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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________________________________
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 001-33383
__________________________________________________________________________
Super Micro Computer, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
77-0353939
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
980 Rock Avenue
San Jose, CA 95131
(Address of principal executive offices, including zip code)
(408) 503-8000
(Registrant’s telephone number, including area code)
__________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, $0.001 par value per share
SMCI
OTC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   No      
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
  
Accelerated filer
Non-accelerated filer
  
Smaller reporting company
  Emerging growth company
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
As of November 30, 2019 there were 50,085,282 shares of the registrant’s common stock, $0.001 par value, outstanding, which is the only class of common stock of the registrant issued.





Explanatory Note

We have been delayed in filing this Quarterly Report on Form 10-Q (this “Q1 2020 Quarterly Report”). On December 19, 2019 we filed our comprehensive Annual Report on Form 10-K for the fiscal year ended June 30, 2019 (the “2019 Comprehensive10-K”), with expanded financial and other disclosures in lieu of filing a separate Annual Report on Form 10-K for the fiscal year ended June 30, 2018 and in lieu of filing Quarterly Reports on Form 10-Q for the first three quarters of fiscal year 2018. On December 19, 2019, we also filed Quarterly Reports on Form 10-Q for the quarters ended September 30, 2018, December 31, 2018 and March 31, 2019 (the “2019 Quarterly Reports” and, with the 2019 Comprehensive 10-K, the “2019 Reports”).

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 filing this Q1 2020 Quarterly Report was primarily due to our inability to file our 2019 Reports, which we could not complete until after May 17, 2019, when we filed the 2017 Reports (including the restatement of certain of our previously issued consolidated financial statements). It took us approximately seven months after we filed the 2017 Reports to prepare and file the 2019 Reports. Once we filed the 2019 Reports on December 19, 2019, we were able to complete the preparation of this Q1 2020 Quarterly Report, including the financial information contained herein.

With the filing of this Q1 2020 Quarterly Report, we are now current in our required filings with the SEC of Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q.

We expect to apply for re-listing of our common stock on the Nasdaq National Market promptly following the filing of this Q1 2020 Quarterly Report.






SUPER MICRO COMPUTER, INC.


QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019

TABLE OF CONTENTS
 
 
 
Page
PART I
 
ITEM 1.
 
 
 
 
 
 
ITEM 2.
ITEM 3.
ITEM 4.
PART II
 
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
 

Unless the context requires otherwise, the words “Super Micro,” “Supermicro,” “we,” “Company,” “us” and “our” in this document refer to Super Micro Computer, Inc. and where appropriate, our wholly owned subsidiaries. Supermicro, the Company logo and our other registered or common law trademarks, service marks, or trade names appearing in this September 30, 2019 Form 10-Q are the property of Super Micro Computer, Inc. or its affiliates. Other trademarks, service marks, or trade names appearing in this September 30, 2019 Form 10-Q are the property of their respective owners.





PART I: FINANCIAL INFORMATION

Item 1.        Financial Statements

SUPER MICRO COMPUTER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
 (unaudited) 
 
September 30,
 
June 30,
 
2019
 
2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
239,300

 
$
248,164

Accounts receivable, net of allowances of $8,962 and $8,906 at September 30, 2019 and June 30, 2019, respectively (including amounts receivable from related parties of $17,913 and $13,439 at September 30, 2019 and June 30, 2019, respectively)
356,230

 
393,624

Inventories
685,231

 
670,188

Prepaid expenses and other current assets (including receivables from related parties of $24,856 and $21,302 at September 30, 2019 and June 30, 2019, respectively)
139,570

 
109,795

Total current assets
1,420,331

 
1,421,771

Investment in equity investee
2,283

 
1,701

Property, plant and equipment, net
212,489

 
207,337

Deferred income taxes, net
41,711

 
41,126

Other assets
24,459

 
10,659

Total assets
$
1,701,273

 
$
1,682,594

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable (including amounts due to related parties of $63,605 and $59,809 at September 30, 2019 and June 30, 2019, respectively)
$
332,173

 
$
360,470

Accrued liabilities (including amounts due to related parties of $15,860 and $10,536 at September 30, 2019 and June 30, 2019, respectively)
132,292

 
114,678

Income taxes payable
3,806

 
13,021

Short-term debt
22,544

 
23,647

Deferred revenue
97,597

 
94,153

Total current liabilities
588,412

 
605,969

Deferred revenue, non-current
104,293

 
109,266

Other long-term liabilities (including related party balance of $4,272 and $3,000 at September 30, 2019 and June 30, 2019, respectively)
36,712

 
26,183

Total liabilities
729,417

 
741,418

Commitments and contingencies (Note 11)


 


Stockholders’ equity:
 
 
 
Common stock and additional paid-in capital, $0.001 par value
 
 
 
Authorized shares: 100,000,000
 
 
 
Issued shares: 51,358,810 and 51,289,413 at September 30, 2019 and June 30, 2019, respectively
354,157

 
349,683

Treasury stock (at cost), 1,333,125 shares at September 30, 2019 and June 30, 2019
(20,491
)
 
(20,491
)
Accumulated other comprehensive loss
(220
)
 
(80
)
Retained earnings
638,248

 
611,903

Total Super Micro Computer, Inc. stockholders’ equity
971,694

 
941,015

Noncontrolling interest
162

 
161

Total stockholders’ equity
971,856

 
941,176

Total liabilities and stockholders’ equity
$
1,701,273

 
$
1,682,594


See accompanying notes to condensed consolidated financial statements.

1



SUPER MICRO COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited) 
 
Three Months Ended
September 30,
 
2019
 
2018
Net sales (including related party sales of $27,662 and $14,465 in the three months ended September 30, 2019 and 2018, respectively)
$
799,804

 
$
971,118

Cost of sales (including related party purchases of $65,033 and $78,154 in the three months ended September 30, 2019 and 2018, respectively)
668,875

 
847,879

Gross profit
130,929

 
123,239

Operating expenses:
 
 
 
Research and development
49,572

 
42,994

Sales and marketing
20,194

 
18,292

General and administrative
28,298

 
33,460

Total operating expenses
98,064

 
94,746

Income from operations
32,865

 
28,493

Other income, net
1,589

 
169

Interest expense
(552
)
 
(2,378
)
Income before income tax provision
33,902

 
26,284

Income tax provision
(8,568
)
 
(5,523
)
Share of gain (loss) from equity investee, net of taxes
1,011

 
(1,419
)
Net income
$
26,345

 
$
19,342

Net income per common share:
 
 
 
Basic
$
0.52

 
$
0.39

Diluted
$
0.51

 
$
0.37

Weighted-average shares used in calculation of net income per common share:
 
 
 
Basic
50,274

 
49,704

Diluted
51,704

 
52,218


See accompanying notes to condensed consolidated financial statements.


2



SUPER MICRO COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited) 
 
Three Months Ended
September 30,
 
2019
 
2018
Net income
$
26,345

 
$
19,342

Other comprehensive loss, net of tax:
 
 
 
Foreign currency translation loss
(140
)
 
(231
)
Total other comprehensive loss
(140
)
 
(231
)
Total comprehensive income
$
26,205

 
$
19,111


See accompanying notes to condensed consolidated financial statements.

3



SUPER MICRO COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
(unaudited)
Three months ended September 30, 2019
Common Stock and
Additional Paid-In
Capital
 
Treasury Stock
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
Non-controlling Interest
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance at June 30, 2019
51,289,413

 
$
349,683

 
(1,333,125
)
 
$
(20,491
)
 
$
(80
)
 
$
611,903

 
$
161

 
$
941,176

Release of common stock shares upon vesting of restricted stock units
100,186

 

 

 

 

 

 

 

Shares withheld for the withholding tax on vesting of restricted stock units
(30,789
)
 
(580
)
 

 

 

 

 

 
(580
)
Stock-based compensation

 
5,054

 

 

 

 

 

 
5,054

Foreign currency translation loss

 

 

 

 
(140
)
 

 

 
(140
)
Net income

 

 

 

 

 
26,345

 
1

 
26,346

Balance at September 30, 2019
51,358,810

 
$
354,157

 
(1,333,125
)
 
$
(20,491
)
 
$
(220
)
 
$
638,248

 
$
162

 
$
971,856


Three Months Ended September 30, 2018
Common Stock and
Additional Paid-In
Capital
 
Treasury Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Non-controlling Interest
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance at June 30, 2018
50,914,571

 
$
331,550

 
(1,333,125
)
 
$
(20,491
)
 
$
165

 
$
532,271

 
$
157

 
$
843,652

Cumulative effect of adjustment from adoption of new accounting standards, net of taxes

 

 

 

 

 
7,714

 

 
7,714

Release of common stock shares upon vesting of restricted stock units
181,207

 

 

 

 

 

 

 

Shares withheld for the withholding tax on vesting of restricted stock units
(58,120
)
 
(1,059
)
 

 

 

 

 

 
(1,059
)
Stock-based compensation

 
5,874

 

 

 

 

 

 
5,874

Foreign currency translation loss

 

 

 

 
(231
)
 

 

 
(231
)
Net income

 

 

 

 

 
19,342

 

 
19,342

Balance at September 30, 2018
51,037,658

 
$
336,365

 
(1,333,125
)
 
$
(20,491
)
 
$
(66
)
 
$
559,327

 
$
157

 
$
875,292


See accompanying notes to condensed consolidated financial statements.


4



SUPER MICRO COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Three Months Ended
September 30,
 
2019
 
2018
OPERATING ACTIVITIES:
 
 
 
Net income
$
26,345

 
$
19,342

Reconciliation of net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
6,826

 
5,946

Stock-based compensation expense
5,054

 
5,874

Allowances for doubtful accounts
56

 
707

Provision for excess and obsolete inventories
8,328

 
9,492

Share of (gain) loss from equity investee
(1,011
)
 
1,419

Foreign currency exchange (gain) loss
(561
)
 
178

Deferred income taxes, net
(585
)
 
(4,275
)
Other
289

 
9

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net (including changes in related party balances of ($4,474) and ($16,581) during the three months ended September 30, 2019 and 2018, respectively)
37,340

 
33,616

Inventories
(23,371
)
 
(8,017
)
Prepaid expenses and other assets (including changes in related party balances of ($3,554) and ($1,074) during the three months ended September 30, 2019 and 2018, respectively)
(31,088
)
 
(172
)
Accounts payable (including changes in related party balances of $3,796 and $823 during the three months ended September 30, 2019 and 2018, respectively)
(24,865
)
 
(64,724
)
Income taxes payable
(9,215
)
 
3,741

Deferred revenue
(1,529
)
 
24,138

Accrued liabilities (including changes in related party balances of $5,324 and ($2,458) during the three months ended September 30, 2019 and 2018, respectively)
12,693

 
9,223

Other long-term liabilities (including changes in related party balances of $1,272 and $1,000 during the three months ended September 30, 2019 and 2018, respectively)
854

 
1,165

Net cash provided by operating activities
5,560

 
37,662

INVESTING ACTIVITIES:
 
 
 
Purchases of property, plant and equipment (including payments to related parties of $813 and $711 during the three months ended September 30, 2019 and 2018, respectively)
(13,325
)
 
(3,171
)
Net cash used in investing activities
(13,325
)
 
(3,171
)
FINANCING ACTIVITIES:
 
 
 
Proceeds from debt

 
25,900

Repayment of debt

 
(35,900
)
Net repayment on asset-backed revolving line of credit
(1,116
)
 
(26,523
)
Payment of withholding tax on vesting of restricted stock units
(580
)
 
(1,059
)
Payments of obligations under finance leases
(19
)
 
(71
)
Net cash used in financing activities
(1,715
)
 
(37,653
)
Effect of exchange rate fluctuations on cash
(38
)
 
(72
)
Net decrease in cash, cash equivalents and restricted cash
(9,518
)
 
(3,234
)
Cash, cash equivalents and restricted cash at the beginning of the period
262,140

 
120,382

Cash, cash equivalents and restricted cash at the end of the period
$
252,622

 
$
117,148

 
 
 
 

5



Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
777

 
$
1,673

Cash paid for taxes, net of refunds
30,800

 
3,522

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Unpaid property, plant and equipment purchases (including due to related parties of $1,514 and $2,974 as of September 30, 2019 and 2018, respectively)
$
6,413

 
$
5,823

Contribution of certain technology rights to equity investee

 
3,000


See accompanying notes to condensed consolidated financial statements.

6



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

Note 1.        Organization and Summary of Significant Accounting Policies

Organization

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

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

The unaudited condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) and include the accounts of Super Micro Computer and its consolidated subsidiaries. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations.

The unaudited condensed consolidated financial statements included herein reflect all adjustments, including normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the periods presented. The consolidated results of operations for the three months ended September 30, 2019 are not necessarily indicative of the results that may be expected for future quarters or for the fiscal year ending June 30, 2020.

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

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

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

7


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


obtains control of the product, which generally happens at the point of shipment or upon delivery, unless customer acceptance is uncertain, and in the amount of consideration to which the Company expects to be entitled.

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

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

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

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

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

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

Product Warranties

The Company offers product warranties ranging from 15 to 39 months against any defective products. These standard warranties are assurance type warranties and the Company does not offer any services beyond the assurance that the product will continue working as specified. Therefore, these warranties are not considered separate performance obligations in the arrangement. Based on historical experience, the Company accrues for estimated returns of defective products at the time revenue is recognized. The Company monitors warranty obligations and may make revisions to its warranty reserve if actual costs of product repair and replacement are significantly higher or lower than estimated. Accruals for anticipated future warranty costs are charged to cost of sales and included in accrued liabilities and other long-term liabilities. Warranty accruals are based on estimates that are updated on an ongoing basis taking into consideration inputs such as new product introductions,

8


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


changes in the volume of claims compared with the Company's historical experience, and the changes in the cost of servicing warranty claims. The Company accounts for the effect of such changes in estimates prospectively.

Inventories

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

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

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

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

Stock-Based Compensation

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

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



9


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


Leases

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

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

Operating Leases

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

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

Finance Leases

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

Recognition of leases for periods prior to the Company’s adoption of the new leasing standard as of July 1, 2019
Prior to July 1, 2019, leases were evaluated and recorded as capital leases if one of the following is true at inception: (a) the present value of minimum lease payments meets or exceeds 90% of the fair value of the asset, (b) the lease term is greater than or equal to 75% of the economic life of the asset, (c) the lease arrangement contains a bargain purchase option, or (d) title to the property transfers to the Company at the end of the lease. The Company records an asset and liability for capital leases at present value of the minimum lease payments based on the incremental borrowing rate. Assets are depreciated over the useful life in accordance with the Company’s depreciation policy while rental payments and interest on the liability are accounted for using the effective interest method.
Leases that are not classified as capital leases are accounted for as operating leases. Operating lease agreements that have tenant improvement allowances are evaluated for lease incentives. For leases that contain escalating rent payments, the Company recognizes rent expense on a straight-line basis over the lease term, with any lease incentives amortized as a reduction of rent expense over the lease term.





10


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


Variable Interest Entities

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

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

The Company and Ablecom jointly established Super Micro Asia Science and Technology Park, Inc. (the "Management Company") in Taiwan to manage the common areas shared by the Company and Ablecom for its separately constructed manufacturing facilities. In fiscal year 2012, each company contributed $0.2 million and owns 50% of the Management Company. The Company has concluded that the Management Company is a VIE, and the Company is the primary beneficiary as it has the power to direct the activities that are most significant to the Management Company. For the three months ended September 30, 2019 and 2018, the accounts of the Management Company have been consolidated with the accounts of Super Micro Computer, and a noncontrolling interest has been recorded for Ablecom's interest in the net assets and operations of the Management Company. Net income (loss) attributable to Ablecom's interest was not material for the periods presented and was included in general and administrative expenses in the Company's condensed consolidated statements of operations.

Investment in a Corporate Venture
 
In October 2016, the Company entered into agreements pursuant to which the Company contributed certain technology rights in connection with an investment in a privately-held company (the "Corporate Venture") located in China to expand the Company's presence in China. The Corporate Venture is 30% owned by the Company and 70% owned by another company in China. The transaction was closed in the third fiscal quarter of 2017 and the investment has been accounted for using the equity method. As such, the Corporate Venture is also a related party. As of September 30, 2019 and June 30, 2019, the Company's equity investment in the Corporate Venture was $2.3 million and $1.7 million, respectively, and was recorded under investment in equity investee on the Company's condensed consolidated balance sheet. The Company's share of gains (losses) of the Corporate Venture were $1.0 million and $(1.4) million for the three months ended September 30, 2019 and 2018, respectively.
 
The Company previously recorded a deferred gain related to the contribution of certain technology rights of $10.0 million. The amortization of the deferred gain is being recognized as a credit to research and development expenses in the Company's condensed consolidated statement of operations over a period of five years which represents the estimated period over which the remaining obligations will be fulfilled. As of September 30, 2019 and June 30, 2019, the Company had unamortized deferred gain balance of $2.0 million and $2.0 million, respectively, in accrued liabilities and $2.5 million and $3.0 million, respectively, in other long-term liabilities in the Company’s condensed consolidated balance sheets.

The Company monitors the investment for events or circumstances indicative of potential other-than-temporary impairment and makes appropriate reductions in carrying values if it determines that an impairment charge is required. No impairment charge was recorded for the three months ended September 30, 2019 and 2018, respectively.
 

11


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


Additionally, the Company sold products worth $22.1 million and $9.3 million to the Corporate Venture in the three months ended September 30, 2019 and 2018, respectively, and the Company's share of intra-entity profits on the products that remained unsold by the Corporate Venture as of September 30, 2019 and June 30, 2019 have been eliminated and have reduced the Company's investment in the Corporate Venture. The Company had $15.3 million and $13.1 million due from the Corporate Venture in accounts receivable, net as of September 30, 2019 and June 30, 2019, respectively, in its condensed consolidated balance sheets.

Concentration of Supplier Risk

Certain materials used by the Company in the manufacture of its products are available from a limited number of suppliers. Shortages could occur in these materials due to an interruption of supply or increased demand in the industry. One supplier accounted for 28.7% and 19.7% of total purchases for the three months ended September 30, 2019 and 2018, respectively. Ablecom and Compuware, related parties of the Company, as noted in Note 9, "Related Party Transactions," accounted for 9.7% and 9.2% of total cost of sales for the three months ended September 30, 2019 and 2018, respectively.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentration of credit risk consist primarily of cash and cash equivalents, restricted cash, investment in an auction rate security and accounts receivable. No single customer accounted for 10% or more of the net sales for the three months ended September 30, 2019 and 2018. No country other than the United States represented greater than 10% of the Company’s total net sales in the three months ended September 30, 2019 and 2018. No customer accounted for greater than 10% of the Company's accounts receivable, net as of September 30, 2019, whereas one customer accounted for 17.0% of accounts receivable, net as of June 30, 2019.

Accounting Pronouncements Recently Adopted

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

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

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

Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued authoritative guidance, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments, that amends the impairment model for certain financial assets by requiring the use of an

12


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


expected loss methodology, which will result in more timely recognition of credit losses. The amendment is effective for the Company from July 1, 2020. Early adoption is permitted. The Company is currently evaluating the effect the guidance will have on its consolidated financial statement disclosures, results of operations and financial position.

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

In August 2018, the FASB issued amended guidance to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments. According to the amendments, the entity shall determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. It requires the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The new standard is effective for the Company from July 1, 2020. The Company is currently evaluating the effect the guidance will have on its consolidated financial statement disclosures, results of operations and financial position.

Note 2.         Revenue

Disaggregation of Revenue

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

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

 
Three Months Ended
September 30,
 
2019
 
2018
 
Amount
 
Percent of
Net Sales
 
Amount
 
Percent of
Net Sales
Server and storage systems
$
636,026

 
79.5
%
 
$
808,027

 
83.2
%
Subsystems and accessories
163,778

 
20.5
%
 
163,091

 
16.8
%
Total
$
799,804

 
100.0
%
 
$
971,118

 
100.0
%

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

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


13


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


 
Three Months Ended
September 30,
 
2019
 
2018
United States
$
468,841

 
$
567,615

Europe
128,059

 
162,560

Asia
161,639

 
206,868

Others
41,265

 
34,075

 
$
799,804

 
$
971,118


The following table presents the percentages of net sales from products sold through the Company's indirect sales channel and to its direct customers and OEMs for the three months ended September 30, 2019 and 2018:

 
Three Months Ended September 30,
 
Change
 
2019
 
2018
 
%
Indirect sales channel
50.2
%
 
34.4
%
 
15.8
 %
Direct customers and OEMs
49.8
%
 
65.6
%
 
(15.8
)%
Total net sales
100.0
%
 
100.0
%
 
 


Contract Balances

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

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

Contract liabilities consist of deferred revenue and relate to amounts invoiced to or advance consideration received from customers, which precede the Company’s satisfaction of the associated performance obligation(s). The Company’s deferred revenue primarily results from customer payments received upfront for extended warranties and on-site services because these performance obligations are satisfied over time. On June 30, 2019, deferred revenue totaled $203.4 million, of which $25.5 million was recognized as revenue during the three months ended September 30, 2019.

Deferred revenue decreased during the three months ended September 30, 2019 because the recognition of revenue from contracts entered into in prior periods exceeded the amounts for service contracts invoiced during the period.

Transaction Price Allocated to the Remaining Performance Obligations

Remaining performance obligations represent in aggregate the amount of transaction price that has been allocated to performance obligations not delivered, or only partially undelivered, as of the end of the reporting period. The Company applies the optional exemption to not disclose information about remaining performance obligations that are part of a contract that has an original expected duration of one year or less. These performance obligations generally consist of services, such as on-site integration services that are contracted for one year or less, and products for which control has not yet been transferred. The value of the transaction price allocated to remaining performance obligations as of September 30, 2019 was approximately $201.9 million. The Company expects to recognize approximately 48% of remaining performance obligations as revenue in the next 12 months, and the remainder thereafter.

Note 3.        Stock-based Compensation

Equity Incentive Plan

In January 2016, the Board of Directors approved the 2016 Equity Incentive Plan (the "2016 Plan") and reserved for issuance 4,700,000 shares of common stock for awards of stock options, stock appreciation rights, restricted stock, RSUs and

14


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


other equity-based awards. The 2016 Plan was approved by the stockholders of the Company and became effective on March 8, 2016. As of the date the 2016 Plan became effective, 8,696,444 shares of common stock were reserved for outstanding awards under the Company's 2006 Equity Incentive Plan (the "2006 Plan"). Such awards remained outstanding under the 2006 Plan following the adoption of the 2016 Plan, although no further awards have been or will be granted under the 2006 Plan. Up to 2,800,000 shares subject to awards that remained outstanding under the 2006 Plan at the time the 2016 Plan became effective, if those awards were or are forfeited at any time after the 2016 Plan became effective, will become available for use under the 2016 Plan. At the time the 2016 Plan became effective, all remaining ungranted shares under the 2006 Plan were canceled. Under the 2016 Plan, the exercise price per share for incentive stock options granted to employees owning shares representing more than 10% of the Company's outstanding voting stock at the time of grant cannot be less than 110% of the fair value of the underlying shares on the grant date. Nonqualified stock options and incentive stock options granted to all other persons are granted at a price not less than 100% of the fair value. Options generally expire ten years after the date of grant. Stock options and RSUs generally vest over four years; 25% at the end of one year and one sixteenth per quarter thereafter. Under the 2016 Plan, the Company granted PRSUs to its Chief Executive Officer, 50% of which vest based on the achievement of certain performance metrics at the end of the performance period while the remainder vest in equal amounts over the following ten quarters provided he continues to be employed by the Company. As of September 30, 2019, the Company had 313,872 authorized shares available for future issuance under the 2016 Plan.

Determining Fair Value

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

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

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

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

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

The fair value of stock option grants for the three months ended September 30, 2019 and 2018 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
 
Three Months Ended
September 30,
 
2019
 
2018
Risk-free interest rate
1.58
%
 
2.87
%
Expected term
6.27 years

 
6.05 years

Dividend yield
%
 
%
Volatility
50.04
%
 
47.34
%
Weighted-average fair value
$
8.72

 
$
10.78



The following table shows total stock-based compensation expense included in the condensed consolidated statements of operations for the three months ended September 30, 2019 and 2018 (in thousands):
 

15


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


 
Three Months Ended
September 30,
 
2019
 
2018
Cost of sales
$
395

 
$
438

Research and development
3,130

 
3,496

Sales and marketing
436

 
505

General and administrative
1,093

 
1,435

Stock-based compensation expense before taxes
5,054

 
5,874

Income tax impact
(1,143
)
 
(1,242
)
Stock-based compensation expense, net
$
3,911

 
$
4,632


    
As of September 30, 2019, $7.0 million of unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 2.61 years, $32.5 million of unrecognized compensation cost related to unvested RSUs is expected to be recognized over a weighted-average period of 2.83 years and $0.2 million of unrecognized compensation cost related to unvested PRSUs is expected to be recognized over a period of 1.25 years.
    
Stock Option Activity

The following table summarizes stock option activity during the three months ended September 30, 2019 under all plans:
 
 
 
Options
Outstanding
 
Weighted
Average
Exercise
Price per
Share
 
Weighted
Average
Remaining
Contractual
Term (in Years)
Balance as of June 30, 2019
 
7,374,635

 
$
18.02

 
 
Granted
 
118,230

 
$
17.60

 
 
Exercised
 

 
$

 
 
Forfeited/Cancelled
 
(39,524
)
 
$
10.14

 
 
Balance as of September 30, 2019
 
7,453,341

 
$
18.06

 
3.68
Options vested and exercisable at September 30, 2019
 
6,665,457

 
$
17.76

 
3.08


RSU and PRSU Activity

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

In August 2017, the Compensation Committee granted two PRSU awards to the Company's Chief Executive Officer, both of which have both performance and service conditions. The first award was a one-year PRSU and the second award was a two-year PRSU. The one-year PRSUs would be earned based on the Company’s performance as it relates to a revenue growth metric and a minimum non-GAAP operating margin metric during the fiscal year ended June 30, 2018 with eligibility up to 200% of the targeted number of units based on revenue growth if the minimum non-GAAP operating margin is achieved. If the performance metrics were met, 50% of the PRSUs would vest at June 30, 2018 while the remainder would vest in equal amounts over the following ten quarters if the Company's Chief Executive Officer continued to be employed during those ten quarters. In December 2019, the Compensation Committee of the Company's Board of Directors determined that the Company achieved the revenue and non-GAAP operating margin metrics for the fiscal year ended June 30, 2018 at a level that entitled the Chief Executive Officer to 200% of the originally targeted number of shares subject to the one-year PRSU. 50% of the PRSUs so earned were vested as of June 30, 2018, and an additional 25% of the PRSUs vested during the five quarters ended September 30, 2019, in accordance with the terms of the grant.

The two-year PRSUs would be earned based on the Company’s performance for the average non-GAAP operating margin metric for the two fiscal years ended June 30, 2019 with eligibility up to 100% of the targeted number of units. If the performance metrics would have been met, 50% of the PRSUs would have vested at June 30, 2019 while the remainder would have been vested in equal amounts over the following ten quarters if the Chief Executive Officer continued to be employed

16


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


during those ten quarters. In December 2019, the Compensation Committee of the Company's Board of Directors has determined that the Company did not achieve the required performance metrics for these two-year PRSUs to be earned and, consequently, this PRSU terminated in December 2019.

The following table summarizes RSUs and PRSUs activity during the three months ended September 30, 2019 under all plans: 
 
Time-Based RSUs
Outstanding
 
Weighted
Average
Grant-Date Fair Value per Share
 
PRSUs
Outstanding
 
 
Weighted
Average
Grant-Date Fair Value per Share
Balance as of June 30, 2019
1,873,102

 
$
20.25

 
120,000

(1)
 
$
27.10

Granted
337,730

 
$
17.60

 

 
 
 
Released (2)
(100,186
)
 
$
24.27

 

 
 
 
Forfeited
(45,313
)
 
$
18.20

 

 
 
 
Balance as of September 30, 2019
2,065,333

 
$
19.66

 
120,000

 
 
$
27.10


__________________________
(1)
Reflects the number of PRSUs that have been earned based on the achievement of performance metrics.
(2)
The number of shares released excludes 221,352 RSUs that were vested but not released as of September 30, 2019, of which 48,495 RSUs vested during the three months ended September 30, 2019. The number of shares released also excludes 90,000 PRSUs that were vested but not released as of September 30, 2019, of which 6,000 PRSUs vested during the three months ended September 30, 2019. These vested RSUs and PRSUs will be released upon the effectiveness of the Company's registration statement on Form S-8.

Note 4.        Net Income Per Common Share

The following table shows the computation of basic and diluted net income per common share for the three months ended September 30, 2019 and 2018 (in thousands, except per share amounts):
 
 
Three Months Ended
September 30,
 
2019
 
2018
Numerator:
 
 
 
Net income
$
26,345

 
$
19,342

 
 
 
 
Denominator:
 
 
 
Weighted-average shares outstanding
50,274

 
49,704

Effect of dilutive securities
1,430

 
2,514

Weighted-average diluted shares
51,704

 
52,218

 
 
 
 
Basic net income per common share
$
0.52

 
$
0.39

Diluted net income per common share
$
0.51

 
$
0.37



For the three months ended September 30, 2019 and 2018, the Company had stock options and RSUs outstanding that could potentially dilute basic earnings per share in the future, but were excluded from the computation of diluted net income per share in the periods presented, as their effect would have been anti-dilutive. The anti-dilutive common share equivalents resulting from outstanding equity awards were 3,958,789 and 2,627,703 for the three months ended September 30, 2019 and 2018, respectively.



17


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


Note 5.        Balance Sheet Components

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

Inventories:
 
September 30,
2019
 
June 30,
2019
Finished goods
$
480,954

 
$
492,387

Work in process
76,098

 
43,598

Purchased parts and raw materials
128,179

 
134,203

Total inventories
$
685,231

 
$
670,188


    
During the three months ended September 30, 2019 and 2018, the Company recorded a provision for excess and obsolete inventory to cost of sales totaling $10.1 million and $8.0 million, respectively, excluding a (recovery) provision for adjusting the cost of certain inventories to net realizable value of $(1.8) million and $1.5 million for the three months ended September 30, 2019 and 2018, respectively.

Prepaid Expenses and Other Current Assets:

 
September 30,
2019
 
June 30,
2019
Receivables from vendors (1)
$
96,038

 
$
83,050

Prepaid income tax
15,748

 
607

Restricted cash
11,021


11,673

Prepaid expenses
8,057

 
7,269

Deferred service costs
3,611

 
3,374

Others
5,095

 
3,822

Total prepaid expenses and other current assets
$
139,570

 
$
109,795

__________________________
(1) Includes receivables from contract manufacturers based on certain buy-sell arrangements of $91.0 million and $82.0 million as of September 30, 2019 and June 30, 2019, respectively.

Cash, cash equivalents and restricted cash:
 
September 30,
2019
 
June 30,
2019
Cash and cash equivalents
$
239,300

 
$
248,164

Restricted cash included in prepaid expenses and other current assets
11,021

 
11,673

Restricted cash included in other assets
2,301

 
2,303

Total cash, cash equivalents and restricted cash
$
252,622

 
$
262,140




18

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


Property, Plant, and Equipment:
 
September 30,
2019
 
June 30,
2019
Buildings
$
86,864

 
$
86,136

Machinery and equipment
81,482

 
79,946

Land
75,197

 
74,926

Building and leasehold improvements
23,238

 
22,307

Furniture and fixtures
20,345

 
20,193

Buildings construction in progress (1)
19,877

 
14,189

Software
18,752

 
18,415

 
325,755

 
316,112

Accumulated depreciation and amortization
(113,266
)
 
(108,775
)
Property, plant and equipment, net
$
212,489

 
$
207,337

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

Other Assets:
 
September 30,
2019
 
June 30,
2019
Operating lease right-of-use asset
$
13,623

 
$

Deferred service costs, non-current
3,634

 
3,572

Restricted cash, non-current
2,301


2,303

Investment in auction rate security
1,571

 
1,571

Non-marketable equity securities
878

 
878

Deposits
587

 
686

Prepaid expense, non-current
1,865

 
1,649

Total other assets
$
24,459

 
$
10,659



Accrued Liabilities:    
 
September 30,
2019
 
June 30,
2019
Contract manufacturers liability
$
31,389

 
$
25,308

Accrued payroll and related expenses
22,515

 
25,552

Customer deposits
19,992

 
11,133

Accrued professional fees
12,058

 
11,756

Accrued warranty costs
8,655

 
8,661

Accrued cooperative marketing expenses
6,042

 
5,830

Operating lease liability
5,159

 

Others
26,482

 
26,438

Total accrued liabilities
$
132,292

 
$
114,678




19

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


Other Long-term Liabilities:
 
September 30,
2019
 
June 30,
2019
Accrued unrecognized tax benefits including related interest and penalties
$
22,851

 
$
20,102

Operating lease liability, non-current
8,624

 

Accrued warranty costs, non-current
2,630

 
2,373

Others
2,607

 
3,708

Total other long-term liabilities
$
36,712

 
$
26,183


Product Warranties:
 
Three Months Ended September 30,
 
2019
 
2018
Balance, beginning of the period
$
11,034

 
$
9,884

Provision for warranty
5,872

 
6,189

Costs utilized
(7,662
)
 
(6,557
)
Change in estimated liability for pre-existing warranties
2,041

 
729

Balance, end of the period
11,285

 
10,245

Current portion
8,655

 
8,150

Non-current portion
$
2,630

 
$
2,095



Note 6.        Fair Value Disclosure

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

Financial Assets and Liabilities Measured on a Recurring Basis

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


20

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


September 30, 2019
Level 1
 
Level 2
 
Level 3
 
Asset at
Fair Value
Money market funds (1)
$
1,158

 
$

 
$

 
$
1,158

Certificates of deposit (2)

 
1,279

 

 
1,279

Auction rate security

 

 
1,571

 
1,571

Total assets measured at fair value
$
1,158

 
$
1,279

 
$
1,571

 
$
4,008

 
 
 
 
 
 
 
 
June 30, 2019
Level 1
 
Level 2
 
Level 3
 
Asset at
Fair Value
Money market funds (1)
$
1,162

 
$

 
$

 
$
1,162

Certificates of deposit (2)

 
1,285

 

 
1,285

Auction rate security

 

 
1,571

 
1,571

Total assets measured at fair value</