.9 million primarily in new manufacturing capacity and used $50.8 million in financing activities to primarily repay outstanding loans. |

Revenue recognition for periods after adoption of ASC 606 as of July 1, 2018

We adopted the new accounting guidance issued by the Financial Accounting Standards Board (“FASB”), Revenue from Contracts with Customers, (“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, we 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.

We 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.

Product sales.

We may use distributors to sell products to end customers.

Services sales.

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.

Certain of our contracts contain multiple promised goods and services.

of products sold.

Revenue recognition for periods prior to adoption of ASC 606 as of July 1, 2018

We recognize revenue from sales of products upon meeting all of the following revenue recognition criteria, which is typically met upon shipment or delivery of our 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.

We estimate reserves for future sales returns based on a review of our history of actual returns for each major product line.

We also reduce 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.

Revenue from distributors may be recognized on sell-in or sell-through basis depending on the terms of the arrangement with the distributor.

We record costs related to shipping and handling in sales and marketing expenses.

Shipping and handling fees billed to customers are included in net sales.

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.

Multiple-element arrangements.

Certain of our arrangements contain multiple elements, consisting of both our products and services.

Revenue allocated to each element is recognized when all the revenue recognition criteria are met for that element.

We allocate 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.

[removed: Interest] [added: Interest] Rate [removed: Risk][added: Risk]

As of June 30, [removed: 2019,] [added: 2020,] our investments were in money market funds, certificates of deposits and auction rate securities.

The interest rates for the term loans and the revolving lines of credit ranged from [removed: 0.93% to 4.50% at June 30, 2019 and 0.95%] [added: 0.45%] to [removed: 4.75%] [added: 3.0%] at June 30, [removed: 2018.][added: 2020.]

Based on the outstanding principal indebtedness of [removed: $23.6] [added: $29.4] million under our credit facilities as of June 30, [removed: 2019,] [added: 2020,] we believe that a 10% change in interest rates would not have a significant impact on our results of operations.

[removed: Foreign] [added: Foreign] Currency [removed: Risk][added: Risk]

However, certain [added: loans and] transactions in these entities are denominated in a currency other than the U.S. dollar, and thus we are subject to foreign currency exchange rate fluctuations associated with re-measurement to U.S. dollars.

Foreign exchange [removed: gain] (loss) [added: gain] for fiscal years [removed: 2019, 2018] [added: 2020, 2019] and [removed: 2017] [added: 2018] was [removed: $0.5] [added: $(1.4)] million, [removed: $(0.6)] [added: $0.5] million and [removed: $(1.3)] [added: $(0.6)] million, respectively.

Our solutions [removed: range from] [added: include] complete [removed: server, storage,] [added: servers, storage systems,] modular blade servers, [removed: blades and workstations to] [added: blades, workstations,] full racks, networking devices, server management software, [removed: server sub-systems] and [removed: global support and services.][added: server sub-systems.]

We offer our customers a high degree of flexibility and customization by providing a broad array of server configurations from which they can choose the [removed: optimal] [added: best] solutions to fit their computing needs.

We perform the majority of our research and development [removed: efforts,] [added: activities in-house in the United States] at our [added: facilities in] San Jose, [removed: California headquarters, which we believe increases] [added: California, and in Taiwan, increasing] the [removed: efficiency of] communication and collaboration between design [removed: teams, streamlines] [added: teams to streamline] the [removed: development process and reduces time-to-market.]

Our [removed: resource-saving] [added: resource saving] architecture [removed: continues] [added: supports] our [removed: tradition of leading the market with] [added: efforts to lead in] green IT innovation.

[removed: Leveraging] [added: We believe our approach of leveraging] an overall architecture that [removed: optimizes] [added: balances] data center [removed: power,] [added: power requirements,] cooling, shared resources and refresh [removed: cycles, we believe this approach] [added: cycles] helps the environment and provides total cost of ownership (“TCO”) savings for our customers.

[removed: Furthermore, our] [added: This] architecture disaggregates [removed: central processing units (“CPU”)] [added: CPU] and memory, which [removed: allows] [added: enables] each resource to be refreshed [removed: independently] [added: independently,] thereby allowing data centers to [added: significantly] reduce [added: both] refresh cycle [removed: costs.][added: costs and e-waste.]

We conduct our operations principally from our Silicon Valley headquarters in California and [removed: subsidiaries] in [added: our] Taiwan and the [removed: Netherlands.][added: Netherlands facilities.]

Our sales and marketing activities are conducted through a combination of our direct sales force and [removed: indirect sales channel partners.]

In our indirect sales channels, we work with distributors, [removed: value added] [added: value-added] resellers, system integrators, and original equipment manufacturers ("OEMs") to market and sell our optimized solutions to their end customers.

During each of [removed: the] fiscal [removed: years] [added: year] 2019 and 2018, we sold to over 850 direct [removed: customers in over 110 countries.][added: customers.]

[removed: Our integrated internal research and development resources] [added: These resources,] along with our [removed: deep] understanding of complex computing and storage [removed: requirements] [added: requirements,] enable us to deliver [removed: the] [added: product innovation featuring] advanced functionality and capabilities required by our customers.

Our in-house design competencies, control of design of many of the components used within our server and storage [removed: systems] [added: systems,] and our [removed: building block architecture] [added: Server Building Block Solutions® (an innovative, modular and open architecture)] enable us to rapidly develop, build and test server and storage systems, subsystems and accessories with unique configurations.

As a result, when new technologies are brought to market, we are generally able to quickly [removed: design, integrate and] assemble a broad portfolio of solutions by leveraging common building blocks across product lines.

We work closely with the leading microprocessor, graphics processing units (“GPU”), memory, disk/flash, and interconnect vendors and other hardware and software suppliers to coordinate the design of our new products with their product release [removed: schedules, thereby enhancing our ability to rapidly introduce new products incorporating the latest technology.][added: schedules.]

[removed: Strategy][added: Strategy]

[removed: We believe that] [added: Through] our [removed: ability to innovate and execute will enable us] [added: strategy, we seek] to maintain or improve our relative competitive position in many product areas and [added: pursue markets that] provide us with additional long-term growth opportunities.

[removed: Enhance Our] [added: Server] Software Management [removed: Solutions][added: Solutions]

[removed: Further Optimize] [added: Leveraging] Our Global Operating [removed: Structure][added: Structure]

[removed: Products] [added: Products] and [removed: Services][added: Services]

We offer a broad range of application-optimized server solutions, [removed: including storage,] rackmount and blade [removed: server and storage systems] [added: servers, storage,] and subsystems and accessories, which can be used to build complete server and storage [removed: systems serving a variety of markets, including cloud computing, data center, enterprise, big data, HPC, AI, 5G, IoT, embedded and edge computing.][added: systems.]

The percentage of our net sales represented by sales of server and storage systems [removed: increased] [added: decreased] to [removed: 81.7%] [added: 78.5%] in fiscal year [removed: 2019] [added: 2020] from [removed: 79.3%] [added: 81.7%] in fiscal year [removed: 2018] [added: 2019] and from [removed: 70.0%] [added: 79.3%] in fiscal year [removed: 2017,] [added: 2018,] and the percentage of our net sales represented by [removed: sales of subsystems and accessories was 18.3% in fiscal year 2019, 20.7% in fiscal year 2018 and 30.0% in fiscal year 2017.]

[removed: Server] [added: Server] and Storage [removed: Systems][added: Systems]

We sell server and storage systems in rackmount, blade, and multi-node [removed: (Twin)] form factors, which support single, dual, and multiprocessor architectures.

[removed: Our SuperBlade®] [added: | • | SuperBlade®] and [removed: MicroBlade™] [added: MicroBlade™] system families [removed: are each] designed to share common computing resources, thereby saving space and power over standard rackmount [removed: servers.][added: servers; |]

[removed: Our SuperStorage] [added: | • | SuperStorage] systems [added: that] provide [removed: high-density] [added: high density] storage while leveraging [removed: high-efficiency] [added: an efficient use of] power to [removed: maximize] [added: achieve] performance-per-watt [removed: savings to reduce TCO for enterprise data centers, big data, and other high-performance applications.][added: savings; |]

[removed: Our Twin] [added: | • | Twin] family of multi-node server systems [removed: including 1U and 2U Twin™, 1U and 2U TwinPro™, 4U FatTwin™, and new 2U BigTwin™ are optimized] [added: designed] for density, performance, and power [removed: efficiency for customers' storage, HPC, Hyper-converged infrastructure and cloud computing requirements.][added: efficiency; |]

[removed: Our Data] [added: | • | Data] Center [removed: Optimized] [added: Optimized] server systems [added: that] deliver [removed: superior] [added: increased] performance-per-watt [removed: to optimize data center TCO] with an improved thermal [removed: architecture utilizing efficient power components and offset processors to help eliminate CPU preheating] [added: architecture;] and [removed: support a 5+ year product life cycle.][added: |]

[removed: MicroCloud integrates advanced technologies within a compact functional design to] [added: | • | MicroCloud server systems that] deliver high performance in environments with space and power constraints. [added: |]

Our open industry-standard remote system management solutions, such as our Server Management suite, including Supermicro Server Manager (“SSM”), Supermicro Power Management software (“SPM”), Supermicro Update Manager (“SUM”), and SuperDoctor 5, have been designed to help manage large-scale heterogeneous data center [removed: environments from the cloud to the edge.][added: environments.]

In addition to our complete [added: server and storage] systems business, we offer a large array of modular server subsystems and [removed: accessories] [added: accessories,] such as [removed: serverboards,] [added: server boards,] chassis, power supplies and other accessories.

These subsystems are the foundation of our server solutions and span product offerings from the entry-level single and [removed: dual processor] [added: dual-processor] server segment to the high-end [removed: multi-][added: multiprocessor market.]

The majority of the subsystems and accessories we sell individually are [removed: optimized] [added: designed] to work together [added: to improve performance,] and are ultimately integrated into complete server and storage systems.

[removed: Supermicro] [added: Supermicro] Global [removed: Services][added: Services]

[removed: Global Services:] [added: *Global Services:*] Our strategic direct and OEM customers may purchase a variety of on-site support service plans.

[removed: Support Services:] [added: *Support Services:*] Our customer support services offer competitive market warranties, generally from one-to-three years, and warranty extension options for products sold by our direct sales team and approved indirect sales channel partners.

[removed: Research] [added: Research] and [removed: Development][added: Development]

We believe that the combination of our focus on internal research and development activities, our close working relationships with customers and vendors and our modular design approach allows us to [removed: minimize] [added: decrease] time-to-market.

We continue to invest in reducing our design and manufacturing costs and improving the performance, cost-effectiveness and [removed: power] [added: power-] and space-efficiency of our solutions.

Our research and development teams focus on the development of new and enhanced products that can support emerging technological and engineering innovations while [removed: highly optimizing the] [added: achieving high] overall system performance.

We work closely with their respective development teams to [removed: optimize] [added: enhance] system performance and reduce system-level issues.

Our Company

We are a Silicon Valley-based provider of application-optimized high performance and high-efficiency server and storage systems for a variety of markets, including enterprise data centers, cloud computing, artificial intelligence, 5G and edge computing.

We also provide global support and services to help our customers install, upgrade and maintain their computing infrastructure.

This enhances our ability to rapidly introduce new products incorporating the latest technology.

We seek to be first to market with products incorporating new technologies and to offer the broadest selection of products using those technologies to our customers.

In order to reduce the high cost of operating datacenters, IT managers increasingly turn to suppliers of high-performance products that are also cost-effective, energy-efficient, and green.

In addition, we offer product lines that are designed to share common computing resources, thereby saving both valuable space and power as compared to general purpose rackmount servers.

indirect sales channel partners.

Key elements of our strategy include executing upon the following:

A Strong Internal Research and Development and Internal Manufacturing Capability

We are continually investing in our engineering organization.

As of June 30, 2020, we employed over 1,700 persons in our research and development organization.

Also, substantially all of our servers are tested and assembled in our facilities, and more than half of our final server and storage production is completed in San Jose, California.

Our engineering aptitude, coupled with our internal manufacturing capability, enables rapid prototyping and product roll-out, contributing to a high level of responsiveness to our customers.

Introducing More Innovative Products, Faster

We seek to sustain advantages in both time-to-market and breadth of products incorporating the latest technological innovations, such as new processors, advancements in storage and evolving I/O technologies.

We seek these advantages by leveraging our in-house design capabilities and our Building Block Solutions ® architecture.

This allows us to offer customers a broad choice of products to match their target application requirements.

For example, in early February 2020, we introduced over 100 new systems in support of Intel’s introduction of its second-generation Xeon Scalable processor.

Capitalizing on New Applications and Technologies

In addition to serving traditional needs for server and storage systems, we have devoted, and will continue to devote, substantial resources to developing systems that support emerging and growing applications including cloud computing, artificial intelligence, 5G/edge computing and others.

We believe there are significant opportunities for us in each of these rapidly developing markets due to stringent design requirements for these applications that often require the use of the latest technologies, allowing us to leverage our capabilities in product innovation, superior time-to-market, and portfolio breadth.

Driving Software and Services Sales to our Global Enterprise Customers

We seek to grow our global enterprise revenue by bolstering and expanding our software management products and support services.

These software products and services are important because the uptime requirements and need to extend the functionality of computing infrastructure are a high priority for enterprise customers.

In addition to our internal software development efforts, we also integrate and partner with external software vendors to meet customer requirements.

We have recently started to increase our manufacturing capacity in Taiwan to diversify our operating base and optimize relatively low labor costs as compared to the United States.

In addition, Taiwan has been less affected by COVID-19, which makes it a well-suited manufacturing location for our Asia and export operations and will also lower our logistics costs.

These solutions and products are designed to serve a variety of markets, such as enterprise data centers, cloud computing, artificial intelligence (“AI”), 5G/edge computing.

sales of subsystems and accessories was 21.5% in fiscal year 2020, 18.3% in fiscal year 2019 and 20.7% in fiscal year 2018.

We complement our server and storage system offerings with software management solutions as well as global services and support, the revenue for which is included in our server and storage systems revenue.

Our key product lines include:

| • | Ultra Server systems for demanding enterprise workloads; |

| • | GPU or Accelerated systems; |

development process and reducing time-to-market.

During fiscal year 2020, we sold to over 820 direct customers in over 100 countries.

In addition, over the three years ended June 30, 2020 we have sold to thousands of end users through our indirect sales channel.

Our marketing programs are designed to create a global awareness and branding for our company and products, as well as an understanding of the significant value we bring to customers.

| | |

| --- | --- |

Overview

We are a Silicon Valley founded, headquartered and operated provider of application-optimized high performance and high-efficiency server and storage systems.

We develop and provide end-to-end green computing solutions to the cloud computing, data centers, enterprise, big data, artificial intelligence ("AI"), High-Performance Computing ("HPC"), edge computing and Internet of Things/embedded (“IoT”) markets.

This building block approach allows us to provide a broad range of products and enables us to build and deliver application-optimized solutions based upon customers’ requirements.

During the same periods, through our indirect sales channels, we have also sold to numerous end users.

We commenced operations in 1993 and have been profitable every year since inception.

The Supermicro Solution

We develop and manufacture high-performance server and storage solutions based upon an innovative, modular and open architecture.

Our primary competitive advantages are the breadth of our product portfolio that can better match exact customer requirements and our ability to deliver new technologies to market faster.

We believe that our approach provides us with greater flexibility to quickly and efficiently develop optimized server solutions for our customers’ specific application requirements.

Rapid Time-to-Market Server Solutions

Improved Power Efficiency and Thermal Management

We believe that we are an industry leader in power-saving technology.

We have designed flexible power management systems, which customize or eliminate components to reduce overall power consumption.

We have developed proprietary power supplies capable of integration across a wide range of server system form factors which can significantly enhance power efficiency.

We have also developed thermal management technologies to reduce the effects of heat dissipation from our servers.

Our products achieve a competitive price-to-performance ratio while minimizing energy costs and reducing the risk of server malfunction caused by overheating.

We have also developed power management software that controls power consumption of server clusters by policy-based administration.

High-Density Servers

Our servers are designed to enable customers to maximize computing power while minimizing the physical space utilized, which allows our customers to deploy our server and storage systems in scale-out configurations.

Our systems can offer significantly more memory, hard drive, solid-state drive (“SSD”), storage and expansion slots than traditional server and storage systems with a comparable server form factor.

For example, our BigTwin® solutions contain two or four full feature dual-processor hot-pluggable compute nodes with All-Flash Non-Volatile Memory express (“NVMe”) support in a two rack unit (“2U”) server.

This high-density design is well suited for our customers that require highly space-efficient solutions and delivers better efficiency through sharing resources across systems.

Key elements of our strategy include sustaining our time-to-market advantage, enhancing our software management solutions, expanding our service and support offerings, further optimizing our global operating structure and deepening our relationships with customers, partners, suppliers and manufacturers.

Maintain Our Time-to-Market Advantage

We believe one of our major competitive advantages is our ability to rapidly incorporate the latest technological innovations into our products.

We intend to maintain our time-to-market advantage by continuing our investment in our research and development efforts to rapidly develop new proprietary server, storage and networking solutions based on industry-standard components.

We plan to continue to work closely with technology partners such as Intel Corporation (“Intel”), Nvidia Corporation (“Nvidia”) and Advanced Micro Devices, Inc. (“AMD”), to develop products that are compatible with the latest generation of industry-standard technologies and maintain our time-to-market advantage.

We have introduced and plan to continue to develop additional server, storage and networking management software capabilities as well as partner with software suppliers for software solutions that are integrated with our server products.

We have invested in system management software like industry standard Redfish APIs for automation, RAS functionality to improve quality, and diagnostics to help reduce debug times.

We have partnerships with security researchers, and have also invested in security technologies and testing tools like Root of Trust for improving product security on BIOS and BMC images.

This strategy will enable our customers to simplify and automate the large scale deployment, configuration and monitoring of our servers.

Expand Our Service and Support Offerings

We intend to continue to expand our global customer service and support offerings that enable our customers to purchase service and support together with our complete server and storage systems as complete solution packages.

Our service and support are designed to help our customers improve uptime, reduce costs and enhance the productivity of our products.

We believe that continued enhancement of these offerings will support the continued growth of our business and increase our market-penetration with enterprise customers.

We remain focused on our global tax structure to optimally manage our tax obligations.

Within our global operating structure, we employ stringent due diligence and qualification processes to select our contract manufacturers, which we regularly audit for process, quality, security and control.

Our global manufacturing process is designed to ensure the end-to-end security of our products.

Deepen Our Relationships with Suppliers and Manufacturers

The court subsequently appointed New York Hotel Trades Council & Hotel Association of New York City, Inc. Pension Fund as lead [removed: plaintiff and it filed an amended complaint naming our Senior Vice President of Investor Relations as an additional defendant.][added: plaintiff.]

On June 21, 2019, [added: the lead] plaintiff filed a further amended complaint naming our former Senior Vice President of International Sales, Corporate Secretary, and Director as an additional defendant.

On July 26, 2019, we filed a motion to dismiss [removed: which remains pending.][added: the complaint.]

We believe the [removed: allegations filed] [added: claims] are without [removed: merit,] [added: merit] and intend to vigorously defend against the lawsuit.

[removed: We] [added: As previously disclosed, we] cooperated with the SEC in its investigation of marketing expenses that contained certain irregularities discovered by our management, which irregularities were disclosed on August 31, [removed: 2015.][added: 2015, and we cooperated with the SEC in its further investigation of the matters underlying our inability to timely file our Form 10-K for the fiscal year ended June 30, 2017 and concerning the publication of a false and widely discredited news article in October 2018 concerning our products.]

The lead plaintiff then filed an amended complaint naming our Senior Vice President of Investor Relations as an additional defendant.

On March 23, 2020, the Court granted our motion to dismiss the complaint, with leave for lead plaintiff to file an amended complaint within 30 days.

On April 22, 2020, lead plaintiff filed a further amended complaint.

On June 15, 2020, we filed a motion to dismiss the further amended complaint, the hearing for which is calendared for September 23, 2020.

On August 25, 2020, to fully resolve all matters under investigation, we consented to entry of an Order Instituting Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order (“Order”), as announced by the SEC.

We admitted the SEC’s jurisdiction over the Company and the subject matter of the proceedings, but otherwise neither admitted nor denied the SEC’s findings, as described in the Order.

We agreed to cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) and (3) of the Securities Act and Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B), of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder.

We also agreed to pay a civil money penalty of $17.5 million.

In addition, our Chief Executive Officer concluded a settlement with the SEC on August 25, 2020, as announced by the SEC.

Our Chief Executive Officer will pay us the sum of $2,122,000 as reimbursement of profits from certain stock sales during the relevant period, pursuant to Section 304 of the Sarbanes-Oxley Act of 2002.

As of and for the year ended June 30, 2020, we recorded a liability of $17.5 million for our SEC settlement which is included in accrued liabilities and general and administrative expenses in the consolidated financial statements.

Our Chief Executive Officer’s payment of $2,122,000 to us is a contingent gain and will be recorded when it is realized.

On September 4, 2015, a complaint was filed against us, our CEO, and our former CFO in the U.S. District Court for the Northern District of California (Deason v.

Super Micro Computer, Inc., et al., No. 15-cv-04049).

The complaint claimed that the defendants violated Section 10(b) of the Securities Exchange Act of 1934 because of alleged misrepresentations and/or omissions in public statements which supposedly were revealed when we announced on August 31, 2015 that the filing of our Annual Report on Form 10-K for fiscal year 2015 would be delayed to allow us to complete an investigation into certain marketing expenses.

On January 12, 2018, after an initial round of successful motion to dismiss briefing leading to Plaintiff filing an amended complaint, we and the named individual defendants filed another motion to dismiss on the grounds that the amended complaint failed to state a claim because it did not plead falsity or scienter.

On June 27, 2018, the Court granted our motion to dismiss without leave to amend and entered judgment in favor of us and the other defendants.

On July 24, 2018, Plaintiff filed a notice of appeal to the 9th Circuit Court of Appeals; however, Plaintiff subsequently filed a voluntary notice dismissing the appeal and, thus, ending the litigation on November 1, 2018.

In addition, we have received subpoenas from the SEC in connection with the matters underlying our inability to timely file our Form 10-K for the fiscal year ending June 30, 2017.

We also received a subpoena from the SEC following the publication of a false and widely discredited news article in October 2018 concerning our products.

We are cooperating fully to comply with these government requests.

[removed: UNITED STATES][added: UNITED STATES]

[removed: SECURITIES] [added: SECURITIES] AND EXCHANGE [removed: COMMISSION][added: COMMISSION]

[removed: Washington,] [added: Washington,] D.C. [removed: 20549][added: 20549]

[removed: Form 10-K][added: Form 10-K]

| [removed: x] [added: ☒] | [removed: ANNUAL] [added: ANNUAL] REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF [removed: 1934] [added: 1934] |

[removed: For] [added: For] the fiscal year [removed: ended June] [added: ended June] 30, [removed: 2019][added: 2020]

| [removed: ¨] [added: ☐] | [removed: TRANSITION] [added: TRANSITION] REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF [removed: 1934] [added: 1934] |

[removed: For] [added: For] the transition period from [removed: to][added: to]

[removed: Commission] [added: Commission] File [removed: Number 001-33383][added: Number 001-33383]

[removed: Super] [added: Super] Micro Computer, [removed: Inc.][added: Inc.]

[removed: (Exact] [added: (Exact] name of registrant as specified in its [removed: charter)][added: charter)]

| [removed: Delaware] [added: Delaware] | | [removed: 77-0353939] [added: 77-0353939] |

| [removed: (State] [added: (State] or other jurisdiction [removed: of incorporation] [added: of incorporation] or [removed: organization)] [added: organization)] | | [removed: (I.R.S. Employer Identification No.)] [added: (I.R.S. Employer Identification No.)] |

[removed: 980] [added: 980] Rock [removed: Avenue][added: Avenue]

[removed: San Jose, CA 95131][added: San Jose, CA 95131]

[removed: (Address] [added: (Address] of principal executive offices, including zip [removed: code)][added: code)]

[removed: (408) 503-8000][added: (408) 503-8000]

[removed: (Registrant’s] [added: (Registrant’s] telephone number, including area [removed: code)][added: code)]

[removed: Securities] [added: Securities] registered pursuant to Section 12(b) of the [removed: Act:][added: Act:]

| [removed: Title] [added: Title] of each [removed: class] [added: class] | [removed: Trading Symbol] [added: Trading Symbol] | [removed: Name] [added: Name] of each exchange on which [removed: registered] [added: registered] |

| [removed: Common] [added: Common] Stock, $0.001 par value per [removed: share] [added: share] | [removed: SMCI] [added: SMCI] | [removed: OTC] [added: NASDAQ Global Select Market] |

[removed: Securities] [added: Securities] registered pursuant to section 12(g) of the Act: [removed: None][added: None]

Yes [removed: ¨] [added: ☐] No [removed: x][added: ☒]

| Large accelerated filer [removed: x] | [added: ☒] | [added: |] Accelerated filer [removed: ¨] | [added: ☐ |]

| Non-accelerated filer [removed: ¨] | [added: ☐] | [added: |] Smaller reporting company [removed: ¨] | [added: ☐ |]

| Emerging growth company [removed: ¨] | [added: ☐] | | [added: | |]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b of the Exchange Act) Yes [removed: ¨] [added: ☐] No [removed: x][added: ☒]

The aggregate market value of the registrant’s common stock held by non-affiliates, based upon the closing price of the common stock on December 31, [removed: 2018,] [added: 2019,] as reported by the OTC Market, was [removed: $596,876,261.][added: $1,057,388,840.]

Shares of common stock held by each executive officer and director and by each person who owns 5% or more of the outstanding common stock, based on filings with the Securities Exchange Commission, have been [removed: excluded since such persons may be deemed affiliates.]

As of [removed: November 30, 2019,] [added: July 31, 2020,] there were [removed: 50,085,282] [added: 52,436,548] shares of the registrant’s common stock, $0.001 par value, outstanding, which is the only class of common stock of the registrant issued.

[removed: DOCUMENTS] [added: DOCUMENTS] INCORPORATED BY [removed: REFERENCE][added: REFERENCE]

[removed: ANNUAL] [added: ANNUAL] REPORT ON FORM [removed: 10-K][added: 10-K]

[removed: TABLE] [added: TABLE] OF [removed: CONTENTS][added: CONTENTS]

| | | [removed: Page] [added: Page] |

| | [removed: PART I] [added: PART I] | |

| Item 1. | [removed: [Business](#sA578BD5545F355689063C6A6319F58C8)] [added: [Business](#sC5763C6A581056D89E09F488AA4DB3B8)] | [removed: [3](#sA578BD5545F355689063C6A6319F58C8)] [added: [2](#sC5763C6A581056D89E09F488AA4DB3B8)] |

| Item 1A. | [Risk [removed: Factors](#sE0C211C4E6885564879962A481DE6996)] [added: Factors](#sBEEDD227BA095B79A2DFB4CDA139B0D7)] | [removed: [11](#sE0C211C4E6885564879962A481DE6996)] [added: [8](#sBEEDD227BA095B79A2DFB4CDA139B0D7)] |

| Item 1B. | [Unresolved Staff [removed: Comments](#sC8825EDAD9885DDFBFCF1081C6312DC2)] [added: Comments](#sF06A8A1D15055104A839EC3B5A1C73A5)] | [removed: [29](#sC8825EDAD9885DDFBFCF1081C6312DC2)] [added: [26](#sF06A8A1D15055104A839EC3B5A1C73A5)] |

| Item 2. | [removed: [Properties](#s4FEFBED5D5B458A996F27EA2C9BF2882)] [added: [Properties](#s3D582FC3B9CA5C0E9E75B4A09CB6E8EC)] | [removed: [29](#s4FEFBED5D5B458A996F27EA2C9BF2882)] [added: [26](#s3D582FC3B9CA5C0E9E75B4A09CB6E8EC)] |

| Item 3. | [Legal [removed: Proceedings](#s44F7D7136F4556A38BD376B1E93089BC)] [added: Proceedings](#s85A375D0A3B450FEB1CDE72FD7EC7E35)] | [removed: [29](#s44F7D7136F4556A38BD376B1E93089BC)] [added: [27](#s85A375D0A3B450FEB1CDE72FD7EC7E35)] |

__________________________________________________________________________

or

__________________________________________________________________________

__________________________________________________________________________

Yes ☐ No ☒

Yes ☒ No ☐

Yes ☒ No ☐

| | | | | |

| --- | --- | --- | --- | --- |

| | | | | |

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

excluded since such persons may be deemed affiliates.

SUPER MICRO COMPUTER, INC.

FOR THE FISCAL YEAR ENDED JUNE 30, 2020

| | [Signatures](#s167F05E4FAD859F785A30D8636B4C338) | [129](#s167F05E4FAD859F785A30D8636B4C338) |

10-K 1 smci-2019630x10k.htm 10-K

__________________________________________________________________________

or

| | | |

| --- | --- | --- |

| | [Explanatory Note](#sD0A14931AD1855CBB6BDEA57FEEA4800) | [2](#sD0A14931AD1855CBB6BDEA57FEEA4800) |

| | [Signatures](#sFA6D19347E705C1CAC15A2941AE41F1F) | [157](#sFA6D19347E705C1CAC15A2941AE41F1F) |

Other trademarks, service marks, or trade names appearing in this Annual Report on Form 10-K are the property of their respective owners.

Explanatory Note

We are filing this comprehensive Annual Report on Form 10-K (this “Annual Report”) for the fiscal year ended June 30, 2019 with expanded financial and other disclosures in lieu of filing a separate Annual Report on Form 10-K for the fiscal year ended June 30, 2018 and separate Quarterly Reports on Form 10-Q for the quarterly periods ended September 30, 2017, December 31, 2017, and March 31, 2018.

Prior to the filing of this Annual Report, we filed separate Quarterly Reports on Form 10-Q for the quarterly periods ended September 30, 2018, December 31, 2018, and March 31, 2019 (collectively, the “2019 10-Qs”).

This Annual Report is being filed to facilitate the dissemination of financial and other information to investors.

We do not intend to file a separate Annual Report on Form 10-K for the fiscal year ended June 30, 2018 or Quarterly Reports on Form 10-Q for the quarterly periods ended September 30, 2017, December 31, 2017 and March 31, 2018.

We did not file our Annual Report on Form 10-K for the fiscal year ended June 30, 2017 (the “2017 10-K”) until May 17, 2019.

On that date we also filed amended Quarterly Reports on Form 10-Q/A for the quarters ended September 30, 2016, December 31, 2016 and March 31, 2017 (the “2017 Amended Quarterly Reports” and with the 2017 10-K, the “2017 Reports”).

Some of the financial statements contained in the 2017 Reports were restated.

The circumstances leading to the need to restate those financial statements, and our efforts to investigate, assess and remediate those matters, are more fully described in those reports.

Our delay in the filing of this Annual Report was primarily due to the time required to (a) complete the preparation of the 2017 Reports, including the restatement of certain of our previously issued consolidated financial statements; (b) prepare the financial statements for each of the quarters in our fiscal year ended June 30, 2018; (c) prepare and file the Quarterly Reports on Form 10-Q for each of the quarters in our fiscal year ended June 30, 2019; (d) prepare the consolidated financial statements for the fiscal years ended June 30, 2019 and 2018; and (e) prepare other disclosures contained herein.

We cannot guarantee future results, levels of activity, performance or achievements.

As of June 30, [removed: 2019,] [added: 2020,] we owned approximately [removed: 1,308,000] [added: 1,320,000] square feet and leased approximately [removed: 768,000] [added: 810,000] square feet of office and manufacturing space.

Our long-lived assets located outside of the United States represented [removed: 21.5%, 22.9%] [added: 23.5%, 21.5%] and [removed: 22.1%] [added: 22.9%] of total [added: value of] long-lived assets in fiscal years [removed: 2019, 2018] [added: 2020, 2019] and [removed: 2017,] [added: 2018,] respectively.

See Part II, Item 8, Note [removed: 17,] [added: 18,] “Segment Reporting” to the consolidated financial statements in this Annual Report for a summary of long-lived assets by geographic region.

We lease approximately [removed: 246,000] [added: 5,000] square feet of [removed: warehouse] [added: office] space in [removed: Fremont, California] [added: Jersey City, New Jersey] under a lease that expires in [removed: July 2020,] [added: January 2022,] lease approximately [removed: 46,000] [added: 47,000] square feet of office space in San Jose, California under a lease that expires in January 2022, and lease approximately [removed: 5,000] [added: 246,000] square feet of [removed: office] [added: warehouse space] in [removed: Jersey City, New Jersey] [added: Fremont, California] under a lease that expires in July [removed: 2020.][added: 2025.]

Our European headquarters for manufacturing and service operations is located in Den Bosch, the Netherlands where we [added: own approximately 12,000 square feet of office and we] lease approximately [removed: 165,000] [added: 203,000] square feet of office and manufacturing space under [removed: three] [added: five] leases, which expire in July 2025 and June 2026.

These manufacturing facilities are [removed: subject to an] [added: pledged as security under the] existing term [removed: loan] [added: loans] with [removed: $22.5] [added: $29.4] million remaining outstanding as of June 30, [removed: 2019.][added: 2020.]

Our research and development center, service operations, and warehouse space in Asia are located in an approximately [removed: 106,000] [added: 100,000] square feet facility in Taipei, Taiwan under [removed: eleven] [added: ten] leases that expire at various dates ranging from [removed: October 2019] [added: November 2020] through [removed: July 2022] [added: February 2023] and an approximately [removed: 194,000] [added: 202,000] square feet facility in Taoyuan, Taiwan under [removed: seven] [added: eight] leases that expire [removed: in] [added: from] December [removed: 2021.][added: 2021 through December 2023.]

We lease approximately [removed: 3,000] [added: 4,000] square feet of office space in Shanghai and Beijing, China for sales and service operations under two leases that expire in [removed: April 2020 and] August [removed: 2020,] [added: 2021 and November 2022,] respectively.

[removed: In addition, we] [added: We] lease approximately 3,000 square feet of office space in Japan under two leases, which [added: both] expire in [removed: January 2020 and April 2020, respectively.][added: August 2021.]

In fiscal years [removed: 2018] [added: 2019] and [removed: 2019,] [added: 2020,] we continued to engage several contractors for the development and construction of improvements on the property.

See Part II, Item 8, Note 10, “Short-term [added: and Long-term] Debt” to the consolidated financial statements in this Annual Report for a discussion of our [removed: company’s short-term] [added: company's] debt.

In addition, starting July 2020, we lease an additional 4,900 square feet of office space in Japan that expires in June 2023, in replacement to our two existing leases.

These facilities are subject to a revolving line of credit with $1.1 million outstanding as of June 30, 2019.

[removed: PART II][added: PART II]

| [removed: Item 5.] [added: Item 5.] | [removed: Market] [added: Market] for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity [removed: Securities] [added: Securities] |

[removed: Market Information][added: Market Information]

[removed: Effective March 22, 2019,] [added: On January 14, 2020,] our common stock was [removed: delisted from] [added: relisted on] the Nasdaq Global Select Market.

[removed: Prior to the suspension, we had traded on the Nasdaq Global Select Market since] [added: We became a public company in] March [removed: 29,] 2007, [removed: and] prior to [removed: that time] [added: which] there was no public market for our common stock.

[removed: Holders][added: Holders]

As of [removed: November 30, 2019,] [added: July 31, 2020,] there were [removed: 31] [added: 30] registered stockholders of record of our common stock.

[removed: Dividend Policy][added: Dividend Policy]

Under the terms of the credit agreement with Bank of America, [removed: dated April 19, 2018,] [added: as amended,] we may not pay any dividends.

[removed: Equity] [added: Equity] Compensation [removed: Plan][added: Plan]

Please see Part III, Item 12, [removed: “Security] [added: *“*Security] Ownership of Certain Beneficial Owners and Management and Related Stockholder [removed: Matters”] [added: Matters*”*] of this Annual Report for disclosure relating to our equity compensation plans.

[removed: Stock] [added: Stock] Performance [removed: Graph][added: Graph]

[removed: This] [added: *This] performance graph shall not be deemed “soliciting material” or to be "filed" with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Super Micro Computer, Inc. under the Securities Act of 1933, as amended, or the Exchange [removed: Act.][added: Act.*]

The following graph compares our cumulative five-year total stockholder return on our common stock with the cumulative return of the Nasdaq Computer Index, the Nasdaq Composite Index and [removed: a new] [added: an] industry peer group, which we refer to as the [removed: FY2019] [added: FY2020] Peer Group, consisting of: Cray Inc., Extreme Networks, Inc., Infinera Corporation, NetApp, Inc., and NetGear, Inc. [removed: In selecting] [added: Such FY2020 Peer Group is] the [removed: companies for inclusion] [added: same as the peer group used] in the FY2019 [removed: Peer Group,] [added: Annual Report to allow easier comparability to the prior year given] we [removed: considered and selected companies with similar industry comparability, net revenues, and operating income] [added: do not intend to use such peer group for the FY2021 Annual Report] as [removed: our company.][added: described above.]

The graph reflects an investment of $100 (with reinvestment of all dividends, if any) in our common stock, the Nasdaq Computer Index, the Nasdaq Composite Index and the [removed: FY2019] [added: FY2020] Peer Group, on June 30, [removed: 2014] [added: 2015] and our relative performance tracked through June 30, [removed: 2019.][added: 2020.]

[removed: ][added: ]

| | | [removed: 6/30/2014] [added: 6/30/2015] | | | [removed: 6/30/2015] [added: 6/30/2016] | | | [removed: 6/30/2016] [added: 6/30/2017] | | | [removed: 6/30/2017] [added: 6/30/2018] | | | [removed: 6/30/2018] [added: 6/30/2019] | | | [removed: 6/30/2019] [added: 6/30/2020] | |

[removed: Recent] [added: Recent] Sales of Unregistered [removed: Securities][added: Securities]

[removed: Issuer] [added: Issuer] Purchases of Equity [removed: Securities][added: Securities]

From March 29, 2007 through August 22, 2018, our common stock traded on the Nasdaq Global Select Market.

Effective March 22, 2019, our common stock was delisted from the Nasdaq Global Select Market, whereupon our common stock was quoted on the OTC Market and traded under the symbol “SMCI.” On January 14, 2020, our common stock was relisted on the NASDAQ Global Select Market under the symbol “SMCI".

The performance graph used in our Annual Report on Form 10-K for the year ended June 30, 2019 (the "FY2019 Annual Report") included the cumulative total shareholder return of our peer issuers’ common stock for comparing against the cumulative total shareholder return on our common stock as our common stock had been delisted from the Nasdaq Global Select Market.

For the Annual Report on Form 10-K for the fiscal year ending June 30, 2021 (the "FY2021 Annual Report") and onward, we will no longer use the performance of our peer issuers’ common stock to compare against the performance of our common stock, and we will use the NASDAQ Composite Index and NASDAQ Computer Index for comparing against the performance of our common stock beginning with the performance graph contained within this Annual Report on Form 10-K.

Cray Inc. was acquired in September 2019.

In selecting the companies for inclusion, we considered and selected companies with similar industry comparability, net revenues, and operating income as our company.

| Super Micro Computer, Inc. | | 100.00 | | | 84.01 | | | 83.33 | | | 79.95 | | | 65.42 | | | 95.98 | |

| FY2020 Peer Group | | 100.00 | | | 96.08 | | | 103.58 | | | 159.66 | | | 132.35 | | | 83.55 | |

| Nasdaq Composite Index | | 100.00 | | | 97.11 | | | 123.13 | | | 150.60 | | | 160.55 | | | 201.71 | |

| Nasdaq Computer Index | | 100.00 | | | 101.41 | | | 138.22 | | | 178.95 | | | 193.66 | | | 277.44 | |

None.

Since the date our common stock was suspended from trading on the Nasdaq Global Select Market, our common stock has been quoted on the OTC Market and is currently traded under the symbol “SMCI.” Any OTC Market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

Due to our delisting from the Nasdaq Global Select Market on March 22, 2019, we have added the FY2019 Industry Peer Group.

| Super Micro Computer, Inc. | | 100.00 | | | 117.06 | | | 98.34 | | | 97.55 | | | 93.59 | | | 76.57 | |

| FY2019 Peer Group | | 100.00 | | | 105.68 | | | 101.44 | | | 109.63 | | | 169.32 | | | 140.32 | |

| Nasdaq Composite Index | | 100.00 | | | 113.13 | | | 109.86 | | | 139.30 | | | 170.37 | | | 181.62 | |

| Nasdaq Computer Index | | 100.00 | | | 110.81 | | | 112.37 | | | 153.16 | | | 198.30 | | | 214.60 | |

During fiscal years 2018 and 2019 we granted a consultant restricted stock units covering a total of 26,491 shares of our common stock for services rendered.

The restricted stock units were fully vested at the time of grant.

The issuances did not involve a public offering of securities and we believe that the transactions were exempt from the registration requirements of the Securities Act pursuant to Section 4(a)(2) thereof and Rule 506 of Regulation D promulgated thereunder.

We derived the selected consolidated balance sheet data as of June 30, [removed: 2019 and 2018,] [added: 2020] and [added: 2019,] the consolidated statement of operations data [added: and the stock-based compensation data] for the years ended June 30, [removed: 2019, 2018] [added: 2020, 2019] and [removed: 2017] [added: 2018] from our audited consolidated financial statements and accompanying notes included in this Annual Report.

The consolidated balance sheet data as of June 30, [removed: 2017, 2016 and 2015,] [added: 2018, 2017] and [added: 2016,] the consolidated statement of operations data [added: and stock-based compensation data] for the years ended June 30, [removed: 2016] [added: 2017] and [removed: 2015] [added: 2016] are derived from our audited consolidated financial statements which are not included in this Annual Report.

| | [removed: Years] [added: Years] Ended June [removed: 30,] [added: 30,] | | | | | | | | | | | | | | | | | | |

| | [removed: 2019] [added: 2020] | | | | [removed: 2018] [added: 2019] | | | | [removed: 2017] [added: 2018] | | | | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | |

| | [removed: (in] [added: (in] thousands, except per share [removed: data)] [added: data)] | | | | | | | | | | | | | | | | | | |

| [removed: Consolidated] [added: Consolidated] Statements of Operations [removed: Data:] [added: Data:] | | | | | | | | | | | | | | | | | | | |

| Net sales | $ | [removed: 3,500,360] [added: 3,339,281] | | | $ | [removed: 3,360,492] [added: 3,500,360] | | | $ | [removed: 2,484,929] [added: 3,360,492] | | | $ | [removed: 2,225,022] [added: 2,484,929] | | | $ | [removed: 1,954,353] [added: 2,225,022] | |

| Cost of sales | [removed: 3,004,838] [added: 2,813,071] | | | | [removed: 2,930,498] [added: 3,004,838] | | | | [removed: 2,134,971] [added: 2,930,498] | | | | [removed: 1,894,521] [added: 2,134,971] | | | | [removed: 1,647,769] [added: 1,894,521] | | |

| Gross profit | [removed: 495,522] [added: 526,210] | | | | [removed: 429,994] [added: 495,522] | | | | [removed: 349,958] [added: 429,994] | | | | [removed: 330,501] [added: 349,958] | | | | [removed: 306,584] [added: 330,501] | | |

| Research and development | [removed: 179,907] [added: 221,478] | | | | [removed: 165,104] [added: 179,907] | | | | [removed: 143,992] [added: 165,104] | | | | [removed: 124,223] [added: 143,992] | | | | [removed: 101,402] [added: 124,223] | | |

| Sales and marketing | [removed: 77,154] [added: 85,137] | | | | [removed: 71,579] [added: 77,154] | | | | [removed: 66,445] [added: 71,579] | | | | [removed: 58,338] [added: 66,445] | | | | [removed: 47,496] [added: 58,338] | | |

| General and administrative | [removed: 141,228] [added: 133,941] | | | | [removed: 98,597] [added: 141,228] | | | | [removed: 44,646] [added: 98,597] | | | | [removed: 40,449] [added: 44,646] | | | | [removed: 25,040] [added: 40,449] | | |

| Total operating expenses | [removed: 398,289] [added: 440,556] | | | | [removed: 335,280] [added: 398,289] | | | | [removed: 255,083] [added: 335,280] | | | | [removed: 223,010] [added: 255,083] | | | | [removed: 173,938] [added: 223,010] | | |

| Income from operations | [removed: 97,233] [added: 85,654] | | | | [removed: 94,714] [added: 97,233] | | | | [removed: 94,875] [added: 94,714] | | | | [removed: 107,491] [added: 94,875] | | | | [removed: 132,646] [added: 107,491] | | |

| Other income (expense), net | [added: 1,410 | | | |] (1,020 | | ) | | (773 | | ) | | (984 | | ) | | 1,507 | | | [removed: | 956 | | |]

| Interest expense | [removed: (6,690] [added: (2,236] | | ) | | [removed: (5,726] [added: (6,690] | | ) | | [removed: (2,300] [added: (5,726] | | ) | | [removed: (1,594] [added: (2,300] | | ) | | [removed: (965] [added: (1,594] | | ) |

| Income before income tax provision | [removed: 89,523] [added: 84,828] | | | | [removed: 88,215] [added: 89,523] | | | | [removed: 91,591] [added: 88,215] | | | | [removed: 107,404] [added: 91,591] | | | | [removed: 132,637] [added: 107,404] | | |

| Income tax provision | [removed: (14,884] [added: (2,922] | | ) | | [removed: (38,443] [added: (14,884] | | ) | | [removed: (24,434] [added: (38,443] | | ) | | [removed: (35,323] [added: (24,434] | | ) | | [removed: (40,082] [added: (35,323] | | ) |

| Share of [removed: loss] [added: income (loss)] from equity investee, net of taxes | [removed: (2,721] [added: 2,402] | | [removed: )] | | [removed: (3,607] [added: (2,721] | | ) | | [removed: (303] [added: (3,607] | | ) | | [removed: —] [added: (303] | | [added: )] | | — | | |

| Net income | $ | [removed: 71,918] [added: 84,308] | | | $ | [removed: 46,165] [added: 71,918] | | | $ | [removed: 66,854] [added: 46,165] | | | $ | [removed: 72,081] [added: 66,854] | | | $ | [removed: 92,555] [added: 72,081] | |

| Basic | $ | [removed: 1.44] [added: 1.65] | | | $ | [removed: 0.94] [added: 1.44] | | | $ | [removed: 1.38] [added: 0.94] | | | $ | [removed: 1.50] [added: 1.38] | | | $ | [removed: 1.99] [added: 1.50] | |

| Diluted | $ | [removed: 1.39] [added: 1.60] | | | $ | [removed: 0.89] [added: 1.39] | | | $ | [removed: 1.29] [added: 0.89] | | | $ | [removed: 1.39] [added: 1.29] | | | $ | [removed: 1.85] [added: 1.39] | |

| Basic | [removed: 49,917] [added: 50,987] | | | | [removed: 49,345] [added: 49,917] | | | | [removed: 48,383] [added: 49,345] | | | | [removed: 47,917] [added: 48,383] | | | | [removed: 46,434] [added: 47,917] | | |

| Diluted | [removed: 51,716] [added: 52,838] | | | | [removed: 52,151] [added: 51,716] | | | | [removed: 51,679] [added: 52,151] | | | | [removed: 51,836] [added: 51,679] | | | | [removed: 50,094] [added: 51,836] | | |

| | [removed: As] [added: As] of June [removed: 30,] [added: 30,] | | | | | | | | | | | | | | | | | | |

| | [removed: (in thousands)] [added: (in thousands)] | | | | | | | | | | | | | | | | | | |

| [removed: Consolidated] [added: Consolidated] Balance Sheet [removed: Data:] [added: Data:] | | | | | | | | | | | | | | | | | | | |

| Cash and cash equivalents | $ | [removed: 248,164] [added: 210,533] | | | $ | [removed: 115,377] [added: 248,164] | | | $ | [removed: 110,606] [added: 115,377] | | | $ | [removed: 178,820] [added: 110,606] | | | $ | [removed: 92,920] [added: 178,820] | |

| Working capital | [removed: 815,802] [added: 885,126] | | | | [removed: 719,321] [added: 815,802] | | | | [removed: 588,636] [added: 719,321] | | | | [removed: 544,698] [added: 588,636] | | | | [removed: 438,144] [added: 544,698] | | |

| Total assets | [removed: 1,682,594] [added: 1,918,646] | | | | [removed: 1,769,505] [added: 1,682,594] | | | | [removed: 1,515,130] [added: 1,769,505] | | | | [removed: 1,191,483] [added: 1,515,130] | | | | [removed: 1,122,031] [added: 1,191,483] | | |

| Long-term obligations | [removed: 135,449] [added: 145,304] | | | | [removed: 114,296] [added: 135,449] | | | | [removed: 68,754] [added: 114,296] | | | | [removed: 85,200] [added: 68,754] | | | | [removed: 26,062] [added: 85,200] | | |

| Total stockholders’ equity | [removed: 941,176] [added: 1,065,707] | | | | [removed: 843,652] [added: 941,176] | | | | [removed: 773,846] [added: 843,652] | | | | [removed: 696,653] [added: 773,846] | | | | [removed: 593,585] [added: 696,653] | | |

| | 2020 | | | | 2019 | | | | 2018 | | | | 2017 | | | | 2016 | | |

| | | | | | | | | | | | | | | | | | | | |

| Stock-based compensation: | | | | | | | | | | | | | | | | | | | |

| Cost of sales | $ | 1,663 | | | $ | 1,812 | | | $ | 1,382 | | | $ | 1,157 | | | $ | 962 | |

| Research and development | 12,981 | | | | 13,893 | | | | 12,559 | | | | 10,651 | | | | 9,195 | | |

| Sales and marketing | 1,805 | | | | 1,980 | | | | 2,144 | | | | 1,934 | | | | 1,601 | | |

| General and administrative | 4,735 | | | | 6,971 | | | | 3,580 | | | | 3,188 | | | | 2,678 | | |

| Total stock-based compensation | $ | 21,184 | | | $ | 24,656 | | | $ | 19,665 | | | $ | 16,930 | | | $ | 14,436 | |

[removed: INDEX] [added: INDEX] TO CONSOLIDATED FINANCIAL [removed: STATEMENTS][added: STATEMENTS]

| | [removed: Page] [added: Page] |

[removed: | [Report of Independent Registered Public Accounting Firm](#s1ED6CD27F0875B9A9E7E469F34243E0E) | [67](#s1ED6CD27F0875B9A9E7E469F34243E0E) |][added: REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM]

[removed: | [Consolidated Balance Sheets](#sDF5D7330ABF95F7EB0D0F26052214326) | [71](#sDF5D7330ABF95F7EB0D0F26052214326) |][added: CONSOLIDATED BALANCE SHEETS]

[removed: | [Consolidated Statements of Operations](#s233F7B56E9325431BFCE3EE7A7DADFA2) | [72](#s233F7B56E9325431BFCE3EE7A7DADFA2) |][added: CONSOLIDATED STATEMENTS OF OPERATIONS]

[removed: | [Consolidated Statements of Comprehensive Income](#s7034767BE92E5EE895DABA98BC650A3B) | [73](#s7034767BE92E5EE895DABA98BC650A3B) |][added: CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME]

[removed: | [Consolidated Statements of Stockholders’ Equity](#s043B781422A15B5FAA46E3C16122F410) | [74](#s043B781422A15B5FAA46E3C16122F410) |][added: CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY]

[removed: | [Consolidated Statements of Cash Flows](#s13D5F7E5983D5CBA808FFC1522B23EF1) | [75](#s13D5F7E5983D5CBA808FFC1522B23EF1) |][added: CONSOLIDATED STATEMENTS OF CASH FLOWS]

[removed: | [Notes to Consolidated Financial Statements](#s10233E1EF33C5358B01764C9E4BCA980) | [77](#s10233E1EF33C5358B01764C9E4BCA980) |][added: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS]

[removed: REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM][added: | [Report of Independent Registered Public Accounting Firm](#s3A168ADB8CB85545A2CE34D7293202B4) | [48](#s3A168ADB8CB85545A2CE34D7293202B4) |]

[removed: Opinion] [added: Opinion] on the Financial [removed: Statements][added: Statements]

We have audited the accompanying consolidated balance sheets of Super Micro Computer, Inc. and subsidiaries (the "Company") as of June [removed: 30, 2019] [added: 30,2020] and [removed: 2018,] [added: 2019,] 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, [removed: 2019,] [added: 2020,] 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, [removed: 2019] [added: 2020] and [removed: 2018,] [added: 2019,] and the results of its operations and its cash flows for each of the three years in the period ended June 30, [removed: 2019,] [added: 2020,] 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, [removed: 2019,] [added: 2020,] based on criteria established in [removed: Internal] [added: *Internal] Control - Integrated Framework [removed: (2013)] [added: (2013)*] issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated [removed: December 19, 2019,] [added: August 28, 2020,] expressed an adverse opinion on the Company’s internal control over financial reporting because of [added: a] material [removed: weaknesses.][added: weakness.]

[removed: Basis] [added: Basis] for [removed: Opinion][added: Opinion]

[removed: Critical] [added: Critical] Audit [removed: Matters][added: Matters]

[added: Variable Interest Entities and] Related Party Transactions - [removed: Variable Interest Entity Primary Beneficiary Determination -] Refer to [removed: Note] [added: Notes] 1 [added: and 13] to the financial [removed: statements][added: statements]

[removed: Critical] [added: *Critical] Audit Matter [removed: Description][added: Description*]

Purchases from Ablecom and Compuware were [removed: $144.5] [added: $160.1] million and [removed: $139.6] [added: $131.8] million, respectively, for the fiscal year ended June 30, [removed: 2019.][added: 2020.]

Net sales to Compuware as a distributor were [removed: $17.7] [added: $23.9] million for the fiscal year ended June 30, [removed: 2019.][added: 2020.]

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 [removed: would cause the Company to protect those related parties’ interests from suffering losses.]

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 [removed: losses, as well as the material weaknesses identified by the Company in all five components of Internal Control - Integrated Framework (2013) issued by COSO.][added: losses.]

[removed: How] [added: *How] the Critical Audit Matter Was Addressed in the [removed: Audit][added: Audit*]

| • | We evaluated and tested whether the arrangements are accurately considered and that [added: such] 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. |

[removed: Inventories] [added: Inventories] - Excess and Obsolescence Reserve - Refer to Notes 1 and 5 to the financial [removed: statements][added: statements]

The Company’s inventories are stated at [removed: weighted average cost, subject to] lower of [added: cost, using weighted average] cost [added: method,] or net realizable [removed: value, and as necessary, the Company writes down the valuation of inventories for excess and obsolescence.][added: value.]

The provision for excess and obsolete inventory for the fiscal year ended June 30, [removed: 2019,] [added: 2020,] was [removed: $28.5] [added: $22.6] million.

| • | 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 [removed: process.] [added: process, including manual adjustments.] |

[added: | • |] As a result of the Company’s material [removed: weaknesses] [added: weakness] identified [removed: by the Company] in [removed: all five components of Internal Control - Integrated Framework (2013) issued by COSO,] [added: IT general controls,] we increased the extent of testing on reports derived from the Company’s systems and applications. [added: |]

Revenue from distributors is recognized when the distributor obtains control of the product, which generally happens at the point of shipment or upon [removed: delivery, unless customer acceptance is uncertain.][added: delivery.]

[removed: SUPER] [added: SUPER] MICRO COMPUTER, [removed: INC.][added: INC.]

[removed: CONSOLIDATED BALANCE SHEETS][added: | [Consolidated Balance Sheets](#s8CB424CA9F3154198BBD3F3FE545C681) | [51](#s8CB424CA9F3154198BBD3F3FE545C681) |]

[removed: (in] [added: (in] thousands, except share and per share [removed: amounts)][added: amounts)]

| | [removed: June 30,] [added: June 30,] | | | | [removed: June 30,] [added: June 30,] | | |

| | [removed: 2019] [added: 2020] | | | | [removed: 2018] [added: 2019] | | | [added: | 2018 | | |]

| [removed: ASSETS] [added: ASSETS] | | | | | | | |

| Cash and cash equivalents | $ | [removed: 248,164] [added: 210,533] | | | $ | [removed: 115,377] [added: 248,164] | |

| Accounts receivable, net of allowances of [removed: $8,906] [added: $4,586] and [removed: $1,945] [added: $8,906] at June 30, [removed: 2019] [added: 2020] and [removed: 2018,] [added: 2019,] respectively (including amounts receivable from related parties of [removed: $13,439] [added: $8,712] and [removed: $3,082] [added: $13,439] at June 30, [removed: 2019] [added: 2020] and [removed: 2018,] [added: 2019,] respectively) | [removed: 393,624] [added: 403,745] | | | | [removed: 451,393] [added: 393,624] | | |

| Inventories | [removed: 670,188] [added: 851,498] | | | | [removed: 853,252] [added: 670,188] | | |

| Prepaid expenses and other current assets (including receivables from related parties of [removed: $21,302] [added: $19,791] and [removed: $24,016] [added: $21,302] at June 30, [removed: 2019] [added: 2020] and [removed: 2018,] [added: 2019,] respectively) | [removed: 109,795] [added: 126,985] | | | | [removed: 110,856] [added: 109,795] | | |

would cause the Company to protect those related parties’ interests from suffering losses.

| • | We tested management’s assertion that the Company does not direct the operations of, or is required to absorb and record losses incurred by Ablecom and Compuware by analyzing the gross margin for contract manufacturing transactions with Ablecom and Compuware in comparison to unrelated third parties to determine if there is an indication of off-market terms, assessing leasing arrangements by performing independent market data searches to assess if such leases are within the normal range of prices for Ablecom and Compuware and recalculating days sales outstanding as well as days purchases outstanding and compared to other contract manufacturers to assess comparability of payment terms. |

*Critical Audit Matter Description*

The Company evaluates inventory for lower of cost or net realizable value and excess and obsolescence and, as necessary, writes down the valuation of units based upon inventory aging, forecasted usage and sales, anticipated selling price, product obsolescence and other factors.

We identified the excess and obsolescence reserve as a critical audit matter because of judgments made by management in recording the manual adjustments that management may make to estimate the excess and obsolescence reserve.

*How the Critical Audit Matter Was Addressed in the Audit*

| • | We evaluated management’s estimate by performing corroborative inquiry with the Company’s program managers, sales personnel, and/or buyers, and inspected correspondence and other communications between the Company’s operations team and customers. |

August 28, 2020

| | 2020 | | | | 2019 | | |

| Long-term debt | 5,697 | | | | — | | |

| Authorized shares: 100,000,000; Outstanding shares: 52,408,703 and 49,956,288 at June 30, 2020 and June 30, 2019, respectively | | | | | | | |

SUPER MICRO COMPUTER, INC.

SUPER MICRO COMPUTER, INC.

SUPER MICRO COMPUTER, INC.

| Net income | — | | | — | | | | — | | | — | | | | — | | | | 84,308 | | | | 6 | | | | 84,314 | | |

| Balance at June 30, 2020 | 53,741,828 | | | $ | 389,972 | | | (1,333,125 | ) | | $ | (20,491 | ) | | $ | (152 | ) | | $ | 696,211 | | | $ | 167 | | | $ | 1,065,707 | |

SUPER MICRO COMPUTER, INC.

(in thousands)

| Net income | $ | 84,308 | | | $ | 71,918 | | | $ | 46,165 | |

| Proceeds from sale of investment in a privately-held company | 750 | | | | — | | | | (2,100 | | ) |

SUPER MICRO COMPUTER, INC.

The Company considered estimates of the economic implications of the COVID-19 pandemic on its critical and significant accounting estimates, including an assessment of the collectability of each customer contract as part of the revenue recognition process, assessment of the valuation of accounts receivable, assessment of provision for excess and obsolete inventory and an impairment of long-lived assets.

SUPER MICRO COMPUTER, INC.

SUPER MICRO COMPUTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

*Product sales*.

The Company applies judgment in determining the transaction price as the Company may be required to estimate variable consideration when determining the amount of revenue to recognize.

The Company assesses whether each promised good or service is distinct for the purpose of identifying the performance obligations in the contract.

This assessment involves subjective determinations and requires management to make judgments about the individual promised goods or services and whether such goods or services are separable from the other aspects of the contractual relationship.

If the standalone selling price is not observable

SUPER MICRO COMPUTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

SUPER MICRO COMPUTER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

During the fiscal year ended June 30, 2020, the Company also recorded a $9.5 million net settlement fee as a reduction in the research and development expenses related to the reimbursement of previously incurred expenses for one canceled joint product development agreement.

Stock option and RSU awards are recognized to expense on a straight-line basis over the requisite service period.

PRSU awards are recognized to expense using an accelerated method only when it is probable that a performance condition is met during the vesting period.

If it is not probable, no expense is recognized and the previously recognized expense is reversed.

The Company bases initial accrual of compensation expense on the estimated number of PRSUs that are expected to vest over the requisite service period.

That estimate is revised if subsequent information indicates that the actual number of PRSUs is likely to differ from previous estimates.

| | |

| --- | --- |

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.

| • | 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. |

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.

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.

| • | 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. |

Revenue - Refer to Note 3 to the financial statements

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.

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.

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. |