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ANNUAL REPORT
2021
LETTER TO OUR SHAREHOLDERS
Dear Supermicro Shareholders,
As we near Supermicro’s 29th anniversary, our business momentum continues
stronger than ever, built on our solid foundation and deep customer relationships
where we are precisely positioned with the most application optimized solutions.
While the world begins to inch towards normal and gradually re-open, we continue to
manage through the many business challenges that shape the current environment.
My optimism for our future is being fueled by the myriad of new computing demands
driven by a broad array of new applications across AI, 5G, Edge, Telco, Cloud, and
Storage platforms. This new normal is a race towards accelerated computing playing
into Supermicro’s competitive design, engineering, manufacture, and distribution
advantages. Our long-standing technology partnerships, location in Silicon Valley,
global manufacturing capabilities, and diversified growth strategy in providing Total
IT Solutions across small/large enterprises, channel, cloud, and service providers will
accelerate our future growth.
My optimism regarding Supermicro’s future, and our ability to achieve growth well above industry averages has never
been greater. My confidence in our ambitious long-term vision and strategy of achieving $10 billion in annual sales along
with increased profitability over the next 3-5 years is stronger and appears to be happening faster than it was planned. My
interests as a shareholder are directly aligned with yours and I am working aggressively to achieve our goals, benefitting
only by the success of increasing long-term shareholder value. My confidence has been reinforced by our continued
strong engagements with new high-profile customers who have been fueling our growth trends.
In addition to our focus on driving growth in our organic markets, we are planning to offer optimized products with our
command-center-based services, starting with a comprehensive product auto-configurator available now. The command
center is the foundation of our expanding B2C and B2B programs, which are well on track. This new business model
enables Supermicro to offer our leading-edge solutions efficiently, and directly address an expansive high value end-user
market.
Our product innovation continues with a host of new offerings incorporating the latest technology developments from
our key partners scheduled for release in the balance of CY22. Moreover, as our product offerings expand, we continue to
see efficiencies with our global manufacturing footprint and I am pleased that our new campus expansion in Taiwan has
enabled increased economies of scale and improved ability to serve the fast-growing Asia markets. In fact, we are ready to
meet the challenge as our worldwide capacity can readily support our ambitious revenue targets.
Our industry position continues to improve, we continue to have market leading technology, a talented employee base,
and deep manufacturing capabilities in the industry. We are poised to excel at the vast growth opportunities in a very
broad market with our Total IT Solutions provider strategy supported by our unique Building Block Solutions architecture.
Our optimized solutions, with their industry-leading energy-efficiency and eco-friendly architecture are helping our
customers achieve even greater environmental efficiencies, ultimately benefiting the environment and Mother Earth.
We continue to look forward to the greener pastures (and planet!) while quickly and consistently growing our revenue and
profitability in the future. Thank you for your continued support as we embark on the next leg of Supermicro’s exciting
journey.
Sincerely,
Charles Liang
Chairman & CEO
Super Micro Computer, Inc.
GPU Systems
AI and Deep Learning
BigTwin™
No compromise Multi-Node System
Twin Architecture
Density Optimized Datacenter/HPC Solutions
SuperStorage
4U 60/90-Bay Storage Server/JBOD
CloudDC
High Density Cloud Storage
All-Flash NVMe
Best IOPS, Latency, and Selection
8/4-way MP Solutions
Optimized Enterprise Computing
SuperBlade®
Up to 10 MP or 20 DP Nodes in 8U
5G Edge Solutions
Edge Computing to the Cloud
Supermicro® Server Management Utility
x
Supermicro RSD
Next Generation Datacenter Architecture
New Business Models
B2B/B2C, Command Center & More
Solution Management/Service
Global Onsite Services
OUR CORPORATE STRATEGY
Design & Manufacture of Total IT Solutions
As of June 2021, 44% of Supermicro’s 4300 employees are dedicated to R&D, focused on designing and helping our
customers deploy application-optimized, accelerated compute, IoT, Edge, Telco, and storage platforms. Our leading-edge
design capability, global manufacturing footprint, and worldwide distribution has been driving an acceleration in our
growth. Universally, our customers are now requiring advanced functionality, driven by emerging applications across
cloud gaming, video streaming, social networking, cloud security, AI/ML, natural language processing, autonomous
driving, virtual reality, and the metaverse, enabling us to emerge as a critical supplier to many key customers across
Enterprise, Cloud, and Edge/Telecom markets. Equally important, nearly all our server and storage systems are
manufactured and tested in house either in Silicon Valley, Taiwan, or the Netherlands giving us a synergistic and global
supply chain advantage that complements our design expertise.
Unique Building Blocks Approach Enables Our Universal GPU/AI Offering
In FY 2022, Supermicro will be releasing a ground-breaking Universal GPU system utilizing our Building Block approach,
uniquely enabling Supermicro systems to support multiple GPU form factors, CPU choices, storage, and networking
options that enable our customers to quickly and efficiently deploy new AI, ML, and HPC applications at scale.
Supermicro’s Building Block approach gives all of our products a performance and time-to-market advantage, along
with the broadest choice of solutions, that match our global customers’ existing and emerging target applications. Our
approach is resulting in increased design win momentum and revenue growth across top-tier customers in the public
cloud, OEM appliance, service provider, and enterprise customers globally.
Focus on Cloud, Edge and Enterprise Partners
We are confident in our 3-year target operating model of 17-23% revenue growth into FY24, a rate nearly three times
the estimated 7% overall industry growth. Increasingly, we are selling Total IT Solutions that include rack-level turnkey
computing platforms with comprehensive CPU/GPU computing, storage, network switch and software included. Our
customers are benefitting from our turnkey complete IT solutions and can deploy our solutions quickly, giving us
opportunities to add more value. We are also seeing global enterprises adopt hybrid cloud models that leverage their
in-house IT investments in combination with a public cloud. These initiatives, along with our automated product
configuration tools are helping us broaden our reach into the Top 3000 global customers.
Supply Chain Leverage with a Global Manufacturing Footprint
We have aggressively expanded our global manufacturing capabilities, helping us achieve cost advantages as we address
large new global customers and emerging, high-growth technologically advanced workloads. Our facilities span the
globe, including the USA, Taiwan, and Europe, providing us a competitive advantage in the timely manufacture and
delivery of our solutions. Our global manufacturing capabilities and our long-term partnerships with our key supplier/
partners has helped us meet our customer needs despite never before seen supply chain disruptions. Looking to the
future, we retain the option to expand manufacturing at our Green Computing campuses and continue to review other
viable alternative locations. Our ability to control our manufacturing enables continued leverage and extends our “time-
to-market” advantage of delivering solutions before competitors.
A Passion for Green Computing and Environmental Sustainability
We continue to focus on environmentally sustainable manufacturing efficiency across all our product lines. We see these
trends accelerating as customer inquiries about our green capabilities continue to accelerate. Energy-efficient, Green IT
products along with liquid cooling solutions are helping our customers become more environmentally friendly in their
deployment of their computing resources. We are seeing increasing demand from customers seeking out suppliers
who can lower energy costs and total cost of ownership while providing superior technical performance. Our green
computing focus means that our users benefit from lower costs to cool and operate their server and storage hardware.
Our Resource-Saving Architecture allows data centers to significantly reduce refresh cycle costs and e-waste, continuing
our tradition of leading the market with Green IT innovation.
CAUTIONARY STATEMENT REGARDING
FORWARD LOOKING STATEMENTS
Statements contained in this letter and “Our Corporate Strategy” section above that are not historical fact may
be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Such forward-looking statements may relate to, among other things, the
Company’s ability to grow well above industry averages, achieve its annual sales target and the timeframe of such
achievement, offer optimized products, continue its product innovation with new offerings incorporating the latest
technology developments, support its revenue targets with its worldwide capacity, quickly and consistently grow its
revenue and profitability in the future, continue to offer unique systems to support multiple GPU form factors, CPU
choices, storage, and networking options, achieve its 3-year operating model (including revenue growth rate into
FY24), continue to meet customer needs despite supply chain disruptions, expand manufacturing in Silicon Value,
Taiwan/Asia and Europe, and accelerate environmentally sustainable manufacturing efficiency. Such forward-looking
statements do not constitute guarantees of future performance and are subject to a variety of risks and uncertainties
that could cause our actual results to differ materially from those anticipated, including: (i) the global COVID-19
pandemic continues to present significant uncertainties for all parts of our business including our supply chain, our
production operations and customer demand, (ii) our quarterly operating results may fluctuate, which could cause
rapid declines in our stock price, (iii) as we increasingly target larger customers and larger sales opportunities, our
customer base may become more concentrated, our cost of sales may increase, our margins may be lower and our
sales may be less predictable, (iv) if we fail to meet publicly announced financial guidance or other expectations
about our business, our stock could decline in value, (v) the average sales prices for our server solutions could decline
if customers do not continue to purchase our latest generation products or additional components, and (vi) adverse
economic conditions may harm our business. Additional factors that could cause actual results to differ materially
from those projected or suggested in any forward-looking statements are contained in our filings with the Securities
and Exchange Commission, including those factors discussed under the caption “Risk Factors” in such filings,
particularly in our Annual Report on Form 10-K for our fiscal year ended June 30, 2021.
Performance Begins Now
Better. Faster. Greener.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________________________________
Form 10-K
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended June 30, 2021
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
(State or other jurisdiction of
incorporation or organization)
77-0353939
(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
Common Stock, $0.001 par value per share
Trading Symbol
SMCI
Name of each exchange on which registered
NASDAQ Global Select Market
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 ☒
Non-accelerated filer ☐
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
Accelerated filer
☐
Smaller reporting company ☐
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 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. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes ☐ No ☒
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, 2020, as reported by the NASDAQ Global Select Market, was $1,374,947,450. 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 excluded since such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
As of July 31, 2021, there were 50,590,466 shares of the registrant’s common stock, $0.001 par value, outstanding, which is the only class
of common stock of the registrant issued.
DOCUMENTS INCORPORATED BY REFERENCE
None
SUPER MICRO COMPUTER, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2021
TABLE OF CONTENTS
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
PART I
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions and Director Independence
Item 14. Principal Accountant Fees and Services
Item 15. Exhibits and Financial Statement Schedules
Signatures
PART IV
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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 Annual
Report on Form 10-K are the property of Super Micro Computer, Inc. or its affiliates. Other trademarks, service marks, or trade
names appearing in this Annual Report on Form 10-K are the property of their respective owners.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934, as amended that involve risks and uncertainties. These
statements relate to future events or our future financial performance. In some cases, you can identify forward-looking
statements by terminology including “would,” “could,” “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,”
“believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of these terms or other comparable terminology. In
evaluating these statements, you should specifically consider various factors, including the risks described below, under Part I,
Item 1A, “Risk Factors”, and in other parts of this Form 10-K as well as in our other filings with the SEC. Moreover, we
operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our
management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we
may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Annual Report
may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking
statements.
We undertake no obligation to update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by law. We cannot guarantee future results, levels of activity,
performance or achievements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such
forward-looking statements.
Item 1.
Business
Our Company
PART I
We are a Silicon Valley-based provider of application-optimized high-performance and high-efficiency server and
storage systems for various markets, including enterprise data centers, cloud computing, artificial intelligence, 5G and edge
computing. Our solutions include complete servers, storage systems, modular blade servers, blades, workstations, complete
rack scale plug and play solutions delivering pre-defined and pre-tested full rack solutions, networking devices, system
management software, and server sub-systems. We also provide global support and services to help our customers install,
upgrade and maintain their computing infrastructure. We offer our customers a high degree of flexibility and customization by
providing a broad array of server models and configurations from which they can choose the best solutions to fit their
computing needs. Our server and storage systems, sub-systems and accessories are architecturally designed to provide high
levels of reliability, quality, configurability, and scalability.
Our in-house design competencies, design control of many of the components used within our server and storage
systems, and our Server Building Block Solutions® (an innovative, modular and open architecture) enable us to rapidly
develop, build and test server and storage systems, sub-systems and accessories with unique configurations. As a result, when
new technologies are brought to market, we are generally able to quickly 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 our new
products' design with their product release schedules. This enhances our ability to introduce new products incorporating the
latest technology rapidly. We seek to be the first to market with products incorporating new technologies and to offer the
broadest selection of products using those technologies to our customers.
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. Our resource saving architecture supports our efforts to lead in
green IT innovation. This architecture disaggregates CPU and memory, which enables each resource to be refreshed
independently, thereby allowing data centers to significantly reduce both refresh cycle costs and e-waste. 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. We believe our approach of leveraging an overall architecture that balances
data center power requirements, cooling, shared resources and refresh cycles helps the environment and provides total cost of
ownership (“TCO”) savings for our customers.
We conduct our operations principally from our Silicon Valley headquarters in California and in our Taiwan and the
Netherlands facilities. Our sales and marketing activities operate through a combination of our direct sales force and indirect
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sales channel partners. We work with distributors, value-added resellers, system integrators, and original equipment
manufacturers ("OEMs") to market and sell our optimized solutions to their end customers in our indirect sales channels.
Strategy
Our objective is to be the world’s leading provider of application-optimized, high-performance server, storage and
networking solutions. Achieving this objective requires continuous development and innovation of our solutions with better
price-performance and architectural advantages compared with our prior generation of solutions and with solutions offered by
our competitors. Through our strategy, we seek to maintain or improve our relative competitive position in many product areas
and pursue markets that provide us with additional long-term growth opportunities. 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, 2021, we employed over 1,800 persons in
our research and development organization. These resources, along with our understanding of complex computing and storage
requirements, enable us to deliver product innovation featuring advanced functionality and capabilities required by our
customers. 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 April 2021, we introduced over
100 new application optimized systems in support of Intel’s introduction of its 3rd Gen Intel Xeon Scalable processors. In
March 2021, Supermicro announced one of the most versatile portfolio of AMD EPYC™ 7003-based systems delivering world
record performance – 36% improvement -- for today’s most critical workloads.
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, storage 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 required for large scale deployments, help meet service level
agreements and address uptime requirements. In addition to our internal software development efforts, we also integrate and
partner with external software vendors to meet customer requirements.
Leveraging Our Global Operating Structure
We plan to continue to increase our worldwide manufacturing capacity and logistics abilities in the United States, the
Netherlands and Taiwan to more efficiently serve our customers and lower our overall manufacturing costs. We have recently
completed the construction of a new 749,000 square feet building in Taiwan to increase our manufacturing capacity and
diversify our operating base and optimize relatively low labor costs as compared to the United States. In addition, we have
added a new building devoted to manufacturing at our San Jose, California headquarters.
Products and Services
We offer a broad range of application-optimized server solutions, rackmount and blade servers, storage, and
subsystems and accessories, which can be used to build complete server and storage systems. These solutions and products are
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designed to serve a variety of markets, such as enterprise data centers, cloud computing, artificial intelligence (“AI”), 5G/edge
computing. The percentage of our net sales represented by sales of server and storage systems was flat in fiscal year 2021
compared to fiscal year 2020 and decreased to 78.5% in fiscal year 2020 from 81.7% in fiscal year 2019, and the percentage of
our net sales represented by sales of subsystems and accessories was 21.6% in fiscal year 2021, 21.5% in fiscal year 2020 and
18.3% in fiscal year 2019. 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.
Server and Storage Systems
We sell server and storage systems in rackmount, blade, multi-node and embedded form factors, which support single,
dual, and multiprocessor architectures. Our key product lines include:
•
•
SuperBlade® and MicroBlade™® system families designed to share common computing resources, thereby
saving space and power over standard rackmount servers;
SuperStorage systems that provide high-density storage while leveraging an efficient use of power to achieve
performance-per-watt savings;
• Twin family of multi-node server systems designed for density, performance, and power efficiency;
• Ultra Server systems for demanding enterprise workloads;
• GPU or Accelerated systems for rapidly growing AI markets;
• Data Center Optimized server systems that deliver increased scalability and performance-per-watt with an
improved thermal architecture;
• Embedded (5G/IoT/Edge) systems optimized for evolving networks and intelligent management of connected
devices; and
• MicroCloud server systems that deliver node density in environments with space and power constraints.
In addition to our complete server and storage systems business, we offer a large array of modular server subsystems
and accessories, such as 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 dual-processor server segment to the high-end
multiprocessor market. The majority of the subsystems and accessories we sell individually are designed to work together to
improve performance, and are ultimately integrated into complete server and storage systems.
Server Software Management Solutions
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 environments.
Supermicro Global Services
We provide global service and support offerings for our direct and OEM customers and our indirect sales channel
partners directly or through approved distributors and third-party partners. Our services include server and storage system
integration, configuration and software upgrades and updates. We also identify service requirements, create and execute project
plans, conduct verification testing and training and provide technical documentation.
Global Services: Our strategic direct and OEM customers may purchase a variety of on-site support service plans. Our
service plans vary depending on specific services, response times, coverage hours and duration, repair priority levels, spare
parts requirements, logistics, data privacy and security needs. Our Global Services team provides help desk services and on-site
product support for our server and storage systems.
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.
Our customer support team provides ongoing maintenance and technical support for our products through our website and 24-
hour continuous direct phone-based support.
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Research and Development
We perform most of our research and development activities in-house in the United States at our facilities in San Jose,
California, and in Taiwan, increasing the communication and collaboration between design teams to streamline the
development process and reduce time-to-market. 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 decrease time-to-market. We continue to invest in reducing our design and manufacturing costs and improving the
performance, cost-effectiveness and 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 achieving high overall system performance. Much of our research
and development activity relates to the new product cycles of leading processor vendors. We work closely with Intel, Nvidia
and AMD, among others, to develop products that are compatible with the latest generation of industry-standard technologies
under development. Our collaborative approach with these vendors allows us to coordinate the design of our new products with
their product release schedules, thereby enhancing our ability to rapidly introduce new products incorporating the latest
technology. We work closely with their respective development teams to enhance system performance and reduce system-level
issues. Similarly, we work very closely with our customers to identify their needs and develop our new product plans
accordingly.
Customers
During fiscal year 2021, we sold to over 1,000 direct customers in over 100 countries. During each of fiscal years 2020
and 2019, we sold to over 820 and 850 direct customers respectively. In addition, over the three years ended June 30, 2021 we
have sold to thousands of end users through our indirect sales channel. These customers represent a diverse set of market
verticals including enterprise data centers, cloud computing, artificial intelligence, 5G and edge computing markets. In fiscal
years 2021, 2020 and 2019, no customer represented greater than 10% of our total net sales.
Sales and Marketing
Our sales and marketing activities are conducted through a combination of our direct sales force and our indirect sales
channel partners. Our direct sales force is primarily focused on selling complete systems and solutions, including management
software and global services to large scale cloud, enterprise and OEM customers.
We work with distributors, value-added resellers, system integrators, and OEMs to market and sell our optimized
solutions to their end customers. We provide sales and marketing assistance and training to our indirect sales channel partners
and OEMs, who in turn provide service and support to end customers. We leverage our relationships in our indirect sales
channel and with our OEMs to penetrate select industry segments where our products can provide better alternatives to existing
solutions.
We maintain close contact with our indirect sales channel partners and end customers. We often collaborate during the
sales process with our indirect sales channel partners and the end customer’s technical staff to help determine the optimal
system configuration for the customer’s needs. Our interaction with our indirect sales channel partners and end customers
allows us to monitor customer requirements and develop new products to meet their needs.
International Sales
Our global sales efforts are supported both by our international offices in the Netherlands, Taiwan, United Kingdom,
China and Japan as well as by our United States based sales team. Product fulfillment and first level support for our
international customers are provided by Supermicro Global Services and through our indirect sales channel and OEMs. Sales to
customers located outside of the United States represented 40.7%, 41.4% and 41.9% of net sales in fiscal years 2021, 2020 and
2019, respectively.
Marketing
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. These programs also inform existing and potential
customers, the trade press, market analysts, indirect sales channel partners and OEMs about the strong capabilities and benefits
of using our products and solutions. Our marketing efforts support the sale and distribution of our products through both direct
5
sales and indirect channels. We rely on a variety of marketing vehicles, including advertising, public relations, web, social
media, participation in industry trade shows and conferences to help gain market acceptance. We provide funds for cooperative
marketing to our indirect sales channel partners to extend the reach of our marketing efforts. We also actively utilize our
suppliers’ cooperative marketing programs and jointly benefit from their marketing development funds to which we are entitled.
Intellectual Property
We seek to protect our intellectual property rights with a combination of patents, trademarks, copyrights, trade secret
laws, and disclosure restrictions. We rely primarily on trade secrets, technical know-how, and other unpatented proprietary
information relating to our design and product development activities. We also enter into confidentiality and proprietary rights
agreements with our employees, consultants, and other third parties and control access to our designs, documentation and other
proprietary information.
Manufacturing and Quality Control
We manufacture the majority of our systems at our San Jose, California headquarters. We believe we are the only
major server and storage vendor that designs, develops, and manufactures a significant portion of their systems in the United
States. Global assembly, test and quality control of our servers are performed at our manufacturing facilities in San Jose,
California, Taiwan and the Netherlands. Each of our facilities Quality and Environmental Management System has been
certified according to ISO 9001, ISO 14001 and/or ISO 13485 standards. Our suppliers and contract manufacturers are required
to support the same standards to maintain consistent product and service quality and continuous improvement of quality and
environmental performance.
We use several third-party suppliers and contract manufacturers for materials and sub-assemblies. We believe that
selectively using outsourced manufacturing services allows us to focus on our core competencies in product design and
development and increases our operational flexibility. We believe our manufacturing strategy allows us to adjust manufacturing
capacity in response to changes in customer demand and to rapidly introduce new products to the market. We use Ablecom
Technology, Inc. (“Ablecom”) and its affiliate Compuware Technology, Inc. ("Compuware"), both of which are related parties,
for contract design and manufacturing coordination support. We work with Ablecom to optimize modular designs for our
chassis and several other components. Ablecom also coordinates the manufacturing of chassis for us. In addition to providing a
large volume of contract manufacturing services to us, Ablecom warehouses multiple components and subassemblies
manufactured by various suppliers before shipment to our facilities in the United States, Europe and Asia. We also have a series
of agreements with Compuware, including multiple product development, production and service agreements, product
manufacturing agreements and lease agreements for office space. See Part II, Item 8, Note 13, “Related Party Transactions,” to
the consolidated financial statements and Part III, Item 13, “Certain Relationships and Related Transactions and Director
Independence.”
We monitor our inventory continuously to be able to meet customer delivery requirements and to avoid inventory
obsolescence. Due to our building-block designs, our inventory can generally be used with multiple different products, lowering
working capital requirements and reducing the risk of inventory write-downs.
Competition
The market for our products is highly competitive, rapidly evolving and subject to new technological developments,
changing customer needs and new product introductions. We compete primarily with large vendors of x86-based general
purpose servers and components. In addition, we also compete with smaller vendors that specialize in the sale of server
components and systems. In recent years, we have experienced increased competition from original design manufacturers
("ODMs”) that benefit from their scale and very low cost manufacturing and are increasingly offering their own branded
products. We believe our principal competitors include:
• Global technology vendors, such as Cisco, Dell, Hewlett-Packard Enterprise, and Lenovo; and
• ODMs, such as Foxconn, Quanta Computer, and Wiwynn Corporation.
• OEMs, such as Inspur
The principal competitive factors in our market include the following:
•
First to market with new emerging technologies;
• High product performance, efficiency and reliability;
• Early identification of emerging opportunities;
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• Cost-effectiveness;
•
•
• Localized and responsive customer support on a worldwide basis.
Interoperability of products;
Scalability; and
We believe that we compete favorably with respect to most of these factors. However, most of our competitors have
longer operating histories, significantly greater resources, greater name recognition and deeper market penetration. They may
be able to devote greater resources to the development, promotion and sale of their products than we can, which could allow
them to respond more quickly to new technologies and changes in customer needs. In addition, it is possible that new
competitors could emerge and acquire significant market share. See Part I, Item 1A, "Risk Factors" risk titled “The market in
which we participate is highly competitive, and if we do not compete effectively, we may not be able to increase our market
penetration, grow our net sales or improve our gross margins.”
Employees and Human Capital Resources
As of June 30, 2021, we employed 4,155 full time employees, consisting of 1,858 employees in research and
development, 460 employees in sales and marketing, 425 employees in general and administrative and 1,412 employees in
manufacturing. Of these employees, 2,367 employees are based in our San Jose facilities. We consider our highly qualified and
motivated employees to be a key factor in our business success. Our employees are not represented by any collective bargaining
organization, and we have never experienced a work stoppage. We believe that our relations with our employees are good.
“The key to success in technology is designing a company around people committed to work that they love”, quote
from Charles Liang, our President, Chief Executive Officer and Chairman. We are motivated to attract, develop and retain a
high performing team engaged in work that they love, motivated by growth opportunities.
Talent Strategy
Our talent strategy focuses on attracting skilled, engaged employees who contribute the talent and skills critical to our
innovative and forward-looking workforce. Our recruiting process actively sources talent supporting our ability to hire
candidates with professional qualifications and potentials. We identify opportunities through tracking and analyzing data from
various sources such as annual performance reviews to assess our progress in ensuring critical talents are in critical roles.
It is our policy to ensure equal employment opportunity for all applicants and employees without regard to prohibited
considerations of race, color, religion, sex (including pregnancy, gender identity and sexual orientation), national origin, age,
disability or genetic information, marital status or any other classification protected by applicable local, state or federal laws.
All employees receive training in the prevention of sexual harassment and abusive conduct in the workplace.
Total Rewards Program
Our total rewards program is designed to attract and reward talented individuals who possess the skills necessary to
support our business objectives, assist in the achievement of our strategic goals and create long-term value for our stockholders.
We provide employees with compensation packages that include base salary, incentive bonus programs, and long-term equity
awards, including restricted stock units and options, tied to the value of our stock price. We believe that a compensation
program with both short-term and long-term awards provides fair and competitive compensation and aligns employee and
stockholder interests, including by incentivizing business and individual performance (pay for performance), motivating based
on long-term company performance and integrating compensation with our business plans. In addition to cash and equity
compensation, we also offer U.S. employees benefits such as life and health (medical, dental & vision) insurance, paid time off,
sick leave, holiday pay, and a 401(k) plan. Outside of the U.S., we provide benefits based on local requirement and needs.
Health & Safety
From the start of the COVID-19 pandemic, we proactively implemented preventative protocols, which we
continuously assess and update for changes in conditions and applicable regulations. These preventative protocols are intended
to safeguard our employees, contractors, suppliers, customers, and communities, and to ensure business continuity. We are
following government policies and recommendations designed to slow the spread of COVID-19 and are committed to the
health and safety of our employees, contractors, suppliers, customers, and communities.
We continuously assess our efforts to respond to the COVID-19 pandemic, which include the following:
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• We require that on-site employees complete a daily health questionnaire, pass through thermal scanning
equipment installed in some of our buildings to ensure they do not have an elevated body temperature, and adhere
to social distance requirement and mask protocols;
• We have enhanced our contact tracing, significantly decreased non-priority business travel, and provided personal
air purifier for each of the employees; and
• To respond to changing COVID-19 updates, we continue to work closely with our Environmental Health and
Safety team to monitor and provide weekly updates to managers and promote and encourage employees to receive
COVID-19 vaccinations.
We believe these actions are appropriate and essential to safeguard our employees, contractors, suppliers, customers,
and communities while allowing us to safely continue operations.
Corporate Information
We were founded in, and maintain our worldwide headquarters and the majority of our employees in San Jose,
California. We are one of the largest employers in the City of San Jose and an active member of the San Jose and Silicon Valley
community.
We were incorporated in California in September 1993. We reincorporated in Delaware in March 2007. Our common
stock is listed on the Nasdaq Global Select Market under the symbol “SMCI.” Our principal executive offices are located at 980
Rock Avenue, San Jose, California 95131, and our telephone number is (408) 503-8000. Our website address is
www.supermicro.com.
Financial Information about Segments and Geographic Areas
Please see Part II, Item 8, Note 18, “Segment Reporting” to the consolidated financial statements in this Annual Report
for information regarding segment reporting and Part II, Item 8, Note 3, “Revenue - Disaggregation of Revenue” to the
consolidated financial statements in this Annual Report for information regarding our net sales by geographic region. See Part
I, Item 1A, “Risk Factors” for further information on risks associated with our international operations.
Working Capital
We focus considerable attention on managing our inventories and other working capital related items. We manage
inventories by communicating with our customers and partners and using our industry experience to forecast demand. We place
manufacturing orders for our products that are based on forecasted demand. We generally maintain substantial inventories of
our products because the computer server industry is characterized by short lead-time orders and quick delivery schedules.
Additionally, during the fiscal year 2021, the computer server industry is experiencing global supply chain shortage, which
requires us to carry more inventories to fulfill our customers and partners’ demands and backlogs.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments
to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”) are available free of charge, on or through our website at www.supermicro.com, as soon as reasonably
practicable after we electronically file such reports with, or furnish those reports to, the SEC. Information contained on our
website is not incorporated by reference in, or made part of, this Annual Report or our other filings with, or reports furnished to
the SEC. The SEC also maintains a website that contains our SEC filings.
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Item 1A. Risk Factors
The risks and uncertainties described below are not the only ones facing us. Other events that we do not currently
anticipate or that we currently deem immaterial also may affect our business, financial condition, results of operations, cash
flows, other key metrics and the trading price of our common stock.
Risk Factor Summary
Operational and Execution Risks
• The effects of the COVID-19 pandemic adversely affected our business operations, financial condition and results of
operations, and there are no assurances adverse effects will not continue.
• Our quarterly operating results have fluctuated and will likely fluctuate in the future.
• 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 we increasingly target larger customers and larger sales opportunities, our customer base may become more
concentrated, our cost of sales may increase, our margins may be lower and our sales may be less predictable.
If we fail to meet any publicly announced financial guidance or other expectations about our business, it could cause
our stock to decline in value.
Increases in average selling prices for our server solutions have 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 components, which could harm our results of
operations.
•
• 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 products.
• We may lose sales or incur unexpected expenses relating to insufficient, excess or obsolete inventory.
• Difficulties we encounter relating to automating internal controls utilizing our ERP systems or integrating processes
•
that occur in other IT applications could adversely impact our controls environment.
System security violations, data protection breaches, cyber-attacks and other related cyber-security issues could disrupt
our internal operations or compromise the security of our products, and any such disruption could reduce our expected
revenues, increase our expenses, damage our reputation and adversely affect our stock price.
• Any failure to adequately expand or retain our sales force will impede our growth.
• Conflicts of interest may arise between us and Ablecom and Compuware, and those conflicts may adversely affect our
operations.
• Our reliance on Ablecom could be subject to risks associated with our reliance on a limited source of contract
•
•
manufacturing services and inventory warehousing.
If negative publicity arises with respect to us, our employees, our third-party service providers or our partners, our
business and operating results could be adversely affected, regardless of whether the negative publicity is true.
If we lose Charles Liang, our President, Chief Executive Officer and Chairman, or any other key employee, we may
not be able to implement our business strategy in a timely manner.
• Our direct sales efforts may create confusion for our end customers and harm our relationships in our indirect sales
•
channel and with our OEMs.
If we are unable to attract and integrate additional key employees in a manner that enables us to scale our business and
operations effectively, or if we do not maintain competitive compensation policies to retain our employees, our ability
to operate effectively and efficiently could be limited.
Strategic and Industry Risks
•
If we do not successfully manage the expansion of our international manufacturing capacity and business operations,
our business could be harmed.
• We may not be able to successfully manage our business for growth and expansion.
• We depend upon the development of new products and enhancements to our existing products, and if we fail to predict
or respond to emerging technological trends and our customers’ changing needs, our operating results and market share
may suffer.
• The market in which we participate is highly competitive.
•
• We must work closely with our suppliers to make timely new product introductions.
Industry consolidation may lead to increased competition and may harm our operating results.
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• Our suppliers’ failure to improve the functionality and performance of materials and key components for our products
may impair or delay our ability to deliver innovative products to our customers.
• We rely on a limited number of suppliers for certain components used to manufacture our products.
• We rely on indirect sales channels and any disruption in these channels could adversely affect our sales.
• Our failure to deliver high quality server and storage solutions could damage our reputation and diminish demand for
our products.
• Our growth into markets outside the United States exposes us to risks inherent in international business operations.
• Our results of operations may be subject to fluctuations based upon our investment in corporate ventures.
Legal and Regulatory Risks
• Because our products and services may store, process and use data, some of which contains personal information, we
are subject to complex and evolving laws and regulations regarding privacy, data protection and other matters.
• Our operations could involve the use of regulated materials, and we must comply with environmental, health and
•
safety laws and regulations, which can be expensive.
If we are unable to maintain and further develop effective internal control over financial reporting, investors may lose
confidence in the accuracy and completeness of our financial reports and the market price of our common stock may
decrease.
• The matters leading to the delay in the filing of our 2017 10-K and adverse publicity and potential concerns from our
•
customers have had and could continue to have an adverse effect on our business and financial condition.
Failure to comply with the U.S. Foreign Corrupt Practices Act, other applicable anti-corruption and anti-bribery laws,
and applicable trade control laws could subject us to penalties and other adverse consequences.
• Any failure to protect our intellectual property could impair our brand and our competitiveness.
• Resolution of claims that we have violated or may violate the intellectual property rights of others could require us to
•
indemnify others, or pay significant royalties to third parties.
Provisions of our governance documents and Delaware law might discourage, delay or prevent a change of control of
our company or changes in our management.
Financial Risks
• We incurred significant expenses related to the matters that led to the delay in the filing of our 2017 10-K and may
incur expenses related to any resulting litigation.
• Our research and development expenditures, as a percentage of our net sales, are considerably higher than many of our
competitors.
• Our future effective income tax rates could be affected by changes in the relative mix of our operations and income
among different geographic regions and by changes in domestic and foreign income tax laws.
• Backlog does not provide a substantial portion of our net sales in any quarter.
Risks Related to Owning our Common Stock
• The trading price of our common stock is likely to be volatile.
•
• The concentration of our capital stock ownership with insiders will likely limit your ability to influence corporate
Future sales of shares by existing stockholders could cause our stock price to decline.
matters.
• We do not expect to pay any cash dividends for the foreseeable future.
General Risks
• Our products may not be viewed as supporting climate change mitigation in the IT sector.
• Our business and operations may be impacted by natural disaster events, including those brought on by climate
change.
Operational and Execution Risks
The effects of the COVID-19 pandemic adversely affected our business operations, financial condition and results of
operations, and there are no assurances adverse effects will not continue.
The novel strain of the coronavirus identified in Wuhan, China in late 2019 (COVID-19) spread throughout the world
and 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,
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and shutdowns. These measures impacted and may continue to impact our business operations, the operations of our customers,
and those of our respective vendors, suppliers, and partners.
During the pandemic, we continued our manufacturing operations and customers’ orders processing and services,
although our productivity at times slowed especially in the United States and in the Netherlands. Travel restrictions and
logistics challenges impacted, and continue to have an impact on, our supply chain. The pandemic also impacted shipments to
our customers and (to a lesser extent) 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. While there are positive
signs with vaccine availability and reductions in infection rates, particularly in the United States, the possibility of new virus
strains, vaccine supply constraints, and high infection rates, particularly in other places around the world makes us 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.
The extent to which the effects of the COVID-19 pandemic will continue to impact our business, operations, financial
condition and results of operations 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.
Our quarterly operating results have fluctuated and will likely fluctuate in the future, which could cause rapid declines
in our stock price.
We believe that our quarterly operating results will continue to be subject to fluctuation due to various factors, many
of which are beyond our control. Factors that may affect quarterly operating results include:
• Fluctuations in demand for our products, in part due to changes in the global economic environment;
• Fluctuations based upon seasonality, with the quarters ending March 31 and September 30 typically being weaker;
• 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;
• 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;
• Variability of our margins based on the mix of server and storage systems, subsystems and accessories we sell and the
percentage of our sales to internet data center, cloud computing customers or certain geographical regions;
• Fluctuations in availability and costs associated with key components, particularly semiconductors, memory, storage
solutions, and other materials needed to satisfy customer requirements, especially during a period of global market
disruption, and, in particular, the impact of the extended duration of the COVID-19 pandemic on our supply chain and
the supply chain of our suppliers;
• The timing of the introduction of new products by leading microprocessor vendors and other suppliers;
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• 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;
• Changes in our product pricing policies, including those made in response to new product announcements;
• Mix of whether customer purchases are of partially or fully integrated systems or subsystems and accessories and
whether made directly or through our indirect sales channel partners;
• The effect of mergers and acquisitions among our competitors, suppliers, customers, or partners;
• General economic conditions in our geographic markets;
• Geopolitical tensions, including trade wars, tariffs and/or sanctions in our geographic markets;
•
• Costs associated with remediation and legal proceedings related to restatement of our financial statements in prior
Impact of regulatory changes on our cost of doing business; and
years.
In addition, customers may hesitate to purchase, or not continue to purchase, our products based upon past
unwarranted reports about security risks associated with the use of our products. Accordingly, our growth and results of
operations may fluctuate on a quarterly basis. If we fail to meet expectations of investors or analysts, our stock price may fall
rapidly and without notice. Furthermore, the fluctuation of quarterly operating results may render less meaningful period-to-
period comparisons of our operating results, and you should not rely upon them as an indication of future performance.
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. 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. 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.
As we increasingly target larger customers and larger sales opportunities, our customer base may become more
concentrated, our cost of sales may increase, our margins may be lower and our sales may be less predictable.
We have become increasingly dependent upon larger sales to grow our business. In particular, in recent years, we have
completed larger sales to leading internet data center and cloud customers, large enterprise customers and OEMs. No single
customer accounted for 10% or more of net sales in fiscal years 2021, 2020 or 2019. 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
customers to maintain our growth. If our largest customers do not purchase our products, or we are unable to supply such
customers with products, at the levels, in the timeframes or within the geographies that we expect, including as a result of the
impact of COVID-19 on their or our businesses, our ability to maintain or grow our net sales will be adversely affected.
Increased sales to larger customers may also cause fluctuations in results of operations. Large orders are generally
subject to intense competition and pricing pressure which can have an adverse impact on our margins and results of operations.
Accordingly, a significant increase in revenue during the period in which we recognize the revenue from a large customer may
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be followed by a period of time during which the customer either does not purchase any products or only a small number of our
products.
Additionally, as we and our partners focus increasingly on selling to larger customers and attracting larger orders, we
expect greater costs of sales. Our sales cycle may become longer and more expensive, as larger customers typically spend more
time negotiating contracts than smaller customers. Larger customers also often seek greater levels of support in the
implementation and use of our server solutions. An actual or perceived inability to meet customer support demands may
adversely affect our relationship with such customers, which may affect the likelihood of future purchases of our products.
As a result of the above factors, our quarter-to-quarter results of operations may be subject to greater fluctuation and
our stock price may be adversely affected.
If we fail to meet any publicly announced financial guidance or other expectations about our business, it could cause our
stock to decline in value.
Before the COVID-19 pandemic, we provided forward looking financial guidance when we announced our financial
results for the prior quarter. No assurances can be given that we will continue to provide forward looking financial guidance,
and if we do issue forward looking guidance, the uncertainties related to these items could cause us to revise such guidance. If
issued, we undertake no obligation to update any forward looking guidance at any time. In the past, our financial results have
failed to meet the guidance we provided. There are a number of reasons why we have failed to meet guidance in the past and
might fail again in the future, including, but not limited to, the factors described in these Risk Factors.
Increases in average selling prices for our server solutions have 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 components, which could harm our results of
operations.
Increases in average selling prices for our server solutions have significantly contributed to increases in net sales in
some of the periods covered by this Annual Report. Recently, the market for key components has become more volatile during
the COVID-19 pandemic. As with most electronics based products, average selling prices of server and storage products are
typically highest at the time of introduction of new products, which utilize the latest technology, and tend to decrease over time
as such products become commoditized and are ultimately replaced by even newer generation products. We cannot predict the
timing or amount of any decline in the average selling prices of our server solutions that we may experience in the future, which
may be exacerbated by continued effects from the COVID-19 pandemic. In some instances, our agreements with our indirect
sales channel partners limit our ability to reduce prices unless we make such price reductions available to them, or price protect
their inventory. If we are unable to decrease the average per unit manufacturing costs faster than the rate at which average
selling prices continue to decline, our business, financial condition and results of operations will be harmed.
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 products.
Prices of certain materials and core components utilized in the manufacture of our server and storage solutions, such
as serverboards, chassis, CPUs, memory, hard drives and SSDs, represent a significant portion of our cost of sales. While we
have increased our purchases of certain critical materials and core components in response to the supply and demand
uncertainties associated with the COVID-19 pandemic, we do not have long-term supply contracts for all critical materials and
core components, but instead often purchase these materials and components on a purchase order basis. Prices of these core
components and materials are volatile, and, as a result, it is difficult to predict expense levels and operating results. In addition,
if our business growth renders it necessary or appropriate to transition to longer term contracts with materials and core
component suppliers, our costs may increase and our gross margins could correspondingly decrease.
Because we often acquire materials and key components on an as needed basis, we may be limited in our ability to
effectively and efficiently respond to customer orders because of the then-current availability or the terms and pricing of these
materials and key components. Our industry has experienced materials shortages and delivery delays in the past, including as a
result of the negative impact of COVID-19 on global supply chains, and we may experience shortages or delays of critical
materials or increased logistics costs to obtain necessary materials in a timely manner in the future. The COVID-19 pandemic
has resulted in widely reported shortages of semiconductors. From time to time, we have been forced to delay the introduction
of certain of our products or the fulfillment of customer orders as a result of shortages of materials and key components, which
can adversely impact our revenue. If shortages, supply or demand imbalances or delays arise, the prices of these materials and
13
key components may increase or the materials and key components may not be available at all. In the event of shortages, some
of our larger competitors may have greater abilities to obtain materials and key components due to their larger purchasing
power. We may not be able to secure enough key components or materials at reasonable prices or of acceptable quality to build
new products to meet customer demand, which could adversely affect our business, results of operations and financial
condition. In addition, from time to time, we have accepted customer orders with various types of component pricing
protection. Such arrangements have increased our exposure to component pricing fluctuations and have adversely affected our
financial results in certain quarters.
If we were to lose any of our current supply or contract manufacturing relationships, the process of identifying and
qualifying a new supplier or contract manufacturer who meets our quality and delivery requirements, and who will
appropriately safeguard our intellectual property, may require a significant investment of time and resources, adversely
affecting our ability to satisfy customer purchase orders and delaying our ability to rapidly introduce new products to market.
Similarly, if any of our suppliers were to cancel, materially change contracts or commitments to us or fail to meet the quality or
delivery requirements needed to satisfy customer demand for our products, whether due to shortages or other reasons, our
reputation and relationships with customers could be damaged. We could lose orders, be unable to develop or sell some
products cost-effectively or on a timely basis, if at all, and have significantly decreased revenues, margins and earnings, which
would have a material adverse effect on our business, results of operations and financial condition.
We may lose sales or incur unexpected expenses relating to insufficient, excess or obsolete inventory.
To offer greater choices and optimization of our products to benefit our customers, we maintain a high level of
inventory. If we fail to maintain sufficient inventory, we may not be able to meet demand for our products on a timely basis, and
our sales may suffer. If we overestimate customer demand for our products, we could experience excess inventory of our
products and be unable to sell those products at a reasonable price, or at all. As a result, we may need to record higher inventory
reserves. In addition, from time to time we assume greater inventory risk in connection with the purchase or manufacture of
more specialized components in connection with higher volume sales opportunities. There are uncertainties and risks related to
COVID-19, for which we have taken certain actions including our increased purchase of certain critical materials and
components as a part of our pandemic response planning. Specifically, we sought to actively manage our supply chain for
potential risks of shortage 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. Nevertheless, no assurances can be given that such efforts will be successful to manage inventory,
and we could be exposed to risks of insufficient, excess, or obsolete inventory. We have from time to time experienced
inventory write downs associated with higher volume sales that were not completed as anticipated. We expect that we will
experience such write downs from time to time in the future related to existing and future commitments, and potentially related
to our proactive purchase of certain critical materials and components as part of our planning in light of COVID-19. Excess or
obsolete inventory levels for these or other reasons could result in unexpected expenses or increases in our reserves against
potential future charges which would adversely affect our business, results of operations and financial condition.
Difficulties we encounter relating to automating internal controls utilizing our ERP systems or integrating processes that
occur in other IT applications could adversely impact our controls environment.
Many companies have experienced challenges with their ERP systems that have had a negative effect on their
business. We have incurred and expect to continue to incur additional expenses related to our ERP systems, particularly as we
continue to further enhance and develop them including by automating certain internal controls. Any future disruptions, delays
or deficiencies relating to automating internal controls utilizing our ERP systems or integrating processes that occur in other IT
applications could adversely affect our ability to file reports with the SEC in a timely manner, deliver accurate financial
statements and otherwise impact our controls environment. Any of these consequences could have an adverse effect on our
business, results of operations and financial condition.
System security violations, data protection breaches, cyber-attacks and other related cyber-security issues could disrupt
our internal operations or compromise the security of our products, and any such disruption could reduce our expected
revenues, increase our expenses, damage our reputation and adversely affect our stock price.
Malicious computer programmers and hackers may be able to penetrate our network and misappropriate or
compromise our confidential information or that of third parties, create system disruptions or cause shutdowns. Computer
programmers and hackers also may be able to develop and deploy viruses, worms and other malicious software programs that
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attack our products or otherwise exploit any security vulnerabilities of our products. While we employ a number of protective
measures, including firewalls, anti-virus and endpoint detection and response technologies, these measures may fail to prevent
or detect attacks on our systems. While there have been unauthorized intrusions into our network in the past, none of these
intrusions, individually or in the aggregate, had a material adverse effect on our business, operations, or products. We have
taken steps to enhance the security of our network and computer systems but, despite these efforts, we may experience future
intrusions, which could adversely affect our business, operations, or products. In addition, our hardware and software or third
party components and software that we utilize in our products may contain defects in design or manufacture, including “bugs”
and other problems that could unexpectedly interfere with the operation or security of the products. The costs to us to eliminate
or mitigate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities
could be significant and, if our efforts to address these problems are not successful, could result in interruptions, delays,
cessation of service and loss of existing or potential customers that may impede our sales, manufacturing, distribution or other
critical functions. Any claim that our products or systems are subject to a cyber-security risk, whether valid or not, could
damage our reputation and adversely impact our revenues and results of operations.
We manage and store various proprietary information and sensitive or confidential data relating to our business as
well as information from our suppliers and customers. Breaches of our or any of our third party suppliers’ security measures or
the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive or confidential
data about us or our customers or suppliers, including the potential loss or disclosure of such information or data as a result of
fraud, trickery or other forms of deception, could expose us or our customers or suppliers to a risk of loss or misuse of this
information, result in litigation and potential liability for us, damage our brand and reputation or otherwise harm our business.
To the extent we experience cyber-security incidents in the future, our relationships with our customers and suppliers
may be materially impacted, our brand and reputation may be harmed and we could incur substantial costs in responding to and
remediating the incidents and in resolving any investigations or disputes that may arise with respect to them, any of which
would cause our business, operations, or products to be adversely affected. In addition, the cost and operational consequences
of implementing and adding further data protection measures could be significant.
Any failure to adequately expand or retain our sales force will impede our growth.
We expect that our direct sales force will continue to grow as larger customers increasingly require a direct sales
approach. Competition for direct sales personnel with the advanced sales skills and technical knowledge we need is intense, and
we face significant competition for direct sales personnel from our competitors. Our ability to grow our revenue in the future
will depend, in large part, on our success in recruiting, training, retaining and successfully managing sufficient qualified direct
sales personnel. New hires require significant training and may take six months or longer before they reach full productivity.
Our recent hires and planned hires may not become as productive as we would like, and we may be unable to hire sufficient
numbers of qualified individuals in the future in the markets where we do business. If we are unable to hire, develop and retain
sufficient numbers of productive sales personnel, our customer relationships and resulting sales of our server solutions will
suffer.
Conflicts of interest may arise between us and Ablecom and Compuware, and those conflicts may adversely affect our
operations.
We use Ablecom, a related party, for contract design and manufacturing coordination support and warehousing, and
Compuware, also a related party and an affiliate of Ablecom, for distribution, contract manufacturing and warehousing. We
work with Ablecom to optimize modular designs for our chassis and certain of other components. We outsource to Compuware
a portion of our design activities and a significant part of our manufacturing of subassemblies, particularly power supplies. Our
purchases of products from Ablecom and Compuware represented 7.8%, 10.1% and 9.2% of our cost of sales for fiscal years
2021, 2020 and 2019, respectively. Ablecom and Compuware’s sales to us constitute a substantial majority of Ablecom and
Compuware’s net sales. Ablecom and Compuware are both privately-held Taiwan-based companies. In addition, we have
entered into a distribution agreement with Compuware, under which we have appointed Compuware as a nonexclusive
distributor of our products in Taiwan, China and Australia.
Steve Liang, Ablecom’s Chief Executive Officer and largest shareholder, is the brother of Charles Liang, our
President, Chief Executive Officer and Chairman of our Board of Directors (“the Board”). Steve Liang owned no shares of our
common stock as of June 30, 2021, 2020 or 2019. Charles Liang and his spouse, Sara Liu, our Co-Founder, Senior Vice
President and Director, jointly owned approximately 10.5% of Ablecom’s capital stock, while Mr. Steve Liang and other family
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members owned approximately 28.8% of Ablecom’s outstanding common stock as of June 30, 2021. Bill Liang, a brother of
both Charles Liang and Steve Liang, is a member of the Board of Directors of Ablecom as well.
In October 2018, our Chief Executive Officer, Charles Liang, personally borrowed approximately $12.9 million from
Chien-Tsun Chang, the spouse of Steve Liang. The loan is unsecured, has no maturity date and bore interest at 0.8% per month
for the first six months, increased to 0.85% per month through February 28, 2020, and reduced to 0.25% effective March 1,
2020. The loan was originally made at Mr. Liang's request to provide funds to repay margin loans to two financial institutions,
which loans had been secured by shares of our common stock that he held. The lenders called the loans in October 2018,
following the suspension of our common stock from trading on NASDAQ in August 2018 and the decline in the market price of
our common stock in October 2018. As of June 30, 2021, the amount due on the unsecured loan (including principal and
accrued interest) was approximately $15.3 million.
Bill Liang is also the Chief Executive Officer of Compuware, a member of Compuware’s Board of Directors and a
holder of a significant equity interest in Compuware. Steve Liang is also a member of Compuware’s Board of Directors and is
an equity holder of Compuware.
Mr. Charles Liang is our Chief Executive Officer and Chairman of the Board, is a significant stockholder of our
company, and has considerable influence over the management of our business relationships. Accordingly, we may be
disadvantaged by the economic interests of Mr. Charles Liang and his spouse, Ms. Sara Liu, as stockholders of Ablecom and
Mr. Charles Liang's personal relationship with Ablecom’s Chief Executive Officer and Compuware's Chief Executive Officer.
We may not negotiate or enforce contractual terms as aggressively with Ablecom or Compuware as we might with an unrelated
party, and the commercial terms of our agreements may be less favorable than we might obtain in negotiations with third
parties. If our business dealings with Ablecom or Compuware are not as favorable to us as arms-length transactions, our results
of operations may be harmed.
If Ablecom or Compuware are acquired or sold, new ownership could reassess the business and strategy of Ablecom
or Compuware, and as a result, our supply chain could be disrupted or the terms and conditions of our agreements with
Ablecom or Compuware may change. As a result, our operations could be negatively impacted or costs could increase, either of
which could adversely affect our margins and results of operations.
Our reliance on Ablecom could be subject to risks associated with our reliance on a limited source of contract
manufacturing services and inventory warehousing.
We plan to continue to maintain our manufacturing relationship with Ablecom in Asia. In order to provide a larger
volume of contract manufacturing services for us, we anticipate that Ablecom will continue to warehouse for us an increasing
number of components and subassemblies manufactured by multiple suppliers prior to shipment to our facilities in the United
States and Europe. We also anticipate that we will continue to lease office space from Ablecom in Taiwan to support our
research and development efforts. We operate a joint management company with Ablecom to manage the common areas shared
by us and Ablecom for our separately constructed manufacturing facilities in Taiwan.
If our commercial relationship with Ablecom deteriorates, we may experience delays in our ability to fulfill customer
orders. Similarly, if Ablecom’s facility in Asia is subject to damage, destruction or other disruptions, our inventory may be
damaged or destroyed, and we may be unable to find adequate alternative providers of contract manufacturing services in the
time that we or our customers require. We could lose orders and be unable to develop or sell some products cost-effectively or
on a timely basis, if at all.
Currently, we purchase contract manufacturing services primarily for our chassis products from Ablecom. If our
commercial relationship with Ablecom were to deteriorate or terminate, establishing direct relationships with those entities
supplying Ablecom with key materials for our products or identifying and negotiating agreements with alternative providers of
warehouse and contract manufacturing services might take a considerable amount of time and require a significant investment
of resources. Pursuant to our agreements with Ablecom and subject to certain exceptions, Ablecom has the exclusive right to be
our supplier of the specific products developed under such agreements. As a result, if we are unable to obtain such products
from Ablecom on terms acceptable to us, we may need to discontinue a product or develop substitute products, identify a new
supplier, change our design and acquire new tooling, all of which could result in delays in our product availability and increased
costs. If we need to use other suppliers, we may not be able to establish business arrangements that are, individually or in the
aggregate, as favorable as the terms and conditions we have established with Ablecom. If any of these things should occur, our
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net sales, margins and earnings could significantly decrease, which would have a material adverse effect on our business,
results of operations and financial condition.
If negative publicity arises with respect to us, our employees, our third-party service providers or our partners, our
business and operating results could be adversely affected, regardless of whether the negative publicity is true.
Negative publicity about our company or our products, even if inaccurate or untrue, could adversely affect our
reputation and the confidence in our products, which could harm our business and operating results. For example, in October
2018, a news article was published alleging that malicious hardware chips were implanted on our motherboards during the
manufacturing process at the facilities of a contract manufacturer in China. We undertook a thorough investigation of this claim
with the assistance of a leading, independent third-party investigations firm wherein we tested a representative sample of our
motherboards, including the specific type of motherboard depicted in the news article and motherboards purchased by
companies referenced in the article, as well as more recently manufactured motherboards. After completing these examinations
as well as a range of functional tests, the investigations firm reported that it had found no evidence of malicious hardware on
our motherboards. In addition, neither the publisher of the news article nor any of our customers have ever provided a single
example of any such altered motherboard. However, despite repeated denials of any tampering by our customers and us, and the
announcement of the results of this independent investigation, the publication of this false allegation in 2018 had a substantial
negative impact on the trading price of our common stock and our reputation. The October 2018 news article, the follow up
news article published in January 2021, and any similar future article making similar false allegations, may continue to have a
negative impact in the future.
Harm to our reputation can also arise from many other sources, including employee misconduct, which we have
experienced in the past, and misconduct by our partners and outsourced service providers. Additionally, negative publicity with
respect to our partners or service providers could also affect our business and operating results to the extent that we rely on
these partners or if our customers or prospective customers associate our company with these partners.
If we lose Charles Liang, our President, Chief Executive Officer and Chairman, or any other key employee or are
unable to attract additional key employees, we may not be able to implement our business strategy in a timely manner.
Our future success depends in large part upon the continued service of our current executive management team and
other key employees. In particular, Charles Liang, our President, Chief Executive Officer and Chairman of the Board, is critical
to the overall management of our company as well as to our strategic direction. Mr. Liang co-founded our company and has
been our Chief Executive Officer since our inception. His experience in leading our business and his personal involvement in
key relationships with suppliers, customers and strategic partners are extremely valuable to our company. We currently do not
have a succession plan for the replacement of Mr. Liang if it were to become necessary. Additionally, we are particularly
dependent on the continued service of our existing research and development personnel because of the complexity of our
products and technologies. Our employment arrangements with our executives and employees do not require them to provide
services to us for any specific length of time, and they can terminate their employment with us at any time, with or without
notice, without penalty. The loss of services of any of these executives or of one or more other key members of our team could
seriously harm our business.
Our direct sales efforts may create confusion for our end customers and harm our relationships in our indirect sales
channel and with our OEMs.
We expect our direct sales force to continue to grow as our business grows. As our direct sales force becomes larger,
our direct sales efforts may lead to conflicts in our indirect sales channel and with our OEMs, who may view our direct sales
efforts as undermining their efforts to sell our products. If an indirect sales channel partner or OEM deems our direct sales
efforts to be inappropriate, they may not effectively market our products, may emphasize alternative products from competitors,
or may seek to terminate our business relationship. Disruptions in our indirect channels could cause our revenues to decrease or
fail to grow as expected. Our failure to implement an effective direct sales strategy that maintains and expands our relationships
in our indirect sales channel and with our OEMs could lead to a decline in sales, harm relationships and adversely affect our
business, results of operations and financial condition.
If we are unable to attract and integrate additional key employees in a manner that enables us to scale our business and
operations effectively, or if we do not maintain competitive compensation policies to retain our employees, our ability to
operate effectively and efficiently could be limited.
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To execute our growth plan, we must attract additional highly qualified personnel, including additional engineers and
executive staff. Competition for qualified personnel is intense, especially in Silicon Valley, where we are headquartered. We
have experienced and may continue to experience difficulty in hiring and retaining highly skilled employees with appropriate
qualifications. If we are unable to attract and integrate additional key employees in a manner that enables us to scale our
business and operations effectively, or if we do not maintain competitive compensation policies to retain our employees, our
ability to operate effectively and efficiently could be limited.
Strategic and Industry Risks
If we do not successfully manage the expansion of our international manufacturing capacity and business operations,
our business could be harmed.
Since inception, we have conducted a majority of our manufacturing operations in San Jose, California. We continue
to increase our manufacturing capacity in Taiwan and in the Netherlands, and as a result of the COVID-19 pandemic have
sought to accelerate manufacturing in Taiwan in order to better diversify our geographical manufacturing concentration. In
order to continue to successfully increase our operations in Taiwan, we must efficiently manage our Taiwan operations from our
headquarters in San Jose, California and continue to develop a strong local management team. If we are unable to successfully
ramp up our international manufacturing capacity, including the associated increased logistics and warehousing, we may incur
unanticipated costs, difficulties in making timely delivery of products or suffer other business disruptions which could
adversely impact our results of operations.
We may not be able to successfully manage our business for growth and expansion.
Over time we expect to continue to make investments to pursue new customers and expand our product and service
offerings to grow our business. We also expect that our annual operating expenses will continue to increase as we invest in sales
and marketing, research and development, manufacturing and production infrastructure, software and product service offerings,
and strengthen customer service and support resources for our customers. Our failure to expand operational and financial or
internal control systems timely or efficiently could result in additional operating inefficiencies, which could increase our costs
and expenses more than we had planned and prevent us from successfully executing our business plan. We may not be able to
offset the costs of operation expansion by leveraging the economies of scale from our growth in negotiations with our suppliers
and contract manufacturers. Additionally, if we increase our operating expenses in anticipation of the growth of our business
and this growth does not meet our expectations, our financial results will be negatively impacted.
If our business grows, we will have to manage additional product design projects, materials procurement processes
and sales efforts and marketing for an increasing number of SKUs, provide and update an increasing amount of software
utilized in our hardware offerings, provide more sophisticated product service offerings to support our customers, and expand
the number and scope of our relationships with suppliers, distributors and end customers. If we fail to manage these additional
responsibilities and relationships successfully, we may incur significant costs, which may negatively impact our operating
results. Additionally, in our efforts to be first to market with new products with innovative functionality and features, we may
devote significant research and development resources to products and product features for which a market does not develop
quickly, or at all. If we are not able to predict market trends accurately, we may not benefit from such research and development
activities, and our results of operations may suffer.
Managing our business for long-term growth also requires us to successfully manage our employee headcount. We
must continue to hire, train and manage new employees as needed. If our new hires perform poorly, or if we are unsuccessful in
hiring, training, managing and integrating these new employees, or if we are not successful in retaining our employees, our
business may be harmed. While in the past we have had significant growth in headcount, particularly during periods of rapid
growth, our headcount has remained relatively flat in recent periods. A growth in headcount would continue to increase our cost
base, which would make it more difficult for us to offset any future revenue shortfalls by offsetting expense reductions in the
short term. If we fail to successfully manage our growth, we will be unable to execute our business plan.
We depend upon the development of new products and enhancements to our existing products, and if we fail to predict
or respond to emerging technological trends and our customers’ changing needs, our operating results and market share
may suffer.
The markets for our products are characterized by rapidly changing technology, evolving industry standards, new
product introductions, and evolving methods of operations. Our operating results depend on our ability to develop and introduce
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new products into existing and emerging markets and to reduce the production costs of existing products. If our customers do
not purchase our products, our business will be harmed. The COVID-19 pandemic may also result in long-term changes in
customer needs for our products in various sectors, along with capital spending reductions or shifts in spending focus, that
could materially adversely affect us if we are unable to adjust our product offerings to match customer needs.
The process of developing products incorporating new technologies is complex and uncertain, and if we fail to
accurately predict customers’ changing needs and emerging technological trends our business could be harmed. We must
commit significant resources, including the investments we have been making in our strategic priorities to developing new
products before knowing whether our investments will result in products and services the market will accept. If the industry
does not evolve as we believe it will, or if our strategy for addressing this evolution is not successful, many of our strategic
initiatives and investments may be of no or limited value. Also, suppliers of our key components may introduce new
technologies that are critical to the functionality of our products at a slower rate than their competition, which could adversely
impact our ability to timely develop and provide competitive offerings to our customers. Similarly, our business could be
harmed if we fail to develop, or fail to develop in a timely fashion, offerings to address other transitions, or if the offerings
addressing these other transitions that ultimately succeed are based on technology, or an approach to technology, different from
ours. In addition, our business could be adversely affected in periods surrounding our new product introductions if customers
delay purchasing decisions to qualify or otherwise evaluate the new product offerings.
Furthermore, we may not execute successfully on our vision or strategy because of challenges with regard to product
planning and timing, technical hurdles that we fail to overcome in a timely fashion, or a lack of appropriate resources. This
could result in competitors, some of which may also be our suppliers, providing those solutions before we do and loss of market
share, revenue, and earnings. The success of new products depends on several factors, including proper new product and service
definition, component costs, timely completion and introduction of these products, differentiation of new products from those
of our competitors, market acceptance of these products, and providing appropriate support of these products. There can be no
assurance that we will successfully identify new product opportunities, develop and bring new products to market in a timely
manner, or achieve market acceptance of our products or that products and technologies developed by others will not render our
products or technologies obsolete or noncompetitive. The products and technologies in our other product categories and key
priority and growth areas may not prove to have the market success we anticipate, and we may not successfully identify and
invest in other emerging or new products.
The market in which we participate is highly competitive, and if we do not compete effectively, we may not be able to
increase our market penetration, grow our net sales or improve our gross margins.
The market for server and storage solutions is intensely competitive and rapidly changing. The market continues to
evolve with the growth of public cloud shifting server and storage purchasing from traditional data centers to lower margin
public cloud vendors. Barriers to entry in our market are relatively low and we expect increased challenges from existing as
well as new competitors. Some of our principal competitors offer server solutions at a lower price, which has resulted in pricing
pressures on sales of our server solutions. We expect further downward pricing pressure from our competitors and expect that
we will have to price some of our server and storage solutions aggressively to increase our market share with respect to those
products or geographies, particularly for internet data center and cloud customers and other large sale opportunities. If we are
unable to maintain the margins on our server and storage solutions, our operating results could be negatively impacted. In
addition, if we do not develop new innovative solutions, or enhance the reliability, performance, efficiency and other features of
our existing server and storage solutions, our customers may turn to our competitors for alternatives. In addition, pricing
pressures and increased competition generally may also result in reduced sales, less efficient utilization of our manufacturing
operations, lower margins or the failure of our products to achieve or maintain widespread market acceptance, any of which
could have a material adverse effect on our business, results of operations and financial condition.
Our principal competitors include global technology companies such as Cisco, Dell, Hewlett-Packard Enterprise and
Lenovo. In addition, we also compete with a number of other vendors who also sell application optimized servers, contract
manufacturers/OEMs and original design manufacturers (“ODMs”), such as Foxconn, Inspur, Quanta Computer and Wiwynn
Corporation. ODMs sell server solutions marketed or sold under a third-party brand.
Many of our competitors enjoy substantial competitive advantages, such as:
• Greater name recognition and deeper market penetration;
• Longer operating histories;
• Larger sales and marketing organizations and research and development teams and budgets;
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• More established relationships with customers, contract manufacturers and suppliers and better channels to reach
larger customer bases and larger sales volume allowing for better costs;
• Larger customer service and support organizations with greater geographic scope;
• A broader and more diversified array of products and services; and
• Substantially greater financial, technical and other resources.
Some of our current or potential ODM competitors are also currently or have in the past been suppliers to us. As a
result, they may possess sensitive knowledge or experience which may be used against us competitively and/or which may
require us to alter our supply arrangements or sources in a way which could adversely impact our cost of sales or results of
operations.
Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities,
technologies, standards or customer requirements. Competitors may seek to copy our innovations and use cost advantages from
greater size to compete aggressively with us on price. Certain customers are also current or prospective competitors and as a
result, assistance that we provide to them as customers may ultimately result in increased competitive pressure against us.
Furthermore, because of these advantages, even if our application optimized server and storage solutions are more effective
than the products that our competitors offer, potential customers might accept competitive products in lieu of purchasing our
products. The challenges we face from larger competitors will become even greater if consolidation or collaboration between or
among our competitors occurs in our industry. Also, initiatives like the Open Compute Project, a project to establish more
industry standard data center configurations, could have the impact of supporting an approach which is less favorable to the
flexibility and customization that we offer. These changes could have a significant impact on the market and impact our results
of operations. For all of these reasons, we may not be able to compete successfully against our current or future competitors,
and if we do not compete effectively, our ability to increase our net sales may be impaired.
Industry consolidation may lead to increased competition and may harm our operating results.
There has been a trend toward consolidation in our industry. We expect this trend to continue as companies attempt to
strengthen or hold their market positions in an evolving industry and as companies are acquired or are unable to continue
operations. Companies that are suppliers in some areas of our business may acquire or form alliances with our competitors,
thereby reducing their business with us. We believe that industry consolidation may result in stronger competitors that are more
likely to compete as sole-source vendors for customers. Additionally, at times in the past, our competitors have acquired certain
customers of ours and terminated our business relationships with such customers. As such, acquisitions by our competitors
could also lead to more variability in our operating results and could have a material adverse effect on our business, operating
results, and financial condition.
We must work closely with our suppliers to make timely new product introductions.
We rely on our close working relationships with our suppliers, including Intel, AMD and Nvidia, to anticipate and
deliver new products on a timely basis when new generation materials and key components are made available. If we are not
able to maintain our relationships with our suppliers or continue to leverage their research and development capabilities to
develop new technologies desired by our customers, our ability to quickly offer advanced technology and product innovations
to our customers would be impaired. We have no long term agreements that obligate our suppliers to continue to work with us
or to supply us with products.
Our suppliers’ failure to improve the functionality and performance of materials and key components for our products
may impair or delay our ability to deliver innovative products to our customers.
We need our material and key component suppliers, such as Intel, AMD and Nvidia, to provide us with components
that are innovative, reliable and attractive to our customers. Due to the pace of innovation in our industry, many of our
customers may delay or reduce purchase decisions until they believe that they are receiving best of breed products that will not
be rendered obsolete by an impending technological development. Accordingly, demand for new server and storage systems
that incorporate new products and features is significantly impacted by our suppliers’ new product introduction schedules and
the functionality, performance and reliability of those new products. If our materials and key component suppliers fail to deliver
new and improved materials and components for our products, we may not be able to satisfy customer demand for our products
in a timely manner, or at all. If our suppliers’ components do not function properly, we may incur additional costs and our
relationships with our customers may be adversely affected.
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We rely on a limited number of suppliers for certain components used to manufacture our products.
Certain components used in the manufacture of our products are available from a limited number of suppliers.
Shortages could occur in these essential materials due to an interruption of supply, including interruptions on the global supply
chain in connection with COVID-19, or increased demand in the industry. One of our suppliers accounted for 20.3%, 26.8%,
and 21.8% of total purchases of components for the fiscal years ended June 30, 2021, 2020 and 2019, respectively. Ablecom
and Compuware, related parties, accounted for 7.8%, 10.1% and 9.2% of our total cost of sales for the fiscal years ended June
30, 2021, 2020 and 2019, respectively. If any of our largest suppliers discontinue their operations or if our relationships with
them are adversely impacted, we could experience a material adverse effect on our business, results of operations and financial
condition. See also “—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 products.”
We rely on indirect sales channels and any disruption in these channels could adversely affect our sales.
We depend on our indirect sales channel partners to assist us in promoting market acceptance of our products. To
maintain and potentially increase our revenue and profitability, we will have to successfully preserve and expand our existing
distribution relationships as well as develop new channel relationships. Our indirect sales channel partners also sell products
offered by our competitors and may elect to focus their efforts on these sales. If our competitors offer our indirect sales channel
more favorable terms or have more products available to meet the needs of their customers, or utilize the leverage of broader
product lines sold through the indirect sales channel, those channel partners may de-emphasize or decline to carry our products.
In addition, the order decision-making process in our indirect sales channel is complex and involves several factors, including
end customer demand, warehouse allocation and marketing resources, which can make it difficult to accurately predict total
sales for the quarter until late in the quarter. We also do not control the pricing or discounts offered by our indirect sales channel
partners to the end customers. To maintain our participation in the marketing programs of our indirect sales channel partners,
we have provided and expect to continue to offer cooperative marketing arrangements and offer short-term pricing concessions.
The discontinuation of cooperative marketing arrangements or pricing concessions could have a negative effect on our
business, results of operations and financial condition. Our indirect sales channel partners could also modify their business
practices, such as payment terms, inventory levels or order patterns. If we are unable to maintain successful relationships in our
indirect sales channel or expand our channel or we experience unexpected changes in payment terms, inventory levels or other
practices in our indirect sales channel, our business will suffer.
Our failure to deliver high quality server and storage solutions could damage our reputation and diminish demand for
our products.
Our server and storage solutions are critical to our customers’ business operations. Our customers require our server
and storage solutions to perform at a high level, contain valuable features and be extremely reliable. The design of our server
and storage solutions is sophisticated and complex, and the process for manufacturing, assembling and testing our server
solutions is challenging. Occasionally, our design or manufacturing processes may fail to deliver products of the quality that our
customers require. For example, in the past certain vendors have provided us with defective components that failed under
certain applications. As a result, our products needed to be repaired and we incurred costs in connection with the recall and
diverted resources from other projects.
New flaws or limitations in our server and storage solutions may be detected in the future. Part of our strategy is to
bring new products to market quickly, and first-generation products may have a higher likelihood of containing undetected
flaws. If our customers discover defects or other performance problems with our products, our customers’ businesses, and our
reputation, may be damaged. Customers may elect to delay or withhold payment for defective or underperforming server and
storage solutions, request remedial action, terminate contracts for untimely delivery, or elect not to order additional products,
which could result in a decrease in revenue, an increase in our provision for doubtful accounts or in collection cycles for
accounts receivable or subject us to the expense and risk of litigation. We may incur expense in recalling, refurbishing or
repairing defective server and storage solutions sold to our customers or remaining in our inventory. If we do not properly
address customer concerns about our products, our reputation and relationships with our customers may be harmed. For all of
these reasons, customer dissatisfaction with the quality of our products could substantially impair our ability to grow our
business.
Our growth into markets outside the United States exposes us to risks inherent in international business operations.
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We market and sell our systems and subsystems and accessories both inside and outside the United States. We intend
to expand our international sales efforts, especially into Asia, and we are expanding our business operations in Europe and Asia,
particularly in Taiwan, the Netherlands and Japan. In particular, we have made, and continue to make, substantial investments
for the purchase of land and the development of new facilities in Taiwan to accommodate our expected growth and the
migration of a substantial portion of our contract manufacturing operations from China to Taiwan.
Our international expansion efforts may not be successful. Our international operations expose us to risks and
challenges that we would otherwise not face if we conducted our business only in the United States, such as:
• Heightened price sensitivity from customers in emerging markets;
• Our ability to establish local manufacturing, support and service functions, and to form channel relationships with
value added resellers in non-United States markets;
• Localization of our systems and components, including translation into foreign languages and the associated expenses;
• Compliance with multiple, conflicting and changing governmental laws and regulations;
• Foreign currency fluctuations;
• Limited visibility into sales of our products by our channel partners;
• Greater concentration of competitors in some foreign markets than in the United States;
• Laws favoring local competitors;
• Weaker legal protections of intellectual property rights and mechanisms for enforcing those rights;
• Market disruptions created by other public health crises in regions outside the United States, such as avian flu, SARS
and other diseases;
Import and export tariffs;
•
• Difficulties in staffing and the costs of managing foreign operations, including challenges presented by relationships
with workers’ councils and labor unions; and
• Changing regional economic and political conditions.
These factors could limit our future international sales or otherwise adversely impact our operations or our results of
operations.
Our results of operations may be subject to fluctuations based upon our investment in corporate ventures.
We have a 30% minority interest in a China corporate venture that was established to market and sell corporate
venture branded systems in China based upon products and technology we supply. We record earnings and losses from the
corporate venture using the equity method of accounting. Our loss exposure is limited to the remainder of our equity investment
in the corporate venture which as of June 30, 2021 and 2020 was $4.6 million and $2.7 million, respectively. We currently do
not intend to make any additional investment in this corporate venture. See Part II, Item 8, Note 8, “Investment in a Corporate
Venture” to the consolidated financial statements in this Annual Report. We may make investments in other corporate ventures.
We do not control this corporate venture and any fluctuation in the results of operations of the corporate venture or any other
similar transaction that we may enter into in the future could adversely impact, or result in fluctuations in, our results of
operations.
In June 2020, the third-party parent company that controls our corporate venture was placed on a U.S. government
export control list, along with several related entities. In addition, the United States has further prohibitions on conducting
business with certain entities in China and continued to impose additional tariffs. If economic conditions or trade disputes,
including trade restrictions and tariffs such as those between the United States and China, in the areas in which we market and
sell our products and other key potential markets for our products continue to remain uncertain or deteriorate, it may further
affect the value of our investment in the corporate venture.
Legal and Regulatory Risks
Because our products and services may store, process and use data, some of which contains personal information, we are
subject to complex and evolving federal, state and foreign laws and regulations regarding privacy, data protection and
other matters, which are subject to change.
22
We are subject to a variety of laws and regulations in the United States and other countries that involve matters central
to our business, including with respect to user privacy, rights of publicity, data protection, content, protection of minors and
consumer protection. These laws can be particularly restrictive in countries outside the United States. Both in the United States
and abroad, these laws and regulations constantly evolve and remain subject to significant change. In addition, the application
and interpretation of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in
which we operate. Because our products and services store, process and use data, some of which contains personal information,
we are subject to complex and evolving federal, state and foreign laws and regulations regarding privacy, data protection and
other matters. Many of these laws and regulations are subject to change and uncertain interpretation and even our inadvertent
failure to comply with such laws and regulations could result in investigations, claims, damages to our reputation, changes to
our business practices, increased cost of operations and declines in user growth, retention or engagement, any of which could
materially adversely affect our business, results of operations and financial condition. Costs to comply with and implement
these privacy-related and data protection measures could be significant.
Global privacy legislation, enforcement, and policy activity for privacy and data protection are rapidly expanding and
creating a complex regulatory compliance environment. Costs to comply with and implement these privacy-related and data
protection measures could be significant. For example, the EU General Data Protection Regulation 2016/679 (“GDPR”), which
came into effect on May 25, 2018, imposes stringent EU data protection requirements on companies established in the
European Union or companies that offer goods or services to, or monitor the behavior of, individuals in the European Union.
The GDPR establishes a robust framework of data subjects’ rights and imposes onerous accountability obligations on
companies, with penalties for noncompliance of up to the greater of 20 million euros or four percent of annual global revenue.
In addition, numerous states in the U.S. are also expanding data protection through legislation. For example, in June 2018,
California enacted the California Consumer Privacy Act, which took effect on January 1, 2020, and gives California residents
expanded privacy rights and protections and provide for civil penalties for violations and a private right of action for data
breaches. At the same time, certain developing countries in which we do business have already or are also currently considering
adopting privacy and data protection laws and regulations. While we have implemented policies and procedures to address
GDPR and other data privacy requirements, failure to comply or concerns about our practices or compliance with GDPR or
other privacy-related laws and regulations could materially adversely affect our business, results of operations and financial
condition.
Our operations could involve the use of regulated materials, and we must comply with environmental, health and safety
laws and regulations, which can be expensive, and may affect our business, results of operations and financial condition.
We are subject to federal, state and local regulations relating to the use, handling, storage, disposal and human
exposure to materials, including hazardous and toxic materials. If we were to violate or become liable under environmental,
health and safety laws in the future as a result of our inability to obtain permits, human error, accident, equipment failure or
other causes, we could be subject to fines, costs or civil or criminal sanctions, face third-party property damage or personal
injury claims or be required to incur substantial investigation or remediation costs, any of which could have a material adverse
effect on business, results of operations and financial condition.
We also face increasing complexity in our product design as we adjust to new requirements relating to the materials
composition, energy efficiency and recyclability of our products, including EU eco-design requirements for servers and data
storage products (Commission Regulation (EU) 2019/424). We are also subject to laws and regulations providing consumer
warnings, such as California’s “Proposition 65” which requires warnings for certain chemicals deemed by the State of
California to be dangerous. We expect that our operations will be affected by other new environmental laws and regulations on
an ongoing basis that will likely result in additional costs, and could require that we change the design and/or manufacturing of
products, and could have a material adverse effect on business, results of operations or financial condition.
We are also subject to the Section 1502 of the Dodd Frank Act concerning the supply of certain minerals coming from
the conflict zones in and around the Democratic Republic of Congo, and adhere to broader industry best practices to source
minerals responsibly from all Conflict-Affected and High-Risk Areas (CAHRA). These requirements and best practices can
affect the cost and ease of sourcing minerals used in the manufacture of electronics.
If we are unable to maintain and further develop effective internal control over financial reporting, investors may lose
confidence in the accuracy and completeness of our financial reports and the market price of our common stock may
decrease.
As a public company, we are required to maintain internal control over financial reporting and to report any material
weaknesses in such internal controls. Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, requires that we evaluate
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and determine the effectiveness of our internal control over financial reporting and provide a management report and attestation
from our independent registered public accountant on our internal control over financial reporting. Both our evaluation and the
external attestation have and will continue to increase our and our independent public accountant costs and expenses.
In the past, we have had one or more material weaknesses, which we have remediated. If we identify one or more
material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are
effective, which could cause our stock price to decline. A “material weakness” is a deficiency, or a combination of deficiencies,
in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual
or interim financial statements will not be prevented or detected on a timely basis.
If we have material weaknesses in our internal control over financial reporting, we may not detect errors on a timely
basis and our financial statements may be materially misstated. If we identify material weaknesses in our internal control over
financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner, if we are unable to
assert that our internal control over financial reporting is effective or if our independent registered public accounting firm is
unable to attest that our internal control over financial reporting is effective, investors may lose confidence in the accuracy and
completeness of our financial reports and the market price of our common stock could decrease. We could also become subject
to stockholder or other third-party litigation as well as investigations by the stock exchange on which our securities are listed,
the SEC or other regulatory authorities, which could require additional financial and management resources and could result in
fines, penalties, trading suspensions or other remedies.
The matters leading to the delay in the filing of our 2017 10-K and adverse publicity and potential concerns from our
customers, including from our prior lack of effective internal control over financial reporting, have had and could
continue to have an adverse effect on our business and financial condition.
We have been and could continue to be the subject of negative publicity focused on the matters that led to the delay in
the filing of our 2017 10-K. We may be adversely impacted by negative reactions to this publicity from our customers or others
with whom we do business. Concerns include the time and effort required to address our accounting and control environment
and our ability to be a long-term provider to our customers. The continued occurrence of any of the foregoing could harm our
business and have an adverse effect on our financial condition.
Failure to comply with the U.S. Foreign Corrupt Practices Act, other applicable anti-corruption and anti-bribery laws,
and applicable trade control laws could subject us to penalties and other adverse consequences.
We manufacture and sell our products in several countries outside of the United States, both to direct and OEM
customers as well as through our indirect sales channel. Our operations are subject to the U.S. Foreign Corrupt Practices Act
(the “FCPA”) as well as the anti-corruption and anti-bribery laws in the countries where we do business. The FCPA prohibits
covered parties from offering, promising, authorizing or giving anything of value, directly or indirectly, to a “foreign
government official” with the intent of improperly influencing the official’s act or decision, inducing the official to act or
refrain from acting in violation of lawful duty or obtaining or retaining an improper business advantage. The FCPA also
requires publicly traded companies to maintain records that accurately and fairly represent their transactions, and to have an
adequate system of internal accounting controls. In addition, other applicable anti-corruption laws prohibit bribery of domestic
government officials, and some laws that may apply to our operations prohibit commercial bribery, including giving or
receiving improper payments to or from non-government parties, as well as so-called “facilitation” payments.
In addition, we are subject to U.S. and other applicable trade control regulations that restrict with whom we may
transact business, including the trade sanctions enforced by the U.S. Treasury, Office of Foreign Assets Control. If we fail to
comply with laws and regulations restricting dealings with sanctioned countries or companies and/or persons on restricted lists,
we may be subject to civil or criminal penalties. Any future violations could have an adverse impact on our ability to sell our
products to United States federal, state and local government and related entities. We have business relationships with
companies in China who have been, or may in the future be, added to the restricted party list. We take steps to minimize
business disruption when these situations arise; however, we may be required to terminate or modify such relationships if our
activities are prohibited by U.S. laws. Further, our association with these parties could subject us to greater scrutiny or
reputational harm among current or prospective customers, partners, suppliers, investors, other parties doing business with us or
using our products, or the general public. The United States and other countries continually update their lists of export-
controlled items and technologies, and may impose new or more-restrictive export requirements on our products in the future.
As a result of regulatory changes, we may be required to obtain licenses or other authorizations to continue supporting existing
customers or to supply existing products to new customers in China and elsewhere. Further escalations in trade restrictions,
particularly between the United States and China, could impede our ability to sell or support our products.
24
In addition, while we have implemented policies, internal controls and other measures reasonably designed to
promote compliance with applicable anti-corruption and anti-bribery laws and regulations, and certain safeguards designed to
ensure compliance with U.S. trade control laws, our employees or agents have in the past engaged and may in the future engage
in improper conduct for which we could be held responsible. If we, or our employees or agents acting on our behalf, are found
to have engaged in practices that violate these laws and regulations, we could suffer severe fines and penalties, profit
disgorgement, injunctions on future conduct, securities litigation, bans on transacting government business and other
consequences that may have a material adverse effect on our business, results of operations and financial condition. In addition,
our brand and reputation, our sales activities or our stock price could be adversely affected if we become the subject of any
negative publicity related to actual or potential violations of anti-corruption, anti-bribery or trade control laws and regulations.
Any failure to protect our intellectual property rights, trade secrets and technical know-how could impair our brand
and our competitiveness.
Our ability to prevent competitors from gaining access to our technology is essential to our success. If we fail to
protect our intellectual property rights adequately, we may lose an important advantage in the markets in which we compete.
Trademark, patent, copyright and trade secret laws in the United States and other jurisdictions as well as our internal
confidentiality procedures and contractual provisions are the core of our efforts to protect our proprietary technology and our
brand. Our patents and other intellectual property rights may be challenged by others or invalidated through administrative
process or litigation, and we may initiate claims or litigation against third parties for infringement of our proprietary rights.
Such administrative proceedings and litigation are inherently uncertain and divert resources that could be put towards other
business priorities. We may not be able to obtain a favorable outcome and may spend considerable resources in our efforts to
defend and protect our intellectual property.
Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property
rights are uncertain. Effective patent, trademark, copyright and trade secret protection may not be available to us in every
country in which our products are available. The laws of some foreign countries may not be as protective of intellectual
property rights as those in the United States, and mechanisms for enforcement of intellectual property rights may be inadequate.
Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating
our intellectual property and using our technology for their competitive advantage. Any such infringement or misappropriation
could have a material adverse effect on our business, results of operations and financial condition.
Resolution of claims that we have violated or may violate the intellectual property rights of others could require us to
indemnify our customers, indirect sales channel partners or vendors, redesign our products, or pay significant royalties
to third parties, and materially harm our business.
Our industry is marked by a large number of patents, copyrights, trade secrets and trademarks and by frequent
litigation based on allegations of infringement or other violation of intellectual property rights. Our primary competitors have
substantially greater numbers of issued patents than we have which may position us less favorably in the event of any claims or
litigation with them. Other third parties have in the past sent us correspondence regarding their intellectual property or filed
claims that our products infringe or violate third parties’ intellectual property rights. In addition, increasingly non-operating
companies are purchasing patents and bringing claims against technology companies. We have been subject to several such
claims and may be subject to such claims in the future.
Successful intellectual property claims against us from others could result in significant financial liability or prevent
us from operating our business or portions of our business as we currently conduct it or as we may later conduct it. In addition,
resolution of claims may require us to redesign our technology to obtain licenses to use intellectual property belonging to third
parties, which we may not be able to obtain on reasonable terms, to cease using the technology covered by those rights, and to
indemnify our customers, indirect sales channel partners or vendors. Any claim, regardless of its merits, could be expensive and
time consuming to defend against, and divert the attention of our technical and management resources.
Provisions of our certificate of incorporation and bylaws and Delaware law might discourage, delay or prevent a change
of control of our company or changes in our management and, as a result, depress the trading price of our common
stock.
25
Our certificate of incorporation and bylaws contain provisions that could discourage, delay or prevent a change in
control of our company or changes in our management that the stockholders of our company may deem advantageous. These
provisions:
• Establish a classified Board of Directors so that not all members of our Board are generally elected at one time
• Require super-majority voting to amend some provisions in our certificate of incorporation and bylaws;
• Authorize the issuance of “blank check” preferred stock that our Board could issue to increase the number of
outstanding shares and to discourage a takeover attempt;
• Limit the ability of our stockholders to call special meetings of stockholders;
• Prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our
stockholders;
• Provide that our Board is expressly authorized to adopt, alter or repeal our bylaws; and
• Establish advance notice requirements for nominations for election to our Board or for proposing matters that can be
acted upon by stockholders at stockholder meetings.
In addition, we are subject to Section 203 of the Delaware General Corporation Law, which, subject to some
exceptions, prohibits “business combinations” between a Delaware corporation and an “interested stockholder,” which is
generally defined as a stockholder who becomes a beneficial owner of 15% or more of a Delaware corporation’s voting stock
for a three-year period following the date that the stockholder became an interested stockholder. Section 203 could have the
effect of delaying, deferring or preventing a change in control that our stockholders might consider to be in their best interests.
These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of our
company. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of
their choosing and cause us to take corporate actions other than those stockholders desire.
Financial Risks
We incurred significant expenses related to the matters that led to the delay in the filing of our 2017 10-K and may incur
expenses related to any resulting litigation.
We 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 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 $0.5
million, $14 million, $67 million and $42 million in fiscal years 2021, 2020, 2019 and 2018, respectively. In addition, as of and
for the year ended June 30, 2020, we recorded a liability of $17.5 million for our SEC settlement of the investigation into our
Company's financial accounting for fiscal years 2014 to 2017. We have taken a number of steps in order to strengthen our
corporate culture, sales processes, and accounting function so as to allow us to be able to provide timely and accurate financial
reporting. To the extent these steps are not successful, we could be required to devote significant additional time and incur
significant additional expenses. Even if these steps are successful, we 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. The expenses
we are incurring in this regard, as well as the substantial time devoted by our management to identify and address internal
control deficiencies, could have a material adverse effect on our business, results of operations and financial condition.
Our research and development expenditures, as a percentage of our net sales, are considerably higher than many of our
competitors and our earnings will depend upon maintaining revenues and margins that offset these expenditures.
Our strategy is to focus on being consistently first-to-market with flexible and application optimized server and
storage systems that take advantage of our own internal development and the latest technologies offered by microprocessor
manufacturers and other component vendors. Consistent with this strategy, we spend higher amounts, as a percentage of
revenues, on research and development costs than many of our competitors. If we cannot sell our products in sufficient volume
and with adequate gross margins to compensate for such investment in research and development, our earnings may be
materially and adversely affected.
26
Our future effective income tax rates could be affected by changes in the relative mix of our operations and income
among different geographic regions and by changes in domestic and foreign income tax laws, which could affect our
future operating results, financial condition and cash flows.
On December 22, 2017, the U.S. federal government enacted the Tax Cuts and Jobs Act (“2017 Tax Reform Act”),
and in December 2019, we realigned our international business operations and group structure to take advantage of certain
international tax planning opportunities and incentives. Our future effective income tax rates could be adversely affected if tax
authorities challenge our international tax structure or if the relative mix of our United States and international income changes
for any reason, or due to changes in U.S. or international tax laws. In particular, a substantial portion of our revenue is
generated from customers located outside the United States.
The effectiveness of our tax planning activities is based upon certain assumptions that we make regarding our future
operating performance and tax laws. We continue to optimize our tax structure to align with our business operations and growth
strategy. We cannot assure you that we will be able to lower our effective tax rate as a result of our current or future tax
planning activities nor that such rate will not increase in the future.
Backlog does not provide a substantial portion of our net sales in any quarter.
Our net sales are difficult to forecast because we do not have sufficient backlog of unfilled orders or sufficient
recurring revenue to meet our quarterly net sales targets at the beginning of a quarter. Rather, a majority of our net sales in any
quarter depend upon customer orders that we receive and fulfill in that quarter. Because our expense levels are based in part on
our expectations as to future net sales and to a large extent are fixed in the short term, we might be unable to adjust spending in
time to compensate for any shortfall in net sales. Accordingly, any significant shortfall of revenues in relation to our
expectations would harm our operating results.
Risks Related to Owning Our Stock
The trading price of our common stock is likely to be volatile, and you might not be able to sell your shares at or above
the price at which you purchased the shares.
The trading prices of technology company securities historically have been highly volatile. In addition, the global
markets have experienced volatility as a result of the COVID-19 pandemic. The trading price of our common stock has been
and is likely to continue to be subject to wide fluctuations. Factors, in addition to those outlined elsewhere in this filing, that
may affect the trading price of our common stock include:
• The impact of COVID-19 on our business, the global economy and trading markets;
• The outcome of litigation and claims as well as regulatory examinations, investigations, proceedings and orders to
which we are subject;
• Actual or anticipated variations in our operating results, including failure to achieve previously provided guidance;
• Announcements of technological innovations, new products or product enhancements, strategic alliances or significant
agreements by us or by our competitors;
• Changes in recommendations by any securities analysts that elect to follow our common stock;
• The financial projections we may provide to the public, any changes in these projections or our failure to meet these
projections;
• False or misleading press releases or articles regarding our company or our products;
• The loss of a key customer;
• The loss of key personnel;
• Technological advancements rendering our products less valuable;
• Lawsuits filed against us, including those described in Part I, Item 3, “Legal Proceedings”;
• Changes in operating performance and stock market valuations of other companies that sell similar products;
• Price and volume fluctuations in the overall stock market;
• Market conditions in our industry, the industries of our customers and the economy as a whole; and
• Other events or factors, including those resulting from war, incidents of terrorism, political instability or responses to
these events.
27
Future sales of shares by existing stockholders could cause our stock price to decline.
Attempts by existing stockholders to sell substantial amounts of our common stock in the public market could cause
the trading price of our common stock to decline significantly. All of our shares are eligible for sale in the public market,
including shares held by directors, executive officers and other affiliates, sales of which are subject to volume limitations and
other requirements under Rule 144 under the Securities Act. In addition, shares subject to outstanding options and reserved for
future issuance under our stock option plans are eligible for sale in the public market to the extent permitted by the provisions
of various vesting agreements. If these additional shares are sold, or if it is perceived that they will be sold in the public market,
the trading price of our common stock could decline.
The concentration of our capital stock ownership with insiders will likely limit your ability to influence corporate
matters.
As of July 31, 2021, our executive officers, directors, current five percent or greater stockholders and affiliated
entities together beneficially owned 42.4% of our common stock, net of treasury stock. As a result, these stockholders, acting
together, have significant influence over all matters that require approval by our stockholders, including the election of directors
and approval of significant corporate transactions. Corporate action might be taken even if other stockholders oppose them.
This concentration of ownership might also have the effect of delaying or preventing a change of control of our company that
other stockholders may view as beneficial.
We do not expect to pay any cash dividends for the foreseeable future.
We do not anticipate that we will pay any cash dividends to holders of our common stock in the foreseeable future. In
addition, under the terms of the credit agreement with Bank of America, dated April 19, 2018, we cannot pay any dividends,
with limited exceptions. Accordingly, investors must rely on sales of their common stock after price appreciation, which may
never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends in the foreseeable
future should not purchase our common stock.
General Risks
Our products may not be viewed as supporting climate change mitigation in the IT sector.
According to the Journal Nature, the global energy demand of IT equipment is expected to be 20% of global energy
demand by 2030. More than 70% of the Scope 3 (lifecycle) emissions of our server products are attributed to their use in data
centers. Our ability to create energy saving products is key to climate change mitigation, and business success. In addition,
climate change reporting and product certification are increasingly sought by customers and regulators. If we do not satisfy
customer requirements for products that help mitigate climate change, and document how they contribute to such change, it
could have a material adverse impact on our business, operating results, and financial conditions.
Our business and operations may be impacted by natural disaster events, including those brought on by climate change.
Land, sea and air routes between economic centers are subject to weather events exacerbated by climate change and
can disrupt commercial activity. Our most significant business offices, research and development, and manufacturing locations,
are in the San Jose, California area and in Taiwan. Each region is subject to climate change events, and known for earthquakes.
While we have adopted a business continuity plan, there is no certainty it will be effective for significant natural disasters,
which could have a material adverse impact on business, operating results, and financial condition.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
As of June 30, 2021, we owned approximately 2,273,000 square feet and leased approximately 753,000 square feet of
office and manufacturing space. Our long-lived assets located outside of the United States represented 34.4%, 23.5% and 21.5%
of total value of long-lived assets in fiscal years 2021, 2020 and 2019, respectively. See Part II, Item 8, Note 18, “Segment
Reporting” to the consolidated financial statements in this Annual Report for a summary of long-lived assets by geographic
region.
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Our principal executive offices, research and development center and production operations are located in San Jose,
California where we own approximately 1,307,000 square feet of office and manufacturing space. We lease approximately
5,000 square feet of office space in Jersey City, New Jersey under a lease that expires in January 2022, lease approximately
46,000 square feet of office space in San Jose, California under a lease that expires in January 2022, and lease approximately
246,000 square feet of warehouse space in Fremont, California under a lease that expires in July 2025. Our European
headquarters for manufacturing and service operations is located in Den Bosch, the Netherlands where we own approximately
12,000 square feet of office and we lease approximately 203,000 square feet of office and manufacturing space under five
leases, which expire in July 2025 and June 2026. In Asia, our manufacturing facilities are located in Taoyuan County, Taiwan
where we own approximately 954,000 square feet of office and manufacturing space on 6.96 acres of land. These
manufacturing facilities are pledged as security under the existing term loans with $59.8 million remaining outstanding as of
June 30, 2021. Our research and development center, service operations, and warehouse space in Asia are located in an
approximately 106,000 square feet facility in Taipei, Taiwan under twelve leases that expire at various dates ranging from
January 2022 through May 2024 and an approximately 134,000 square feet facility in Taoyuan, Taiwan under six leases that
expire from December 2021 through December 2023.
Additionally, we own 36 acres of land in San Jose, California that would allow us to expand our Green Computing
Park. We remodeled one warehouse with approximately 310,000 square feet of storage space and completed the construction of
a new manufacturing and warehouse building with approximately 182,000 square feet of manufacturing space in August 2015.
In fiscal years 2019 and 2020, we continued to engage several contractors for the development and construction of
improvements on the property. We completed the construction of a second new manufacturing and warehouse building in the
first quarter of fiscal year 2018. We financed this development through our operating cash flows and borrowings from banks.
See Part II, Item 8, Note 10, “Short-term and Long-term Debt” to the consolidated financial statements in this Annual Report
for a discussion of our company's debt.
We believe that our existing properties, including both owned and leased, are in good condition and are suitable for the
conduct of our business.
Item 3.
Legal Proceedings
The information required by this item is incorporated herein by reference to the information set forth under the
caption “Litigation and Claims” in Note 16 “Commitments and Contingencies” of our notes to the consolidated financial
statements included in this Annual Report.
Due to the inherent uncertainties of legal proceedings, we cannot predict the outcome of these proceedings at this
time, and we can give no assurance that they will not have a material adverse effect on our financial position or results of
operations
Item 4.
Mine Safety Disclosures
Not applicable.
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Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
PART II
Securities
Market Information
We became a public company in March 2007, prior to which there was no public market for our common stock. On
January 14, 2020, our common stock was relisted on the NASDAQ Global Select Market under the symbol “SMCI".
Holders
As of July 31, 2021, there were 23 registered stockholders of record of our common stock. Because most of our shares
are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial
stockholders represented by these holders of record.
Dividend Policy
We have never declared or paid cash dividends on our capital stock. We intend to retain any future earnings and do not
expect to pay any dividends in the foreseeable future. Under the terms of the credit agreement with Bank of America, as
amended, we may not pay any dividends.
Equity Compensation Plan
Please see Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters” of this Annual Report for disclosure relating to our equity compensation plans.
Stock Performance Graph
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 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 and Nasdaq Composite Index. The graph reflects an investment of $100 (with
reinvestment of all dividends, if any) in our common stock, the Nasdaq Computer Index and the Nasdaq Composite Index on
June 30, 2016 and our relative performance tracked through June 30, 2021. The stockholder return shown on the graph below is
not necessarily indicative of future performance, and we do not make or endorse any predictions as to future stockholder
returns.
30
6/30/2016
100.00
100.00
100.00
6/30/2017
99.20
126.80
136.30
6/30/2018
95.17
155.09
176.47
6/30/2019
77.87
165.33
190.98
6/30/2020
114.25
207.71
273.59
6/30/2021
141.57
299.50
411.33
Super Micro Computer, Inc.
Nasdaq Composite Index
Nasdaq Computer Index
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
During the three months ended June 30, 2021, we repurchased the following shares of our common stock:
Period
Month 1 (April 1, 2021 to April 30, 2021)
Month 2 (May 1, 2021 to May 31, 2021)
Month 3 (June 1, 2021 to June 30, 2021)
Total
Total Number
of Shares
Purchased(1)
Average Price
Paid per Share(1)
39.56
35.28
—
38.45
236,171 $
83,341 $
— $
319,512 $
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs(2)
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
under the Plans or
Programs(2)
236,171 $150.0 million
— $150.0 million
— $150.0 million
236,171
__________________________
(1)
(2)
Includes shares withheld from delivery to satisfy tax withholding obligations of recipients that occur upon the vesting
of restricted stock units granted under our equity incentive plans.
On January 29, 2021, a duly authorized subcommittee of our Board approved a share repurchase program to
repurchase up to $200 million of our common stock at prevailing prices in the open market. The share repurchase
program is effective until July 31, 2022 or until the maximum amount of common stock is repurchased, whichever
occurs first.
31
Item 6.
Reserved
Removed and reserved.
32
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements and related notes
which appear elsewhere in this Annual Report. This discussion contains forward-looking statements that involve risks and
uncertainties. 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
Factors."
Overview
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. Our solutions include complete servers, storage systems, modular blade servers, blades, workstations, full racks,
networking devices, server management software, and server sub-systems. We also provide global support and services to help
our customers install, upgrade and maintain their computing infrastructure.
We commenced operations in 1993 and have been profitable every year since inception. For fiscal years 2021, 2020
and 2019, our net income was $111.9 million, $84.3 million and $71.9 million, respectively. In order to increase our sales and
profits, we believe that we must continue to develop flexible and application optimized server and storage solutions and be
among the first to market with new features and products. We must also continue to expand our software and customer service
and support offerings, particularly as we increasingly focus on larger enterprise customers. Additionally, we must focus on
development of our sales partners and distribution channels to further expand our market share. We measure our financial
success based on various indicators, including growth in net sales, gross profit margin and operating margin. Among the key
non-financial indicators of our success is our ability to rapidly introduce new products and deliver the latest application-
optimized server and storage solutions. In this regard, we work closely with microprocessor and other key component vendors
to take advantage of new technologies as they are introduced. Historically, our ability to introduce new products rapidly has
allowed us to benefit from technology transitions such as the introduction of new microprocessors and storage technologies,
and as a result, we monitor the introduction cycles of NVIDIA Corporation, Intel Corporation, Advanced Micro Devices, Inc.,
Samsung Electronics Company Limited, Micron Technology, Inc. and others closely and carefully. This also impacts our
research and development expenditures as we continue to invest more in our current and future product development efforts.
Coronavirus (COVID-19) Pandemic Impact
The global spread of the coronavirus (COVID-19) and the various attempts to contain it have created significant
volatility, uncertainty and economic disruption for many businesses worldwide. In an effort to contain COVID-19 or slow its
spread, governments around the world have enacted various measures, including orders that govern the operations of
businesses, require masks be worn and define shelter in place and social distancing protocols. We are an essential critical
infrastructure (information technology) business under the relevant federal, state and county regulations. Accordingly, in late
March 2020, we responded to the directives from Santa Clara County and the State of California regarding instructions to
combat the spread of COVID-19. Our first priority is the safety of our workforce and we have implemented numerous health
precautions and work practices to be in compliance with the law and to operate in a safe manner.
We quickly transitioned certain of our indirect labor forces to work from home at the earlier phase of the pandemic and
continued to operate our local assembly in Taiwan and, after an initial period of disruption, in the United States and Europe. We
operate in the critical industry of IT infrastructure and we assessed our customer base to identify priority customers who operate
in critical industries. We continue to see ongoing demand and do not have significant direct exposure to industries such as retail,
oil and gas and hospitality, which have been impacted the greatest. As time passes, we may discover greater indirect exposure to
distressed industries through our channel partners and OEM customers.
We have actively managed our supply chain for potential shortage risk by building inventories of critical components
required for our motherboards and other system printed circuit boards in response to the early outbreak of COVID-19 in China.
Since that time, we have continued to add to our inventories of key components such as CPUs, memory, SSDs and GPUs such
that customer orders can be fulfilled as they are received.
Logistics has emerged as a new challenge as globally the transportation industry restricted the frequency of departures
and increased logistics costs. We experienced increased costs in freight as well as direct labor costs as we incentivized our
employees to continue to work and assist us in serving our customers, many of whom are in critical industries. We expect this
trend to continue for the duration of the COVID-19 pandemic.
33
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 December 2020, our Taiwan subsidiary entered into a general credit agreement with E.SUN Bank in Taiwan. This
general credit agreement provides for the issuance of loans, advances, acceptances, bills, bank guarantees, overdrafts, letters of
credit, and other types of drawdown instruments up to a credit limit of $30 million. The term of this general credit agreement
was through September 18, 2021. In June 2021, we negotiated an extension of our credit facility with Bank of America to
extend the maturity date to June 2026. In July 2021, we replaced our prior credit facility and term loan facility with China Trust
and Bank Corp ("CTBC Bank"), with a new facility for omnibus credit lines.
Our management team is focused on guiding our company through the ongoing challenges presented by COVID-19.
Currently, there are positive signs with vaccine availability and reductions in infection rates; however, with the possibility of
new virus strains and vaccine supply constraints, we are unable to predict the ultimate extent to which the global COVID-19
pandemic may further impact our business operations, financial performance and results of operations within the next 12
months. See also “Business–Employees and Human Capital Resources.”
Financial Highlights
The following is a summary of financial highlights of fiscal years 2021 and 2020:
• Net sales increased by 6.5% in fiscal year 2021 as compared to fiscal year 2020.
• Gross margin declined to 15.0% in fiscal year 2021 from 15.8% in fiscal year 2020, primarily due to product and
customer mix and increased logistic costs.
• Operating expenses declined by 6.8% in fiscal year 2021 as compared to fiscal year 2020, primarily due to the
special performance bonuses to our employees and the accrual for our settlement with the SEC incurred in fiscal
year 2020.
• Net income increased to $111.9 million in fiscal year 2021 as compared to $84.3 million in fiscal year 2020,
which was primarily due to the higher net sales and lower operating expenses in fiscal year 2021 as compared to
fiscal year 2020.
• Our cash and cash equivalents were $232.3 million and $210.5 million at the end of fiscal years 2021 and 2020,
respectively. In fiscal year 2021, we generated net cash of $21.1 million, of which $123.0 million was provided by
operating activities related primarily to the increase in net income. We also invested $58.0 million in purchases of
property and equipment, including construction of a new facility in San Jose, California, and used $44.4 million in
financing activities primarily due to the repurchase of $130.0 million of our common stock, which was offset by
the proceeds from borrowings.
Critical Accounting Policies and Estimates
General
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated
financial statements, which have been prepared in accordance with generally accepted accounting principles in the United
States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the
reported amount of assets, liabilities, net sales and expenses. 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
not readily apparent from other sources. Because these estimates can vary depending on the situation, actual results may differ
from the estimates. Making estimates and judgments about future events is inherently unpredictable and is subject to significant
uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to have
been incorrect, it could have a material impact on our results of operations, financial position and statement of cash flows.
A summary of significant accounting policies is included in Part II, Item 8, Note 1, “Organization and Summary of
Significant Accounting Policies” in our notes to the consolidated financial statements in this Annual Report. Management
believes the following are the most critical accounting policies and reflect the significant estimates and assumptions used in the
preparation of the consolidated financial statements.
34
Revenue Recognition
The most critical accounting policy estimate and judgments required in applying ASC 606, Revenue Recognition of
Contracts from Customers, and our revenue recognition policy relate to the determination of the transaction price, distinct
performance obligations and the evaluation of the standalone selling price (the “SSP”) for each performance obligation.
We generate revenues from the sale of server and storage systems, subsystems, accessories, services, server software
management solutions, and support services. Many of our customer contracts include multiple performance obligations.
Judgment is required in determining whether each performance obligation within a customer contract is distinct. 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.
As part of determining the transaction price in contracts with customers, we may be required to estimate variable
consideration when determining the amount of revenue to recognize. We estimate reserves for future sales returns based on a
review of our history of actual returns. 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. We also estimate the costs of customer and distributor programs and incentive offerings such
as price protection, 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 is recorded as a reduction of revenue at the time
of sale based on an evaluation of the contract terms and historical experience.
We allocate the transaction price for each customer contract to each performance obligation based on the relative SSP
for each performance obligation within each contract. We recognize the amount of transaction price allocated to each
performance obligation within a customer contract as revenue as each performance obligation is delivered. Determining the
relative SSP for contracts that contain multiple performance obligations requires significant judgement. We determine
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, we apply judgment to estimate the SSP. For substantially all performance
obligations, we are able to establish the SSP based on the observable prices of products or services sold separately in
comparable circumstances to similar customers. We typically establish an SSP range for our products and services, which is
reassessed on a periodic basis or when facts and circumstances change. SSP for our products and services can evolve over time
due to changes in our pricing practices, internally approved pricing guidelines with respect to geographies, customer type,
internal costs, and gross margin objectives for the related performance obligations which can also be influenced by intense
competition, changes in demand for our products and services, economic and other factors.
These estimates and judgements have not fluctuated significantly for the fiscal year ended June 30, 2021 compared to
prior fiscal years.
Inventories
Inventories are stated at lower of cost, using weighted average cost method, 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. 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
inventories based upon our inventory aging, 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.
We receive various rebate incentives from certain suppliers based on our 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. We determine the volume-based rebates to be recognized in the cost of sales on a first-in,
first-out basis.
Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our taxes in each
of the jurisdictions in which we operate. We estimate actual current tax exposure together with assessing temporary differences
resulting from differing treatment of items, such as accruals and allowances not currently deductible for tax purposes. These
differences result in deferred tax assets, which are included in our consolidated balance sheets. In general, deferred tax assets
35
represent future tax benefits to be received when certain expenses previously recognized in our consolidated statements of
income become deductible expenses under applicable income tax laws, or when loss or credit carryforwards are utilized. In
assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or
all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences become deductible. We continue to assess the
need for a valuation allowance on the deferred tax assets by evaluating both positive and negative evidence that may exist. Any
adjustment to the valuation allowance on deferred tax assets would be recorded in the consolidated statements of income for the
period that the adjustment is determined to be required.
We recognize 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 us to determine the probability of
various possible outcomes. We evaluate 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 we later determine that our exposure is lower or that the liability is not sufficient to cover our
revised expectations, we adjust the liability and effect a related charge in our tax provision during the period in which we make
such a determination.
Stock-Based Compensation
We measure and recognize compensation expense for all share-based awards made to employees and non-employees,
including stock options, restricted stock units ("RSUs") and performance-based restricted stock units (“PRSUs”). We recognize
the grant date fair value of all share-based awards over the requisite service period and account for forfeitures as they occur.
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.
The fair value of RSUs 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 model. This model requires us to make
estimates and assumptions with respect to the expected term of the option and the expected volatility of the price of our
common stock. The expected term represents the period that our stock-based awards are expected to be outstanding and was
determined based on our historical experience. The expected volatility is based on the historical volatility of our common stock.
The assumptions used to determine the fair value of the option awards represent management’s best estimates. These estimates
involve inherent uncertainties and the application of management’s judgment. Our use of the Black-Scholes option-pricing
model requires the input of highly subjective assumptions. If factors change and different assumptions are used, our stock-based
compensation expense could be materially different in the future.
Variable Interest Entities
We determine at the inception of each arrangement whether an entity in which we hold an investment or in which we
have other variable interests is considered a variable interest entity ("VIE"). We consolidate VIEs when we are 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, we assess 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 we are the primary beneficiary. If we are not the primary beneficiary in a VIE, we account for the investment or other
variable interest in accordance with applicable GAAP.
We have concluded that Ablecom and its affiliate, Compuware, are 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
all contractual arrangements with these entities. Also, as a result of the substantial related party relationships between us and
36
these two companies, we considered whether any implicit arrangements exist that would cause us to protect these related
parties’ interests from suffering losses. We determined that no material implicit arrangements exist with Ablecom, Compuware,
or their shareholders.
Our ability to assess correctly our influence or control over an entity at inception of our involvement or on a
continuous basis when determining the primary beneficiary of a VIE affects the presentation of these entities in our
consolidated financial statements. Subsequent evaluations of the primary beneficiary of a VIE may require the use of different
assumptions that could lead to identification of a different primary beneficiary, resulting in a different consolidation conclusion
than what was determined at inception of the arrangement.
Results of Operations
The following table presents certain items of our consolidated statements of operations expressed as a percentage of
revenue.
Net sales
Cost of sales
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Total operating expenses
Income from operations
Other (expense) income, net
Interest expense
Income before income tax provision
Income tax provision
Share of income (loss) from equity investee, net of taxes
Net income
Net Sales
2021
100.0 %
85.0 %
15.0 %
6.3 %
2.4 %
2.8 %
11.5 %
3.5 %
(0.1) %
(0.1) %
3.3 %
(0.2) %
— %
3.1 %
Years Ended June 30,
2020
100.0 %
84.2 %
15.8 %
6.6 %
2.5 %
4.1 %
13.2 %
2.6 %
— %
(0.1) %
2.5 %
(0.1) %
0.1 %
2.5 %
2019
100.0 %
85.8 %
14.2 %
5.1 %
2.2 %
4.0 %
11.3 %
2.9 %
— %
(0.2) %
2.7 %
(0.4) %
(0.1) %
2.2 %
Net sales consist of sales of our server and storage solutions, including systems and related services and subsystems
and accessories. The main factors that impact net sales of our server and storage systems are the number of compute nodes sold
and the average selling prices per node. The main factors that impact net sales of our subsystems and accessories are units
shipped and the average selling price per unit. The prices for our server and storage systems range widely depending upon the
configuration, including the number of compute nodes in a server system as well as the level of integration of key components
such as SSDs and memory. The prices for our subsystems and accessories can also vary widely based on whether a customer is
purchasing power supplies, server boards, chassis or other accessories.
A compute node is an independent hardware configuration within a server system capable of having its own CPU,
memory and storage and that is capable of running its own instance of a non-virtualized operating system. The number of
compute nodes sold, which can vary by product, is an important metric we use to track our business. Measuring volume using
compute nodes enables more consistent measurement across different server form factors and across different vendors. As with
most electronics-based product life cycles, average selling prices typically are highest at the time of introduction of new
products that utilize the latest technology and tend to decrease over time as such products mature in the market and are replaced
by next generation products. Additionally, in order to remain competitive throughout all industry cycles, we actively change our
selling price per unit in response to changes in costs for key components such as memory and SSDs.
The following table presents net sales by product type for fiscal years 2021, 2020 and 2019 (dollars in millions):
37
Server and storage systems
Percentage of total net sales
2021
$2,790.3
Years Ended June 30,
2020
$2,620.8
2019
$2,858.7
2021 over 2020 Change
2020 over 2019 Change
$
169.5
$
%
6.5 % $
$
(237.9)
%
(8.3) %
78.4 %
78.5 %
81.7 %
Subsystems and accessories
767.1
718.5
641.7
48.6
6.8 %
76.8
12.0 %
Percentage of total net sales
21.6 %
21.5 %
18.3 %
Total net sales
$3,557.4
$3,339.3
$3,500.4
$
218.1
6.5 % $
(161.1)
(4.6) %
Fiscal Year 2021 Compared with Fiscal Year 2020
During fiscal year 2021 we experienced increased revenue from server and storage systems, particularly from our large
enterprise and datacenter customers. The year-over-year increase in net sales of server and storage systems was primarily due to
an increase of average selling prices per compute node by approximately 17%, offset by a decrease of approximately 9% in the
number of units of compute nodes sold. We typically adjust our selling prices as component costs rise and fall. The increase in
average selling prices was primarily due to significant inventory component price increases resulting from component shortages
during fiscal year 2021. The year-over-year increase in net sales of subsystems and accessories was primarily due to an increase
of approximately 5% in the volume of subsystems and accessories sold, mainly due to increased demand and approximately 2%
increase in average selling prices due primarily to the increase in costs of the components. Our services and software revenue,
included in server and storage systems revenue, increased by $0.2 million year-over-year.
Fiscal Year 2020 Compared with Fiscal Year 2019
During fiscal year 2020 we continued to experience a steady demand for server and storage systems, particularly from
our large enterprise and datacenter customers. The year-over-year decrease in net sales of server and storage systems was
primarily due to a decrease of average selling prices per compute node by approximately 11%, offset by a slight increase in the
number of units of compute nodes sold. We typically adjust our prices as component costs rise and fall. The decline in average
selling prices was primarily due to substantially lower costs for key components, specifically for memory and storage, as
compared to the previous fiscal year. The year-over-year increase in net sales of subsystems and accessories was primarily due
to an increase of approximately 19% in the volume of subsystems and accessories sold, mainly due to increased demand from
our indirect sales channel offset by an approximately 6% decrease in average selling prices due primarily to the decrease in
costs of the components. Our services and software revenue, included in server and storage systems revenue, increased by
$39.8 million year-over-year.
The following table presents percentages of net sales by geographic region for fiscal years 2021, 2020 and 2019
(dollars in millions):
United States
Percentage of total net sales
Asia
Percentage of total net sales
Europe
Percentage of total net sales
Others
Percentage of total net sales
2021
$ 2,107.9
Years Ended June 30,
2020
$ 1,957.3
2019
$ 2,032.9
59.3 %
699.7
19.7 %
614.8
17.3 %
135.0
3.7 %
58.6 %
650.7
19.5 %
598.6
17.9 %
132.7
4.0 %
$
58.1 %
712.2
20.3 %
611.0
17.5 %
144.3
4.1 %
$
$ 3,500.4
2021 over 2020 Change
%
7.7 % $
$
150.6
2020 over 2019 Change
%
(3.7) %
$
(75.6)
49.0
7.5 %
(61.5)
(8.6) %
16.2
2.7 %
(12.4)
(2.0) %
2.3
1.7 %
(11.6)
(8.0) %
218.1
6.5 % $
(161.1)
(4.6) %
Total net sales
$ 3,557.4
$ 3,339.3
Fiscal Year 2021 Compared with Fiscal Year 2020
The year-over-year increase in net sales in the United States was primarily due to an increase in net sales of our server
and storage systems. The year-over-year increase in net sales in Asia was primarily due to an increase in net sales of our server
and storage systems in China, Singapore, India and Japan, partially offset by a decrease in the net sales in Taiwan. The year-
38
over-year increase in net sales in Europe was primarily due to an increase in net sales of our server and storage systems in the
Germany, UK and France, partially offset by a decrease in net sales in the Netherlands and Russia.
Fiscal Year 2020 Compared with Fiscal Year 2019
The year-over-year decrease in net sales in the United States was primarily due to a decrease in net sales of our server
and storage systems to our direct customers and OEMs. The year-over-year decrease in net sales in Asia was primarily due to a
decrease in net sales of our server and storage systems to OEMs in China, India and Japan, partially offset by a slight increase
in the net sales of subsystems and accessories in China and of server and storage systems in the rest of Asia region. The year-
over-year decrease in net sales in Europe was primarily due to a decrease in net sales of our server and storage systems to our
direct customers and OEMs in the Netherlands, partially offset by an increase in net sales of our subsystems and accessories to
our indirect sales channel in Germany and an increase in sales to our indirect sales channel in France.
Cost of Sales and Gross Margin
Cost of sales primarily consists of the costs to manufacture our products, including the costs of materials, contract
manufacturing, shipping, personnel expenses, including salaries, benefits, stock-based compensation and incentive bonuses,
equipment and facility expenses, warranty costs and inventory excess and obsolescence provisions. The primary factors that
impact our cost of sales are the mix of products sold and cost of materials, which include purchased parts and material costs,
shipping costs, salary and benefits and overhead costs related to production. Cost of sales as a percentage of net sales may
increase over time if decreases in average selling prices are not offset by corresponding decreases in our costs. Our cost of sales
as a percentage of net sales is also impacted by the extent to which we are able to efficiently utilize our expanding
manufacturing capacity. Because we generally do not have long-term fixed supply agreements, our cost of sales is subject to
change based on the cost of materials and market conditions. As a result, our cost of sales as a percentage of net sales in any
period can increase due to significant component price increases resulting from component shortages.
We use several suppliers and contract manufacturers to design and manufacture subsystems in accordance with our
specifications, with most final assembly and testing predominantly performed at our manufacturing facilities in the same region
where our products are sold. During the fiscal year 2021, we continued to expand manufacturing and service operations in
Taiwan primarily to support our Asian and European customers and have continued to work on improving our utilization of our
overseas manufacturing capacity. We work with Ablecom, one of our key contract manufacturers and also a related party to
optimize modular designs for our chassis and certain of other components. We also outsource to Compuware, also a related
party, a portion of our design activities and a significant part of our manufacturing of components, particularly power supplies.
Our purchases of products from Ablecom and Compuware combined represented 7.8%, 10.1% and 9.2% of our cost of sales for
fiscal years 2021, 2020 and 2019, respectively. For further details on our dealings with related parties, see Part II, Item 8, Note
13, “Related Party Transactions.”
Cost of sales and gross margin for fiscal years 2021, 2020 and 2019, are as follows (dollars in millions):
Cost of sales
Gross profit
Gross margin
2021 over 2020 Change
2020 over 2019 Change
2021
$ 3,022.9
Years Ended June 30,
2020
$ 2,813.1
526.2
15.8 %
2019
$ 3,004.8
495.5
14.2 %
534.5
15.0 %
$
$ 209.8
8.3
$
%
7.5 % $ (191.7)
1.6 %
30.7
(0.8) %
%
(6.4) %
6.2 %
1.6 %
Fiscal Year 2021 Compared with Fiscal Year 2020
The year-over-year increase in cost of sales was primarily attributable to an increase of $244.1 million in costs of
materials and contract manufacturing expenses primarily related to the increase in net sales volume and an increase of $8.9
million of freight. This was offset by a decrease of $29.5 million in overhead costs attributable primarily to a recovery of costs
paid in prior periods, a decrease of $12.4 million in the provision of excess inventory and obsolescence and a decrease of $2.6
million in personnel expenses due to a decrease in special performance bonuses in the fiscal year 2021. Warranty and repairs
costs also decreased by $3.4 million in the fiscal year 2021 as compared to the fiscal year 2020.
The period-over-period decrease in the gross margin percentage was primarily due to sales prices increasing at a
slower rate than the increase in the costs of components and due to the decrease in services and software revenue which have
higher margins than product sales. Since the start of the COVID-19 pandemic, we have experienced an increase in both
logistics costs as well as direct labor costs as we incentivize our employees to continue to work and assist us in serving our
39
customers. This increase in costs negatively impacts our gross margins, and we expect these higher costs to continue for the
duration of the COVID-19 pandemic.
Fiscal Year 2020 Compared with Fiscal Year 2019
The year-over-year decrease in cost of sales was primarily attributable to a decrease of $214.3 million in inventory
costs related primarily to the decrease in the prices of components and a decrease of $14.6 million in the provision of excess
inventory and obsolescence due to fewer excess and obsolescence items identified in the fiscal year 2020. This was offset by an
increase of $19.6 million in overhead costs attributable primarily to increased tariffs and an increase of $11.3 million in
personnel expenses, which included a special performance bonus of $4.1 million. Warranty and repairs costs also increased by
$5.7 million in the fiscal year 2020 as compared to the fiscal year 2019.
The period-over-period increase in the gross margin percentage was primarily due to sales prices declining at a slower
rate than the decline in the costs of components and due to the increase in services and software revenue which have higher
margins than product sales. Since the start of the COVID-19 pandemic, we have experienced an increase in both logistics costs
as well as direct labor costs as we incentivize our employees to continue to work and assist us in serving our customers. This
increase in costs negatively impacts our gross margins, and we expect these higher costs to continue for the duration of the
COVID-19 pandemic.
Operating Expenses
Research and development expenses consist of personnel expenses, including salaries, benefits, stock-based
compensation and incentive bonuses, and related expenses for our research and development personnel, as well as product
development costs such as materials and supplies, consulting services, third-party testing services and equipment and facility
expenses related to our research and development activities. All research and development costs are expensed as incurred. We
occasionally receive non-recurring engineering funding from certain suppliers and customers for joint development. Under
these arrangements, we are reimbursed for certain research and development costs that we incur as part of the joint
development efforts with our suppliers and customers. These amounts offset a portion of the related research and development
expenses and have the effect of reducing our reported research and development expenses.
Sales and marketing expenses consist primarily of personnel expenses, including salaries, benefits, stock-based
compensation and incentive bonuses, and related expenses for our sales and marketing personnel, costs for tradeshows,
independent sales representative fees and marketing programs. From time to time, we receive cooperative marketing funding
from certain suppliers. Under these arrangements, we are reimbursed for certain marketing costs that we incur as part of the
joint promotion of our products and those of our suppliers. These amounts offset a portion of the related expenses and have the
effect of reducing our reported sales and marketing expenses. The timing, magnitude and estimated usage of these programs can
result in significant variations in reported sales and marketing expenses from period to period. Spending on cooperative
marketing, reimbursed by our suppliers, typically increases in connection with new product releases by our suppliers.
General and administrative expenses consist primarily of general corporate costs, including personnel expenses such as
salaries, benefits, stock-based compensation and incentive bonuses, and related expenses for our general and administrative
personnel, financial reporting, information technology, corporate governance and compliance, outside legal, audit, tax fees,
insurance and bad debt reserves on accounts receivable.
Operating expenses for fiscal years 2021, 2020 and 2019 are as follows (dollars in millions):
Research and development
Sales and marketing
General and administrative
Total operating expenses
Years Ended June 30,
2020
$ 221.5
85.1
133.9
$ 440.5
2019
$ 179.9
77.2
141.2
$ 398.3
2021
$ 224.4
85.7
100.5
$ 410.6
$
2021 over 2020 Change
2020 over 2019 Change
$
2.9
0.6
(33.4)
(29.9)
%
1.3 % $
0.7 %
(24.9) %
(6.8) %
$
41.6
7.9
(7.3)
42.2
%
23.1 %
10.2 %
(5.2) %
10.6 %
Fiscal Year 2021 Compared with Fiscal Year 2020
The year-over-year increase in research and development expenses was primarily due to an increase of $11.6 million in
costs mainly related to materials, supplies and equipment used in product development. During the fiscal year 2020, we
40
recorded a $9.5 million net settlement fee as a reduction in the research and development expenses related to the reimbursement
of previously incurred materials, supplies and equipment costs for one canceled joint product development agreement.
Personnel expenses increased $1.7 million as a result of an increase in the number of research and development employees,
These increases were partially offset by an increase of $8.8 million in research and development credits from certain suppliers
and customers towards our development efforts and a $1.5 million decrease in trade shows and business travel as a result in a
change in our operations in response to the COVID-19 pandemic.
The year-over-year increase in sales and marketing expenses was primarily due to an increase of $1.2 million in
advertising expenses, a $1.0 million increase in other sales and marketing expenses, offset by a $1.7 million decrease in trade
shows and business travel as a result in a change in our operations in response to the COVID-19 pandemic.
The year-over-year decrease in general and administrative expenses was due to a decrease of $41.8 million in
professional fees incurred to investigate, assess and remediate the causes that led to the delay in filing our periodic reports with
the SEC and the associated restatement of certain of our previously issued financial statements, a decrease of $4.1 million in
other expenses related to the COVID-19 pandemic, and a $1.1 million decrease in supplies costs. These decreases were partially
offset by a $12.9 million increase in personnel expenses due to increased full time personnel and bonuses.
We anticipate the above expenses impacted by the COVID-19 pandemic to normalize if and when the COVID-19
pandemic is over.
Fiscal Year 2020 Compared with Fiscal Year 2019
The year-over-year increase in research and development expenses was primarily due to an increase of $41.3 million
in personnel expenses as a result of an increase in the number of research and development employees and a special
performance bonus of $17.3 million, a decrease of $0.7 million in reimbursements received for certain research and
development costs that we incurred as part of joint product development; an increase of $6.7 million in costs mainly related to
materials, supplies and equipment used in product development, and an increase of $1.8 million in facilities expenses. During
fiscal year 2020, we 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.
The year-over-year increase in sales and marketing expenses was primarily due to an increase of $8.1 million in
personnel expenses as a result of an increase in the number of sales and marketing personnel and a special performance bonus
of $1.8 million.
The year-over-year decrease in general and administrative expenses was due to a decrease of $33.9 million in
professional fees 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;
a decrease of $10.2 million in bad debt provision expenses due to recovery of previously provisioned receivables from certain
international customers, offset by an increase of $17.5 million related to an expense accrual for the settlement with the SEC; an
increase of $14.1 million in personnel expenses as a result of an increase in the number of personnel and a special performance
bonus of $4.5 million; an increase of $3.2 million in insurance expense; and an increase of $1.7 million related primarily to
facilities expenses.
Interest and Other Expense, Net
Other (expense) income, net consists primarily of interest earned on our investment and cash balances and foreign
exchange gains and losses.
Interest expense represents interest expense on our term loans and lines of credit.
Interest and other expense, net for fiscal years 2021, 2020 and 2019 are as follows (dollars in millions):
Years Ended June 30,
2020
2021
2019
Other (expense) income, net
Interest expense
Interest and other expense, net
$
$
(2.8) $
(2.5)
(5.3) $
1.4 $
(2.2)
(0.8) $
(1.0) $
(6.7)
(7.7) $
2021 over 2020 Change
2020 over 2019 Change
$
(4.2)
(0.3)
(4.5)
%
$
(300.0) % $
13.6 %
562.5 % $
2.4
4.5
6.9
%
(240.0) %
(67.2) %
(89.6) %
41
Fiscal Year 2021 Compared with Fiscal Year 2020
The change of $4.2 million in other (expense) income, net was attributable to a decrease of $2.4 million in interest
income on our interest-bearing deposits due primarily to lower yields on investments and an increase of $1.8 million in foreign
exchange loss due to unfavorable foreign currency fluctuations.
Fiscal Year 2020 Compared with Fiscal Year 2019
The year-over-year change in interest expense of $4.5 million is primarily a result of lower interest rates and reduced
levels of borrowings in fiscal year 2020 as compared to fiscal year 2019. The change of $2.4 million in other (expense) income,
net was attributable to an increase of $1.6 million in interest income on our interest bearing deposits and a decrease of $0.8
million in other expenses.
Provision for Income Taxes
Our income tax provision is based on our taxable income generated in the jurisdictions in which we operate, primarily
the United States, Taiwan, and the Netherlands. Our effective tax rate differs from the statutory rate primarily due to research
and development tax credits, uncertain tax positions, tax benefits from foreign derived intangible income and stock based
compensation. A reconciliation of the federal statutory income tax rate to our effective tax rate is set forth in Part II, Item 8,
Note 15, “Income Taxes” to the consolidated financial statements in this Annual Report.
Provision for income taxes and effective tax rates for fiscal years 2021, 2020 and 2019 are as follows (dollars in
millions):
Income tax provision
Effective tax rate
$
Years Ended June 30,
2020
2.9
3.4 %
2021
6.9
5.8 %
$
2019
$ 14.9
16.6 %
2021 over 2020 Change
2020 over 2019 Change
$
%
$
4.0
137.9 % $
$
(12.0)
%
(80.5) %
Fiscal Year 2021 Compared with Fiscal Year 2020
The year-over-year increase in the effective tax rate was primarily due to a release of reserve from uncertain tax
positions in the prior year.
Fiscal Year 2020 Compared with Fiscal Year 2019
The year-over-year decrease in the effective tax rate was primarily due to an increase in tax benefits from research and
development tax credits, stock based compensation, releases of uncertain tax positions, and U.S. sales to foreign jurisdictions,
partially offset by the tax impact from the non-deductible settlement with the SEC.
Share of (Loss) from Equity Investee, Net of Taxes
Share of income (loss) from
equity investee, net of taxes
$
0.2
$
2.4
$
(2.7) $
(2.2)
(91.7) % $
5.1
188.9 %
Years Ended June 30,
2020
2021
2019
2021 over 2020 Change
2020 over 2019 Change
$
%
$
%
Fiscal Year 2021 Compared with Fiscal Year 2020
The year-over-year decrease of $2.2 million in share of income from equity investee, net of taxes was primarily due to
lower net income recognized by the Corporate Venture in the fiscal year 2021 as compared to 2020.
Fiscal Year 2020 Compared with Fiscal Year 2019
The year-over-year increase of $5.1 million from share of (loss) to income from equity investee, net of taxes was
primarily due to net income recognized by the Corporate Venture in the fiscal year 2020 as compared to net loss in the fiscal
year 2019.
42
Liquidity and Capital Resources
We have financed our growth primarily with funds generated from operations, in addition to utilizing borrowing
facilities, particularly in relation to the financing of real property acquisitions as well as an increase in the need for working
capital due to longer supply chain manufacturing and delivery times. Our cash and cash equivalents were $232.3 million and
$210.5 million as of June 30, 2021 and 2020, respectively. Our cash in foreign locations was $152.6 million and $98.0 million
as of June 30, 2021 and 2020, respectively.
Amounts held outside of the U.S. are generally utilized to support non-U.S. liquidity needs. Repatriations generally
will not be taxable from a U.S. federal tax perspective, but may be subject to state income or foreign withholding tax. Where
local restrictions prevent an efficient intercompany transfer of funds, our intent is to keep cash balances outside of the U.S. and
to meet liquidity needs through operating cash flows, external borrowings, or both. We do not expect restrictions or potential
taxes incurred on repatriation of amounts held outside of the U.S. to have a material effect on our overall liquidity, financial
condition or results of operations.
We believe that our current cash, cash equivalents, borrowing capacity available from our credit facilities and
internally generated cash flows will be sufficient to support our operating businesses and maturing debt and interest payments
for the twelve months following the issuance of these consolidated financial statements. We expect to pay a special
performance bonus of approximately $4.0 million to our CEO within the next year. During the fiscal year 2021, the target
average closing price of our common stock condition for the bonus was satisfied but no determination has been made if the
specified performance condition has been satisfied.
During the fiscal year ended June 30, 2021, we retired 1,333,125 shares of common stock repurchased in prior years.
Additionally, we repurchased and retired 4,209,211 shares of common stock for an aggregated $130.0 million under multiple
share repurchase programs. All programs were completed during the fiscal year except for the program approved on January 29,
2021 to repurchase up to an aggregate of $200.0 million of our common stock at market prices. The program is effective until
July 31, 2022 or if earlier, until the maximum amount of common stock is repurchased. As of June 30, 2021, we still had $150.0
million available to be used by July 31, 2022.
Our key cash flow metrics were as follows (dollars in millions):
Net cash provided by (used in) operating activities
Net cash used in investing activities
Net cash (used in) provided by financing activities
$
Net increase (decrease) in cash, cash equivalents and restricted cash $
2019
2021 over
2020
Years Ended June 30,
2020
(30.3) $ 262.6 $ 153.3 $ (292.9)
(14.4) $
(24.8) $
(43.6) $
(18.8)
(68.2) $ 119.6
23.8 $
(95.8) $
70.9 $ (191.6)
(49.8) $ 141.8 $
2021
$ 123.0 $
(58.0) $
$
(44.4) $
21.1 $
2020 over
2019
Operating Activities
Net cash provided by operating activities increased by $153.3 million for fiscal year 2021 as compared to fiscal year
2020. While net income increased by $27.6 million in fiscal year 2021 as compared to fiscal year 2020, the increase in cash
flows from operating activities was due primarily to a decrease of cash used for net working capital requirements of $120.3
million. Non-cash charges related to stock-based compensation expense increased by $8.4 million, collection of bad debt
previously reserved decreased by $2.3 million, income from equity investee decreased by $2.2 million and $5.4 million
decrease in the non-cash charges related to the change in our deferred income tax assets. These increases in the cash flow from
operating activities were partially offset by the decrease of $11.6 million in previously reserved excess and obsolete inventory.
Net cash provided by operating activities decreased by $292.9 million for fiscal year 2020 as compared to fiscal year
2019. While net income increased by $12.4 million in fiscal year 2020 as compared to fiscal year 2019, the decrease in cash
flows from operating activities was due primarily to an increase of cash used for net working capital requirements of $281.3
million, including a $181.3 million increase in inventories to meet customer demand, support expected business growth and
mitigate supply chain risk due to the COVID-19 pandemic environment. Non-cash charges related to excess and obsolete
inventory decreased by $14.6 million, related to bad debt reserve decreased by $10.1 million, related to income (loss) from
equity investee decreased by $5.1 million, and related to impairment of investments decreased by $2.7 million in fiscal year
2020 compared to fiscal year 2019. These decreases were offset by an increase of $8.9 million in the non-cash charges related
to the change in our deferred income tax assets, unrealized losses on our foreign currency-denominated credit facilities, and
depreciation and amortization expense resulting from the amortization of operating lease right-of-use assets.
43
Investing Activities
Net cash used in investing activities was $58.0 million, $43.6 million and $24.8 million for the fiscal years 2021, 2020
and 2019, respectively, as we invested in our Green Computing Park in San Jose to expand our capacity and office space we
purchased and expanded our Bade Facility in Taiwan and made purchases of property, plant and equipment.
Financing Activities
Net cash used in financing activities increased by $68.2 million for fiscal year 2021 as compared to fiscal year 2020
primarily due to an increase of $130.0 million in repurchase of our common stock, partially offset by an increase of $61.9
million in proceeds from borrowings net of repayment. Net cash used in financing activities decreased by $119.6 million for
fiscal year 2020 as compared to fiscal year 2019 primarily due to decreased net repayments of debt of $96.4 million, and cash
receipts from exercises of stock options of $28.3 million offset by increased cash payments for withholding taxes from the
vesting of restricted stock of $5.2 million.
Other Factors Affecting Liquidity and Capital Resources
2018 Bank of America Credit Facility
In April 2018, we entered into a revolving line of credit with Bank of America for up to $250.0 million (as amended
from time to time, the "2018 Bank of America Credit Facility"). On June 28, 2021, the 2018 Bank of America Credit Facility
was amended to, among other items, extend the maturity to June 28, 2026, reduce the size of the facility from $250.0 million to
$200.0 million, increase the maximum amount that we can request the facility be increased (the accordion feature) from $100.0
million to $150.0 million, and update provisions relating to erroneous payments and LIBOR replacement mechanics. In
addition, the amendment reduced both the unused line fee from 0.375% per annum to 0.2% or 0.3% per annum (depending
upon amount drawn under the facility) and the interest rate applicable to the facility from LIBOR plus 2.00% or 3.00% per
annum (depending upon amount drawn under the facility) to LIBOR plus 1.375% or 1.625% per annum. As of June 30, 2021,
we had no outstanding borrowings. Our available borrowing capacity was $200.0 million, subject to the borrowing base
limitation and compliance with other applicable terms. Interest accrued on any loans under the 2018 Bank of America Credit
Facility is due on the first day of each month, and the loans are due and payable in full on the termination date of the 2018 Bank
of America Credit Facility. Voluntary prepayments are permitted without early repayment fees or penalties. The 2018 Bank of
America Credit Facility is secured by substantially all of Super Micro Computer’s assets, other than real property assets. In
addition, we are not permitted to pay any dividends. Under the terms of the 2018 Bank of America Credit Facility agreement,
we are required to maintain a certain fixed charge ratio and we have been in compliance with all covenants under the 2018
Bank of America Credit Facility.
CTBC Bank
2020 CTBC Credit Facility
In August 2020, we entered into a credit agreement with CTBC Bank in Taiwan that provides for term loans of up to
$50.0 million (the "2020 CTBC Credit Facility"), which had a maturity date of August 2021. As of June 30, 2021, the
outstanding borrowings under the CTBC Credit Facility revolving line of credit were $18.0 million and the interest rates for
these loans were 0.98% per annum. The total outstanding borrowings under the CTBC Credit Facility term loan were
denominated in NTD and remeasured into U.S. dollars of $25.1 million at June 30, 2021 and the interest rates for these loans
were 0.75% per annum. The amount available for future borrowing under the CTBC Credit Facility was $6.9 million as of June
30, 2021. The term loans are secured by certain of our assets, including certain property, plant, and land. There are no financial
covenants under the 2020 CTBC Credit Facility.
2020 CTBC Term Loan Facility due June 4, 2030
In May 2020, we entered into a ten-year, non-revolving term loan facility (the “2020 CTBC Term Loan Facility”) to
obtain up to NTD 1.2 billion ($40.7 million in U.S. dollar equivalents) in financing for use in the expansion and renovation of
our Bade Manufacturing Facility located in Taiwan. Draw downs on the 2020 CTBC Term Loan Facility are based on 80% of
balances owed on commercial invoices from the contractor and are drawn according to the progress of the renovations.
Borrowings under the 2020 CTBC Term Loan Facility are available through June 2022. We are required to pay against total
outstanding principal and interest in equal monthly installments starting June 2023 and continuing through the maturity date of
June 2030. The 2020 CTBC Term Loan Facility is secured by the Bade Manufacturing Facility, including any expansion. Fees
paid to the lender as debt issuance costs were immaterial. We borrowed $29.0 million in the fiscal year ended June 30, 2021
44
with a rate of 0.45% per annum. As of June 30, 2021, the amount outstanding under the 2020 CTBC Term Loan Facility was
$34.7 million and the net book value of the property serving as collateral was $45.9 million. We have financial covenants
requiring our current ratio, debt service coverage ratio, and financial debt ratio, to be maintained at certain levels. As of June
30, 2021, we were in compliance with all financial covenants under the 2020 CTBC Term Loan Facility.
2021 CTBC Credit Lines
On July 20, 2021 (the “Effective Date”), we entered into a general agreement for omnibus credit lines with CTBC
Bank, which replaced the 2020 CTBC Credit Facility and 2020 CTBC Term Loan Facility (the “Prior CTBC Credit Lines”) in
their entirety and permits borrowings, from time to time, of (i) a term loan facility of up to NTD1,550.0 million ($55.4 million
in U.S. dollar equivalents) and (ii) a line of credit facility of up to US$105.0 million (the “2021 CTBC Credit Lines”). Interest
rates are to be established according to individual credit arrangements established pursuant to the 2021 CTBC Credit Lines,
which interest rates shall be subject to adjustment depending on the satisfaction of certain conditions. Term loans made
pursuant to the 2021 CTBC Credit Lines are secured by certain of our assets, including certain property, land, plant, and
equipment located in Bade, Taiwan. We are subject to various financial covenants under the 2021 CTBC Credit Lines, including
current ratio, debt service coverage ratio, and financial debt ratio requirements. Amounts outstanding under the Prior CTBC
Credit Lines on the Effective Date were assumed by the 2021 CTBC Credit Lines.
E.SUN Credit Facility
In December 2020, Super Micro Computer Inc, Taiwan, our wholly-owned Taiwan subsidiary, entered into a General
Credit Agreement (the “E.SUN Credit Facility”) with E.SUN Bank in Taiwan. The E.SUN Credit Facility provides for the
issuance of loans, advances, acceptances, bills, bank guarantees, overdrafts, letters of credit, and other types of drawdown
instruments up to a credit limit of $30.0 million. Terms for specific drawdowns are set forth in separate Notification and
Confirmation of Credit Conditions by and between us and E.SUN Bank. The E.SUN Credit Facility expires September 18,
2021. There are no financial covenants associated with the E.SUN Credit Facility. A Notification and Confirmation Agreement
was entered into on December 2, 2020 for a $30.0 million import loan (the “Import Loan”) under the E. SUN Credit Facility
with a tenor of 120 days bearing interest at a rate based on LIBOR or TAIFX plus a fixed margin. As of June 30, 2021, the
amounts outstanding under the E.SUN Credit Facility were $20.4 million and the interest rates for these loans ranged from
approximately .0% to1.29% per annum. As of June 30, 2021, the amount available for future borrowing under the E.SUN
Credit Facility was $9.6 million.
Refer to Part I, Item 1, Note 10, “Short-term and Long-term Debt” in our notes to consolidated financial statements in
this Annual Report on Form 10-K for further information on our outstanding debt.
Capital Expenditure Requirements
We anticipate our capital expenditures in fiscal year 2022 will be approximately $21.4 million, relating primarily to
costs associated in our manufacturing capabilities, including tooling for new products, new information technology
investments, and facilities upgrades. We will continue to evaluate new business opportunities and new markets. As a result, our
future growth within the existing business or new opportunities and markets may dictate the need for additional facilities and
capital expenditures to support that growth. We evaluate capital expenditure projects based on a variety of factors, including
expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer
retention) and our expected return on investment.
We intend to continue to focus our capital expenditures in fiscal year 2022 to support the growth of our operations.
Our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to
support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced software
and services offerings, the investments in our office facilities and our systems infrastructure, the continuing market acceptance
of our offerings and our planned investments, particularly in our product development efforts, applications or technologies.
Contractual Obligations
Our estimated future obligations as of June 30, 2021 include both current and long term obligations. For our long-term
debt as noted in Part I, Item 1, Note 10, “Short-term and Long-term Debt”, we have a current obligation of $63.5 million and a
long-term obligation of $34.7 million. Under our operating leases as noted in Note 12, "Leases", we have a current obligation of
$6.3 million and a long-term obligation of $14.5 million. As noted in Note 16, "Commitments and Contingencies", we have
current obligations related to noncancelable purchase commitments of $569.8 million.
Recent Accounting Pronouncements
45
For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects,
if any, on our consolidated financial statements, see Part II, Item 8, Note 1, “Organization and Summary of Significant
Accounting Policies” to the consolidated financial statements in this Annual Report.
46
Item 7A.
Quantitative and Qualitative Disclosure About Market Risk
Interest Rate Risk
The primary objectives of our investment activities are to preserve principal, provide liquidity and maximize income
without significantly increasing the risk. Some of the securities we invest in are subject to market risk. This means that a change
in prevailing interest rates may cause the fair value of the investment to fluctuate. To minimize this risk, we maintain our
portfolio of cash equivalents and short-term investments in money market funds and certificates of deposit. Our investment in
an auction rate security has been classified as non-current due to the lack of a liquid market for these securities. Since our
results of operations are not dependent on investments, the risk associated with fluctuating interest rates is limited to our
investment portfolio, and we believe that a 10% change in interest rates would not have a significant impact on our results of
operations. As of June 30, 2021, our investments were in money market funds, certificates of deposits and auction rate
securities.
We are exposed to changes in interest rates as a result of our borrowings under our term loan and revolving lines of
credit. The interest rates for the term loans and the revolving lines of credit ranged from 0.45% to 1.5% at June 30, 2021. Based
on the outstanding principal indebtedness of $98.2 million under our credit facilities as of June 30, 2021, we believe that a 10%
change in interest rates would not have a significant impact on our results of operations.
Foreign Currency Risk
To date, our international customer and supplier agreements have been denominated primarily in U.S. dollars and
accordingly, we have limited exposure to foreign currency exchange rate fluctuations from customer agreements, and do not
currently engage in foreign currency hedging transactions. The functional currency of our subsidiaries in the Netherlands and
Taiwan is the U.S. dollar. However, certain 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. Such fluctuations have not been significant historically. Foreign exchange (loss) gain for fiscal years 2021, 2020 and
2019 was $(3.2) million, $(1.4) million and $0.5 million, respectively.
47
Item 8.
Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
49
51
52
53
54
55
57
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Super Micro Computer, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Super Micro Computer, Inc. and subsidiaries (the
"Company") as of June 30,2021 and 2020, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows
for each of the three years in the period ended June 30, 2021, 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, 2021, based on criteria established in Internal
Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) and our report dated August 27, 2021, expressed an unqualified opinion on the Company’s internal control over
financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that
was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that
are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and
we are not, by communicating the critical audit matter below, providing separate opinion on the critical audit matter or on the
accounts or disclosures to which it relates.
Inventories - Excess and Obsolescence Reserve — Refer to Notes 1 and 5 to the financial statements
Critical Audit Matter Description
The Company’s inventories are stated at lower of cost, using weighted average cost method, or net realizable value. The
Company evaluates inventory on a quarterly basis for excess and obsolescence and lower of cost or net realizable value and, as
necessary, writes down the valuation of inventory 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
determining the reserve rates applied by inventory aging category to estimate the Company’s excess and obsolescence reserve.
This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate
the reasonableness of the Company’s reserve rates within its estimation of the inventory excess and obsolescence reserve.
How the Critical Audit Matter Was Addressed in the Audit
49
Our audit procedures related to the reserve rates applied to the inventory aging categories to estimate the Company’s excess and
obsolescence reserve included the following procedures, among others:
a. We tested the effectiveness of controls over the review of the calculation of excess and obsolescence reserve based on
the Company’s reserve methodology, including management’s evaluation of the reserve rates by inventory aging
category using historical data.
b. To understand and evaluate the Company’s methodology for determining inventory that is excess or obsolete and the
key assumptions and judgments made as part of the process, including the reserve rates, we made inquiries of various
personnel in the Company including but not limited to finance and operations personnel about the expected product
lifecycles and product development plans.
c. We involved data specialists to assess management’s estimate on reserve rates by recalculating historical reserve rates
across multiple fiscal periods. We compared our independently developed historical reserve rates with the reserve rates
used by management.
d. We tested the accuracy and completeness of the underlying data utilized in management’s excess and obsolescence
reserve, including the classification of inventory by aging category. Then, selected a sample of inventory products and
verified the items were properly included in the correct aging category for determination of the reserve rate.
e. We considered the existence of contradictory evidence based on reading of internal communications to management,
Company press releases, and industry reports, as well as our observations and inquires as to changes within the
business.
/s/ Deloitte & Touche LLP
San Jose, California
August 27, 2021
We have served as the Company's auditor since fiscal 2003.
50
SUPER MICRO COMPUTER, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowances of $2,591 and $4,586 at June 30, 2021 and 2020, respectively
(including amounts receivable from related parties of $8,678 and $8,712 at June 30, 2021 and 2020,
respectively)
Inventories
Prepaid expenses and other current assets (including receivables from related parties of $23,748 and
$19,791 at June 30, 2021 and 2020, respectively)
Total current assets
Investment in equity investee
Property, plant and equipment, net
Deferred income taxes, net
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
June 30,
2021
June 30,
2020
$
232,266 $
210,533
463,834
1,040,964
403,745
851,498
130,195
1,867,259
4,578
274,713
63,288
32,126
2,241,964 $
126,985
1,592,761
2,703
233,785
54,898
34,499
1,918,646
$
Accounts payable (including amounts due to related parties of $70,096 and $72,368 at June 30, 2021
and 2020, respectively)
$
612,336 $
417,673
Accrued liabilities (including amounts due to related parties of $18,528 and $16,206 at June 30, 2021
and 2020, respectively)
Income taxes payable
Short-term debt
Deferred revenue
Total current liabilities
Deferred revenue, non-current
Long-term debt
Other long-term liabilities (including related party balance of $0 and $1,699 at June 30, 2021 and 2020,
respectively)
Total liabilities
Commitments and contingencies (Note 16)
Stockholders’ equity:
Common stock and additional paid-in capital, $0.001 par value
178,850
12,741
63,490
101,479
968,896
100,838
34,700
41,132
1,145,566
155,401
4,700
23,704
106,157
707,635
97,612
5,697
41,995
852,939
Authorized shares: 100,000,000; Outstanding shares: 50,582,078 and 52,408,703 at June 30, 2021 and
2020, respectively
Issued shares: 50,582,078 and 53,741,828 at June 30, 2021 and 2020, respectively
Treasury stock (at cost), 0 and 1,333,125 shares at June 30, 2021 and 2020, respectively
Accumulated other comprehensive income (loss)
Retained earnings
Total Super Micro Computer, Inc. stockholders’ equity
Noncontrolling interest
Total stockholders’ equity
Total liabilities and stockholders’ equity
438,012
—
453
657,760
1,096,225
173
1,096,398
2,241,964 $
389,972
(20,491)
(152)
696,211
1,065,540
167
1,065,707
1,918,646
$
See accompanying notes to consolidated financial statements.
51
SUPER MICRO COMPUTER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Net sales (including related party sales of $79,018, $85,759, and $69,906 in
fiscal years 2021, 2020 and 2019, respectively)
Cost of sales (including related party purchases of $239,558, $283,056, and
$276,843 in fiscal years 2021, 2020 and 2019, respectively)
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Total operating expenses
Income from operations
Other (expense) income, net
Interest expense
Income before income tax provision
Income tax provision
Share of income (loss) from equity investee, net of taxes
Net income
Net income per common share:
Basic
Diluted
Weighted-average shares used in calculation of net income per common share:
Basic
Diluted
Years Ended June 30,
2020
2021
2019
$ 3,557,422 $ 3,339,281 $ 3,500,360
3,022,884 2,813,071 3,004,838
495,522
526,210
534,538
224,369
85,683
100,539
410,591
123,947
(2,834)
(2,485)
118,628
(6,936)
173
111,865 $
221,478
85,137
133,941
440,556
85,654
1,410
(2,236)
84,828
(2,922)
2,402
84,308 $
179,907
77,154
141,228
398,289
97,233
(1,020)
(6,690)
89,523
(14,884)
(2,721)
71,918
2.19 $
2.09 $
1.65 $
1.60 $
1.44
1.39
51,157
53,507
50,987
52,838
49,917
51,716
$
$
$
See accompanying notes to consolidated financial statements.
52
SUPER MICRO COMPUTER, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Net income
Other comprehensive income (loss), net of tax:
Foreign currency translation gain (loss)
Total other comprehensive income (loss)
Total comprehensive income
Years Ended June 30,
2020
84,308 $
2021
111,865 $
2019
71,918
605
605
112,470 $
(72)
(72)
84,236 $
(245)
(245)
71,673
$
$
See accompanying notes to consolidated financial statements.
53
SUPER MICRO COMPUTER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
Balance at June 30, 2018
Cumulative effect of adjustment
from adoption of new accounting
standard, net of taxes
Release of common stock shares
upon vesting of restricted stock
units
Shares withheld for the withholding
tax on vesting of restricted stock
units
Stock-based compensation
Foreign currency translation loss
Net income
Balance at June 30, 2019
Exercise of stock options, net of
taxes
Release of common stock shares
upon vesting of restricted stock
units
Shares withheld for the withholding
tax on vesting of restricted stock
units
Stock-based compensation
Foreign currency translation loss
Net income
Balance at June 30, 2020
Exercise of stock options, net of
taxes
Release of common stock shares
upon vesting of restricted stock
units
Shares withheld for the withholding
tax on vesting of restricted stock
units
Share repurchase and retirement
Stock-based compensation
Foreign currency translation gain
Net income
Balance at June 30, 2021
Common Stock and
Additional Paid-In
Capital
Shares
Amount
50,914,571 $ 331,550
Treasury Stock
Amount
Shares
(1,333,125) $ (20,491) $
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Non-
controlling
Interest
Total
Stockholders’
Equity
165 $ 532,271 $
157 $
843,652
—
—
—
—
—
7,714
549,886
—
—
—
—
—
(3,051)
(175,044)
21,184
—
—
—
—
—
51,289,413 $ 349,683
—
—
—
—
—
—
—
—
(1,333,125) $ (20,491) $
—
—
—
—
—
(245)
—
71,918
(80) $ 611,903 $
1,804,789
28,343
—
—
—
—
—
4
161 $
7,714
—
(3,051)
21,184
(245)
71,922
941,176
28,343
979,274
—
—
—
—
—
—
—
(8,243)
(331,648)
20,189
—
—
—
—
—
53,741,828 $ 389,972
—
—
—
—
—
—
—
—
(1,333,125) $ (20,491) $
—
—
(72)
—
—
—
—
84,308
(152) $ 696,211 $
1,645,800
28,387
—
—
—
—
1,011,406
—
—
—
—
—
(8,721)
(274,620)
(175)
(5,542,336)
28,549
—
—
—
—
—
50,582,078 $ 438,012
—
1,333,125
—
—
—
— $
—
20,491
—
—
—
— $
—
—
(150,316)
—
—
—
605
— 111,865
453 $ 657,760 $
—
—
—
6
167 $
—
—
—
—
—
6
173 $
(8,243)
20,189
(72)
84,314
1,065,707
28,387
—
(8,721)
(130,000)
28,549
605
111,871
1,096,398
See accompanying notes to consolidated financial statements.
54
SUPER MICRO COMPUTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
OPERATING ACTIVITIES:
Net income
Reconciliation of net income to net cash (used in) provided by operating activities:
2021
Years Ended June 30,
2020
2019
$
111,865 $
84,308 $
71,918
Depreciation and amortization
Stock-based compensation expense
(Recoveries of) Allowance for doubtful accounts
Provision for excess and obsolete inventories
Other
Impairment of investments
Share of (income) loss from equity investee
Foreign currency exchange loss (gain)
Deferred income taxes, net
Changes in operating assets and liabilities:
Accounts receivable, net (including changes in related party balances of $34, $4,727 and $(10,357)
in fiscal years 2021, 2020 and 2019, respectively)
Inventories
Prepaid expenses and other assets (including changes in related party balances of $(3,957), $1,511
and $2,714 in fiscal years 2021, 2020 and 2019, respectively)
Accounts payable (including changes in related party balances of $(2,272), $12,559 and $(18,001)
in fiscal years 2021, 2020 and 2019, respectively)
Income taxes payable
Accrued liabilities (including changes in related party balances of $2,322, $5,670 and $(7,858) in
fiscal years 2021, 2020 and 2019, respectively)
Deferred revenue
Other long-term liabilities (including changes in related party balances of $(1,699), $(1,301) and
$(500) in fiscal years 2021, 2020 and 2019, respectively)
Net cash provided by (used in) operating activities
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (including payments to related parties of $7,347, $4,386 and
$4,472 in fiscal years 2021, 2020 and 2019, respectively)
Proceeds from sale of investment in a privately-held company
Net cash used in investing activities
FINANCING ACTIVITIES:
Proceeds from borrowings, net of debt issuance costs
Repayment of debt
Net repayment on asset-backed revolving line of credit, net of costs
Payment of other fees for debt financing
Proceeds from exercise of stock options
Changes in obligations under capital leases
Payment of withholding tax on vesting of restricted stock units
Stock repurchases
Net cash (used in) provided by financing activities
Effect of exchange rate fluctuations on cash
Net increase (decrease) in cash, cash equivalents, and restricted cash
Cash, cash equivalents and restricted cash at beginning of year
Cash, cash equivalents and restricted cash at end of year
Supplemental disclosure of cash flow information:
Cash paid for interest
Cash paid for taxes, net of refunds
Non-cash investing and financing activities:
Unpaid property, plant and equipment purchases (including due to related parties of $400, $2,223 and
$1,609 as of June 30, 2021, 2020 and 2019, respectively)
Equipment purchased under capital leases
Contribution of certain technology rights to equity investee
$
$
$
$
$
$
55
28,185
28,549
(820)
6,805
(1,044)
—
(173)
2,482
(8,390)
(59,325)
(196,271)
(5,291)
189,309
8,041
24,705
(1,452)
(4,220)
122,955
(58,016)
—
(58,016)
127,059
(60,629)
—
(561)
28,387
25
(8,721)
(130,000)
(44,440)
560
21,059
212,390
233,449 $
28,472
20,189
(3,081)
18,373
1,364
—
(2,402)
1,008
(13,772)
(7,023)
(199,683)
(29,869)
59,889
(8,321)
27,865
350
(8,001)
(30,334)
(44,338)
750
(43,588)
164,791
(159,191)
(1,116)
(650)
28,343
(138)
(8,243)
—
23,796
376
(49,750)
262,140
212,390 $
1,948 $
2,914 $
2,172 $
43,317 $
9,003 $
3,258 $
— $
12,051 $
— $
— $
24,202
21,184
7,058
32,946
733
2,661
2,721
(313)
(17,100)
85,027
119,314
8,410
(173,410)
5,831
11,456
59,800
116
262,554
(24,849)
—
(24,849)
41,760
(67,700)
(65,945)
(625)
—
(267)
(3,051)
—
(95,828)
(119)
141,758
120,382
262,140
3,861
23,604
9,232
—
3,000
See accompanying notes to consolidated financial statements.
56
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1.
Organization and Summary of Significant Accounting Policies
Organization
Super Micro Computer, Inc. (“Super Micro Computer”) was incorporated in 1993. Super Micro Computer is a global
leader in server technology and green computing innovation. Super Micro Computer develops and provides high performance
server and storage solutions based upon an innovative, modular and open-standard architecture. Super Micro Computer has
operations primarily in the United States, the Netherlands, Taiwan, China and Japan.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted
accounting principles in the United States of America (“U.S. GAAP”). The consolidated financial statements of Super Micro
Computer include the accounts of Super Micro Computer and entities consolidated under the variable interest model or the
voting interest model. Noncontrolling interests are not presented separately in the consolidated statements of operations, and
consolidated statements of comprehensive income as the amounts are immaterial. All intercompany accounts and transactions
of Super Micro Computer and its consolidated entities (collectively, the "Company") have been eliminated in consolidation. For
equity investments over which the Company is able to exercise significant influence over the investee but does not control the
investee, and is not the primary beneficiary of the investee’s activities are accounted for using the equity method. Investments
in equity securities which do not have readily determinable fair values and for which the Company is not able to exercise
significant influence over the investee are accounted for under the measurement alternative which is the cost minus impairment,
if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar
securities of the same investee.
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 revenue recognition,
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. 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.
Fair Value of Financial Instruments
The Company accounts for certain assets and liabilities at fair value, which is the price that would be received upon
the sale of an asset or paid to transfer a liability in an orderly arms-length transaction between market participants. When
measuring fair value, the Company takes into account the characteristics of the asset or liability that a market participant would
consider when pricing the asset or liability at the measurement date. The Company considers one or more techniques for
measuring fair value: market approach, income approach, and cost approach. The valuation techniques include inputs that are
based on three different levels of observability to the market. The Company categorizes each of its fair value measurements in
one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These
levels are:
•
•
•
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical,
unrestricted assets or liabilities;
Level 2 - Quoted prices in markets that are not active or financial instruments for which all significant inputs
are observable, either directly or indirectly; and
Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and
unobservable.
57
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Accounts receivable and accounts payable are carried at cost, which approximates fair value due to the short maturity
of these instruments. Cash equivalents, certificates of deposit and the investment in an auction rate security are carried at fair
value. Short-term and long-term debt is carried at amortized cost, which approximates its fair value based on borrowing rates
currently available to the Company for loans with similar terms.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original maturity of three months or less from the date of
purchase to be cash equivalents. Cash equivalents consist primarily of money market funds and certificates of deposit with
original maturities of less than three months.
Restricted Cash and Cash Equivalents
Restricted cash is comprised of amounts held in bank accounts which are controlled by the lenders pursuant to the
terms of certain debt agreements, certificates of deposit primarily related to leases and customs requirements, and money
market accounts held in escrow pursuant to the Company’s workers’ compensation program. These restricted cash balances
have been excluded from the Company's cash and cash equivalents balance.
Inventories
Inventories are stated at lower of cost, using weighted average cost method, or net realizable value. Net realizable
value is the estimated selling price of the Company's 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 excess and obsolescence and lower of cost or net realizable value and, as necessary, writes
down the valuation of inventories based upon the Company's inventory aging, 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.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost and depreciated using the straight-line method over the estimated
useful lives of the related assets as follows:
Software
Machinery and equipment
Furniture and fixtures
Buildings
Building improvements
Land improvements
Leasehold improvements
Long-Lived Assets
3 to 5 years
3 to 7 years
5 years
39 years
Up to 20 years
15 years
Shorter of lease term or estimated useful life
The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. When the sum of the undiscounted future net cash flows expected to
result from the use of the asset and its eventual disposition is less than its carrying amount, an impairment loss would be
measured based on the fair value of the asset compared to the carrying amount. No impairment charge for long-lived assets has
been recorded in any of the periods presented.
58
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 customers from a
Company vendor. The Company may use distributors to sell products to end customers. Revenue from distributors is
recognized when the distributor obtains control of the product, which generally happens at the point of shipment or upon
delivery.
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. 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. 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. 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 applies judgment to estimate 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.
59
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 sales. 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 and included in operating expenses.
Allowances for Doubtful Accounts
Customers are subjected to a credit review process that evaluates each customer’s financial position and ability and
intent to pay. On a quarterly basis, the Company makes estimates of its uncollectible accounts receivable by analyzing the aging
of accounts receivable, history of bad debts, customer concentrations, customer-credit-worthiness, and current economic trends
to evaluate the adequacy of the allowance for doubtful accounts. The Company's (recovery of) provision for bad debt was
$(0.8) million, $(3.1) million, and $7.1 million in fiscal years 2021, 2020 and 2019, respectively.
Cost of Sales
Cost of sales primarily consists of the costs of materials, contract manufacturing, in-bound shipping, personnel and
related expenses including stock-based compensation, equipment and facility expenses, warranty costs and provision for lower
of cost or net realizable value and excess and obsolete inventory.
Product Warranties
The Company offers product warranties typically 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 recorded to cost of sales and included in accrued liabilities and other long-term liabilities. Warranty accruals
are based on estimates that are updated on an ongoing basis taking into consideration inputs such as new product introductions,
changes in the volume of claims compared with the Company's historical experience, and the changes in the cost of servicing
warranty claims. The Company accounts for the effect of such changes in estimates prospectively. The following table presents
for the fiscal years ended June 30, 2021, 2020 and 2019, the reconciliation of the changes in accrued warranty costs which is
included as a component of accrued liabilities and other long-term liabilities (in thousands):
Balance, beginning of the year
Provision for warranty
Costs utilized
Change in estimated liability for pre-existing warranties
Balance, end of the year
Current portion
Non-current portion
$
$
$
Research and Development
Years Ended June 30,
2020
2021
2019
12,379 $
29,638
(30,575)
1,421
12,863 $
10,185
2,678 $
11,034 $
35,962
(34,502)
(115)
12,379 $
9,984
2,395 $
9,884
22,991
(26,281)
4,440
11,034
8,661
2,373
Research and development expenses consist of personnel expenses including salaries, benefits, stock-based
compensation and incentive bonuses, and related expenses for the Company's research and development personnel, as well as
materials and supplies, consulting services, third-party testing services and equipment and facility expenses related to the
Company's research and development activities. All research and development costs are expensed as incurred. The Company
occasionally receives funding from certain suppliers and customers towards its development efforts. Such amounts are recorded
as a reduction of research and development expenses and were $10.9 million, $2.1 million, and $2.8 million for the fiscal years
ended June 30, 2021, 2020 and 2019, respectively. During the fiscal year ended June 30, 2020, the Company also recorded a
60
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
$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.
Software development costs, including costs to develop software sold, leased, or otherwise marketed, that are incurred
subsequent to the establishment of technological feasibility are capitalized if significant. Costs incurred during the application
development stage for internal-use software are capitalized if significant. Capitalized software development costs are amortized
using the straight-line amortization method over the estimated useful life of the applicable software. Such software
development costs required to be capitalized have not been material to date.
Advertising Costs
Advertising costs, net of reimbursements received under the cooperative marketing arrangements with the Company's
vendors, are expensed as incurred. Total advertising and promotional expenses were $4.1 million, $3.0 million and $2.4 million
for the fiscal years ended June 30, 2021, 2020 and 2019, respectively.
Stock-Based Compensation
The Company measures and recognizes compensation expense for all share-based awards made to employees and non-
employees, including stock options, restricted stock units ("RSUs") and performance-based restricted stock units (“PRSUs”).
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. 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. 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.
The 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 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.
Leases
The Company has arrangements for the right to use certain of its office, warehouse spaces and other premises, and
equipment. 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") assets are
recorded in long-term other assets, and lease liabilities are recorded in accrued liabilities and other long-term liabilities on the
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.
61
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 the economic environment 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 amount 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 lease liabilities.
Finance Leases
Assets under finance leases are recorded in property, plant and equipment, net and lease liabilities are included in
accrued liabilities and other long-term liabilities on the 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.
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 of operating loss carry-forwards and other tax credits measured by applying
enacted tax laws related to the financial statement periods. Valuation allowances are provided when necessary to reduce
deferred tax assets to an amount that is more likely than not to be realized.
The Company recognizes tax liabilities for uncertain income tax positions on the income tax return based on the two-
step process. The first step is to determine whether it is more likely than not that each income tax position would be sustained
upon audit. The second step is to estimate and measure the tax benefit as the amount that has a greater than 50% likelihood of
being realized upon ultimate settlement with the tax authority. Estimating these amounts requires the Company to determine the
probability of various possible outcomes. The Company evaluates these uncertain tax positions on a quarterly basis. This
evaluation is based on the consideration of several factors, including changes in facts or circumstances, changes in applicable
tax law, settlement of issues under audit and new exposures. If the Company later determines that its exposure is lower or that
the liability is not sufficient to cover its revised expectations, the Company adjusts the liability and effects a related charge in its
tax provision during the period in which the Company makes such a determination.
Variable Interest Entities
The Company determines at the inception of each arrangement whether an entity in which the Company holds an
investment or in which the Company has other variable interests is considered a variable interest entity ("VIE"). The Company
consolidates VIEs when it is the primary beneficiary. The primary beneficiary of a VIE is the party that meets both of the
following criteria: (1) has the power to make decisions that most significantly affect the economic performance of the VIE and
(2) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the
VIE. Periodically, the Company assesses whether any changes in the interest or relationship with the entity affect the
determination of whether the entity is still a VIE and, if so, whether the Company is the primary beneficiary. If the Company is
not the primary beneficiary in a VIE, the Company accounts for the investment or other variable interest in accordance with
applicable GAAP.
The Company has concluded that Ablecom Technology, Inc. (“Ablecom”) and its affiliate, Compuware Technology,
Inc. ("Compuware"), are VIEs; 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, all contractual arrangements
with these entities. 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 these related parties’
62
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 party contributed $0.2 million for a 50% ownership interest 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 fiscal years
ended 2021, 2020 and 2019, the accounts of the Management Company were consolidated with the accounts of Super Micro
Computer, and a noncontrolling interest was recorded for Ablecom's interest in the net assets and operations of the Management
Company. Net income (loss) attributable to Ablecom's interest was not material for the periods presented and was included in
general and administrative expenses in the Company's consolidated statements of operations.
Foreign Currency Transactions
The functional currency of the Company’s international subsidiaries is the U.S. dollar, with the exception of Super
Micro Asia and Technology Park, Inc., a consolidated variable interest entity. Monetary assets and liabilities of the Company's
international subsidiaries that are denominated in foreign currency are remeasured into U.S. dollars at period-end exchange
rates. Non-monetary assets and liabilities that are denominated in the foreign currency are remeasured into U.S. dollars at the
historical rates. Revenue and expenses that are denominated in the foreign currency are remeasured into U.S. dollars at the
average exchange rates during the period. Remeasurement of foreign currency accounts and resulting foreign exchange
transaction gains and losses, which have not been material, are reflected in the consolidated statements of operations in other
expense, net.
The functional currency of Super Micro Asia and Technology Park, Inc. is New Taiwanese Dollar (“NTD”). Assets and
liabilities are translated to U.S. dollars at the period-end exchange rate. Revenues and expenses are translated using the average
exchange rate for the period. The effects of foreign currency translation are included in stockholders’ equity as a component of
accumulated other comprehensive (loss) income in the accompanying consolidated balance sheets and periodic movements are
summarized as a line item in the consolidated statements of comprehensive income.
The Company has an investment in a privately-held company that is accounted for under the equity method (the
"Corporate Venture"). The functional currency of the Corporate Venture is the Chinese Yuan. Adjustments for the Company's
share of the effects of foreign currency translation from local currency to U.S. dollars are recorded as increases or decreases to
the carrying value of the investment and included in stockholders’ equity as a component of accumulated other comprehensive
(loss) income in the accompanying consolidated balance sheets and periodic movements are summarized as a line item in the
consolidated statements of comprehensive income.
Net Income Per Common Share
Basic net income per common share is computed by dividing net income by the weighted-average number of shares of
common stock outstanding during the period. Diluted net income per common share is computed by dividing net income by the
weighted-average number of shares of common stock outstanding during the period increased to include the number of
additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued.
Potentially dilutive securities include outstanding stock options and unvested RSUs and PRSUs. Contingently issuable shares
are included in computing basic net income per common share as of the date that all necessary conditions, including service
vesting conditions have been satisfied. Contingently issuable shares are considered for computing diluted net income per
common share as of the beginning of the period in which all necessary conditions have been satisfied and the only remaining
vesting condition is a service vesting condition.
Under the treasury stock method, an increase in the fair market value of the Company's common stock results in a
greater dilutive effect from outstanding stock options and RSUs and PRSUs. Additionally, the exercise of stock options and the
vesting of RSUs results in a further dilutive effect on net income per share.
The computation of basic and diluted net income per common share is as follows (in thousands, except per share
amounts):
63
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Numerator:
Net income
Denominator:
Weighted-average shares outstanding
Effect of dilutive securities
Weighted-average diluted shares
2021
Years Ended June 30,
2020
2019
$
111,865 $
84,308 $
71,918
51,157
2,350
53,507
2.19 $
2.09 $
50,987
1,851
52,838
1.65 $
1.60 $
49,917
1,799
51,716
1.44
1.39
Basic net income per common share
Diluted net income per common share
$
$
For the fiscal years ended June 30, 2021, 2020 and 2019, the Company had stock options, RSUs and PRSUs
outstanding that could potentially dilute basic earnings per share in the future, but were excluded from the computation of
diluted net income per share in the periods presented, as their effect would have been anti-dilutive. The anti-dilutive common
share equivalents resulting from outstanding equity awards were 670,179, 2,208,000, and 3,758,000 for the fiscal years ended
June 30, 2021, 2020 and 2019, respectively.
Concentration of Supplier Risk
Certain materials used by the Company in the manufacturing of its products are available from a limited number of
suppliers. Shortages could occur in these materials due to an interruption of supply or increased demand in the industry. One
supplier accounted for 20.3%, 26.8%, and 21.8% of total purchases for the fiscal years ended June 30, 2021, 2020 and 2019,
respectively. Purchases from Ablecom and Compuware, related parties of the Company as noted in Note 13, "Related Party
Transactions," accounted for a combined 7.8%, 10.1%, and 9.2% of total cost of sales for the fiscal years ended June 30, 2021,
2020 and 2019, respectively.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration of credit risk consist primarily of cash
and cash equivalents, restricted cash, investment in an auction rate security and accounts receivable. No single customer
accounted for 10% or more of the net sales in fiscal years 2021, 2020 and 2019. One customer accounted for 13.5% and 10.1%
of accounts receivable, net as of June 30, 2021 and 2020, respectively.
Treasury Stock
The Company accounts for treasury stock under the cost method. Upon the retirement of treasury shares, the Company
deducts the par value of the retired treasury shares from common stock and allocates the excess of cost over par as a deduction
to additional paid-in capital based on the pro-rata portion of additional paid-in-capital, and the remaining excess as a deduction
to retained earnings. Retired treasury shares revert to the status of authorized but unissued shares.
Accounting Pronouncements Recently Adopted
In June 2016, the FASB issued authoritative guidance, Financial Instruments-Credit Losses: Measurement of Credit
Losses on Financial Instruments. Under this new guidance, a company is required to estimate credit losses on certain types of
financial instruments using an expected-loss model, replacing the current incurred-loss model, and record the estimate through
an allowance for credit losses, which results in more timely recognition of credit losses. The Company adopted this guidance on
July 1, 2020 using the modified retrospective transition method, which requires a cumulative-effect adjustment, if any, to the
opening balance of retained earnings to be recognized on the date of adoption with prior periods not restated. The adoption of
the guidance had no material impact on the Company’s consolidated financial statements as of July 1, 2020.
64
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company maintains an allowance for credit losses for accounts receivable and the investment in an auction rate
security. The allowance for credit losses is estimated using a loss rate method, considering factors such as customers’ credit
risk, historical loss experience, current conditions, and forecasts. The allowance for credit losses is measured on a collective
(pool) basis by aggregating customer balances with similar risk characteristics. The Company also records a specific allowance
based on an analysis of individual past due balances or customer-specific information, such as a decline in creditworthiness or
bankruptcy. The new guidance has no material impact on the Company's consolidated financial statements for the year ended
June 30, 2021.
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 FASB Concepts Statements, including the consideration of costs and benefits. The Company adopted this
guidance on July 1, 2020. As of June 30, 2021, the Company’s investment in an auction rate security is the only Level 3
investment measured at fair value on a recurring basis. Changes to the disclosures in the consolidated financial statements were
immaterial. See Note 2, "Fair Value Disclosure".
In August 2018, the FASB issued authoritative guidance, Intangibles-Goodwill and Other-Internal-Use Software
(Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a
Service Contract, to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a
service contract as well as hosting arrangements that include an internal use software license with the requirements for
capitalizing implementation costs incurred to develop or obtain internal-use software. The accounting for the service element of
a hosting arrangement that is a service contract is not affected by the new guidance. The Company adopted this guidance on
July 1, 2020, prospectively. The adoption of this guidance did not have a material impact on the Company's consolidated
financial statements and disclosures.
Accounting Pronouncements Not Yet Adopted
In December 2019, the FASB issued amended guidance, Simplifying the Accounting for Income Taxes, to remove
certain exceptions to the general principles from ASC 740 - Income Taxes, and to improve consistent application of U.S. GAAP
for other areas of ASC 740 by clarifying and amending existing guidance. The guidance is effective for the Company from July
1, 2021; early adoption is permitted. The Company determined that the adoption of the guidance will not have a material impact
on the Company's consolidated financial statements and disclosures.
In March 2020, the FASB issued authoritative guidance, Facilitation of the Effects of Reference Rate Reform on
Financial Reporting. The new guidance provides optional expedients and exceptions for applying generally accepted
accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference
LIBOR or another reference rate expected to be discontinued. The guidance also establishes (1) a general contract modification
principle that entities can apply in other areas that may be affected by reference rate reform and (2) certain elective hedge
accounting expedients. The amendment is effective for all entities through December 31, 2022. In January 2021, the FASB
issued further guidance on this topic, which clarified the scope and application of the original guidance. LIBOR is used to
calculate the interest on borrowings under the Company's 2018 Bank of America Credit Facility and E.SUN Credit Facility. The
2018 Bank of America Credit Facility was amended on June 28, 2021 with a new maturity date of June 28, 2026 and fallback
terms related to LIBOR replacement mechanics. As the amendment has changes not related to LIBOR replacement, optional
expedients under this guidance cannot be elected. E.SUN Credit Facility will terminate on September 18, 2021 before the phase
out of LIBOR. Therefore, the Company does not expect the adoption of the guidance to have an impact on its consolidated
financial statements and disclosures.
Note 2.
Fair Value Disclosure
The financial instruments of the Company measured at fair value on a recurring basis are included in cash equivalents,
other assets and accrued liabilities. The Company classifies its financial instruments, 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.
65
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company’s investment in an auction rate security is classified within Level 3 of the fair value hierarchy as the
determination of its fair value was not based on observable inputs as of June 30, 2021 and June 30, 2020. See Note 1,
"Organization and Summary of Significant Accounting Policies," for a discussion of the Company’s policies regarding the fair
value hierarchy. The Company is using the discounted cash flow method to estimate the fair value of the auction rate security at
each period end and the following assumptions: (i) the expected yield based on observable market rate of similar securities, (ii)
the security coupon rate that is reset monthly, (iii) the estimated holding period and (iv) a liquidity discount. The liquidity
discount assumption is based on the management estimate of lack of marketability discount of similar securities and is
determined based on the analysis of financial market trends over time, recent redemptions of securities and other market
activities. The Company performed a sensitivity analysis and applying a change of either plus or minus 100 basis points in the
liquidity discount does not result in a significantly higher or lower fair value measurement of the auction rate security as of June
30, 2021.
Financial Assets and Liabilities Measured on a Recurring Basis
The following table sets forth the Company’s financial instruments as of June 30, 2021 and 2020, which are measured
at fair value on a recurring basis by level within the fair value hierarchy. These are classified based on the lowest level of input
that is significant to the fair value measurement (in thousands):
June 30, 2021
Assets
Money market funds(1)
Certificates of deposit(2)
Auction rate security
Total assets measured at fair value
June 30, 2020
Assets
Money market funds(1)
Certificates of deposit(2)
Auction rate security
Total assets measured at fair value
Liabilities
Performance awards liability(3)
Total liabilities measured at fair
l
$
$
$
$
$
$
Level 1
Level 2
Level 3
Asset at
Fair Value
151 $
—
—
151 $
— $
863
—
863 $
— $
—
1,556
1,556 $
151
863
1,556
2,570
Level 1
Level 2
Level 3
Asset at
Fair Value
1,163 $
—
—
1,163 $
— $
836
—
836 $
— $
—
1,571
1,571 $
— $
— $
2,100 $
2,100 $
— $
— $
1,163
836
1,571
3,570
2,100
2,100
__________________________
(1) $0.0 million and $0.4 million in money market funds are included in cash and cash equivalents and $0.2 million and $0.8 million in money market funds are
included in restricted cash, non-current in other assets in the consolidated balance sheets as of June 30, 2021 and 2020, respectively.
(2) $0.2 million and $0.2 million in certificates of deposit are included in cash and cash equivalents, $0.3 million and $0.3 million in certificates of deposit are
included in prepaid expenses and other assets, and $0.4 million and $0.3 million in certificates of deposit are included in restricted cash, non-current in other
assets in the consolidated balance sheets as of June 30, 2021 and 2020, respectively.
(3) As of June 30, 2021, the Company no longer measures performance awards liability at fair value because the Company trued up the performance awards
liability to the cash payment value. As of June 30, 2020, the current portion of the performance awards liability of $1.5 million is included in accrued liabilities
and the noncurrent portion of $0.6 million is included in other long-term liabilities in the consolidated balance sheets.
On a quarterly basis, the Company also evaluates the current expected credit loss by considering factors such as
historical experience, market data, issuer-specific factors, and current economic conditions. For the fiscal year ended June 30,
2021, the credit losses related to the Company’s investments was not significant.
66
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of June 30, 2020, the Company estimated the fair value of performance awards using the Monte-Carlo simulation
model and classified them within Level 2 of the fair value hierarchy as estimates are based on the observable inputs. The
significant inputs used in estimating the fair value of the awards as of June 30, 2020 are as follows:
Stock Price as of
Period End
Performance
Period
Risk-free Rate
Volatility
Dividend Yield
$28.39
1.25 - 2.00
years
0.16%
53.75%
—
There was no movement in the balances of the Company's financial assets measured at fair value on a recurring basis,
consisting of investment in an auction rate security, using significant unobservable inputs (Level 3) for fiscal years
2021 and 2020.
There were no transfers between Level 1, Level 2 or Level 3 financial instruments in fiscal years 2021 and 2020.
The following is a summary of the Company’s investment in an auction rate security as of June 30, 2021 and 2020 (in
thousands):
Auction rate security
Auction rate security
June 30, 2021
Gross
Unrealized
Holding
Gains
Gross
Unrealized
Holding
Losses
Fair Value
Cost Basis
$
1,750 $
— $
(194) $
1,556
June 30, 2020
Gross
Unrealized
Holding
Gains
Gross
Unrealized
Holding
Losses
Cost Basis
Fair Value
$
1,750 $
— $
(179) $
1,571
For the fiscal year ended June 30, 2021, the Company's loss recognized in other comprehensive income for the auction
rate security was immaterial. No gain or loss was recognized in other comprehensive income for the auction rate security for the
fiscal years ended June 30, 2020 and 2019.
The Company measures the fair value of outstanding debt for disclosure purposes on a recurring basis. As of June 30,
2021 and 2020, total debt of $98.2 million and $29.4 million, respectively, is reported at amortized cost. This outstanding debt
is classified as Level 2 as it is not actively traded. The amortized cost of the outstanding debt approximates the fair value.
Other Financial Assets - Investments into Non-Marketable Equity Securities
The Company's non-marketable equity securities are investments in privately held companies without readily
determinable fair values in the amount of $0.1 million as of June 30, 2021 and 2020, respectively. The Company accounts for
these investments at cost minus impairment, if any, plus or minus changes from observable price changes in orderly
transactions for the identical or similar investments by the same issuer. During the years ended June 30, 2021 and 2020, the
Company did not record any upward or downward adjustments to the carrying values of the non-marketable equity securities
related to observable price changes. The Company also did not record any impairment to the carrying values of the non-
marketable equity securities during fiscal year 2021 and 2020. During fiscal year 2019, the Company recorded impairment
charges of $2.7 million for its non-marketable equity securities which had an initial cost basis of $2.7 million as it was
determined the carrying value of the investments were not recoverable.
Note 3.
Revenue
67
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Disaggregation of Revenue
The Company disaggregates revenue by type of product and geographical market in order to depict the nature, amount,
and timing of revenue and cash flows. Service revenues, which are less than 10%, are not a significant component of total
revenue and are aggregated within the respective categories.
The following is a summary of net sales by product type (in thousands):
Server and storage systems
Subsystems and accessories
Total
2021
Years Ended June 30,
2020
$ 2,790,305 $ 2,620,754 $ 2,858,644
641,716
$ 3,557,422 $ 3,339,281 $ 3,500,360
718,527
767,117
2019
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 geographical region to which the products were shipped. The
following is a summary of net sales by geographic region (in thousands):
United States
Asia
Europe
Other
Total
2021
2019
Years Ended June 30,
2020
$ 2,107,910 $ 1,957,329 $ 2,032,948
712,211
611,014
144,187
$ 3,557,422 $ 3,339,281 $ 3,500,360
699,653
614,826
135,033
650,652
598,558
132,742
Starting July 1, 2020, the Company does not separately disclose revenue by products sold to indirect sales channel
partners or direct customers and original equipment manufacturers because management does not make business operational
decisions based on this set of disaggregation so the disclosure is no longer material to investors.
Contract Balances
Generally, the payment terms of the Company’s offerings range from 30 to 60 days. In certain instances, customers
may prepay for products and services in advance of delivery. Receivables relate to the Company’s unconditional right to
consideration for performance obligations either partially or fully completed.
Contract assets are rights to consideration in exchange for goods or services that the Company has transferred to a
customer when such right is conditional on something other than the passage of time. Such contract assets are insignificant to
the Company’s consolidated financial statements.
Contract liabilities consist of deferred revenue and relate to amounts invoiced to or advance consideration received
from customers, which precede the Company’s satisfaction of the associated performance obligation(s). The Company’s
deferred revenue primarily results from customer payments received upfront for extended warranties and on-site services
because these performance obligations are satisfied over time. Revenue recognized during fiscal year ended June 30, 2021,
which was included in the opening deferred revenue balance as of June 30, 2020 of $203.8 million, was $101.6 million.
Deferred revenue decreased $1.5 million during the fiscal year ended June 30, 2021 as compared to the fiscal year
ended June 30, 2020 mainly due to the recognition of revenue from contracts entered into in prior periods exceeding the value
of the transaction price allocated for service contract performance obligations during the fiscal year ended June 30, 2021.
68
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Transaction Price Allocated to the Remaining Performance Obligations
Remaining performance obligations represent the aggregate the amount of transaction price that is allocated to
performance obligations not delivered, or only partially undelivered, as of the end of the reporting period. The Company applies
the exemption to not disclose information about remaining performance obligations that are part of a contract that has an
original expected duration of one year or less. These performance obligations generally consist of services, such as on-site
services, including integration services and extended warranty services. that are contracted for one year or less, and products for
which control has not yet been transferred. The value of the transaction price allocated to remaining performance obligations as
of June 30, 2021 was approximately $202.3 million. The Company expects to recognize approximately 50% of remaining
performance obligations as revenue in the next 12 months, and the remainder thereafter.
Capitalized Contract Acquisition Costs and Fulfillment Cost
Contract acquisition costs are those incremental costs that the Company incurs to obtain a contract with a customer
that it would not have incurred if the contract had not been obtained. Contract acquisition costs consist primarily of incentive
bonuses. Contract acquisition costs are considered incremental and recoverable costs of obtaining and fulfilling a contract with
a customer and are therefore capitalizable. The Company applies the practical expedient to expense incentive bonus costs as
incurred if the amortization period would be one year or less, generally upon delivery of the associated server and storage
systems or components. Where the amortization period of the contract cost would be more than a year, the Company applies
judgment in the allocation of the incentive bonus cost asset between hardware and service performance obligations and
expenses the cost allocated to the hardware performance obligations upon delivery of associated server and storage systems or
components and amortizes the cost allocated to service performance obligations over the period the services are expected to be
provided. Contract acquisition costs allocated to service performance obligations that are subject to capitalization are
insignificant to the Company’s consolidated financial statements.
Contract fulfillment costs consist of costs paid in advance for outsourced services provided by third parties to the
extent they are not in the scope of other guidance. Fulfillment costs paid in advance for outsourced services provided by third
parties are capitalized and amortized over the period the services are expected to be provided. Such fulfillment costs are
insignificant to the Company’s consolidated financial statements.
Note 4.
Accounts Receivable Allowances
The Company has established an allowance for doubtful accounts. The allowance for doubtful accounts is based upon
the age of outstanding receivables, credit risk of specific customers, historical trends related to past losses and other relevant
factors. Accounts receivable allowances as of June 30, 2021, 2020 and 2019 consisted of the following (in thousands):
Allowance for doubtful accounts:
Year ended June 30, 2021
Year ended June 30, 2020
Year ended June 30, 2019
Note 5.
Inventories
Beginning
Balance
Charged to
Cost and
Expenses
(Recovered), net Write-offs
Ending
Balance
$
4,586 $
8,906
1,945
(820) $
(3,081)
7,058
(1,175) $
(1,239)
(97)
2,591
4,586
8,906
Inventories as of June 30, 2021 and 2020 consisted of the following (in thousands):
69
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Finished goods
Work in process
Purchased parts and raw materials
Total inventories
June 30,
2021
2020
$ 761,694 $ 656,817
38,146
156,535
$ 1,040,964 $ 851,498
80,472
198,798
During fiscal years 2021, 2020 and 2019, the Company recorded a net provision for excess and obsolete inventory to
cost of sales totaling $6.8 million, $18.4 million and $32.9 million, respectively. The Company classifies subsystems and
accessories that may be sold separately or incorporated into systems as finished goods.
Note 6.
Property, Plant, and Equipment
Property, plant and equipment as of June 30, 2021 and 2020 consisted of the following (in thousands):
Buildings
Land
Machinery and equipment
Buildings construction in progress(1)
Building and leasehold improvements
Software
Furniture and fixtures
Accumulated depreciation and amortization
Property, plant and equipment, net
June 30,
2021
86,930 $
76,421
97,671
87,438
26,640
22,592
22,843
420,535
(145,822)
274,713 $
2020
86,930
75,251
85,381
46,311
24,517
20,597
21,544
360,531
(126,746)
233,785
$
$
__________________________
(1) Primarily relates to the development and construction costs associated with the Company’s Green Computing Park located in San Jose, California and a new
building in Taiwan.
Note 7.
Prepaid Expenses and Other Assets
Prepaid expenses and other current assets as of June 30, 2021 and 2020 consisted of the following (in thousands):
June 30,
Other receivables(1)
Prepaid income tax
Prepaid expenses
Deferred service costs
Restricted cash
Others
Total prepaid expenses and other current assets
$
2021
99,921 $
12,288
6,719
4,900
251
6,116
2020
96,669
14,323
7,075
4,161
250
4,507
$ 130,195 $ 126,985
__________________________
(1) Includes other receivables from contract manufacturers based on certain buy-sell arrangements of $76.2 million and $83.8 million as of June 30, 2021 and
2020, respectively.
70
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Other assets as of June 30, 2021 and 2020 consisted of the following (in thousands):
Operating lease right-of-use asset
Deferred service costs, non-current
Deposits
Prepaid expense, non-current
Investment in auction rate security
Restricted cash, non-current
Others
Total other assets
June 30,
2021
20,047 $
5,421
1,669
1,973
1,556
932
528
32,126 $
2020
23,784
4,632
1,201
1,576
1,571
1,607
128
34,499
$
$
Cash, cash equivalents and restricted cash as of June 30, 2021 and 2020 consisted of the following (in thousands):
Cash and cash equivalents
Restricted cash included in prepaid expenses and other current assets
Restricted cash included in other assets
Total cash, cash equivalents and restricted cash
Note 8.
Investment in a Corporate Venture
June 30,
2021
2020
$ 232,266 $ 210,533
250
1,607
$ 233,449 $ 212,390
251
932
In October 2016, the Company entered into agreements pursuant to which the Company contributed certain
technology rights in connection with an investment in the Corporate Venture 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.
The Company recorded a deferred gain related to the contribution of certain technology rights. As of June 30, 2021
and 2020, the Company had unamortized deferred gain balance of $1.0 million and $2.0 million, respectively, in accrued
liabilities and $0.0 million and $1.0 million, respectively, in other long-term liabilities in the Company’s consolidated balance
sheets.
The Company monitors the investment for events or circumstances indicative of potential impairment and makes
appropriate reductions in carrying values if it determines that an impairment charge is required. In June 2020, the third-party
parent company that controls the Corporate Venture was placed on a U.S. government export control list, along with
several of such third-party parent's related entities and a separate listing for one of its subsidiaries. The Corporate Venture is not
itself a restricted party. The Company has concluded that the Corporate Venture is in compliance with the new restrictions. The
Company does not believe that the equity investment carrying value is impacted as of June 30, 2021. No impairment charge
was recorded for the fiscal years ended June 30, 2021 and 2020.
The Company sold products worth $51.2 million, $61.9 million, $52.2 million to the Corporate Venture in the fiscal
years 2021, 2020, 2019, respectively, and the Company's share of intra-entity profits on the products that remained unsold by
the Corporate Venture as of June 30, 2021 and June 30, 2020 have been eliminated and have reduced the carrying value of the
Company's investment in the Corporate Venture. To the extent that the elimination of intra-entity profits reduces the investment
balance below zero, such amounts are recorded within accrued liabilities. The Company had $8.5 million and $7.8 million due
from the Corporate Venture in accounts receivable, net as of June 30, 2021 and 2020, respectively.
Note 9.
Accrued Liabilities
71
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Accrued liabilities as of June 30, 2021 and 2020 consisted of the following (in thousands):
June 30,
Accrued payroll and related expenses
Contract manufacturers liabilities
Customer deposits
Accrued warranty costs
Operating lease liability
Accrued cooperative marketing expenses
Accrued professional fees
Accrued legal liabilities
Others
Total accrued liabilities
Performance Awards Liability
$
2021
45,770 $
45,319
32,419
10,185
6,322
5,652
2,737
—
30,446
2020
33,577
36,249
9,942
9,984
6,310
5,925
5,661
18,114
29,639
$ 178,850 $ 155,401
In March 2020, the Board of Directors (the “Board”) approved performance bonuses for the Chief Executive Officer, a
senior executive and two members of the Board, which payments will be earned when specified market and performance
conditions are achieved.
The Chief Executive Officer’s aggregate cash bonuses of up to $8.1 million are earned in two tranches. The first 50%
is payable if the average closing price for the Company’s common stock equals or exceeds $31.61 for any period of 20
consecutive trading days following the date of the agreement and ending prior to September 30, 2021 and the Chief Executive
Officer remains employed with the Company through the date that such common stock price goal is determined to have been
achieved. This payment can be reduced at the discretion of the Board to the extent the Company has not made adequate
progress in remediating its material weaknesses in its internal control over financial reporting as determined by the Board. The
second 50% is payable if the average closing price for the Company’s common stock equals or exceeds $32.99 for any period
of 20 consecutive trading days following the date of the agreement and ending prior to June 30, 2022 and the Chief Executive
Officer remains employed with the Company through the date that such common stock price goal is achieved. During the fiscal
year ended June 30, 2021, the target average closing prices for both tranches were met but no determination has been made if
there has been adequate progress in remediating the Company’s internal weaknesses in its internal control over financial
reporting. The cash payment under the second tranche has been made as of June 30, 2021, but no cash payment had been made
for the first tranche as the Board has to approve this payment.
Performance bonuses for a senior executive and two members of the Board are earned based on achieving a specified
target average closing price for the Company’s common stock over the specified period as determined by the Board at the grant
dates and continuous services through the payment dates. A senior executive earned an aggregate cash payment of $0.1 million
when the target average closing price was met in the fourth quarter of fiscal year 2020. The two members of the Board can earn
aggregate cash payments of $0.3 million in two tranches if the target average closing price reaches $31.61 for the first tranche
and $32.99 per share for the second tranche. During the fiscal year ended June 30, 2021, the target average closing prices for
both tranches were met and the cash payment for both tranches was made to the two Board members.
The Company accounts for the outstanding performance bonuses as liabilities and estimates fair value of payable
amounts using a Monte-Carlo simulation model. The awards are re-measured at each period end with changes in fair value
recorded in the Company’s consolidated statement of operations in operating expenses. The cumulative recorded expense at
each period end is trued-up to the expected payable amount vested through the period end. The requisite service periods over
which expenses are recognized are derived from the Monte-Carlo model for all performance awards, except for the first 50% of
the Chief Executive Officer’s award that includes a performance condition. The Company estimates if it is probable that the
performance condition will be met prior to the expiration date of this award. If at the measurement date it is determined to be
probable, the Company estimates the requisite period as the longer of the service period derived by the Monte-Carlo model and
the implicit service period when the Company expects to make adequate progress in remediating its material weaknesses in its
72
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
internal control over financial reporting, as reported by the Company's Audit Committee. If it is determined to not be probable,
then the Company will reverse any previously recognized expense for this award in the period when it is no longer probable
that the performance condition will be achieved.
With the satisfaction of the target average closing price conditions in the fiscal year ended June 30, 2021, the Company
trued up all the unpaid performance bonuses to the cash payment value. As of June 30, 2021, the full cash value of the bonuses
were paid, except the Chief Executive Officer's first tranche performance bonus which was recorded as an accrued liability on
the Company's consolidated balance sheet. The Company has completed the remediation of its material weaknesses in its
internal control over financial reporting, and anticipates that the Board will conclude that there has been adequate progress in
remediating the Company's material weaknesses in its internal control over financial reporting by October 31, 2021. Therefore,
as of June 30, 2021, the Company trued up the accrued liability for the Chief Executive Officer’s first tranche award to the
expected payable amount vested through the period end and the unrecognized cash value will be recorded over the remaining
service period.
Based on the cash payment value and estimated fair value of these performance bonuses as of June 30, 2021 and June
30, 2020, the Company recorded a $3.6 million and $2.1 million liability, respectively, of which $3.6 million and $1.5 million,
respectively, was recorded within accrued liabilities and $0.0 million and $0.6 million, respectively, was recorded within other
long-term liabilities on the Company's consolidated balance sheet. An unrecognized compensation expense of $0.5 million will
be recorded over the remaining service periods of 0.18 years. The expense recognized during fiscal years 2021 and 2020 was
$5.8 million and $2.1 million, respectively.
Note 10.
Short-term and Long-term Debt
Short-term and long-term debt obligations as of June 30, 2021 and 2020 consisted of the following (in thousands):
June 30,
2021
2020
$
$
18,000 $
20,400
38,400
25,090
34,700
59,790
98,190
63,490
34,700 $
—
—
—
23,704
5,697
29,401
29,401
23,704
5,697
Line of credit:
CTBC Bank
E.SUN Bank
Total line of credit
Term loans:
CTBC Bank, due August 31, 2021
CTBC Bank, due June 4, 2030
Total term loans
Total debt
Short-term debt and current portion of long-term debt
Debt, Non-current
Activities under Revolving Lines of Credit and Term Loans
Bank of America
2018 Bank of America Credit Facility
In April 2018, the Company entered into a revolving line of credit with Bank of America for up to $250.0 million (as
amended from time to time, the "2018 Bank of America Credit Facility"). On June 28, 2021, the 2018 Bank of America Credit
Facility was amended to, among other items, extend the maturity to June 28, 2026, reduce the size of the facility from
$250.0 million to $200.0 million, increase the maximum amount that the Company can request the facility be increased (the
accordion feature) from $100.0 million to $150.0 million, and update provisions relating to erroneous payments and LIBOR
replacement mechanics. In addition, the amendment reduced both the unused line fee from 0.375% per annum to 0.2% or 0.3%
73
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
per annum (depending upon amount drawn under the facility) and the interest rate applicable to the facility from LIBOR plus
2.00% or 3.00% per annum (depending upon amount drawn under the facility) to LIBOR plus 1.375% or 1.625% per annum.
The amendment was accounted for as a modification and the impact was immaterial to the consolidated financial statements.
Interest accrued on any loans under the 2018 Bank of America Credit Facility is due on the first day of each month, and the
loans are due and payable in full on the termination date of the 2018 Bank of America Credit Facility. Voluntary prepayments
are permitted without early repayment fees or penalties. Subject to customary exceptions, the 2018 Bank of America Credit
Facility is secured by substantially all of Super Micro Computer’s assets, other than real property assets. Under the terms of the
2018 Bank of America Credit Facility, the Company is not permitted to pay any dividends. The 2018 Bank of America Credit
Facility contains customary representations and warranties and customary affirmative and negative covenants applicable to the
Company and its subsidiaries and contains a financial covenant, which requires that the Company maintain a certain fixed
charge coverage ratio, for each twelve-month period while in a Trigger Period, as defined in the agreement, is in effect.
As of June 30, 2021 and 2020, the Company had no outstanding borrowings under the 2018 Bank of America Credit
Facility. The interest rates under the 2018 Bank of America Credit Facility as of June 30, 2021 and 2020 were 1.50% and
3.00%, respectively. In October 2018, a $3.2 million letter of credit was issued under the 2018 Bank of America Credit Facility
and in October 2019, the letter of credit amount was increased to $6.4 million. No amount was drawn under the standby letter
of credit. In May 2021, the letter of credit was cancelled. The balance of debt issuance costs outstanding were $0.5 million and
$0.6 million as of June 30, 2021 and 2020, respectively. The Company has been in compliance with all the covenants under the
2018 Bank of America Credit Facility, and as of June 30, 2021, the Company's available borrowing capacity was
$200.0 million, subject to the borrowing base limitation and compliance with other applicable terms.
CTBC Bank
CTBC Credit Facility
In June 2019, the Company entered into a credit agreement with CTBC Bank, which was amended in August 2020,
(collectively, the "CTBC Credit Facility"). The amended credit agreement with CTBC Bank that provides for (i) a 12-month
NTD 700.0 million ($24.0 million U.S. dollar equivalent) term loan facility secured by the land and building located in Bade,
Taiwan with an interest rate equal to the lender's established NTD interest rate plus 0.25% per annum which is adjusted
monthly, which term loan facility also includes a 12-month guarantee of up to NTD 100.0 million ($3.4 million U.S. dollar
equivalent) with an annual fee equal to 0.50% per annum, (ii) a 180-day NTD 1,500.0 million ($51.5 million U.S. dollar
equivalent) term loan facility up to 100% of eligible accounts receivable in an aggregate amount with an interest rate equal to
the lender's established NTD interest rate plus an interest rate ranging from 0.30% to 0.50% per annum which is adjusted
monthly, and (ⅲ) a 12-month revolving line of credit of up to 100% of eligible accounts receivable in an aggregate amount of
up to $50.0 million with an interest rate equal to the lender's established USD interest rate plus 0.80% per annum which is
adjusted monthly, or equal to the lender’s established NTD interest rate plus an interest rate ranging from 0.30% to 0.50% per
annum which is adjusted monthly if the borrowing is in NTD. In February 2021, CTBC Bank amended the USD interest rate to
be the lender's established USD interest rate plus 0.70% to 0.75% per annum which is adjusted monthly. The total borrowings
allowed under the CTBC Credit Facility was capped at $50.0 million. There are no financial covenants associated with the
CTBC Credit Facility.
The total outstanding borrowings under the CTBC Credit Facility term loan were denominated in NTD and
remeasured into U.S. dollars of $25.1 million and $23.7 million at June 30, 2021 and 2020, respectively. The interest rate for
these loans were 0.75% per annum as of June 30, 2021 and 0.63% per annum as of June 30, 2020. As of June 30, 2021 and
2020, the outstanding borrowings under the CTBC Credit Facility revolving line of credit were $18.0 million and $0.0 million,
respectively. The interest rate was 0.98% per annum as of June 30, 2021. As of June 30, 2021, the amount available for future
borrowing under the CTBC Credit Facility was $6.9 million. As of June 30, 2021, the net book value of land and building
located in Bade, Taiwan, collateralizing the CTBC Credit Facility term loan was $24.8 million.
2020 CTBC Term Loan Facility due June 4, 2030
In May 2020, the Company entered into a ten-year, non-revolving term loan facility (“2020 CTBC Term Loan
Facility”) to obtain up to NTD 1.2 billion ($40.7 million in U.S. dollar equivalents) in financing for use in the expansion and
renovation of the Company’s Bade Manufacturing Facility located in Taiwan. Drawdowns on the 2020 CTBC Term Loan
Facility are based on 80% of balances owed on commercial invoices from the contractor and shall be drawn according to the
74
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
progress of the renovations. Borrowings under the 2020 CTBC Term Loan Facility are available through June 2022. The
Company is required to pay against total outstanding principal and interest in equal monthly installments starting June 2023 and
continuing through the maturity date of June 2030. Interest under the 2020 CTBC Term Loan Facility is the two-year term
floating rate of postal saving interest rate plus 0.105% and is established on the date of the drawdown application. If no interest
rate is agreed upon, interest shall accrue at the annual base rate for CTBC plus 4.00%. The 2020 CTBC Term Loan Facility is
secured by the Bade Manufacturing Facility and its expansion. Fees paid to the lender as debt issuance costs were immaterial.
The Company has financial covenants requiring the Company's current ratio, debt service coverage ratio, and financial debt
ratio, as defined in the agreement, to be maintained at certain levels under the 2020 CTBC Term Loan Facility.
As of June 30, 2021 and 2020, the amounts outstanding under the 2020 CTBC Term Loan Facility were $34.7 million
and $5.7 million, respectively. The interest rates for these loans were 0.45% per annum as of June 30, 2021 and June 30, 2020.
The net book value of the property serving as collateral as of June 30, 2021 was $45.9 million. As of June 30, 2021, the
Company was in compliance with all financial covenants under the 2020 CTBC Term Loan Facility.
2021 CTBC Credit Lines
On July 20, 2021 (the “Effective Date”), the Company entered into a general agreement for omnibus credit lines with
CTBC Bank, which replaced the CTBC Credit Facility and 2020 CTBC Term Loan Facility (the “Prior CTBC Credit Lines”) in
their entirety and permit borrowings, from time to time, of (i) a term loan facility of up to NTD 1,550.0 million ($55.4 million
in U.S. dollar equivalents) and (ii) a line of credit facility of up to US$105.0 million (the “2021 CTBC Credit Lines”). Interest
rates are to be established according to individual credit arrangements established pursuant to the 2021 CTBC Credit Lines,
which interest rates shall be subject to adjustment depending on the satisfaction of certain conditions. Term loans made
pursuant to the 2021 CTBC Credit Lines are secured by certain of the Company’s assets, including certain property, land, plant,
and equipment. As of June 30, 2021, the net book value of land and building located in Bade, Taiwan, collateralizing the New
CTBC Credit Facility term loan was $70.7 million. The Company is subject to various financial covenants under the 2021
CTBC Credit Lines, including current ratio, debt service coverage ratio, and financial debt ratio requirements. Amounts
outstanding under the Prior CTBC Credit Lines on the Effective Date were assumed by the 2021 CTBC Credit Lines.
E.SUN Bank Credit Facility
In December 2020, Super Micro Computer Inc, Taiwan, a wholly-owned Taiwan subsidiary of the Company, entered
into a General Credit Agreement (the “E.SUN Credit Facility”) with E.SUN Bank in Taiwan. The E.SUN Credit Facility
provides for the issuance of loans, advances, acceptances, bills, bank guarantees, overdrafts, letters of credit, and other types of
drawdown instruments up to a credit limit of $30.0 million. The E.SUN Credit Facility expires on September 18, 2021.
Generally, the interest for base rate loans made under the E.SUN Credit Facility is based upon an average interbank
overnight call loan rate in the finance industry (such as LIBOR or TAIFX) plus a fixed margin, and is subject to occasional
adjustment. Interest for adjustable loan rate loans made under the E.SUN Credit Facility is based upon an average one-year
fixed rate time saving deposit rate of a selected reference bank which shall be a well-known domestic bank in Taiwan, and is
subject to occasional adjustment. The E.SUN Credit Facility has customary default provisions permitting E.SUN Bank to
terminate or reduce the credit limit, shorten the credit period, or deem all liabilities due and payable, including in the event such
Taiwan subsidiary of the Company has an overdue liability at another financial organization. There are no financial covenants
associated with the E.SUN Credit Facility.
Terms for specific drawdown instruments issued under the E.SUN Credit Facility, such as credit amount, term of use,
mode of drawdown, specific lending rate, and other relevant terms, are to be set forth in Notifications and Confirmation of
Credit Conditions by and between the Company and E.SUN Bank. A Notification and Confirmation of Credit Conditions
agreement under the E.SUN Credit Facility was entered into on December 2, 2020 for a $30.0 million import loan (the “Import
Loan”) with a tenor of 120 days. In June 2021, the Import Loan was amended to, among other items, bearing interest at a rate
based on the higher of LIBOR plus 1.00% then divided by 0.946 or TAIFX plus 0.80% then divided by 0.946. As of June 30,
2021, the amounts outstanding under the E.SUN Credit Facility was $20.4 million and the interest rates for these loans ranged
from approximately 1.0% to 1.29% per annum. As of June 30, 2021, the amount available for future borrowing under the
E.SUN Credit Facility was $9.6 million.
Principal payments on short-term and long-term debt obligations are due as follows (in thousands):
75
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Fiscal Year:
2022
2023
2024
2025
2026
2027 and thereafter
Total short-term and long-term debt
Principal Payments
$
63,490
413
4,957
4,957
4,957
19,416
98,190
$
Note 11.
Other Long-term Liabilities
Other long-term liabilities as of June 30, 2021 and 2020 consisted of the following (in thousands):
Accrued unrecognized tax benefits including related interest and penalties
Operating lease liability, non-current
Accrued warranty costs, non-current
Others
Total other long-term liabilities
Note 12.
Leases
June 30,
2021
17,841 $
14,539
2,678
6,074
41,132 $
2020
15,496
18,102
2,395
6,002
41,995
$
$
The Company leases offices, warehouses and other premises, vehicles and certain equipment leased under non-
cancelable operating leases. Operating lease expense recognized and supplemental cash flow information related to operating
leases for the years ended June 30, 2021 and 2020 were as follows (in thousands):
Years Ended June 30,
2020
2021
Operating lease expense (including expense for lease agreements with related parties of $1,319
and $1,421 for the years ended June 30, 2021 and 2020, respectively)
Cash payments for operating leases (including payments to related parties of $1,351 and $1,443
for the years ended June 30, 2021 and 2020, respectively)
New operating lease assets obtained in exchange for operating lease liabilities
$
7,827 $
6,993
7,966
3,538
6,411
15,229
During the years ended June 30, 2021 and 2020, the Company's costs related to short-term lease arrangements for real
estate and non-real estate assets were immaterial. Non-lease variable payments expensed in the years ended June 30, 2021,
2020 and 2019 were $1.8 million, $1.3 million and $0.0 million, respectively.
As of June 30, 2021, the weighted average remaining lease term for operating leases was 3.8 years and the weighted
average discount rate was 3.4%. Maturities of operating lease liabilities under noncancelable operating lease arrangements as of
June 30, 2021 were as follows (in thousands):
76
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Fiscal Year:
2022
2023
2024
2025
2026 and beyond
Total future lease payments
Less: Imputed interest
Present value of operating lease liabilities
Maturities of operating
leases
$
$
$
6,932
5,430
4,538
4,382
1,017
22,299
(1,438)
20,861
As of June 30, 2021, commitments under short-term lease arrangements and operating and financing leases that have
not yet commenced were immaterial.
The Company has entered into lease agreements with related parties. See Note 13, "Related Party Transactions" for a
further discussion.
Note 13.
Related Party Transactions
The Company has a variety of business relationships with Ablecom and Compuware. Ablecom and Compuware are
both Taiwan corporations. Ablecom is one of the Company’s major contract manufacturers; Compuware is both a distributor of
the Company’s products and a contract manufacturer for the Company. Ablecom’s Chief Executive Officer, Steve Liang, is the
brother of Charles Liang, the Company’s President, Chief Executive Officer and Chairman of the Board. Steve Liang and his
family members owned approximately 28.8% of Ablecom’s stock and Charles Liang and his spouse, Sara Liu, who is also an
officer and director of the Company, collectively owned approximately 10.5% of Ablecom’s capital stock as of June 30, 2021.
Bill Liang, a brother of both Charles Liang and Steve Liang, is a member of the Board of Directors of Ablecom. Bill Liang is
also the Chief Executive Officer of Compuware, a member of Compuware’s Board of Directors and a holder of a significant
equity interest in Compuware. Steve Liang is also a member of Compuware’s Board of Directors and is an equity holder of
Compuware. Charles Liang or Sara Liu do not own any capital stock of Compuware and the Company does not own any of
Ablecom or Compuware's capital stock.
Dealings with Ablecom
The Company has entered into a series of agreements with Ablecom, including multiple product development,
production and service agreements, product manufacturing agreements, manufacturing services agreements and lease
agreements for warehouse space.
Under these agreements, the Company outsources to Ablecom a portion of its design activities and a significant part of
its server chassis manufacturing as well as an immaterial portion of other components. Ablecom manufactured approximately
91.8%, 95.5% and 96.3% of the chassis included in the products sold by the Company during fiscal years 2021, 2020 and 2019,
respectively. With respect to design activities, Ablecom generally agrees to design certain agreed-upon products according to
the Company’s specifications, and further agrees to build the tools needed to manufacture the products. The Company pays
Ablecom for the design and engineering services, and further agrees to pay Ablecom for the tooling. The Company retains full
ownership of any intellectual property resulting from the design of these products and tooling.
With respect to the manufacturing aspects of the relationship, Ablecom purchases most of materials needed to
manufacture the chassis from third parties and the Company provides certain components used in the manufacturing process
(such as power supplies) to Ablecom through consignment or sales transactions. Ablecom uses these materials and components
to manufacture the completed chassis and then sell them back to the Company. For the components purchased from the
Company, Ablecom sells the components back to the Company at a price equal to the price at which the Company sold the
components to Ablecom. The Company and Ablecom frequently review and negotiate the prices of the chassis the Company
purchases from Ablecom. In addition to inventory purchases, the Company also incurs other costs associated with design
services, tooling and other miscellaneous costs from Ablecom.
77
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company’s exposure to financial loss as a result of its involvement with Ablecom is limited to potential losses on
its purchase orders in the event of an unforeseen decline in the market price and/or demand of the Company’s products such
that the Company incurs a loss on the sale or cannot sell the products. Outstanding purchase orders from the Company to
Ablecom were $40.2 million and $23.2 million at June 30, 2021 and 2020, respectively, representing the maximum exposure to
financial loss. The Company does not directly or indirectly guarantee any obligations of Ablecom, or any losses that the equity
holders of Ablecom may suffer. Since Ablecom manufactures substantially all the chassis that the Company incorporates into its
products, if Ablecom were to suddenly be unable to manufacture chassis for the Company, the Company’s business could suffer
if the Company is unable to quickly qualify substitute suppliers who can supply high-quality chassis to the Company in volume
and at acceptable prices.
Dealings with Compuware
The Company has entered into a distribution agreement with Compuware, under which the Company appointed
Compuware as a non-exclusive distributor of the Company’s products in Taiwan, China and Australia. Compuware assumes the
responsibility to install the Company's products at the site of the end customer, if required, and administers customer support in
exchange for a discount from the Company's standard price for its purchases.
The Company also has entered into a series of agreements with Compuware, including a multiple product
development, production and service agreements, product manufacturing agreements, and lease agreements for office space.
Under these agreements, the Company outsources to Compuware a portion of its design activities and a significant part
of its power supplies manufacturing as well as an immaterial portion of other components. With respect to design activities,
Compuware generally agrees to design certain agreed-upon products according to the Company’s specifications, and further
agrees to build the tools needed to manufacture the products. The Company pays Compuware for the design and engineering
services, and further agrees to pay Compuware for the tooling. The Company retains full ownership of any intellectual property
resulting from the design of these products and tooling. With respect to the manufacturing aspects of the relationship,
Compuware purchases most of materials needed to manufacture the power supplies from outside markets and uses these
materials to manufacture the products and then sell those products to the Company. The Company and Compuware frequently
review and negotiate the prices of the power supplies the Company purchases from Compuware.
Compuware also manufactures motherboards, backplanes and other components used on printed circuit boards for the
Company. The Company sells to Compuware most of the components needed to manufacture the above products. Compuware
uses the components to manufacture the products and then sells the products back to the Company at a purchase price equal to
the price at which the Company sold the components to Compuware, plus a “manufacturing value added” fee and other
miscellaneous material charges and costs. The Company and Compuware frequently review and negotiate the amount of the
“manufacturing value added” fee that will be included in the price of the products the Company purchases from Compuware. In
addition to the inventory purchases, the Company also incurs costs associated with design services, tooling assets, and
miscellaneous costs.
The Company’s exposure to financial loss as a result of its involvement with Compuware is limited to potential losses
on its purchase orders in the event of an unforeseen decline in the market price and/or demand of the Company’s products such
that the Company incurs a loss on the sale or cannot sell the products. Outstanding purchase orders from the Company to
Compuware were $71.0 million and $45.7 million at June 30, 2021 and 2020, respectively, representing the maximum exposure
to financial loss. The Company does not directly or indirectly guarantee any obligations of Compuware, or any losses that the
equity holders of Compuware may suffer.
The Company’s results from transactions with Ablecom and Compuware for each of the fiscal years ended June 30,
2021, 2020 and 2019 are as follows (in thousands):
78
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Ablecom
Purchases(1)
Compuware
Net sales
Purchases(1)
Years Ended June 30,
2020
2021
2019
$
130,852 $
160,084 $
145,273
$
27,865 $
115,213
23,867 $
131,763
17,651
139,579
__________________________
(1) Includes principally purchases of inventory and other miscellaneous items.
The Company's net sales to Ablecom were not material for the fiscal years ended June 30, 2021, 2020 and 2019.
The Company had the following balances related to transactions with Ablecom and Compuware as of June 30, 2021
and 2020 (in thousands):
Ablecom
Accounts receivable and other receivables(1)
Accounts payable and accrued liabilities(2)
Other long-term liabilities(3)
Compuware
Accounts receivable and other receivables(1)
Accounts payable and accrued liabilities(2)
Other long-term liabilities(3)
June 30,
2021
2020
$
5,577 $
41,194
—
18,371
46,430
—
6,379
40,056
513
14,323
46,518
186
__________________________
(1) Other receivables include receivables from vendors included in prepaid and other current assets.
(2) Includes current portion of operating lease liabilities included in other current liabilities.
(3) Represents non-current portion of operating lease liabilities.
The Company procures certain semiconductor products from Monolithic Power Systems, Inc. (“MPS”), a fabless
manufacturer of high-performance analog and mixed-signal semiconductors, for use in its products. Saria Tseng, who serves as
a member on the Board of Directors, also serves as Vice President of Strategic Corporate Development, General Counsel and
Secretary of MPS. The Company purchased $3.9 million, $5.2 million and $3.7 million of semiconductor products from MPS
for use in its manufacturing process during the years ended June 30, 2021, 2020 and 2019, respectively. The amounts due to
MPS as of June 30, 2021 and 2020 were not material.
See Note 8, "Investment in a Corporate Venture" for a discussion of the investment and the transactions and balances
in the Company's Corporate Venture.
Note 14.
Stock-based Compensation and Stockholders’ Equity
Equity Incentive Plan
On June 5, 2020, the stockholders of the Company approved the 2020 Equity and Incentive Compensation Plan (the
"2020 Plan"). The maximum number of shares available under the 2020 Plan is 5,000,000 plus 1,045,000 shares of common
stock that remained available for future awards under the 2016 Equity Incentive Plan (the “2016 Plan”), at the time of adoption
of the 2020 Plan. No other awards can be granted under the 2016 Plan and 7,246,000 shares of common stock remain reserved
for outstanding awards issued under the 2016 Plan at the time of adoption of the 2020 Plan.
79
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Under the 2020 Plan, the Company can grant stock options, stock appreciation rights, restricted stock, restricted stock
units, performance shares, performance units, dividend equivalents, and certain other awards, including those denominated or
payable in, or otherwise based on, the Company’s common stock. The exercise price per share for incentive stock options
granted to employees owning shares representing more than 10% of the Company's outstanding voting stock at the time of
grant cannot be less than 110% of the fair value of the underlying shares on the grant date. Nonqualified stock options and
incentive stock options granted to all other persons are granted at a price not less than 100% of the fair value. Options generally
expire ten years after the date of grant. Stock options and RSUs generally vest over four years; 25% at the end of one year and
one sixteenth per quarter thereafter.
As of June 30, 2021, the Company had 2,730,277 authorized shares available for future issuance under the 2020 Plan.
Common Stock Repurchase and Retirement
On August 9, 2020, the Board approved a share repurchase program to repurchase up to an aggregate of $30.0 million
of the Company's common stock at market prices. The program was effective until December 31, 2020 or if earlier, until the
maximum amount of common stock is repurchased. During the three months ended September 30, 2020, 1,142,294 shares of
common stock were repurchased for $30.0 million and the program ended. Repurchased shares were recorded as treasury shares
in the Company's condensed consolidated balance sheet as of September 30, 2020.
On December 11, 2020, the Company retired 2,475,419 shares of common stock, which were recorded as treasury
stock in the Company's condensed consolidated balance sheet as of September 30, 2020.
On October 31, 2020, the Board approved a share repurchase program to repurchase up to an aggregate of $50.0
million of the Company's common stock at market prices. The program was effective until October 31, 2021 or if earlier, until
the maximum amount of common stock was repurchased. As of March 31, 2021, 1,675,746 shares of common stock were
repurchased and retired for an aggregate $50.0 million and the program ended.
On January 29, 2021, a duly authorized subcommittee of the Board approved a share repurchase program to
repurchase up to an aggregate of $200.0 million of the Company's common stock at market prices. The program is effective
until July 31, 2022 or if earlier, until the maximum amount of common stock is repurchased. 1,391,171 shares of common stock
were repurchased and retired for an aggregate $50.0 million as of June 30, 2021.
During the fiscal year ended June 30, 2021, the Company repurchased and retired 4,209,211 shares of common stock
for an aggregated $130.0 million. Additionally, the Company retired 1,333,125 shares of common stock repurchased in prior
years.
Determining Fair Value
The Company's fair value of RSUs and PRSUs is based on the closing market price of the Company's common stock
on the date of grant. The Company estimates the fair value of stock options granted using the Black-Scholes-option-pricing
model. This fair value is then amortized ratably over the requisite service periods of the awards, which is generally the vesting
period. The key inputs in using the Black-Scholes-option-pricing model were as follows:
Expected Term—The Company’s expected term represents the period that the Company’s stock-based awards are
expected to be outstanding and was determined based on the Company's historical experience.
Expected Volatility—Expected volatility is based on the Company's implied and historical volatility.
Expected Dividend—The Black-Scholes valuation model calls for a single expected dividend yield as an input and the
Company has no plans to pay dividends.
Risk-Free Interest Rate—The risk-free interest rate used in the Black-Scholes valuation method is based on the United
States Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of option.
80
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The fair value of stock option grants for the fiscal years ended June 30, 2021, 2020 and 2019 was estimated on the date
of grant using the Black-Scholes option pricing model with the following assumptions:
Risk-free interest rate
Expected term
Dividend yield
Volatility
Weighted-average fair value
2021
0.27% - 1.09%
5.98 years
— %
50.03% - 50.43%
Years Ended June 30,
2020
0.47% - 1.72%
6.27 years
— %
49.61% - 50.46%
2019
2.32% - 2.97%
6.05 years
— %
47.34% - 50.28%
$
14.92
$
9.59
$
9.25
The following table shows total stock-based compensation expense included in the consolidated statements of
operations for the fiscal years ended June 30, 2021, 2020 and 2019 (in thousands):
Cost of sales
Research and development
Sales and marketing
General and administrative
Stock-based compensation expense before taxes
Income tax impact
Stock-based compensation expense, net
Years Ended June 30,
2020
2019
2021
$
$
1,762 $
14,030
2,022
10,735
28,549
(8,574)
19,975 $
1,504 $
12,202
1,680
4,803
20,189
(6,814)
13,375 $
1,663
12,981
1,805
4,735
21,184
(4,349)
16,835
As of June 30, 2021, $8.4 million of unrecognized compensation cost related to stock options is expected to be
recognized over a weighted-average period of 4 years, $45.1 million of unrecognized compensation cost related to unvested
RSUs is expected to be recognized over a weighted-average period of 2.73 years and $0.1 million of unrecognized
compensation cost related to unvested PRSUs is expected to be recognized over a period of 0.36 year. Additionally, as
described below, $10.5 million of unrecognized compensation cost related to the 2021 CEO Performance Stock Option is
expected to be recognized over a period of 5 years.
Stock Option Activity
In March 2021, the Company’s Compensation Committee of the Board of Directors (the “Compensation Committee”)
approved the grant of a stock option award for 1,000,000 shares of common stock to the Company’s CEO (the “2021 CEO
Performance Stock Option”). The 2021 CEO Performance Stock Option has five vesting tranches with a vesting schedule based
entirely on the attainment of operational milestones (performance conditions) and market conditions, assuming (1) continued
employment either as the CEO or in such capacity as agreed upon between the Company’s CEO and the Board and (2) service
through each vesting date. Each of the five vesting tranches of the 2021 CEO Performance Stock Option will vest upon
certification by the Compensation Committee that both (i) the market price milestone for such tranche, which begins at $45.00
per share for the first tranche and increases up to $120.00 per share thereafter (based on a 60 calendar day average, counting
only trading days), has been achieved, and (ii) any one of five operational milestones focused on total revenue, as reported
under U.S. GAAP, have been achieved for the previous four consecutive fiscal quarters. Upon vesting and exercise, including
the payment of the exercise price of $45.00 per share, prior to March 2, 2024, the Company’s CEO must hold shares that he
acquires until March 2, 2024, other than those shares sold pursuant to a cashless exercise where shares are simultaneously sold
to pay for the exercise price and any required tax withholding.
The achievement status of the operational and stock price milestones as of June 30, 2021 was as follows:
81
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Annualized Revenue Milestone
Achievement Status
Stock Price Milestone
Achievement Status
(in billions)
$4.0
$4.8
$5.8
$6.8
$8.0
Probable
Probable
Probable
Probable
—
$45
$60
$75
$95
$120
Not met
Not met
Not met
Not met
Not met
On the grant date, a Monte Carlo simulation was used to determine for each tranche (i) a fixed expense amount for
such tranche and (ii) the future time when the market price milestone for such tranche was expected to be achieved, or its
“expected market price milestone achievement time.” Separately, based on a subjective assessment of the Company’s future
financial performance, each quarter, the Company will determine whether achievement is probable for each operational
milestone that has not previously been achieved or deemed probable of achievement, and, if so, the future time when the
Company expects to achieve that operational milestone, or its “expected operational milestone achievement time.” When the
Company first determines that an operational milestone has become probable of being achieved, the Company will allocate the
entire expense for the related tranche over the number of quarters between the grant date and the then-applicable “expected
vesting time.” The “expected vesting time” at any given time is the later of (i) the expected operational milestone achievement
time (if the related operational milestone has not yet been achieved) and (ii) the expected market price milestone achievement
time (if the related market price milestone has not yet been achieved). The Company will immediately recognize a catch-up
expense for all accumulated expenses from the grant date through the quarter in which the operational milestone was first
deemed probable of being achieved. Each quarter thereafter, the Company will recognize the prorated portion of the then-
remaining expense for the tranche based on the number of quarters between such quarter and the then-applicable expected
vesting time, except that upon vesting of a tranche, all remaining expenses for that tranche will be immediately recognized.
During the fiscal year ended June 30, 2021, the Company recognized compensation expense related to the 2021 CEO
Performance Stock Option of $1.1 million. As of June 30, 2021, $10.5 million in unrecognized compensation cost related to the
2021 CEO Performance Stock Option is expected to be recognized over a period of 5 years.
The following table summarizes stock option activity during the fiscal years ended June 30, 2021, 2020 and 2019
under all plans:
Balance as of June 30, 2018
Granted
Forfeited/Cancelled
Balance as of June 30, 2019
Granted
Exercised
Forfeited/Cancelled
Balance as of June 30, 2020
Granted
Exercised
Forfeited/Cancelled
Balance as of June 30, 2021
Options vested and exercisable at June 30, 2021
Weighted
Average
Exercise
Price per
Share
Weighted
Average
Remaining
Contractual
Term
(in Years)
Aggregate
Intrinsic
Value
(in thousands)
16.50
18.58
8.94
18.02
19.61
15.74
11.97
19.38
40.49
17.25
24.43
26.17
20.47
5.36 $
3.41 $
57,099
50,887
Options
Outstanding
8,301,138 $
434,320 $
(1,360,823) $
7,374,635 $
273,260 $
(1,812,000) $
(456,127) $
5,379,768 $
1,517,110 $
(1,645,800) $
(75,524) $
5,175,554 $
3,448,888 $
82
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The total pretax intrinsic value of options exercised during the fiscal year ended June 30, 2021, 2020 and 2019 was
$24.3 million, $19.3 million and $0, respectively. Additional information regarding options outstanding as of June 30, 2021, is
as follows:
Range of
Exercise Prices
$9.24 - $12.50
$13.00 - $15.22
$17.09 - $18.93
$20.37 - $22.10
$22.15 - $25.44
$26.60 - $28.71
$30.33 - $38.50
$39.19 - $39.19
$42.35 - $42.35
$45.00 - $45.00
$9.24 - $45.00
Options Outstanding
Weighted-
Average
Remaining
Contractual
Term (Years)
Options Vested and Exercisable
Weighted-
Average
Exercise
Price Per
Share
Weighted-
Average
Exercise
Price Per
Share
Number
Exercisable
1.54 $
2.68 $
3.17 $
4.90 $
5.81 $
4.69 $
7.26 $
3.62 $
4.82 $
9.67 $
5.36 $
521,886 $
10.81
490,794 $
14.33
648,411 $
17.94
547,375 $
21.13
436,968 $
24.26
529,181 $
27.08
246,273 $
34.31
28,000 $
39.19
— $
42.35
45.00
— $
26.17 3,448,888 $
10.81
14.40
17.97
21.10
24.67
27.06
34.48
39.19
—
—
20.47
Number
Outstanding
521,886
540,699
714,906
619,745
614,906
536,681
590,341
28,000
8,390
1,000,000
5,175,554
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 typically service
based 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. 50% of the PRSUs vested at June 30, 2018 when performance
conditions were achieved, while the remainder vest in equal amounts over the following ten quarters subject to the continued
employment of the CEO. As of June 30, 2021, the remaining 50% of the PRSUs had vested in accordance with the terms of the
grant.
In March 2020, the Compensation Committee granted a PRSU award to one of the Company's senior executives. The
award vests in two tranches and includes service and performance conditions. Each tranche has 15,000 RSUs that vest in May
2021 and November 2021 based on service conditions only. Additional units can be earned based on revenue growth percentage
in fiscal year 2020 compared to fiscal year 2019, which units would vest in May 2021, and based on revenue growth percentage
in fiscal year 2021 compared to fiscal year 2020, which units would vest in November 2021. No additional units were earned
for fiscal year 2020 as revenue decreased from fiscal year 2019.
The following table summarizes RSUs and PRSUs activity during the fiscal years ended June 30, 2021 and 2020 under
all plans:
83
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Balance as of June 30, 2018
Granted
Released(1)
Forfeited
Balance as of June 30, 2019
Granted
Released(1)
Forfeited
Balance as of June 30, 2020
Granted
Released(1)
Forfeited
Balance as of June 30, 2021
Time-based
RSUs
Outstanding
1,480,605 $
1,086,911 $
(549,886) $
(144,528) $
1,873,102 $
943,650 $
(871,274) $
(177,451) $
1,768,027 $
1,334,418 $
(984,406) $
(263,083) $
1,854,956 $
Weighted
Average
Grant-Date
Fair Value per
Share
Weighted
Average
Grant-Date
Fair Value per
Share
PRSUs
Outstanding
23.34
18.37
24.87
20.25
20.25
20.45
20.97
19.49
20.08
31.54
21.63
25.01
26.79
120,000 $
—
—
—
120,000 $
30,000 $
(108,000) $
—
42,000 $
30,000 $
(27,000) $
(30,000) $
15,000 $
27.10
27.10
20.37
27.10
22.29
34.27
23.36
20.37
34.27
_________________
(1) The number of shares released excludes 172,857 RSUs that were vested but not released in fiscal year 2019. The number of vested but not released RSUs
for fiscal years 2021 and 2020 was not material. The number of shares released also excludes 24,000 PRSUs that were vested but not released in fiscal
year 2019. These vested RSUs and PRSUs were primarily released in fiscal year 2020 and included in fiscal year 2020 number upon the effectiveness of
the Company's registration statement on Form S-8.
The total pretax intrinsic value of RSUs and PRSUs vested was $32.6 million, $18.9 million and $14.3 million for the
fiscal years ended June 30, 2021, 2020 and 2019, respectively. In fiscal years 2021, 2020 and 2019, the Company withheld
274,620, 331,648 and 175,044 shares with value equivalent to the employees' minimum statutory obligation for the applicable
income and other employment taxes from the vesting and release of 1,011,406, 979,274 and 549,886 RSUs and PRSUs,
respectively, and remitted the cash to the appropriate taxing authorities. The total shares withheld were based on the value of the
RSUs on their respective vesting dates as determined by the Company's closing stock price. Total payments for the employees'
tax obligations to tax authorities were $8.7 million, $8.2 million and $3.1 million for the fiscal years ended June 30, 2021, 2020
and 2019, respectively, and are reflected as a financing activity within the consolidated statements of cash flows. Pursuant to
the terms of the 2020 and 2016 Plan, shares withheld in connection with net-share settlements are returned to the 2016 Plan and
are available for future grants under the 2020 and 2016 Plan.
Note 15.
Income Taxes
The components of income before income tax provision for the fiscal years ended June 30, 2021, 2020 and 2019 are as
follows (in thousands):
United States
Foreign
Income before income tax provision
$
2021
80,922 $
37,706
$ 118,628 $
Years Ended June 30,
2020
35,701 $
49,127
84,828 $
2019
45,126
44,397
89,523
The income tax provision for the fiscal years ended June 30, 2021, 2020 and 2019, consists of the following (in
thousands):
84
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
Income tax provision
Years Ended June 30,
2020
2019
2021
$
$
3,406 $
1,077
10,843
15,326
4,568 $
1,727
10,399
16,694
12,308
2,917
16,531
31,756
(5,489)
(409)
(2,492)
(8,390)
6,936 $
(10,108)
(1,621)
(2,043)
(13,772)
2,922 $
(13,078)
(2,888)
(906)
(16,872)
14,884
The Company’s net deferred tax assets as of June 30, 2021 and 2020 consist of the following (in thousands):
Research and development credits
Deferred revenue
Inventory valuation
Capitalized research and development costs
Stock-based compensation
Lease obligations
Accrued vacation and bonus
Prepaid and accrued expenses
Warranty accrual
Bad debt and other reserves
Marketing fund accrual
Other
Total deferred income tax assets
Deferred tax liabilities-depreciation and other
Right of use asset
Valuation allowance
Deferred income tax assets, net
June 30,
2021
30,540 $
18,584
13,831
15,206
3,868
2,861
5,098
1,179
2,154
1,668
720
4,460
100,169
(4,137)
(2,831)
(29,913)
63,288 $
$
$
2020
24,304
20,354
13,946
7,509
4,075
3,632
3,281
2,560
2,051
1,917
548
3,652
87,829
(4,428)
(3,612)
(24,891)
54,898
The Company assesses its deferred tax assets for recoverability on a regular basis, and where applicable, a valuation
allowance is recorded to reduce the total deferred tax asset to an amount that will, more likely than not, be realized in the future.
As of June 30, 2021, the Company believes that most of its deferred tax assets are “more-likely-than not” to be realized with the
exception of state research and development tax credits that have not met the “more-likely than not” realization threshold
criteria. As a result, at June 30, 2021, the gross excess credits of $37.1 million, or net of federal tax benefit of $29.3 million, are
subject to a full valuation allowance. At June 30, 2020, the gross excess credits of $30.8 million, or net of federal tax benefit of
$24.3 million, are subject to a full valuation allowance. The change in valuation allowance is $5.0 million and $3.9 million for
the fiscal years ended June 30, 2021 and 2020, respectively. The Company will continue to review its deferred tax assets in
accordance with the applicable accounting standards. The net deferred tax assets balance as of June 30, 2021 and 2020 was
$63.3 million and $54.9 million, respectively.
85
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The 2017 Tax Reform Act also creates a new requirement that Global Intangible Low-Taxed Income (“GILTI”) earned
by controlled foreign corporations (“CFCs”) that must be included currently in the gross income of a CFC’s U.S. stockholder
starting in the tax year that begins after 2017. GILTI does not have material impact on the Company's income tax provision.
Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (i) treating taxes due on
future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”)
or (ii) factoring such amounts into a company’s measurement of its deferred taxes. The Company's selection of an accounting
policy with respect to the GILTI tax rules is to treat GILTI tax as a current period expense under the period cost method.
Under the 2017 Tax Reform Act, starting on July 1, 2018, the Company is no longer subject to federal income tax on
earnings remitted from our foreign subsidiaries. The Company previously asserted that all of its foreign undistributed earnings
were indefinitely reinvested. As a result of the 2017 Tax Reform Act, the Company has determined that its foreign undistributed
earnings are indefinitely reinvested except for Netherlands. The Company may repatriate foreign earnings from Netherlands
which are previously taxed income as a result of the 2017 Tax Reform Act. The tax impact of such repatriation is estimated to
be immaterial.
As a result of the 2017 Tax Reform Act, in December 2019, the Company realigned its international business
operations and group structure. As a part of this restructuring, the Company moved certain intellectual property back to the
United States. As a result of this restructuring, the Company estimated approximately $3.0 million and $1.9 million additional
tax benefit from foreign derived intangible income in fiscal years 2021 and 2020 as compared to fiscal year 2019.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted. The
CARES Act provides temporary relief from certain aspects of the 2017 Tax Reform Act that imposed limitations on the
utilization of certain losses, interest expense deductions, alternative minimum tax credits and made a technical correction to the
2017 Tax Reform Act related to the depreciable life of qualified improvement property. The CARES Act did not have a material
impact on the Company.
The following is a reconciliation for the fiscal years ended June 30, 2021, 2020 and 2019, of the statutory rate to the
Company’s effective federal tax rate:
Income tax provision at statutory rate
State income tax, net of federal tax benefit
Foreign rate differential
Research and development tax credit
Uncertain tax positions, net of (settlement) with Tax Authorities
Foreign derived intangible / Subpart F income inclusion
Stock-based compensation
Non deductible penalty on SEC matter
Provision to return true-up
Other, net
Effective tax rate
Years Ended June 30,
2020
21.0 %
—
2021
21.0 %
0.3
(0.5)
(10.5)
2.0
(2.5)
(3.3)
—
(1.9)
1.2
5.8 %
—
(13.1)
(2.3)
(3.8)
(2.8)
4.4
(1.1)
1.1
3.4 %
2019
21.0 %
0.5
1.1
(9.5)
4.1
(2.1)
2.1
—
(1.6)
1.0
16.6 %
As of June 30, 2021, the Company had state research and development tax credit carryforwards of $50.2 million. The
state research and development tax credits will carryforward indefinitely to offset future state income taxes.
The following table summarizes the activity related to the unrecognized tax benefits (in thousands):
86
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Balance at June 30, 2018
Gross increases:
For current year’s tax positions
For prior years’ tax positions
Gross decreases:
Decreases due to settlements with taxing authority
Decreases due to lapse of statute of limitations
Balance at June 30, 2019
Gross increases:
For current year’s tax positions
For prior years’ tax positions
Gross decreases:
Decreases due to settlements with taxing authority
Decreases due to lapse of statute of limitations
Balance at June 30, 2020
Gross increases:
For current year’s tax positions
For prior years’ tax positions
Gross decreases:
Decreases due to lapse of statute of limitations
Balance at June 30, 2021
________________________
*excludes interest, penalties, federal benefit of state reserves
Gross*
Unrecognized
Income Tax
Benefits
25,117
7,789
—
(1,504)
(3,354)
28,048
8,769
505
(7,632)
(2,484)
27,206
13,333
1,439
(1,243)
40,735
$
$
The total amount of unrecognized tax benefits that would affect the effective tax rate, if recognized, was $27.1 million
and $13.4 million as of June 30, 2021 and 2020, respectively.
The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the income tax
provision in the consolidated statements of operations. As of June 30, 2021 and 2020, the Company had accrued $2.5 million
and $2.1 million for the payment of interest and penalties relating to unrecognized tax benefits, respectively.
In October 2019, the Taiwan tax authority completed its audit in Taiwan for fiscal year 2018 and proposed a transfer
pricing adjustment on the Company which resulted in additional tax liability of $1.6 million. The Company accepted the
proposed adjustment in October 2019 and paid the $1.6 million tax liability in February 2020. In February 2020, the Taiwan tax
authority completed its audit in Taiwan for fiscal year 2019 and proposed a transfer pricing adjustment on the Company which
resulted in additional tax liability of $1.0 million. The Company accepted the proposed adjustment and paid the $1.0 million tax
liability in February 2020. The impact of these adjustments on the income statement was offset by the release of previously
unrecognized tax benefits related to the fiscal years audited in the periods in which the proposed adjustments were accepted.
The Company believes that it has adequately provided reserves for all uncertain tax positions; however, amounts
asserted by tax authorities could be greater or less than the Company’s current position. Accordingly, the Company’s provision
on federal, state and foreign tax related matters to be recorded in the future may change as revised estimates are made or as the
underlying matters are settled or otherwise resolved.
The federal statute of limitations remains open in general for tax years ended June 30, 2018 through 2021. Various
states statute of limitations remains open in general for tax years ended June 30, 2017 through 2021. Certain statutes of
limitations in major foreign jurisdictions remain open in general for the tax years ended June 30, 2016 through 2021. It is
reasonably possible that our gross unrecognized tax benefits will decrease by approximately $1.0 million, in the next 12
87
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
months, due to the lapse of the statute of limitations. These adjustments, if recognized, would positively impact our effective
tax rate, and would be recognized as additional tax benefits.
Note 16.
Commitments and Contingencies
Litigation and Claims— On February 8, 2018, two putative class action complaints were filed against the Company,
the Company's Chief Executive Officer, and the Company's former Chief Financial Officer in the U.S. District Court for the
Northern District of California (Hessefort v. Super Micro Computer, Inc., et al., No. 18-cv-00838 and United Union of Roofers
v. Super Micro Computer, Inc., et al., No. 18-cv-00850). The complaints contain similar allegations, claiming that the
defendants violated Section 10(b) of the Securities Exchange Act due to alleged misrepresentations and/or omissions in public
statements regarding recognition of revenue. The court subsequently appointed New York Hotel Trades Council & Hotel
Association of New York City, Inc. Pension Fund as lead plaintiff. The lead plaintiff then filed an amended complaint naming
the Company's Senior Vice President of Investor Relations as an additional defendant. On June 21, 2019, the lead plaintiff filed
a further amended complaint naming the Company's former Senior Vice President of International Sales, Corporate Secretary,
and Director as an additional defendant. On July 26, 2019, the Company filed a motion to dismiss the complaint. On March 23,
2020, the Court granted the Company’s motion to dismiss the complaint, with leave for lead plaintiff to file an amended
complaint within 30 days. On April 22, 2020, lead plaintiff filed a further amended complaint. On June 5, 2020, the Company
filed a motion to dismiss the further amended complaint, the hearing for which was calendared for September 23, 2020;
however, the Court held a conference on September 15 to discuss how the Court could efficiently address the recent SEC
settlement agreement. The parties stipulated to allow plaintiffs to further amend the complaint solely to add allegations relating
to the SEC settlement. On October 14, 2020, plaintiffs filed a Fourth Amended Complaint. On October 28, 2020, defendants
filed a supplemental motion to dismiss. On March 29, 2021, the Court granted in part and denied in part defendants’ motions to
dismiss. Plaintiffs’ claims under Sections 10(b) and 20 of the Exchange Act were dismissed with prejudice as against the
Company’s former head of Investor Relations, Perry Hayes. Plaintiffs’ Section 10(b) claim, but not the Section 20 claim, was
likewise dismissed as to Wally Liaw, a founder, former director, and former SVP of International Sales. The Court denied the
motions to dismiss the Section 10(b) and Section 20 claims against the Company, Charles Liang, and Howard Hideshima, the
Company’s former CFO. Discovery has commenced, and the Court has calendared a hearing on class certification for January
20, 2022. The Company intends to defend the lawsuit vigorously.
On October 27, 2020, certain current and former directors and officers of the Company were named as defendants in a
putative derivative lawsuit filed in the Superior Court of the State of California, County of Santa Clara (the “Court”), captioned
Barry v. Liang, et al., 20-CV-372190. The Company was also named as a nominal defendant. The complaint purports to allege
claims for breaches of fiduciary duties, waste of corporate assets, and unjust enrichment arising out of allegations that the
Company’s officers and directors caused the Company to issue false and misleading statements about recognition of revenue
and the effectiveness of its internal controls, failed to adopt and implement effective internal controls, and failed to timely file
various reports with the Securities and Exchange Commission. The plaintiff seeks unspecified compensatory damages and other
equitable relief. Defendants filed demurrers, which were set for hearing on August 4, 2021, but which were continued to
September 15, 2021. Following this continuance, on July 21, 2021, Plaintiffs' counsel filed an amended complaint in lieu of
responding to the demurrer. The amended complaint added no new claims; primarily, the amendment added allegations
describing the March 29, 2021 motion to dismiss decision in the Hessefort class action. Defendants demurred to the amended
complaint on August 24, 2021, and the Court has calendared the hearing for November 24, 2021. The case is otherwise
currently stayed. The Company intends to defend the lawsuit vigorously.
On May 5, 2021, certain current and former directors and officers of the Company were named as defendants in a
putative derivative lawsuit filed in the U.S. District Court for the Northern District of California, captioned Stein v. Liang, et al.,
Case No. 3:21-cv-03357-KAW (the “Stein Derivative Action”). The Company was also named as a nominal defendant. The
complaint purports to allege claims for breaches of fiduciary duties, waste of corporate assets, unjust enrichment, and
contribution for violations of federal securities laws arising out of allegations that the Company’s officers and directors caused
the Company to issue false and misleading statements about recognition of revenue and the effectiveness of its internal controls,
failed to adopt and implement effective internal controls, and failed to timely file various reports with the Securities and
Exchange Commission. The plaintiff seeks unspecified compensatory damages and other equitable relief. Defendants filed
motions to dismiss the complaint on August 6, 2021, and the Court has calendared the hearing for November 4, 2021. The
Company intends to defend the lawsuit vigorously.
88
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEC Matter— The Company cooperated with the SEC in its investigation of marketing expenses that contained
certain irregularities discovered by Company management, which irregularities were disclosed on August 31, 2015, and the
Company cooperated with the SEC in its further investigation of the matters underlying the Company’s inability to timely file
its Form 10-K for the fiscal year ended June 30, 2017 and concerning the publication of a false and widely discredited news
article in October 2018 concerning the Company’s products. On August 25, 2020, to fully resolve all matters under
investigation, the Company consented to entry of an Order Instituting Cease-and-Desist Proceedings Pursuant to Section 8A of
the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-
and-Desist Order (“Order”), as announced by the SEC. The Company admitted the SEC’s jurisdiction over the Company and
the subject matter of the proceedings, but otherwise neither admitted nor denied the SEC’s findings, as described in the Order.
The Company agreed to cease and desist from committing or causing any violations and any future violations of Sections
17(a)(2) and (3) of the Securities Act and Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B), of the Exchange Act and Rules 12b-20,
13a-1, 13a-11, and 13a-13 thereunder. The Company agreed and paid a civil money penalty of $17,500,000 during the three
months ended September 30, 2020, which was recorded to general and administrative expense in the Company's consolidated
statement of operations. In addition, the Company’s Chief Executive Officer concluded a settlement with the SEC on August
25, 2020, as announced by the SEC. The Company’s Chief Executive Officer paid the Company the sum of $2,122,000 as
reimbursement of profits from certain stock sales during the relevant period, pursuant to Section 304 of the Sarbanes-Oxley Act
of 2002. The settlement amount was paid during the first quarter of fiscal 2021 and the Company recorded the payment as a
credit to general and administrative expense.
Other legal proceedings and indemnifications
From time to time, the Company has been involved in various legal proceedings arising from the normal course of
business activities. The resolution of any such matters have not had a material impact on the Company’s consolidated financial
condition, results of operations or liquidity as of June 30, 2021 and any prior periods.
The Company has entered into indemnification agreements with its current and former directors and executive officers.
Under these agreements, the Company has agreed to indemnify such individuals to the fullest extent permitted by law
against liabilities that arise by reason of their status as directors or officers and to advance expenses incurred by such
individuals in connection with related legal proceedings. It is not possible to determine the maximum potential amount of
payments the Company could be required to make under these agreements due to the limited history of prior indemnification
claims and the unique facts and circumstances involved in each claim. However, the Company maintains directors and officers
liability insurance coverage to reduce its exposure to such obligations.
Purchase Commitments - The Company has agreements to purchase inventory and non-inventory items primarily
through the next 12 months. As of June 30, 2021, these remaining noncancelable commitments were $569.8 million, including
$111.2 million for related parties.
Standby Letter of Credit - In October 2019, Bank of America increased the value of a previously issued standby letter
of credit to a beneficiary from $3.2 million to $6.4 million to facilitate ongoing operations of the Company. The standby letter
of credit is cancellable upon written notice from the issuer. No amounts have been drawn under the standby letter of credit. In
May 2021, the standby letter of credit was cancelled.
Lease Commitments - See Note 12, "Leases," for a discussion of the Company's operating lease and financing lease
commitments.
Note 17.
Retirement Plans
The Company sponsors a 401(k) savings plan for eligible United States employees and their beneficiaries.
Contributions by the Company are discretionary, and no contributions have been made by the Company for the fiscal years
ended June 30, 2021, 2020 and 2019.
Beginning in March 2003, employees of Super Micro Computer, B.V. are required to deduct a portion of their gross
wages based on a defined age-dependent premium and invest the amount in a defined contribution plan. The Company is
required to match the amount that is deducted monthly from employees’ wages. Similar to contributions into a 401(k) plan, the
89
SUPER MICRO COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Company's obligation is limited to the contributions made to the contribution plan. Investment risk and investment rewards are
assumed by the employees and not by the Company. For the fiscal years ended June 30, 2021, 2020 and 2019, the Company’s
matching contribution was $0.7 million, $0.6 million, and $0.5 million, respectively.
The Company contributes to a defined contribution pension plan administered by the government of Taiwan that
covers all eligible employees within Taiwan. Pension plan benefits are based primarily on participants’ compensation and years
of service credited as specified under the terms of Taiwan’s plan. The funding policy is consistent with the local requirements of
Taiwan. The Company's obligation is limited to the contributions made to the pension plan. The Company has no control over
the investment strategy of the assets of the government administered pension plan. For the fiscal years ended June 30, 2021,
2020 and 2019, the Company’s contribution was $2.5 million, $1.9 million and $1.6 million, respectively.
The Company has a defined benefit pension plan under the R.O.C. Labor Standards Law for certain employees of
Super Micro Computer, Inc. Taiwan that provides benefits based on an employee’s length of service and average monthly salary
for the six-month period prior to retirement. The Company contributes an amount equal to 2% of salaries paid each month to
the pension fund (the “Fund”), which is administered by the Labor Pension Fund Supervisory Committee (the “Committee”)
and deposited in the Committee’s name in the Bank of Taiwan. Before the end of each year, the Company assesses the balance
in the Fund. If the amount of the balance in the Fund is inadequate to pay retirement benefits for eligible employees in the next
year, the Company is required to fund the difference in one appropriation that should be made before the end of March 31 of the
next year. The Fund is operated and managed by the government’s designated authorities. As such, the Company does not have
any right to intervene in the investments of the Fund. For the fiscal year ended June 30, 2021, the Company recorded a pension
expense of $1.0 million. For the fiscal years ended June 30, 2020 and 2019, the Company’s pension expense was immaterial.
Note 18.
Segment Reporting
The Company operates in one operating segment that develops and provides high performance server solutions based
upon an innovative, modular and open-standard architecture. The Company’s chief operating decision maker is the Chief
Executive Officer.
The following is a summary of property, plant and equipment, net (in thousands):
Long-lived assets:
United States
Asia
Europe
June 30,
2021
2020
$ 180,143 $
91,640
2,930
$ 274,713 $
178,812
51,605
3,368
233,785
The Company’s revenue is presented on a disaggregated basis in Note 3, “Revenue” by type of product and by
geographical market.
90
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision, and with the participation, of our management, including our Chief Executive Officer (“CEO”)
and Chief Financial Officer (“CFO”), we evaluated the effectiveness of our disclosure controls and procedures as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of June 30,
2021. Based on this evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were effective at
a reasonable assurance level as of June 30, 2021.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f).
Internal control over financial reporting is a process designed by, or under the supervision of, our CEO and CFO to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial
statements for external purposes in accordance with U.S. GAAP. Management’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of our assets, (ii) provide reasonable assurance that transactions are appropriately
recorded to permit preparation of financial statements in accordance with U.S. GAAP and that our receipts and expenditures are
made only in accordance with authorizations of management, acting under authority delegated to them by the Board, and (iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on our financial statements.
Management, including our CEO and CFO, assessed our internal control over financial reporting as of June 30, 2021.
In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in its Internal Control - Integrated Framework (2013) (the “COSO Framework”). Based on this
assessment, management has concluded that our internal control over financial reporting was effective as of June 30, 2021 to
provide reasonable assurance regarding the reliability of financial reporting and preparation of consolidated financial statements
in accordance with U.S. GAAP. The effectiveness of our internal control over financial reporting as of June 30, 2021 has been
audited by Deloitte & Touche LLP, an independent registered public accounting firm, and their opinion is stated in their report
which is included in this Annual Report on Form 10-K.
Remediation of Prior Year Material Weakness
We have remediated the IT general controls that aggregated to a material weakness as previously disclosed in our
Annual Report on Form 10-K for the year ended June 30, 2020. Since that time, with the oversight of our management and
audit committee, we have implemented measures to remediate the material weakness. The following actions have been
implemented and performed:
• Re-designed the logical access roles associated with our primary ERP application and re-provisioned those roles to
enforce segregation of duties and align user access commensurate with their business process role and job
responsibilities;
Implemented a third-party application to facilitate improved processes and controls related to provisioning privileged
access roles and the monitoring of those roles;
•
• For our boundary applications relevant to financial reporting, implemented new program change management control;
• Strengthened access and monitoring controls related to boundary systems;
• For our primary ERP application, strengthened provisioning of privileged access roles; and
• Monitored instances in which individuals were granted broad access.
We believe the foregoing efforts have effectively remediated the material weakness as these procedures
91
have been implemented for a sufficient period of time during the fiscal year and we have completed our testing of the design
and operating effectiveness of these above procedures as of June 30, 2021. As we continue to evaluate and work to improve our
internal control over financial reporting, we may execute additional measures to enhance the overall design of our internal
controls.
Changes in Internal Control over Financial Reporting
Other than the remediation efforts described above, there were no changes in our internal control over financial
reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that
occurred during the three months ended June 30, 2021 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
92
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Super Micro Computer, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Super Micro Computer, Inc. and subsidiaries (the “Company”)
as of June 30, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of June 30, 2021, based on criteria established in Internal Control
— Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated financial statements as of and for the year ended June 30, 2021, of the Company and our report
dated August 27, 2021, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report
on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
San Jose, California
August 27, 2021
Item 9B.
Other Information
None.
93
Item 10.
Directors, Executive Officers, and Corporate Governance
Executive Officers and Directors
PART III
The following table sets forth information regarding our current directors and executive officers and their ages as of
July 31, 2021:
Name
Charles Liang
David Weigand
Don Clegg
George Kao
Sara Liu
Daniel W. Fairfax (1)(4)
Saria Tseng (2)(3)(4)
Sherman Tuan (2)(3)(4)
Shiu Leung (Fred) Chan (1)(4)
Tally Liu (1)(4)
__________________________
(1)
(2)
(3)
(4)
Age
63
63
62
60
59
65
51
67
73
71
Position(s)
President, Chief Executive Officer and Chairman of the Board
Senior Vice President, Chief Financial Officer and Chief Compliance
Officer
Senior Vice President of Worldwide Sales
Senior Vice President of Operations
Co-Founder, Senior Vice President and Director
Director
Director
Director
Director
Director
Member of the Audit Committee
Member of the Compensation Committee
Member of the Nominating and Corporate Governance Committee (the “Governance Committee”)
Determined by the Board of Directors to be “independent”
Executive Officers and Management Directors
Charles Liang founded Super Micro and has served as our President, Chief Executive Officer and Chairman of the
Board since our inception in September 1993. Mr. Liang has been developing server and storage system architectures and
technologies for the past three decades. From July 1991 to August 1993, Mr. Liang was President and Chief Design Engineer of
Micro Center Computer Inc., a high-end motherboard design and manufacturing company. From January 1988 to April 1991,
Mr. Liang was Senior Design Engineer and Project Leader for Chips & Technologies, Inc., a chipset technology company, and
Suntek Information International Group, a system and software development company. Mr. Liang has been granted many server
technology patents. Mr. Liang holds an M.S. in Electrical Engineering from the University of Texas at Arlington and a B.S. in
Electrical Engineering from National Taiwan University of Science & Technology in Taiwan. Our Governance Committee
concluded that Mr. Liang should serve on the Board based on his skills, experience and qualifications in managing technology
businesses, his technical expertise, and his long familiarity with our company’s business.
David Weigand has served as our Senior Vice President, Chief Financial Officer since February 2021 and as Chief
Compliance Officer since May 2018. Prior to his employment with our company, Mr. Weigand was a Vice President at Hewlett
Packard Enterprise (HPE) from November 2016 until April 2018 and served as Vice President, Tax at Silicon Graphics
International, Inc., from September 2013 until its acquisition by HPE in November 2016. Prior to that he was Vice President,
Chief Financial Officer of Renesas Electronics America, a semiconductor company formed by the merger of the semiconductor
businesses of NEC Corporation, Hitachi and Mitsubishi Electric from October 2010 until April 2013, and Vice President,
Controller of NEC Electronics America from October 2004 until September 2010. Mr. Weigand holds a M.S. degree in Taxation
from the University of Hartford and a B.S. degree in Accounting from San Jose State University and is a Certified Public
Accountant in California (Inactive).
Don Clegg serves as our Senior Vice President of Worldwide Sales. He previously served as our Vice President of
Marketing and Worldwide Business Development. Mr. Clegg has been an employee since April 2006 and has held various
senior sales and marketing roles with the Company during that time. Mr. Clegg started his career as a Design Engineer and
evolved from Engineer to Vice President of Sales and Marketing working at several established and startup Silicon Valley
system and semiconductor companies. Mr. Clegg graduated with high honors from Brigham Young University, where he earned
a B.S. in Electrical Engineering.
94
George Kao serves as our Senior Vice President of Operations and previously served as our Vice President of
Operations. Mr. Kao joined the Company in October 2016. Mr. Kao was Vice President of Operations of Pericom
Semiconductor Corp. from October 2006 to September 2016. Mr. Kao served as a Chief Operating Officer of Orient
Semiconductor Electronics Philippines, Inc., a subsidiary of Orient Semiconductor Electronics Ltd., from July 2003 to March
2006. Mr. Kao joined Orient Semiconductor Electronics Philippines, Inc. from Santa Clara-based Foveon after a 20-year career
in technology in the United States that began at National Semiconductor. Mr. Kao holds a B.S. in Electrical Engineering from
California State Polytechnic University in San Luis Obispo.
Sara Liu co-founded Super Micro in September 1993, has been a member of our Board of Directors since March 2007
and currently serves as our Co-Founder, Senior Vice President, and a director. She has held a variety of positions with the
Company, including Treasurer from inception to May 2019, Senior Vice President of Operations from May 2014 to February
2018, and Chief Administrative Officer from October 1993 to May 2019. From 1985 to 1993, Ms. Liu held accounting and
operational positions for several companies, including Micro Center Computer Inc. Ms. Liu holds a B.S. in Accounting from
Providence University in Taiwan. Ms. Liu is married to Mr. Charles Liang, our Chairman, President and Chief Executive
Officer. Our Governance Committee concluded that Ms. Liu should serve on the Board based on her skills, experience, her
general expertise in business and operations and her long familiarity with our company’s business.
Non-Management Directors
Daniel W. Fairfax has been a member of our Board of Directors since July 2019. Mr. Fairfax served as Senior Vice
President and Chief Financial Officer of Brocade Communications, a networking equipment company ("Brocade") from June
2011 to November 2017. Brocade was acquired by Broadcom in November 2017. Mr. Fairfax previously served as Brocade's
Vice President of Global Services from August 2009 to June 2011 and Brocade's Vice President of Business Operations from
January 2009 to August 2009. Prior to Brocade, Mr. Fairfax served as Chief Financial Officer of Foundry Networks, Inc., from
January 2007 until December 2008. Foundry Networks was acquired by Brocade in December 2008. Earlier in his career Mr.
Fairfax served in executive financial management and/or general management positions at GoRemote Internet
Communications, Ironside Technologies, Acta Technology, NeoVista Software, Siemens and Spectra-Physics. He began his
career as a consultant with the National Telecommunications Practice Group of Ernst & Young. Mr. Fairfax currently serves on
the board of directors of Energous Corporation, where he is both the chair of the board and chair of the audit committee. Mr.
Fairfax is a certified public accountant with an inactive license in California and holds an MBA degree from The University of
Chicago Booth School of Business and a Bachelor of Arts degree, with a major in Economics, from Whitman College. Our
Governance Committee concluded that Mr. Fairfax should serve on the Board based on his skills, experience, his financial
literacy and his familiarity with technology businesses.
Saria Tseng has been a member of our Board of Directors since November 2016. Ms. Tseng has served as Vice
President of Strategic Corporate Development, General Counsel and Secretary of Monolithic Power Systems, Inc. (“MPS”), a
fabless manufacturer of high-performance analog and mixed-signal semiconductors since 2004. From 2001 to 2004, Ms. Tseng
served as Vice President, General Counsel and Corporate Secretary of MaXXan Systems, an enterprise class storage network
system. Previously, Ms. Tseng was an attorney at Gray Cary (now DLA Piper) and Jones Day. Ms. Tseng is a member of the
state bar in both California and New York and is a member of the bar association of the Republic of China, Taiwan. She holds
Master of Law degrees from the University of California at Berkeley and the Chinese Culture University in Taipei. Our
Governance Committee concluded that Ms. Tseng should serve on the Board based on her skills, experience and qualifications
in business and corporate law, her legal expertise and her familiarity with technology business.
Sherman Tuan has been a member of our Board of Directors since February 2007. Mr. Tuan is founder of
PurpleComm, Inc. (doing business as 9x9.tv), a platform for connected TV, where he has served as Chief Executive Officer
since January 2005 and Chairman of the Board since June 2003. From September 1999 to May 2002, he was director of
Metromedia Fiber Network, Inc., a fiber optical networking infrastructure provider. Mr. Tuan was co-founder of AboveNet
Communications, Inc., an internet connectivity solutions provider, where he served as President from March 1996 to January
1998, Chief Executive Officer from March 1996 to May 2002 and director from March 1996 to September 1999. Mr. Tuan
holds a degree in Electrical Engineering from Feng-Chia University in Taiwan. Our Governance Committee concluded that Mr.
Tuan should serve on the Board based on his skills, experience and qualifications in managing technology businesses, his
technical expertise, and his familiarity with our company’s business.
Shiu Leung (Fred) Chan has been a member of our Board of Directors since October 2020. Mr. Chan is the founder
and president of KCR Development, Inc. which has developed real estate projects in excess of $1 billion in California and
Hawaii specializing in high-density residential and retail projects. Mr. Chan also has more than three decades of experience in
the high technology sector and as an entrepreneur. He most recently served as chairman of ESS Technology, Inc., a privately
held semiconductor company which he founded, from 2015 to 2019. ESS Technology was previously a public company listed
on Nasdaq from 1995 until 2008, where he had held a variety of senior executive roles, including as chairman, president and
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chief executive officer, and served as a director. Mr. Chan has also previously served as chairman of a privately-held consumer
electronic company, founder and an executive officer of a VLSI chip design center providing computer aided design,
engineering and other design services, and co-founder and an executive officer of a company in the business of computer aided
engineering systems development. Mr. Chan holds B.S.E.E. and M.S.C. degrees from the University of Hawaii. Our
Governance Committee concluded that Mr. Chan should serve on the Board based on his skills and experience in growing
companies and familiarity with technology businesses.
Tally Liu was appointed to our Board of Directors and our Audit Committee on January 30, 2019, and was appointed
as the chair of the Audit Committee on June 30, 2019. Mr. Liu has been retired since 2015. Prior to his retirement, Mr. Liu was
Chief Executive Officer of Wintec Industries, a supply chain solutions company for high-tech manufacturers, from 2012 to
2015. Prior to Wintec, Mr. Liu served as Chairman of the Board and Chief Executive Officer of Newegg, Inc., an internet
consumer technology retailer, from 2008 to 2010, and as President of Newegg in 2008. Prior to Newegg, Mr. Liu held various
positions with Knight Ridder Inc., including Vice President, Finance & Advanced Technology and Vice President of Internal
Audit. Mr. Liu served as President of the International Newspapers Financial Executives (INFE) for one year before it merged
with other media associations. A Certified Public Accountant from 1982-2007, Mr. Liu is a member of the American Institute of
Certified Public Accountants (AICPA) with retired status, and was previously a member of the Florida Institute of Certified
Public Accountants (FICPA). Mr. Liu is also a Certified Information System Auditor (CISA) and Certified Information Security
Manager (CISM), with non-practice status, with the Information Systems Audit and Control Association (ISACA) and has also
been certified in Control Self-assessment (CCSA) by the Institute of Internal Auditors (IIA). After earning his BA of Commerce
from National Chengchi University, Taipei, Taiwan, and MBA from Florida Atlantic University, Mr. Liu received executive
leadership training at the Stanford Advanced Finance Program in 1986 and at Harvard Business School in the Advanced
Management Program (AMP) in 1998. Mr. Liu is not related to any member of our Board of Directors or any of our officers.
Our Governance Committee concluded that Mr. Liu should serve on the Board based on his skills, experience, his financial
literacy and his familiarity with technology businesses.
Except for Mr. Charles Liang and Ms. Sara Liu who are married, there are no other family relationships among any of
our directors or executive officers.
Composition of the Board
Our authorized number of directors is currently seven. There are currently seven directors. Our Amended and Restated
Certificate of Incorporation provides for a classified Board of Directors divided into three classes. The members of each class
are elected to serve a three-year term with the term of office for each class ending in consecutive years. Vacancies may be filled
by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. Alternatively, the
Board of Directors, at its option, may reduce the number of directors, provided that no decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent director. Directors chosen to fill newly created
directorships hold office for a term expiring at the next annual meeting of stockholders to which the term of the office of the
class to which they have been elected expires.
The current composition of the Board of Directors is:
Class I Directors (1)
Class II Director (2)
Class III Directors (3)
Charles Liang
Sherman Tuan
Tally Liu
Sara Liu
Daniel W. Fairfax
Saria Tseng
Shiu Leung (Fred) Chan
__________________________
(1)
(2)
(3)
The term of Class I directors expires at the annual meeting of stockholders following fiscal year 2022.
The term of the Class II director expires at the annual meeting of stockholders following fiscal year 2023.
The term of Class III directors expires at the annual meeting of stockholders following fiscal year 2021.
Corporate Governance Guidelines
CORPORATE GOVERNANCE
We have adopted “Corporate Governance Guidelines” to help ensure that the Board of Directors is independent from
management, appropriately performs its function as the overseer of management, and that the interests of the Board of Directors
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and management align with the interests of our stockholders. The “Corporate Governance Guidelines” are available at
https://ir.supermicro.com/governance/governance-documents/default.aspx.
Code of Ethics
We have adopted a “Code of Business Conduct and Ethics” that is applicable to all directors, executive officers and
employees and embodies our principles and practices relating to the ethical conduct of our business and our long-standing
commitment to honesty, fair dealing and full compliance with all laws affecting our business. Our “Code of Business Conduct
and Ethics” is available at https://ir.supermicro.com/governance/governance-documents/default.aspx. Any substantive
amendment or waiver of the Code relating to executive officers or directors will be made only after approval by our Board of
Directors and will be promptly disclosed on our website within four business days.
Director Independence
The listing requirements of The Nasdaq Stock Market generally require that a majority of the members of a listed
company's board of directors be independent. In addition, the listing rules generally require that, subject to specified exceptions,
each member of a listed company's audit committee, compensation committee, and nominating and corporate governance
committees be independent. Audit Committee members must also satisfy the independence criteria set forth in Rule 10A-3
under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the listing requirements of The Nasdaq Stock
Market. In addition, compensation committee members must satisfy the independence criteria set forth in Rule 10C-1 under the
Exchange Act and the listing requirements of The Nasdaq Stock Market.
The Board affirmatively determines the independence of each director and nominee for election as a director in
accordance with the listing requirements of The Nasdaq Stock Market.
Based on these standards, our Board of Directors has determined that five of its current seven members, Daniel W.
Fairfax, Saria Tseng, Sherman Tuan Shiu Leung (Fred) Chan and Tally Liu, are "independent directors" under the applicable
rules and regulations of the SEC and the listing requirements and rules of The Nasdaq Stock Market.
Executive Sessions
Non-management directors meet in executive session without management present each time the Board holds its
regularly scheduled meetings.
Communications with the Board of Directors
The Board of Directors welcomes the submission of any comments or concerns from stockholders or other interested
parties. If you wish to send any communications to the Board of Directors, you may use one of the following methods:
• Write to the Board at the following address:
Board of Directors
Super Micro Computer, Inc.
c/o General Counsel
980 Rock Avenue
San Jose, California 95131
• E-mail the Board of Directors at BODInquiries@supermicro.com
Communications that are intended specifically for the independent directors or non-management directors should be
sent to the e-mail address or street address noted above, to the attention of the "Independent Directors."
MEETINGS AND COMMITTEES OF THE BOARD
Board Meetings
Each director is expected to devote sufficient time, energy and attention to ensure diligent performance of his or her
duties and to attend all Board and committee meetings. We encourage, but do not require, each Board member to attend our
annual meeting of stockholders. We held an annual meeting of stockholders on May 28, 2021 for our fiscal year 2020. The
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Board held nine meetings during fiscal year 2021, four of which were regularly scheduled meetings and five of which were
special meetings. All directors attended at least 75% of the meetings of the Board and the committees on which they served
during the time they were members of the Board or such committees during fiscal year 2021.
Board Leadership Structure
Our Chairman, Charles Liang, is also our Chief Executive Officer. The Board and our Governance Committee believe
that it is appropriate for Mr. Liang to serve as both the Chief Executive Officer and Chairman due to the relatively small size of
our Board, and the fact that Mr. Liang is the founder of our company with extensive experience in our industry. We do not
currently have a lead independent director.
Board Role in the Oversight of Risk
The Board oversees our risk management activities, requesting and receiving reports from management. The Board
conducts this oversight directly and through its committees. Our Board has delegated primary responsibility for oversight of
risks relating to financial controls and reporting to our Audit Committee, which in turn reports to the full Board on such matters
as appropriate. The Audit Committee also assists the Board in oversight of certain risks, particularly in the areas of internal
controls over financial reporting, financial reporting and review of related party transactions.
Our management, with oversight from our Compensation Committee, has reviewed our compensation policies and
practices with respect to risk-taking incentives and risk management and does not believe that potential risks arising from our
compensation polices or practices are reasonably likely to have a material adverse effect on our company
Committees of the Board of Directors
The Board has three standing committees to facilitate and assist the Board in discharging its responsibilities: the Audit
Committee, the Compensation Committee and the Governance Committee. In accordance with applicable listing requirements
of The Nasdaq Stock Market, each of these committees is comprised solely of non-employee, independent directors. The
charter for each committee is available at https://ir.supermicro.com/governance/governance-documents/default.aspx. In October
2020, the Board of Directors approved amendments to the charters for each of the Audit Committee and the Compensation
Committee, and, in January 2021, the Board of Directors approved amendments to the Governance Committee charter, which
amendments are all reflected in the descriptions contained herein. The charter of each committee also is available in print to any
stockholder who requests it. The following table sets forth the current members of each of the standing Board committees.
Audit Committee
Tally Liu (1)
Daniel W. Fairfax
Shiu Leung (Fred) Chan
Compensation Committee
Sherman Tuan (1)
Saria Tseng
Governance Committee (2)
Saria Tseng
Sherman Tuan
__________________________
Committee Chairperson
(1)
The Governance Committee does not currently have a designated chairperson.
(2)
Audit Committee
The Audit Committee has three members currently. The Audit Committee met 21 times in fiscal year 2021, four of
which were regularly scheduled meetings and 17 of which were special meetings. The Board has determined that each member
of our Audit Committee meets the requirements for independence under the applicable listing requirements of The Nasdaq
Stock Market and the rules of the SEC. The Board has also determined that our Audit Committee has the required number of
“audit committee financial experts” as defined under applicable SEC rules.
As outlined more specifically in the Audit Committee charter, the Audit Committee has, among other duties, the
following responsibilities:
• Appoints, retains and approves the compensation of our independent auditors, and reviews and evaluates the
auditors’ qualifications, independence and performance;
• Oversees the independent auditors’ audit work and reviews and pre-approves all audit and non-audit services that
may be performed by them;
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• Reviews and discusses with the independent auditors any audit problems, or difficulties and management’s
response to them, and all matters that the Public Company Accounting Oversight Board and the SEC require to be
discussed with the committee;
• Reviews and discusses with management press releases regarding our financial results, as well as financial
information and earnings guidance provided to securities analysts and rating agencies;
• Reviews and approves the planned scope of our annual audit;
• Monitors the rotation of partners of the independent auditors on their engagement team as required by law;
• Reviews our financial statements and discusses with management and the independent auditors the results of the
annual audit and the review of our quarterly financial statements;
• Reviews our critical accounting policies and estimates;
• Oversees the adequacy of our financial controls;
• Periodically reviews and discusses with management and the independent auditors our disclosure controls and
procedures and our internal control over financial reporting;
• Reviews, discusses and approves the internal audit function’s (i) internal audit plan, (ii) all major changes to the
internal audit plan, (iii) the scope, progress and results of executing the internal audit plan, and (iv) the annual
performance of the internal audit function
• Reviews, approves and oversees all related party transactions;
• Establishes and oversees procedures for the receipt, retention and treatment of complaints regarding accounting,
internal controls or auditing matters and oversees enforcement, compliance and remedial measures under our Code
of Business Conduct and Ethics;
Initiates investigations and hires legal, accounting and other outside advisors or experts to assist the Audit
Committee, as it deems necessary to fulfill its duties;
•
• Periodically reviews and discusses with management our major financial risk exposures and steps management has
taken to monitor and control the exposures, including our risk assessment and risk management guidelines and
policies; and
• Reviews and evaluates, at least annually, the adequacy of the Audit Committee charter and recommends any
proposed changes to the Board for approval.
Compensation Committee
The Compensation Committee has two members currently. The Compensation Committee charter provides that the
Compensation Committee shall be comprised of no fewer than two members. The Compensation Committee met eight times in
fiscal year 2021, four of which were regularly scheduled meetings and four of which were special meetings. The Compensation
Committee is comprised solely of non-employee directors. The Board has determined that each member of our Compensation
Committee meets the requirements for independence under the applicable listing requirements of The Nasdaq Stock Market.
As outlined more specifically in the Compensation Committee charter, the Compensation Committee has, among other
duties, the following responsibilities:
• Periodically reviews and advises the Board concerning our overall compensation philosophy, policies and plans,
including a review and approval of a group of companies for general executive compensation competitive
comparisons, approval of target pay and performance objectives against this group (and broader industry
reference), and monitoring of our executive compensation levels and their performance relative to this group;
• Reviews and approves corporate goals and objectives relevant to compensation of the Chief Executive Officer and
other executive officers;
• Evaluates the performance of the Chief Executive Officer and other executive officers in light of those goals and
objectives, including generally against the overall performance of executive officers at comparable companies, all
while taking into account our risk management policies and practices, and any other factors the Compensation
Committee deems appropriate;
• Reviews and approves the compensation of the Chief Executive Officer and other executive officers and other key
employees;
• Reviews and approves our incentive compensation plans and equity compensation plans;
• Monitors and assesses risks associated with our compensation policies, including whether such policies could lead
to unnecessary risk-taking behavior, and consults with management regarding such risks;
• Administers the issuance of restricted stock grants, stock options and other equity awards to executive officers,
directors and other eligible individuals under our equity compensation plans , provided that the Compensation
Committee may delegate the approval of grants of options and equity awards to participants other than certain
individuals subject to Section 16 of the Exchange Act as provided in the applicable plan; and
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• Reviews and evaluates, at least annually, the performance of the Compensation Committee, including compliance
of the Compensation Committee with its charter and the adequacy of the Compensation Committee charter.
In general, the Compensation Committee discharges the Board's responsibilities regarding the determination of
executive compensation, and reviews and makes recommendations to the full Board in the determination of non-employee
director compensation. The Compensation Committee also makes recommendations to the full Board regarding non-ordinary
course executive compensation matters, including with respect to new or amended employment contracts, severance or change-
in-control plans or arrangements, and may adopt, amend and terminate such agreements, arrangements or plans. The
Compensation Committee may delegate its responsibilities, along with the authority to take action in relation to such
responsibilities, to subcommittees comprised of one or more Compensation Committee members, subject to requirements of our
bylaws and applicable laws, regulations and the terms of our executive compensation plans. Additional information about the
Compensation Committee's processes for determining executive and non-employee director compensation, including the role of
the Compensation Committee's compensation consultant and our executive officers, can be found in the "Executive
Compensation" and "2021 Director Compensation" sections of this Annual Report.
Nominating and Corporate Governance Committee
The Governance Committee has two members currently. The Governance Committee charter provides that the
Governance Committee shall be comprised of no fewer than two members. The Governance Committee met seven times in
fiscal year 2021, four of which were regularly scheduled meetings and three of which were special meetings. The Governance
Committee is comprised solely of non-employee directors. The Board has determined that each member of our Governance
Committee meets the requirements for independence under the applicable listing requirements of The Nasdaq Stock Market.
As outlined more specifically in the Governance Committee charter, the Governance Committee has, among other
duties, the following responsibilities:
Identifies individuals qualified to become directors;
• Reviews and makes recommendations to the Board regarding the size of the Board;
•
• Evaluates and selects, or recommends to the Board, director nominees for each election of directors;
• Develops and recommends to the Board criteria any other factors that the Governance Committee deems relevant,
including those that promote diversity, for selecting qualified director candidates in the context of the current make-
up of the Board;
• Considers any nominations of director candidates validly made by our stockholders;
• Conducts an annual evaluation of director independence according to Nasdaq rules, applicable law and our
Corporate Governance Guidelines to enable the Board to make a determination of each director’s independence;
• Reviews committee structures and compositions and recommends to the Board concerning qualifications,
appointment and removal of committee members;
• Develops, recommends for approval by the Board and reviews on an ongoing basis the adequacy of the corporate
governance principles applicable to us;
• Reviews, on a periodic basis, the adequacy of our Corporate Governance Guidelines and recommends any
proposed changes to the Board;
• Oversees compliance with our Corporate Governance Guidelines and reports on such compliance to the Board;
• Assists the Board in the evaluation of the Board and each committee;
• Periodically reviews succession planning for executive officers;
• Periodically reviews and discusses with management our practices with respect to environmental, social and
corporate governance issues; and
• Periodically reviews the scope of responsibilities of the Governance Committee and the committee's performance
of its duties.
The Governance Committee may delegate its responsibilities, along with the authority to take action in relation to such
responsibilities, to subcommittees comprised of one or more Governance Committee members, subject to requirements of our
bylaws, applicable laws and regulations.
In accordance with our bylaws, our Board establishes additional committees for specific delegated purposes, roles and
responsibilities that are temporary in nature.
Delinquent Section 16(a) Reports
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Section 16(a) of the Exchange Act, requires our directors, executive officers, and holders of more than 10% of our
common stock to file reports regarding their ownership and changes in ownership of our securities with the SEC, and to furnish
us with copies of all Section 16(a) reports that they file.
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to us and certain written
representations provided to us, we believe that during the fiscal year ended June 30, 2021, our directors, executive officers, and
greater than 10% stockholders complied with all applicable Section 16(a) filing requirements, except that one late Form 4 was
filed on September 15, 2020 for each of Ms. Sara Liu, Mr. Charles Liang (as the spouse of Ms. Sara Liu), Mr. David Weigand,
and Mr. Don Clegg to reflect equity awards made to Ms. Liu, Mr. Weigand, and Mr. Clegg on August 4, 2020.
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Item 11.
Executive Compensation
Compensation Discussion and Analysis (“CD&A”)
EXECUTIVE COMPENSATION
In this section we provide an explanation and analysis of the material elements of the compensation provided to our
Chief Executive Officer, persons who served as Chief Financial Officer during fiscal year 2021, and our other three most highly
compensated executive officers who were serving as executive officers at the end of our fiscal year 2021 (collectively referred
to as our “named executive officers”).
Our named executive officers and their positions at the end of fiscal year 2021 were:
Charles Liang
David Weigand(1)
Don Clegg
George Kao
Alex Hsu(2)
Kevin Bauer(1)
President, Chief Executive Officer (“CEO”) and Chairman of the Board
Senior Vice President, Chief Financial Officer and Chief Compliance Officer
Senior Vice President, Worldwide Sales
Senior Vice President, Operations
Senior Chief Executive, Strategic Business
Former Senior Vice President, Chief Financial Officer
__________________________
(1)
Mr. Weigand (whose previous title was Senior Vice President, Chief Compliance Officer) assumed the role of Senior Vice
President, Chief Financial Officer and Chief Compliance Officer following the resignation of Mr. Bauer in January 2021.
However, information for Mr. Bauer is still presented in this Executive Compensation section as Mr. Bauer served as Chief
Financial Officer during a portion of fiscal year 2021.
Mr. Hsu served as Senior Vice President, Chief Operating Officer until March 2021. In March 2021, Mr. Hsu transitioned to the
role of Senior Chief Executive, Strategic Business.
(2)
Overview of Compensation
_____________________________
(1) The chart presents the percentage compensation by compensation component received by the five presented non-CEO named
executive officers together (aggregate compensation) as a group, as well as the split between cash and equity compensation for all
such persons received in aggregate as a group.
Compensation Philosophy and Objectives—Our Move Toward Performance-Based Compensation Arrangements
Our executive compensation philosophy is to link compensation to corporate performance, particularly the
compensation of Mr. Liang, our CEO. Starting in fiscal year 2018 (beginning July 1, 2017), we have moved toward an explicit
linking of Mr. Liang’s compensation to performance goals. This movement began in August 2017, when approximately half of
Mr. Liang’s equity awards for fiscal year 2018 were in the form of performance-based restricted stock units (“PRSUs”). This
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trend was interrupted during the time when we were not current in filing our periodic reports with the SEC (September 2017 to
January 2020). See our Annual Reports on Form 10-K for fiscal years 2019 and 2020 on file with the SEC for a description of
the circumstances that led to us not being able to file our periodic reports during that time.
After we returned to being current in our SEC filings in December 2019, we continued to link more of Mr. Liang’s
compensation to corporate performance, through granting him a special cash award opportunity in March 2020 tied to stock
price and other metrics, and a short-term incentive award opportunity in May 2020 tied to corporate performance metrics for
fiscal year 2020. This movement culminated in March 2021, when we changed Mr. Liang’s compensation to be almost
completely performance-based. As discussed in more detail below, in March 2021, we converted nearly 100% of Mr. Liang’s
compensation to performance-based compensation through the issuance of options (the “2021 CEO Performance Award”) to
purchase 1,000,000 shares of our common stock at an exercise price of $45.00 per share, which was 32% higher than the
market price of our common stock on the date of the award ($34.08). The option is comprised of five tranches, which vest only
if the market price of our common stock reaches various prices (ranging from $45.00 to $120.00 per share) and we achieve
certain specified revenue goals, all as described in greater detail below. In connection with the 2021 CEO Performance Award,
Mr. Liang’s base salary was reduced to $1.00 per year (or, if required by law, the statutory minimum wage applicable in San
Jose, California) and Mr. Liang agreed that he would not be eligible for any increase in base salary, or any other cash
compensation, until June 30, 2026.
In summary, as of the end of fiscal year 2021, almost all of Mr. Liang’s compensation for the next five years is based
upon us achieving the revenue goals described below and the market price of our common stock meeting the price targets
described below. To fully achieve those goals and targets, our revenue must increase from $3.6 billion for fiscal year 2021 to
$8 billion, and the market price of our common stock must reach $120, an increase of 252% from the market price on the day
the stock options were awarded. See below for more details about the 2021 CEO Performance Award.
Through fiscal year 2021, we have utilized explicit linking of compensation to performance metrics less with our other
NEOs than we have with Mr. Liang. The extent of such linking is described in greater detail below. During fiscal year 2022,
the Compensation Committee intends to continue exploring (with Mr. Liang) the appropriate balance between performance-
based equity awards like PRSUs and our traditional use of stock options and restricted stock units (“RSUs”) with time-based
vesting for future long-term equity programs for other named executive officers. While PRSUs provide the recipient the
opportunity to earn a defined number of shares of our common stock if we and/or the recipient achieve pre-set performance
goals over time and have become increasingly common in compensation arrangements in the technology industry generally, we
believe that our traditional approach to equity awards has served us well, both historically and in fiscal year 2021.
Process Overview
The Compensation Committee of the Board discharges the Board’s responsibilities relating to compensation of all of
our executive officers. During fiscal year 2021, the Compensation Committee was comprised of three non-employee directors
through May 28, 2021 and two non-employee directors for the remainder of the fiscal year through June 30, 2021 following the
expiration of the term of office of Mr. Hwei-Ming (Fred) Chan as a director. All of the non-employee directors who served on
the Compensation Committee during fiscal year 2021 were independent pursuant to the applicable listing rules of NASDAQ
and Rule 16b-3 under the Exchange Act.
The agenda for meetings is determined by the Chair of the Compensation Committee with the assistance of our Chief
Financial Officer and General Counsel. Committee meetings are regularly attended by our Chief Financial Officer and our
General Counsel. However, neither our Chief Financial Officer nor our General Counsel attends the portion of meetings during
which his own performance or compensation is being discussed. Our Chief Financial Officer and General Counsel support the
Compensation Committee in its work by providing information relating to our financial plans and certain personnel-related
data. In addition, the Compensation Committee has the authority under its charter to hire, terminate and approve fees for
advisors, consultants and agents as it deems necessary to assist in the fulfillment of its responsibilities. As part of making an
overall assessment of each named executive officer’s role and performance, and structuring our compensation programs for
fiscal year 2021, the Compensation Committee reviewed recommendations of our Chief Executive Officer, as well as publicly
available peer group compensation data and data compiled by our independent compensation consultant.
During fiscal year 2021, the Compensation Committee considered various sources of information and comparative
data when structuring the compensation awards issued and determining executive compensation levels, including information
and compensation data assembled for the Compensation Committee by Radford, an Aon Hewitt company ("Radford"), from a
sample of public companies selected by us.
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For the 2021 CEO Performance Award, the Compensation Committee considered similar awards issued by technology
companies consisting of Tesla, Axon Enterprise, RH Technologies, Dish Networks, Oracle, and Sorento Therapeutics. The
Compensation Committee engaged Radford in designing, modeling, drafting and reviewing the 2021 CEO Performance Award.
In addition, for other fiscal year 2021 compensation decisions, the sample consisted of the following companies(1):
Ciena Corporation
Cray Inc.(2)
Diebold Nixdorf, Incorporated
Extreme Networks, Inc.
F5 Networks, Inc.
__________________________
(1)
Infinera Corporation
Juniper Networks, Inc.
NetApp, Inc.
NETGEAR, Inc.
Plexus Corp.
(2)
The same sample companies were used for fiscal year 2019, 2020 and 2021. In selecting the companies for inclusion
in the sample, we considered whether the company may compete against us for executive talent.
Although Cray Inc. was acquired by Hewlett Packard Enterprise Company in 2019, it remained included in the
information regarding the sample public companies that was used for fiscal year 2021 purposes.
Other than with respect to the 2021 CEO Performance Award for which the independent consultant prepared a report
in March 2021 at the request of the Compensation Committee, the Compensation Committee utilized for fiscal year 2021 the
independent consultant report developed for fiscal year 2019 as it believed the report continued to be relevant. Recognizing that
over-reliance on external comparisons can be of concern, the Compensation Committee used external comparisons as only one
point of reference and is mindful of the value and limitations of comparative data.
Key Fiscal Year 2021 Executive Compensation Decisions and Actions
During fiscal years 2019 and 2020, the Compensation Committee generally refrained from compensation adjustments
for named executive officers until after such time as we became current in our filings with the SEC (which occurred in
December 2019) and our stock was re-listed on the Nasdaq Global Select Market (which occurred in January 2020), except in
connection with out of the ordinary circumstances, such as a transition in executive officers. At the beginning of fiscal year
2021 (which began July 1, 2020), the Compensation Committee decided that, in light of (1) the recent increase during the fourth
quarter of fiscal year 2020 in the base salaries of named executive officers, (2) the fiscal year 2020 incentive cash program tied
to specific performance goals adopted during the fourth quarter of fiscal year 2020 in which each of our named executive
officers participated, (3) approval during the third quarter of fiscal year 2020 of special performance-based cash incentive
award opportunities linked to stock price to certain long-term employees (which included some of the named executive
officers), and (4) special cash bonus payments made to certain of our employees (which included some of the named executive
officers), all of which were discussed in the CD&A for fiscal year 2020 included in our most recent proxy statement (the “Prior
Year CD&A”), it would generally not implement increases in base salaries or annual cash incentive opportunities for named
executive officers, except in connection with out of the ordinary circumstances, such as a transition in executive officers.
In order to further incentivize Mr. Liang’s continued long-term performance as Chief Executive Officer, the
Compensation Committee designed the 2021 CEO Performance Award to be a challenging long-term incentive for future
performance. In connection with the issuance of such award in March 2021, the Compensation Committee noted in particular
that the performance thresholds adopted were challenging and could take years to achieve. In addition, the Compensation
Committee sought to help ensure that the 2021 CEO Performance Award would further align Mr. Liang’s interests with those of
the Company’s stockholders over the long-term. In connection with the grant of the 2021 CEO Performance Award, it was also
determined that Mr. Liang would receive a de minimis salary of $1 per annum (or such other non-waivable minimum wage
requirement, if deemed advisable) and no cash bonuses through June 30, 2026. Mr. Liang must also remain as the Company’s
Chief Executive Officer (or such other position with the Company as Mr. Liang and the Board may agree) at the time each goal
set forth in the 2021 CEO Performance Award is met in order for the corresponding tranche to vest. This helps ensure Mr.
Liang’s active leadership of the Company over the long-term.
As a result of our becoming current in our filings with the SEC in December 2019 and stockholder approval of the
2020 Equity and Incentive Compensation Plan at the annual meeting of stockholders held on June 5, 2020, we were in position
to also re-commence the grant of equity incentives to our employees during fiscal year 2021, including our named executive
officers. In addition to the special grant to Mr. Liang of the 2021 CEO Performance Award, during fiscal year 2021, we made
grants under the 2020 Equity and Incentive Compensation Plan of equity incentives to each of Mr. Weigand, Mr. Clegg and Mr.
Kao, which grants were consistent with our historical practice prior to the time we had ceased being current in our periodic
filings with the SEC in 2017, all as discussed further below.
Additional Information on the Compensation Committee's Compensation Consultant
104
For fiscal year 2021, the Compensation Committee utilized information from Radford in making certain named
executive officer compensation decisions. Previously, in fiscal year 2019, Radford had advised the Compensation Committee
regarding executive officer compensation decisions and our management had commissioned Radford to provide additional
services to management for similar compensation studies to evaluate components of total compensation for our employees
generally. In making the adjustments to base salaries for our named executive officers in the fourth quarter of fiscal year 2020,
the Compensation Committee relied on information that Radford had provided in both fiscal year 2020 and in fiscal year 2019.
In addition, in connection with evaluating the 2021 CEO Performance Award in fiscal year 2021, the Compensation Committee
considered information Radford had provided in March 2021 related to peer group chief executive officer compensation and
pay-for-performance analyses, as described above.
In fiscal year 2019, before receiving Radford’s information and assistance, the Compensation Committee assessed the
independence of Radford in the light of all relevant factors, including the additional services and other factors required by the
SEC, that could give rise to a potential conflict of interest with respect to Radford. Based on these reviews and assessments, the
Compensation Committee did not identify any conflicts of interest raised by the work performed by Radford. In each of fiscal
years 2020 and 2021, the Compensation Committee updated its assessment of Radford’s independence and did not identify any
conflicts of interest raised by additional work performed by Radford in such fiscal years.
The Role of the Most Recent Stockholder Say-on-Pay Vote
The Compensation Committee, with the entire Board, and our management value the opinions of our stockholders. As
discussed in the Prior Year CD&A, feedback received from stockholders has included a desire that a more significant portion of
executive compensation (including future equity awards made following the adoption of the 2020 Equity and Incentive
Compensation Plan) be tied to performance based upon the achievement of pre-established goals. For fiscal year 2021, the
Compensation Committee took such prior feedback into consideration when it developed, designed, and granted the 2021 CEO
Performance Award. In addition, prior to granting such award in March 2021, the Compensation Committee (through
management) solicited the views of several of our largest stockholders regarding the grants of large, long-term performance
based equity incentives, including compensation philosophy embodied by these types of awards, potential size, appropriate
performance metrics, the time periods within which such metrics should be achieved, and other terms.
Our last annual meeting of stockholders was held on May 28, 2021 (the "Fiscal Year 2020 Annual Meeting"), and we
provided our stockholders the annual opportunity to vote to approve, on an advisory basis, the compensation of our named
executive officers as disclosed in the proxy statement for such meeting. At the meeting, stockholders representing
approximately 78% of the stock present and entitled to vote on this “say-on-pay” proposal approved the compensation of our
named executive officers. Although the Fiscal Year 2020 Annual Meeting was held during the latter part of fiscal year 2021
when significant decisions affecting compensation matters for fiscal year 2021 for the named executives had already been made
by the Compensation Committee and the say-on-pay vote was non-binding, the Compensation Committee expects to continue
to consider the outcome of the vote when making future compensation decisions for our named executive officers.
Role of Executive Officers in the Compensation Process
Each year, management provides recommendations to the Compensation Committee regarding compensation program
design and evaluations of executive and Company performance. In particular, in fiscal year 2021, our Chief Executive Officer
provided the Compensation Committee with his views on the merits of large, long-term performance based equity incentives
while minimizing other typical compensation components, such as base salary and short-term cash and equity incentives. Mr.
Liang was very willing to change his compensation arrangements so that almost all of his compensation for the next five years
will depend on whether we achieve the difficult performance metrics embedded in the 2021 CEO Performance Award. Mr.
Liang has expressed his view that this change in his compensation arrangements is evidence of his commitment to our
Company and his confidence in our future.
Following stockholder approval of the 2020 Equity and Incentive Compensation Plan in June 2020 that had (among
other things) refreshed the pool of equity awards available for grant, our Chief Executive Officer and Chief Financial Officer
provided the Compensation Committee with their views on non-CEO named executive officer equity grants based on their view
of investor expectations and our operating plans and financial goals. At the end of fiscal year 2021, our Chief Executive Officer
provided the Compensation Committee with his views of the nature and extent of our performance against expectations. Finally,
our Chief Executive Officer also provided the Compensation Committee with regular performance evaluations of the other
named executive officers, including his views as to their impact on strategic initiatives and organizational goals, as well as their
functional expertise and leadership. While the Compensation Committee carefully considers all recommendations made by
members of management, ultimate authority for all compensation decisions regarding our named executive officers rests with
the Compensation Committee and the Board.
2021 CEO Performance Award Granted in March 2021
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Terms of the 2021 CEO Performance Award
On March 2, 2021, the Compensation Committed granted to our Chief Executive Officer, Mr. Liang, a long-term
performance-based option award to purchase up to 1,000,000 shares of the Company’s common stock which may vest in five
equal tranches. Each of the five tranches vests if a specified revenue goal (each, a “Revenue Goal”) and a specified stock price
goal (each, a “Stock Price Goal”) is achieved. Revenue Goals must be achieved by June 30, 2026 (the “Revenue Performance
Period”) and Stock Price Goals must be achieved by September 30, 2026 (the “Stock Price Performance Period”). The 2021
CEO Performance Award was granted with an exercise price equal to $45.00 (the “Exercise Price”), representing a premium of
approximately 32% to the closing stock price of $34.08 reported on NASDAQ on March 2, 2021. The 2021 CEO Performance
Award will generally expire on March 2, 2031 and includes, among other terms and conditions, a restriction on the sale of any
shares issued upon exercise of the 2021 CEO Performance Award until March 2, 2024, the third anniversary of the date of
grant.
The Compensation Committee designed the 2021 CEO Performance Award to be a challenging long-term incentive for
future performance, and the Compensation Committee noted in particular that the performance thresholds could take many
years to achieve, if they can be achieved at all. In addition, the Compensation Committee intended that the 2021 CEO
Performance Award would further align Mr. Liang’s interests with those of the Company’s stockholders over the long term. In
connection with the grant of the 2021 CEO Performance Award, Mr. Liang will receive a de minimis salary of $1 per annum (or
such other non-waivable minimum wage requirement, if deemed advisable) and no cash bonuses through June 30, 2026. Mr.
Liang must also remain as the Company’s CEO (or such other position with the Company as Mr. Liang and the Board may
agree) at the time each goal is met in order for the corresponding tranche to vest. This helps ensure Mr. Liang’s active
leadership of the Company over the long term.
The following table sets forth the Revenue Goals which must be achieved by the end of the Revenue Performance
Period of June 30, 2026:
Revenue Goals(1)
$4.0 billion
$4.8 billion
$5.8 billion
$6.8 billion
$8.0 billion
Absolute Change From Revenue Reported for the Fiscal Year Ended June
30, 2020(2)
20%
44%
74%
104%
140%
__________________________
(1)
Revenue means the Company’s total revenues, as reported by the Company in its financial statements on Forms 10-Q and 10-K
filed with the SEC (but without giving effect to any rounding used in reporting the amounts in Form 10-Q and Form 10-K), for the
previous four consecutive fiscal quarters of the Company.
Revenue reported in the Company’s Form 10-K for the fiscal year ended June 30, 2020 was $3,339.3 million. Revenue reported in
this report for the fiscal year ended June 30, 2021 was $3,557.4 million.
(2)
The following table sets forth the Stock Price Goals which must be achieved by September 30, 2026:
Stock Price Goals(1)
$45
$60
$75
$95
$120
Absolute Change in Stock Price from
Grant Date Stock Price(2)
32%
76%
120%
179%
252%
Absolute Change in Stock Price From
$45 Exercise Price
0%
33%
67%
111%
167%
__________________________
(1)
Sustained stock price performance is required for each Stock Price Goal to be met, other than in connection with a change in
control. For each Stock Price Goal to be met, the sixty trading day average stock price must equal or exceed the Stock Price Goal.
Utilizes closing stock price on March 2, 2021 of $34.08 per share. The June 30, 2021 closing stock price was $35.18 per share.
(2)
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Each of the five tranches vests only when both the applicable Revenue Goal and Stock Price Goal for such tranche are
certified by the Compensation Committee as having been met.
A Revenue Goal and a Stock Price Goal that are matched together can be achieved at different points in time and
vesting will occur at the later of the achievement certification dates for such Revenue Goal and Stock Price Goal. Subject to any
applicable clawback provisions, policies or other forfeiture terms described in the 2021 CEO Performance Award, once a goal is
achieved, it is forever deemed achieved for determining the vesting of a tranche.
There is no automatic acceleration of vesting of the 2021 CEO Performance Award upon a future “change in control”,
but any tranches that are unvested as of the date of the change in control will vest upon the change in control if the Stock Price
Goal related to that tranche is achieved (the Revenue Goals will be disregarded). For purposes of determining whether any
Stock Price Goal has been achieved, the stock price shall equal the greater of (1) the most recent closing price per share
immediately prior to the effective time of such change in control, or (2) the per share common stock price (plus the per share of
common stock value of any other consideration) received by our stockholders in the change in control. To the extent any
tranche of the 2021 CEO Performance Award has not vested prior to the change in control, and does not vest in connection with
the change of control based on attainment of the relevant Stock Price Goal, as described above, such tranche under the 2021
CEO Performance Award will terminate as of the effective date of the change in control.
Reasons for the 2021 CEO Performance Award
The Compensation Committee’s primary objective in designing the 2021 CEO Performance Award was to help the
Company continue to grow and achieve its mission, which would facilitate the creation of significant stockholder value.
Mr. Liang has been critical to fulfilling the Company’s mission to be the leading innovator in high-performance, high-
efficiency server and storage technology while being committed to protect the environment through, and provide customers
with, the most energy-efficient, environmentally-friendly solutions available on the market. Mr. Liang co-founded the
Company, has been our Chief Executive Officer and Chairman since our inception, leads the overall management of the
Company, and sets our strategic direction. His experience in running our business, and his continued personal involvement in
key relationships with suppliers, customers and strategic partners and directing product innovations, will be extremely valuable
to the Company as the Company looks to re-accelerate its growth and meet its bold vision to achieve the Revenue Goals and
Stock Price Goals embedded in the 2021 CEO Performance Award.
Mr. Liang remains the Company's largest stockholder, and the Compensation Committee believes the 2021 CEO
Performance Award helps ensure his commitment and focus on delivering on a long-term vision that can increase stockholder
value.
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Fiscal Year 2021 Named Executive Officer Compensation Components, Other than the 2021 CEO Performance Award
For fiscal year 2021, the principal components of compensation for our named executive officers (including for the
Chief Executive Officer during fiscal year 2021 prior to the grant of the 2021 CEO Performance Award in March 2021) were
some or all of the following:
• Base salary;
•
• Equity-based incentive compensation consisting of grants of stock options and/or RSUs.
Short-term bonuses, some of which are discretionary and some of which are guaranteed; and
Base Salary. We pay base salaries to our named executive officers to provide them with a base level of fixed income
for services rendered to us. Base salary rates for our named executive officers other than the Chief Executive Officer are
determined annually by the Compensation Committee based upon recommendations by our Chief Executive Officer, typically
taking into account factors such as salary norms in comparable companies and publicly available data regarding compensation
increases in our industry, subjective assessments of the nature of the officers' positions and an annual review of the contribution
and experience of each named executive officer. For the Chief Executive Officer, prior to the grant of the 2021 CEO
Performance Award in March 2021, the Compensation Committee had considered substantially the same type of information, as
well as our overall size in terms of annual revenue, scale and number of employees and the Chief Executive Officer’s overall
stock ownership. In connection with the grant of the 2021 CEO Performance Award, Mr. Liang will receive a de minimis salary
of $1 per annum (or such other non-waivable minimum wage requirement, if deemed advisable) and no cash bonuses through
June 30, 2026.
Other than as discussed in the paragraphs above and below, the Compensation Committee held base salaries at the
same annual rates as were in effect at the end of fiscal year 2020. As had been discussed in the Prior Year CD&A, in the fourth
quarter of fiscal year 2020, the Compensation Committee had approved increases in base salary rates for the named executive
officers, which ranged from approximately 8% to 43%, after we had again become current in filing our periodic reports with the
SEC and our common stock was relisted on the Nasdaq Global Select Market.
In addition, following the assumption of the role of Senior Vice President, Chief Financial Officer and Chief
Compliance Officer in February 2021 by Mr. Weigand, the Compensation Committee approved an adjustment to his base salary
to $380,000 per annum, which was substantially identical to the annual base salary of his predecessor. Mr. Hsu’s base salary
was also adjusted following a transition in his role (and a decrease in his responsibilities) as discussed in the table below.
Charles Liang
David Weigand
Don Clegg
George Kao
Alex Hsu
Kevin Bauer
Principal Position During Fiscal Year 2021
President, Chief Executive Officer and Chairman of
the Board
Senior Vice President, Chief Financial Officer and
Chief Compliance Officer
Senior Vice President, Worldwide Sales
Senior Vice President, Operations
Senior Chief Executive, Strategic Business
Former Senior Vice President, Chief Financial
Officer
Fiscal Year
2020
Base Salary
Rate
Fiscal Year
2021
Base Salary
Rate(1)
Base Salary
% Change
$ 522,236 $
1
(100) %
$ 337,716 $ 380,000
$ 352,000 $ 352,000
$ 325,728 $ 325,728
$ 378,000 $ 160,000
$ 379,040 $ 379,040
13 %
— %
— %
(58) %
— %
____________________
(1)
The base salary amounts actually paid to each named executive officer for fiscal year 2020 and 2021 are disclosed in the Summary
Compensation Table. The fiscal year 2020 salary amounts disclosed in the Summary Compensation Table for each named executive
officer are less than the amounts disclosed in the table above because each named executive officer was receiving his fiscal year
2019 base salary rate for a portion of fiscal year 2020. In addition:
•
•
•
For Mr. Liang, the fiscal year 2021 salary amount disclosed in the Summary Compensation Table is higher than the amount
disclosed in the table above because Mr. Liang commenced receiving his $1 de minimis base salary following the grant of
the 2021 CEO Performance Award in March 2021;
For Mr. Weigand, the fiscal year 2021 salary amount disclosed in the Summary Compensation Table is lower than the
amount disclosed in the table above because Mr. Weigand only commenced receiving the amount set forth in the table
following his appointment in February 2021 as Senior Vice President, Chief Financial Officer and Chief Compliance
Officer;
For Mr. Hsu, the fiscal year 2021 salary amount disclosed in the Summary Compensation Table is higher than the amount
disclosed in the table above because for most of fiscal year 2021 Mr. Hsu served in the role of Chief Operating Officer at his
fiscal year 2020 base salary rate. In March 2021, Mr. Hsu transitioned to the role of Senior Chief Executive, Strategic
108
Business, a part-time position, from his prior role as Senior Vice President, Chief Operating Officer and ceased being an
executive officer, and his base salary rate was adjusted to the fiscal year 2021 base salary rate in the table above. Such
amount was determined primarily through discussions with the Chief Executive Officer; and
For Mr. Bauer, the fiscal year 2021 salary amount disclosed in the Summary Compensation Table is lower than the amount
disclosed in the table above because Mr. Bauer resigned as Senior Vice President, Chief Financial Officer in January 2021.
•
Short-Term Incentive Cash Compensation. In fiscal year 2021, the Compensation Committee did not utilize a uniform
short-term incentive cash compensation program for the named executive officers. As discussed in the Prior Year CD&A, in the
fourth quarter of fiscal year 2020 the Compensation Committee had implemented a short-term incentive cash compensation
program for fiscal year 2020 with performance goals as part of its review of executive compensation following the re-listing of
our common stock on the Nasdaq Global Select Market (which had occurred in January 2020) in order to support our overall
business objectives by aligning short-term Company performance with the interests of investors and focusing attention on key
measures of success. Following the completion of such short-term incentive cash program, the Compensation Committee did
not believe it was necessary to renew a similar program for fiscal year 2021.
Other Short-Term Bonuses. During fiscal year 2021, we instead utilized individualized short-term cash bonus
arrangements with various officers of the Company, including all of our named executive officers. In some cases these
arrangements pre-date the time that these individuals became executive officers, in other cases the arrangements were
negotiated at the time the individual was hired or was designated as an executive officer, and in still other cases the
arrangements were new short-term bonus opportunities implemented for fiscal year 2021. These arrangements provide for fixed
bonus payments, variable bonus payments, or a hybrid program. We award these short-term bonuses to the named executive
officers for their continued achievements and contributions to the Company, as further described below. The table below
summarizes the fiscal year 2021 arrangements for the named executive officers.
Charles Liang
David Weigand
Don Clegg
George Kao
Alex Hsu
Kevin Bauer
For a portion of fiscal year 2021, and spurred by the COVID-19 pandemic, we provided
employees additional per day compensation for coming into the workplace. In the United
States, both exempt and non-exempt employees were generally eligible for this program
based upon the number of days on which they worked on-site, based on a standard rate for
each of the exempt and non-exempt employees (the “Workplace Incentive”). Under the
Workplace Incentive, Mr. Liang received $3,360.
In connection with his appointment as Senior Vice President, Chief Financial Officer and
Chief Compliance Officer in February 2021, Mr. Weigand received a fixed bonus, paid
quarterly, at a rate of $80,000 per year. Due to the commencement of the award in February
2021, Mr. Weigand received only half of the annual amount for fiscal year 2021 ($40,000).
This bonus amount is similar in both structure and amount to what was provided to Mr.
Weigand’s predecessor upon his initial appointment to the position. Under the Workplace
Incentive, Mr. Weigand received $3,360.
Mr. Clegg received a fixed bonus, paid monthly, at a rate of $84,000 per year. Due to the
termination of this program after July 2020, however, Mr. Clegg received only 1/12th of the
annual amount for fiscal year 2021 ($7,000). Under the Workplace Incentive, Mr. Clegg
received $2,990.
Under the Workplace Incentive, Mr. Kao received $3,168.
Under the Workplace Incentive, Mr. Hsu received $768.
Mr. Bauer received a fixed bonus, paid monthly, initially at a rate of $80,000 per year, then
increased to a rate of $120,000 per year in September 2019. Due to the termination of this
program after July 2020, however, Mr. Bauer received only 1/12th of the annual amount for
fiscal year 2021 ($10,000). Under the Workplace Incentive, Mr. Bauer received $3,408.
Equity-Based Incentive Compensation. Stock options and other equity-based awards are also an important component
of the total compensation of our named executive officers. We believe that equity-based awards also align the interests of each
named executive officer with those of our stockholders. They also provide named executive officers a significant, long-term
interest in our success and help retain key named executive officers in a competitive market for executive talent. The 2020
Equity and Incentive Compensation Plan authorized the Compensation Committee to grant stock options and other equity-based
awards to eligible named executive officers. The number of shares owned by, or subject to equity-based awards held by, each
named executive officer is periodically reviewed and additional awards are considered based upon a generalized assessment of
past performance, expected future performance and the relative holdings of other executive officers. The Compensation
Committee has historically granted equity awards to employees on a two-year cycle.
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Due to the fact that we failed to file our 2017 Form 10-K by its due date, the effectiveness of our registration statement
on Form S-8 covering equity awards under our prior 2016 Equity Incentive Plan was suspended. It remained suspended until
December 20, 2019, the date on which we had completed filing all of our delinquent quarterly and annual reports with the SEC.
The effectiveness of our registration statement on Form S-8 for the prior 2016 Equity Incentive Plan was then revived. The
Compensation Committee did not make equity awards to our named executive officers during the period of time when our
registration statement on Form S-8 for the 2016 Equity Incentive Plan was not effective, except to persons who became named
executive officers during this period. With the adoption of the 2020 Equity and Incentive Compensation Plan, and the
effectiveness of a Form S-8 registration statement for that plan and awards granted under it on June 16, 2020, our
Compensation Committee has granted, and expects that it will continue to grant, additional equity awards to our named
executive officers that will reflect the lack of equity awards for the period of time during which the effectiveness of our
registration statement on Form S-8 for our prior 2016 Equity Incentive Plan was suspended. We expect to make all future equity
awards out of the 2020 Equity and Incentive Compensation Plan.
For fiscal year 2021, which commenced July 1, 2020, the Compensation Committee determined to provide the awards
of performance-based stock options, service-based stock options and RSUs to named executive officers as outlined in the table
below.
Charles Liang
David Weigand(2)
Don Clegg
George Kao
Alex Hsu(3)
Type of Award
Performance options
Stock options
RSUs
Stock options
RSUs
Stock options
RSUs
N/A
Quantity (at Target)
of Award
Rationale for Providing the Award
1,000,000 Long-term incentive(1)
8,000 Refresh grant
3,600 Refresh grant
7,500 Refresh grant
3,380 Refresh grant
5,410 Refresh grant
2,430 Refresh grant
N/A N/A
__________________________
(1)
(2)
(3)
See “2021 CEO Performance Award Granted in March 2021” above for additional information.
Mr. Weigand assumed the role of Senior Vice President, Chief Financial Officer and Chief Compliance Officer following the
resignation of Mr. Bauer in January 2021.
Mr. Hsu served as Senior Vice President, Chief Operating Officer until March 2021. In March 2021, Mr. Hsu transitioned to the
role of Senior Chief Executive, Strategic Business. Although Mr. Hsu did not receive any new grants of equity awards during
fiscal year 2021, the original vesting schedules for his awards outstanding as of February 28, 2021 were continued despite his
reduction in responsibilities effective March 1, 2021, and his awards were deemed modified for accounting purposes. For more
information about modification fair value for Mr. Hsu’s awards relating to his transition, please see the “Fiscal Year 2021
Summary Compensation Table” and “Fiscal Year 2021 Grants of Plan-Based Awards Table” below.
Stock Options. In general, the Compensation Committee uses stock options to directly align the compensation interests
of participating named executive officers with the investment interests of our stockholders. See “2021 CEO Performance
Award Granted in March 2021” for additional information regarding the grant of the long-term performance-based option
award to Mr. Liang. The stock options described above for each of Messrs. Weigand and Clegg were granted on August 4,
2020 with a 10-year term and an exercise price equal to the closing market price of our common stock on the grant date ($30.33
per share). Subject to the continued service of such named executive officers, these stock options vest and become exercisable
at the rate of 25% of the shares on May 1, 2021, and 1/16th at the end of each successive calendar quarter thereafter. The
Compensation Committee had approved utilizing May 1, 2021 as the first vesting date because (if not for the delay in the
Company’s ability to issue equity incentive awards because it did not have an effective registration statement on Form S-8
covering equity awards under its equity incentive plans) such awards otherwise would have been made for these named
executive officers on or prior to May 1, 2020 as part of their two-year award cycle. The stock options described above for Mr.
Kao were granted on October 27, 2020 with a 10-year term and an exercise price equal to the closing market price of our
common stock on the grant date ($23.74 per share). Subject to the continued service of such named executive officer, the grant
is generally exercisable at the rate of 25% of the options granted on October 27, 2021, and then 1/16th at the end of each
successive calendar quarter thereafter. The particular size of the stock option grants to each of these named executive officers
was determined based upon the recommendation of Mr. Liang which was reviewed and approved by the Compensation
Committee.
RSUs. In general, RSUs represent the right to receive a defined number of shares of our common stock subject to the
continued employment through the vesting date. The RSUs described above for each of Messrs. Weigand and Clegg were
granted on August 4, 2020. Subject to the continued service of such named executive officers, these RSUs vest at the rate of
110
25% of the total number of units on May 10, 2021, and 1/16th at the end of each successive calendar quarter thereafter. The
Compensation Committee had approved utilizing May 10, 2021 as the first vesting date because (if not for the delay in the
Company’s ability to issue equity incentive awards because it did not have an effective registration statement on Form S-8
covering equity awards under its equity incentive plans) such awards otherwise would have been made for these named
executive officers on or prior to May 10, 2020 as part of their two-year award cycle. The RSUs described above for Mr. Kao
were granted on October 27, 2020. Subject to the continued service of such named executive officer, these RSUs vest at the
rate of 25% of the total number of units on November 10, 2021, and 1/16th at the end of each successive calendar quarter
thereafter. The particular size of the RSU grants to each of these named executive officers was determined based upon the
recommendation of Mr. Liang which was reviewed and approved by the Compensation Committee.
PRSUs. PRSUs represent the right to receive a defined number of shares of our common stock subject to the
achievement of pre-established goals. Mr. Hsu received a grant of 30,000 in target PRSUs on March 27, 2020. In general, a
total of 30,000 units were to vest based on service conditions only, with the first tranche of 15,000 vesting in May 2021 and
15,000 vesting in November 2021. Additional units could have been earned for each tranche if the Company’s revenue
increased year-over-year (fiscal year 2020 compared to fiscal year 2019 for the first tranche and fiscal year 2021 compared to
fiscal year 2020 for the second tranche).
With respect to the first tranche, the Company’s revenue for fiscal year 2020 ($3,339 million) did not exceed revenue
for fiscal 2019 ($3,500 million), so no additional units were earned for the first tranche. With respect to the second tranche, if
the Company’s revenue for fiscal year 2021 exceeded its revenue for fiscal year 2020, then a number of additional units would
have been earned for the second tranche. The number of additional units was to be determined by multiplying the percentage
growth in revenue by three, which amount would have then been a multiplier of the base number of 15,000 units. Based upon
the Company’s revenue for fiscal year 2021 ($3,557 million) increased from revenue for fiscal year 2020, management has
calculated that for the second tranche, approximately 2,939 additional units were earned, such that a total of 17,939 units will
vest in November 2021. Such amount remains subject to final certification by the Compensation Committee.
Update on Special Performance-Based Cash Incentive Award Granted in March 2020
As discussed in the Prior Year CD&A, in March 2020, the Board, upon the recommendation of the Compensation
Committee, approved special performance-based cash incentive award opportunities to certain long-term employees, including
Mr. Liang, our Chief Executive Officer. This incentive for Mr. Liang was specifically linked to Company stock price
performance. Mr. Liang’s award, for a cash incentive opportunity of up to $8,076,701 (the “Maximum Value”), was subject to
the following conditions:
•
•
50% of the Maximum Value will be paid to Mr. Liang only if the average closing price for the Company’s common
stock equals or exceeds $31.61 (representing a 15% premium over the average closing price of the Company’s
common stock for the 20 consecutive trading days preceding the Board’s decision) for any period of 20 consecutive
trading days prior to September 30, 2021 (the “First Price Target”), provided that Mr. Liang remains employed with
the Company through the date that such common stock price goal is achieved; provided further that this payment shall
be subject to reduction (including possibly a reduction to zero) at the sole discretion of the Board to the extent the
Company has not made, in the Board’s determination, adequate progress in remediating its internal weaknesses in its
internal control over financial reporting; and
50% of the Maximum Value will be paid to Mr. Liang only if the average closing price for the Company’s common
stock equals or exceeds $32.99 (representing a 20% premium over the average closing price of the Company’s
common stock for the 20 consecutive trading days preceding the Board’s decision) (the “Second Price Target”) for any
period of 20 consecutive trading days prior to June 30, 2022, provided that Mr. Liang remains employed with the
Company through the date that such common stock price goal is achieved.
The relevant stock price goals under Mr. Liang’s award were not met during fiscal year 2020, and no portion of these
amounts were paid to Mr. Liang during fiscal year 2020. During fiscal year 2021, the First Price Target was achieved based
upon stock price performance from December 22, 2020 through January 21, 2021. As of August 27, 2021, the Board has not yet
determined whether to exercise any negative discretion with respect to the first 50% of the Maximum Value earned by Mr.
Liang (as described in the first bullet point above), and no portion of the first 50% of the Maximum Value has yet been paid to
Mr. Liang through such date. The Board is expected to make a final determination whether to exercise any negative discretion
by October 31, 2021. However, due to the fact that we currently expect that the Board will determine that the Company has
made adequate progress in remediating the Company’s material weaknesses in its internal control over financial reporting, we
have chosen to disclose the first 50% of the Maximum Value as having been earned by Mr. Liang for fiscal year 2021, and are
disclosing it as an earned amount in the Summary Compensation Table below, all in advance of formal Board determination.
Also during fiscal year 2021, the Second Price Target was achieved based upon stock price performance from February 8, 2021
through March 8, 2021. Payment of the 50% of the Maximum Value relating to the Second Price Target was made to Mr. Liang
111
during the fourth quarter of fiscal year 2021. As a result of these activities and achievements, we currently consider 100% of
the Maximum Value to have been earned by Mr. Liang for fiscal year 2021.
Former CFO Consulting Arrangement
Prior to ceasing employment with the Company as Chief Financial Officer, in February 2021 Mr. Bauer entered into a
consulting arrangement with the Company related to reinforcing a smooth transition of his prior duties, and providing general
consultation and advice services. The term of the arrangement is for one year with a monthly fee of $13,334 for services. As a
result of the consulting service provided for in the consulting arrangement, Mr. Bauer's outstanding equity awards generally
will continue to vest during the consulting period in accordance with their terms and the period Mr. Bauer was permitted to
exercise his awards was extended until May 25, 2022. Assuming a stock price equal to $32.50 (our closing stock price on
February 25, 2021, Mr. Bauer’s last day of employment), the intrinsic value of the unvested awards subject to such continued
vesting was approximately $40,500 in stock options and $0 in RSUs.
On April 27, 2021, Mr. Bauer was also granted 10,000 stock options to compensate his consulting efforts in a smooth
transition of his prior duties, and his provision of general consultation and advice services. Such stock options have a 10-year
term and an exercise price equal to the closing market price of our common stock on the grant date ($38.50 per share). Subject
to the continued provision of consulting services, these stock options vest and become exercisable at the rate of 100% of the
shares on February 25, 2022. The number of shares subject to these stock options was determined primarily through discussions
with the Chief Executive Officer.
Stock Ownership Guidelines
Other than as discussed below under “Stock Retention Policy,” we currently do not require our directors or executive
officers to own a particular amount of our common stock. The Compensation Committee is satisfied that stock and option
holdings among our directors and named executive officers have historically been sufficient to provide motivation and to align
this group’s interests with those of our stockholders. Our insider trading policy prohibits any of our directors, executive
officers, employees or contractors from engaging in any transactions in publicly-traded options, such as puts and calls, and
other derivative securities, including any hedging or similar transaction, with respect to our common stock.
Stock Retention Policy
We have adopted a stock retention policy which requires that our Chief Executive Officer hold a significant portion of
the shares of our common stock acquired under our equity incentive plans for at least 36 months. Generally, under the policy,
the Chief Executive Officer must retain at least 50% of all “net” shares received (“net” shares means those shares remaining
after the sale or withholding of shares in payment of the exercise price, if applicable, and withholding taxes) for at least 36
months following the date on which an equity award is vested, settled or exercised, as applicable. In addition, in connection
with the 2021 CEO Performance Award granted to our Chief Executive Officer in March 2021, the Board required a restriction
on the sale of any shares issued upon the exercise of the options associated with such award until March 2, 2024, the third
anniversary of the grant date. See “2021 CEO Performance Award Granted in March 2021.”
Recoupment Policy
We established a recoupment policy that is applicable to our named executive officers (the “Recoupment Policy”).
Under the Recoupment Policy, if we are required to prepare an accounting restatement due to material noncompliance with the
financial reporting requirements under United States securities laws, the Compensation Committee shall be entitled to recover
from any current or former executive officer any excess incentive-based compensation received by such person during the
three-year period prior to the date on which we are required to prepare the restatement. This Recoupment Policy applies to both
equity-based and cash-based incentive compensation awards. The “excess incentive-based compensation” is the difference
between the actual amount that was paid, and the amount that would have been paid under the restated financial results.
Other Benefits
Health and Welfare Benefits. Our named executive officers receive the same health and welfare benefits as are offered
to our other employees, including medical, dental, vision, life, accidental death and dismemberment and disability insurance
coverage, flexible spending account participation and holiday pay. The same contribution amounts, percentages and plan design
provisions are applicable to all employees. We offer these health and welfare benefits generally to help provide a competitive
compensation package to employees to assist with the attraction, hiring and retention of employees.
112
Retirement Program. Our named executive officers may participate in the same tax-qualified, employee-funded 401(k)
plan that is offered to all our other employees. We do not maintain a supplemental executive retirement plan, nor do we offer
any defined benefit retirement plans or other defined contribution plans to our named executive officers. We offer these
retirement program benefits generally to help provide a competitive compensation package to employees to assist with the
attraction, hiring and retention of employees.
Perquisites. We do not provide perquisites or personal benefits to any of our named executive officers.
Employment Arrangements, Severance and Change of Control Benefits. We have not entered into employment
agreements with any of our named executive officers (we have entered into a consulting agreement with Mr. Bauer, which is
further described above under “- Former CFO Consulting Arrangement”). Each of Messrs. Clegg, Hsu, Kao and Weigand
currently has a signed offer letter which provides for at-will employment. Each such offer letter provides for an initial base
salary rate, an initial stock option grant and rights to participate in our employee benefit plans as described above. Prior to his
departure in February 2021, Mr. Bauer had a substantially similar offer letter. We do not have any written employment
arrangements with Mr. Liang. Other than as described in the following sentence, we do not have any arrangements with any of
our named executive officers that provide for any severance or other benefits in the event of termination or change of control of
our Company. See also “- Fiscal Year 2021 Potential Payments Upon Termination or Change of Control.” The 2021 CEO
Performance Award has certain provisions related to the treatment of such award in the event of a change of control of our
Company. See “2021 CEO Performance Award Granted in March 2021.”
Tax and Accounting Considerations. In our review and establishment of named executive officer compensation
programs and payments, we consider, but do not place substantial emphasis on, the anticipated accounting and tax treatment of
our compensation programs to us and our named executive officers. Among other factors that receive greater consideration are
the net costs to us and our ability to effectively administer executive compensation in the short and long-term interests of
stockholders.
Section 162(m) of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), generally limits a Company’s
ability to deduct for tax purposes compensation in excess of $1.0 million paid in any single tax year to certain executive officers
(and, beginning in 2018, certain former executive officers). We expect to continue to design and maintain executive
compensation arrangements that we believe will attract and retain the executive talent that we need to compete successfully,
even if in certain cases such compensation is not deductible for federal income tax purposes. In addition, there can be no
assurance that compensation intended to satisfy the requirements for deductibility under Section 162(m) will in fact be
deductible.
We account for equity compensation paid to our employees in accordance with Financial Accounting Standards Board
Accounting Standards Codification Topic 718, Stock-Compensation (“ASC Topic 718”), which requires us to estimate and
record expenses for each award of equity compensation over the service period of the award.
We intend that our plans, arrangements and agreements will be structured and administered in a manner that complies
with (or is exempt from) the requirements of Section 409A of the Code. Participation in, and compensation paid under, our
plans, arrangements and agreements may, in certain instances, result in the deferral of compensation that is subject to the
requirements of Section 409A. If our plans, arrangements and agreements as administered fail to meet certain requirements
under or exemptions from Section 409A, compensation earned thereunder may be subject to immediate taxation and tax
penalties.
Summary
The Compensation Committee believes that our compensation philosophy and programs are designed to foster a
performance-oriented culture that aligns our named executive officers’ interests with those of our stockholders. The
Compensation Committee also believes that the compensation of our named executive officers is both appropriate and
responsive to the goal of building stockholder value.
Compensation Committee Report
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis (“CD&A”)
with our management. Based on this review and these discussions, the Compensation Committee recommended to the Board
that the CD&A be included in this Annual Report.
113
This report has been furnished by the Compensation Committee.
Sherman Tuan, Chair
Saria Tseng
114
Fiscal Year 2021 Summary Compensation Table
The following table sets forth information concerning the reportable compensation for our named executive officers
for the fiscal years ended 2021, 2020 and 2019, as applicable.
FISCAL YEAR 2021 SUMMARY COMPENSATION TABLE
Name and Principal
Position
Charles Liang
President, Chief
Executive Officer
and Chairman of the
Board
Year
2021
2020
2019
David Weigand
Senior Vice President,
Chief Financial
Officer and Chief
Compliance Officer
Don Clegg
Senior Vice President,
Worldwide Sales
George Kao
Senior Vice President,
Operations
Alex Hsu(6)
Senior Chief
Executive, Strategic
Business
Kevin Bauer(7)
Former Senior Vice
President, Chief
Financial Officer
2021
2020
2019
2021
2020
2019
2021
2020
2019
2021
2020
2019
2021
2020
2019
Salary
($)(1)
421,785
423,346
386,212
367,709
300,347
270,000
362,140
348,459
336,910
333,858
324,807
305,060
305,333
374,845
206,340
294,575
363,954
340,356
Bonus
($)(2)
3,360
—
—
43,360
222,107
48,921
9,990
108,970
146,419
6,273
4,524
4,262
768
5,048
2,623
13,408
460,967
80,004
Stock
Awards
($)(3)
Option
Awards
($)(4)
— 11,616,000
—
—
—
—
Non-Equity
Incentive
Plan
Compensatio
n
($)(5)
8,076,701
875,635
—
All Other
Compensatio
n
($)
Total
($)
— 20,117,846
1,298,981
—
386,212
—
109,188
—
221,000
102,515
—
132,600
57,688
68,851
—
452,964
611,100
60,112
—
—
—
113,280
—
215,600
106,200
—
215,600
60,213
15,288
39,323
475,592
372,400
172,480
426,500
—
—
—
78,970
—
—
290,581
—
—
152,333
—
—
189,624
—
—
164,441
—
—
—
—
—
—
—
—
—
—
—
—
—
53,336
—
—
633,537
601,424
755,521
580,845
748,010
831,529
458,032
565,803
348,645
1,234,657
1,553,017
441,555
787,819
989,362
420,360
__________________________
(1)
(2)
(3)
(4)
Amounts disclosed under "Salary" for fiscal year 2021 include leave pay earned by the named executive officers.
Amounts disclosed under “Bonus” for fiscal year 2021 reflect short-term bonuses earned by each of the named executive officers.
See discussion under “Compensation Discussion and Analysis” for more information about these individualized programs.
The amount disclosed for fiscal year 2021 represents the grant date fair value of the RSU award granted during the fiscal year to the
named executive officer calculated in accordance with ASC Topic 718 (plus, for Mr. Hsu, the modification fair value for the
continuation of the original vesting schedules for his awards outstanding as of February 28, 2021 despite his reduction in
responsibilities effective March 1, 2021 (based on a deemed modification for accounting purposes)), in each case as further
described in the Fiscal Year 2021 Grants of Plan-Based Awards table below. Assumptions used in the calculation of this amount are
included in Part II, Item 8, “Financial Statement and Supplementary Data”, and Part II, Item 8, Note 14 “Stock-based Compensation
and Stockholders’ Equity”, to our consolidated financial statements for fiscal year 2021 included in this Annual Report on Form 10-
K.
The amount disclosed for fiscal year 2021 represents the grant date fair value of the stock option award for each named executive
officer calculated in accordance with ASC Topic 718, using the Black Scholes option-pricing model (plus (A) for Mr. Bauer, the
modification fair value for a modification of the post-employment termination exercise period for 70,000 in vested stock options
held by Mr. Bauer as of February 25, 2021, and (B) for Mr. Hsu the modification fair value for the continuation of the original
vesting schedules for his awards outstanding as of February 28, 2021 despite his reduction in responsibilities effective March 1,
2021 (based on a deemed modification for accounting purposes)), in each case as further described in the Fiscal Year 2021 Grants of
Plan-Based Awards table below. The amount set forth in the table above with respect to Mr. Liang’s award represents our
determination of probable outcome of the performance conditions embedded in the 2021 CEO Performance Award as of the date of
115
grant. If the maximum level of performance is achieved with respect to this award (in other words, if we achieve the $8.0 billion
revenue target and our common stock reaches the $120.00 per share price target, the grant date fair value of the award will be
$13,882,000. These amounts do not necessarily correspond to the actual values that may be realized by the named executive
officers, which depend, among other things, on the market value of our common stock appreciating from that on the grant
dates of the options. This award was designed to be entirely an incentive for future performance that could take many years, if at
all, to be achieved. Further, each of the stock price targets (starting at $45.00 and rising to $120.00) and revenue targets (starting at
$4.0 billion and rising to $8.0 billion) was selected to be very difficult to achieve. If any options have not vested by the end of the
term of the option award, they will be forfeited and Mr. Liang will not realize any value from such options. As of the date of
this filing, none of the revenue or stock price goals has been achieved. Furthermore, the exercise price of $45.00 per share is
32% higher than the closing price of our common stock on the date the 2021 CEO Performance Award was granted AND
exceeds the highest price at which our common stock has ever traded as of the date of this filing. Even if we achieve the first
revenue goal of $4.0 billion and the first stock price goal of $45.00 is also met, so that the first tranche of the 2021 CEO
Performance Award vests, Mr. Liang will realize no gain on the shares covered by the first tranche unless he exercises the
option for the first tranche of shares and thereafter our common stock trades at a price higher than $45.00 per share.
Assumptions used in the calculation of these amounts are included in Part II, Item 8, "Financial Statements and Supplementary
Data", and Part II, Item 8, Note 14 “Stock-based Compensation and Stockholders’ Equity”, to our consolidated financial statements
for fiscal year 2021 included in this Annual Report on Form 10-K.
The amount disclosed in this column for fiscal year 2021 represents for Mr. Liang $8,076,701 in Maximum Value deemed earned
under a special performance-based cash incentive award opportunity granted to Mr. Liang in March 2020. See “Update on Special
Performance-Based Cash Incentive Award Granted in March 2020” above for more information about this award.
Mr. Hsu served as Senior Vice President, Chief Operating Officer until March 2021. In March 2021, Mr. Hsu transitioned to the role
of Senior Chief Executive, Strategic Business.
Mr. Bauer resigned as our Chief Financial Officer in January 2021, and Mr. Weigand has assumed such role. Mr. Bauer served as
consultant after his resignation from the Company and earned $53,336 in consulting fees for fiscal year 2021.
(5)
(6)
(7)
Fiscal Year 2021 Grants of Plan-Based Awards
The following table provides information concerning all plan-based awards granted during fiscal year 2021 to each of
our named executive officers, which grants were made under the 2020 Equity and Incentive Compensation Plan.
FISCAL YEAR 2021 GRANTS OF PLAN-BASED AWARDS TABLE
Maximum
(#)
Estimated Future Payouts Under Equity
Incentive Plan Awards
Target
(#)
Threshold
(#)
200,000 1,000,000 1,000,000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(3)
All Other
Stock
Awards:
Number of
Shares of
Stock or
Units (#)
All Other
Option
Awards:
Number of
Securities
Underlying
Options (#)
Exercise or
Base Price of
Option
Awards
($/Sh)
Grant
Date Fair
Value of
Stock and
Option
Awards
($)(1)
—
—
3,600
—
3,380
—
2,430
(3)
—
—
—
— $
8,000
—
7,500
—
5,410
—
—
45.00 $ 11,616,000 (6)
30.33
—
30.33
—
23.74
—
—
113,280
109,188
106,200
102,515
60,213
57,688
452,964
475,592
183,600
242,900
(4)
(4)
10,000
(5)
38.50
(5)
Don Clegg
George Kao
Name
Charles Liang(2)
David Weigand
Grant Date
3/2/2021
8/4/2020
8/4/2020
8/4/2020
8/4/2020
10/27/2020
10/27/2020
3/1/2021
3/1/2021
4/27/2021
2/25/2021
_________________________
(1)
Kevin Bauer
Alex Hsu
(2)
Amounts disclosed in this column represent the fair value of the RSU and stock option awards as of the date of grant (for Mr.
Liang’s stock option award, based upon the probable outcome of the performance conditions), computed in accordance with ASC
Topic 718, excluding the effect of estimated forfeitures.
These stock options are performance-based and shall vest and become exercisable depending upon the degree of satisfaction of both
the Stock Price Goals and Revenue Goals discussed above in CD&A. The Stock Price Goals must be achieved on or prior to
September 30, 2026 and the Revenue Goals must be achieved on or prior to June 30, 2026. The options may vest in tranches of
200,000 shares each only when coordinating Stock Price Goals and Revenue Goals, respectively, of $45.00 sixty-trading-day-
average stock price and $4.0 billion in four-consecutive-fiscal-quarter revenue, $60.00 sixty-trading-day-average stock price and
$4.8 billion four-consecutive-fiscal-quarter revenue, $75.00 sixty-trading-day-average stock price and $5.8 billion four-consecutive-
fiscal-quarter revenue, $95.00 sixty-trading-day-average stock price and $6.8 billion four-consecutive-fiscal-quarter revenue, and
$120.00 sixty-trading-day-average stock price and $8.0 billion four-consecutive-fiscal-quarter revenue, are achieved. The smallest
116
(3)
(4)
(5)
(6)
amount of these stock options (threshold) that can be earned based on performance is vested stock options for 200,000 shares for
achieving a Stock Price Goal of $45.00 sixty-trading-day-average stock price and a Revenue Goal of $4.0 billion in four-
consecutive-fiscal-quarter revenue. However, even if those goals are achieved, if the Company’s stock price remained at $45.00 per
share, based on the $45.00 exercise price for these stock options, there would be no appreciation value in those stock options for Mr.
Liang. For more information about the operation of this award, see “2021 CEO Performance Award Granted in March 2021” above.
In connection with his change in role with us effective March 1, 2021, the remaining PRSUs and unvested RSUs held by Mr. Hsu as
of March 1, 2021 were deemed modified for accounting purposes. The value disclosed in this row reflects the modification fair
value for the modification of Mr. Hsu’s remaining PRSUs and unvested RSUs.
In connection with his change in role with us effective March 1, 2021, the unvested stock options held by Mr. Hsu as of March 1,
2021 were deemed modified for accounting purposes. The value disclosed in this row reflects the modification fair value for the
modification of Mr. Hsu’s unvested stock options.
In connection with his termination of employment and consulting arrangement with us, the post-employment termination exercise
period for 70,000 in vested stock options held by Mr. Bauer as of February 25, 2021 was extended to expire within three months of
the end of his consulting period (which is currently expected to occur on February 25, 2022). These vested stock options consisted
of 8,030 stock options, 21,970 stock options, 6,400 stock options and 33,600 stock options, each at an exercise price of $28.45 per
share to expire on January 25, 2027. The value disclosed in this row reflects the modification fair value for the modification of the
post-employment termination exercise period for Mr. Bauer’s stock options.
Reflects the grant date fair value of the 2021 CEO Performance Award, calculated in accordance with ASC Topic 718, as described
in footnote one. This amount does not necessarily correspond to the actual value that may be realized by Mr. Liang. The 2021
CEO Performance Award is intended to compensate Mr. Liang over its 10-year maximum term and will become vested as to all
shares subject to it only if the market price of our common stock increases to $120.00 per share (determined on a sixty-
trading-day average) and our revenue increases to $8.0 billion over four consecutive fiscal quarters, in each case during the
applicable performance period. This award was designed to be entirely an incentive for future performance that could take many
years, if at all, to be achieved. Further, each of the stock price targets (starting at $45.00 and rising to $120.00) and revenue targets
(starting at $4.0 billion and rising to $8.0 billion) was selected to be very difficult to achieve. If any options have not vested by
the end of the term of the option award, they will be forfeited and Mr. Liang will not realize any value from such options. As
of the date of this filing, none of the revenue or stock price goals has been achieved. Furthermore, the exercise price of
$45.00 per share is 32% higher than the closing price of our common stock on the date the 2021 CEO Performance Award
was granted AND exceeds the highest price at which our common stock has ever traded as of the date of this filing. Even if
we achieve the first revenue goal of $4.0 billion and the first stock price goal of $45.00 is also met, so that the first tranche of
the 2021 CEO Performance Award vests, Mr. Liang will realize no gain on the shares covered by the first tranche unless he
exercises the option for the first tranche of shares and thereafter our common stock trades at a price higher than $45.00 per
share. See “Executive Compensation—Compensation Discussion and Analysis (“CD&A”)— Compensation Philosophy and
Objectives—Our Move Toward Performance-Based Compensation Arrangements” and “Executive Compensation—Compensation
Discussion and Analysis (“CD&A”)—2021 CEO Performance Award Granted in March 2021” above and Part II, Item 8, Note 14
“Stock-based Compensation and Stockholders’ Equity”, to our consolidated financial statements for fiscal year 2021 included in this
Annual Report on Form 10-K.
Grants made in fiscal year 2021 are described more fully in the "Compensation Discussion and Analysis" section of
this Annual Report. More information concerning the terms of the employment or consulting arrangements, if applicable, in
effect with our named executive officers during fiscal year 2021 is provided under the "Employment Arrangements, Severance
and Change of Control Benefits" under the “Compensation Discussion and Analysis”.
Outstanding Equity Awards at 2021 Fiscal Year-End
The following table provides information concerning the outstanding equity-based awards as of June 30, 2021, held by
our named executive officers.
OUTSTANDING EQUITY AWARDS AT 2021 FISCAL YEAR-END TABLE
Option Awards
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
Number
of
Shares
or Units
of Stock
That
Have
Not
Vested
(#)
Option
Expiration
Date
1/21/2023
1/19/2025
Option
Exercise
Price
($)
20.70
35.07
117
Stock Awards
Equity
Incentive
Plan
Awards:
Number
of
Unearne
d Shares,
Units or
Other
Rights
That
Have Not
Vested
(#)
Equity
Incentive
Plan
Awards:
Market
or Payout
Value of
Unearne
d Shares,
Units or
Other
Rights
That
Have Not
Vested
($)
Market
Value
of
Shares
or
Units of
Stock
That
Have
Not
Vested
($)(1)
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
231,260
166,750
Name
Charles Liang
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
David Weigand
Don Clegg
George Kao
Alex Hsu
130,000
—
11,310
3,690
—
2,000
6,800
6,000
4,000
9,917
5,083
—
1,875
14,840
5,160
744
2,968
974
—
3,500
2,500
2,082
9,005
2,995
38,000
1,000,000 (2)
—
4,762 (3)
238 (3)
4,475 (4)
1,525 (4)
26.95
45.00
22.10
22.10
30.33
30.33
8/2/2027
3/2/2031
7/31/2028
7/31/2028
8/4/2030
8/4/2030
2,500 (5) 87,950
2,700 (6) 94,986
—
—
—
4,762 (7)
238 (7)
4,288 (4)
1,337 (4)
—
—
2,228 (8)
—
586 (9)
5,410 (10)
—
—
298 (13)
3,956 (7)
44 (7)
—
12.50
26.75
20.54
22.10
22.10
30.33
30.33
8/6/2022
8/4/2024
8/3/2026
7/31/2028
7/31/2028
8/4/2030
8/4/2030
1,500 (5) 52,770
2,535 (6) 89,181
8/2/2027
26.95
26.95
8/2/2027
13.00 10/30/2028
13.00 10/30/2028
20.37
3/27/2030
23.74 10/27/2030
1,268 (11) 44,608
2,430 (12) 85,487
17.96
27.28
22.80
22.10
22.10
20.37
1/20/2024
1/27/2026
1/24/2028
7/31/2028
7/31/2028
3/27/2030
134 (14) 4,714
680 (15) 23,922
17,939 (16) 631,094
Kevin Bauer
400
2,100
—
1,200 (17)
6,300 (17)
10,000 (18)
28.45
28.45
38.50
1/25/2027
1/25/2027
4/27/2031
__________________________
(1)
(2)
Represents the closing stock price per share of our common stock as of June 30, 2021 ($35.18) multiplied by the number of shares
underlying RSUs that had not vested as of June 30, 2021 (or, for Mr. Hsu, PRSUs that had been earned based on performance
through June 30, 2021 but that had not vested as of June 30, 2021).
These stock options are performance-based and shall vest and become exercisable depending upon the degree of satisfaction of both
the Stock Price Goals and Revenue Goals discussed above in CD&A. The Stock Price Goals must be achieved on or prior to
September 30, 2026 and the Revenue Goals must be achieved on or prior to June 30, 2026. The options may vest in tranches of
200,000 shares each only when coordinating Stock Price Goals and Revenue Goals, respectively, of $45.00 sixty-trading-day-
average stock price and $4.0 billion in four-consecutive-fiscal-quarter revenue, $60.00 sixty-trading-day-average stock price and
$4.8 billion four-consecutive-fiscal-quarter revenue, $75.00 sixty-trading-day-average stock price and $5.8 billion four-consecutive-
fiscal-quarter revenue, $95.00 sixty-trading-day-average stock price and $6.8 billion four-consecutive-fiscal-quarter revenue, and
$120.00 sixty-trading-day-average stock price and $8.0 billion four-consecutive-fiscal-quarter revenue, are achieved. The smallest
amount of these stock options (threshold) that can be earned based on performance is vested stock options for 200,000 shares for
achieving a Stock Price Goal of $45.00 sixty-trading-day-average stock price and a Revenue Goal of $4.0 billion in four-
consecutive-fiscal-quarter revenue. However, even if those goals are achieved, if the Company’s stock price remained at $45.00 per
118
share, based on the $45.00 exercise price for these stock options, there would be no appreciation value in those stock options for Mr.
Liang. For more information about the operation of this award, see “2021 CEO Performance Award Granted in March 2021” above.
These incentive and nonqualified stock options vested at the rate of 25% on April 30, 2019 and vested (or generally will vest) at a
rate of 1/16th per quarter thereafter, such that the granted options will be fully vested on April 30, 2022.
These incentive and nonqualified stock options vested at the rate of 25% on May 1, 2021 and vested (or generally will vest) at a rate
of 1/16th per quarter thereafter, such that the granted options will be fully vested on May 1, 2024.
These RSUs vested at the rate of 25% on May 16, 2019 and vested (or generally will vest) at a rate of 1/16th per quarter thereafter,
such that the RSUs will be fully vested on May 16, 2022.
These RSUs vested at the rate of 25% on May 10, 2021 and vested (or generally will vest) at a rate of 1/16th per quarter thereafter,
such that the RSUs will be fully vested on May 10, 2024.
These incentive and nonqualified stock options vested at the rate of 25% on May 1, 2019 and vested (or generally will vest) at a rate
of 1/16th per quarter thereafter, such that the granted options will be fully vested on May 1, 2022.
These incentive and nonqualified stock options vested at the rate of 25% on October 30, 2019 and vested (or generally will vest) at
a rate of 1/16th per quarter thereafter, such that the granted options will be fully vested on October 30, 2022.
These nonqualified stock options vested at the rate of 56% on March 27, 2021 and vested (or generally will vest) at a rate of 6%
per quarter thereafter, such that the granted options will be fully vested on December 27, 2022.
These incentive stock options shall vest at the rate of 25% on October 27, 2021 and generally will vest at a rate of 1/16th per quarter
thereafter, such that the granted options will be fully vested on October 27, 2024.
These RSUs vested at the rate of 63% on May 10, 2021 and vested (or generally will vest) at a rate of 6% per quarter thereafter,
such that the RSUs will be fully vested on November 10, 2022.
These RSUs shall vest at the rate of 25% on November 10, 2021 and generally will vest at a rate of 1/16th per quarter thereafter,
such that the RSUs will be fully vested on November 10, 2024.
These incentive stock options vested at the rate of 25% on October 22, 2018 and vested (or generally will vest) at a rate of 1/16th
per quarter thereafter, such that the granted options will be fully vested on October 22, 2021.
These RSUs vested at the rate of 25% on November 16, 2018 and vested (or generally will vest) at a rate of 1/16th per quarter
thereafter, such that the RSUs will be fully vested on November 16, 2021.
These RSUs vested at the rate of 25% on May 10, 2019 and vested (or generally will vest) at a rate of 1/16th per quarter thereafter,
such that the RSUs will be fully vested on May 10, 2022.
This amount reflects the service-based portion of the March 2020 PRSU grant to Mr. Hsu (15,000 units). In addition to the 15,000
units, based upon the Company’s revenue for fiscal year 2021 ($3,557 million), which increased from revenue for fiscal year 2020,
management has calculated that 2,939 additional units were earned, such that a total of 17,939 units will vest in November 2021.
Such amount remains subject to final certification by the Compensation Committee.
These nonqualified stock options vested at the rate of 20% on January 11, 2018 and vested (or generally will vest) at a rate of
1/20th per quarter thereafter, such that the granted options will be fully vested on January 11, 2022.
These nonqualified stock options shall vest at the rate of 100% on February 25, 2022.
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
Fiscal Year 2021 Option Exercises and Stock Vested
The following table sets forth the dollar amounts realized by each of our named executive officers pursuant to the
exercise or vesting of equity-based awards during fiscal year 2021.
FISCAL YEAR 2021 OPTION EXERCISES AND STOCK VESTED TABLE
Name
Charles Liang
David Weigand
Don Clegg
George Kao
Alex Hsu
Kevin Bauer
__________________________
(1)
Option Awards
Number of Shares
Acquired on
Exercise (#)
Value Realized on
Exercise ($)(1)
Stock Awards
Number of Shares
Acquired on
Vesting (#)
Value Realized on
Vesting ($)(2)
132,000 $
—
—
—
—
70,000
2,601,009
—
—
—
—
640,821
12,000
3,400
2,345
2,862
15,948
2,813
348,360
109,016
76,136
95,125
557,412
82,064
(2)
The value disclosed in this column is based on the difference between the price of our common stock at the time of exercise and the
exercise price.
The values disclosed in this column are based on the closing price of our common stock on the date of vesting, multiplied by the
gross number of shares vested.
Fiscal Year 2021 Pension Benefits and Nonqualified Deferred Compensation
119
We do not provide any nonqualified deferred compensation arrangements or pension plans. As such, the Pension
Benefits disclosure and Nonqualified Deferred Compensation disclosure for fiscal year 2021 are omitted from this Annual
Report.
Fiscal Year 2021 Potential Payments Upon Termination or Change of Control
Other than as set forth below or described elsewhere in this Item 11, “Executive Compensation,” we do not currently,
and did not during fiscal year 2021 have, any arrangements with any of our named executive officers that provide for any
additional or enhanced severance or other compensation or benefits in the event of termination or change of control of our
Company.
Other than with respect to the 2021 CEO Performance Award, the Company’s stock option agreements generally
provide for three months of exercise of vested options after termination of service, one year of exercise after disability, and one
year of exercise after death. The 2021 CEO Performance Award has certain provisions related to the treatment of such award in
the event of a change of control of our Company. See “2021 CEO Performance Award Granted in March 2021.” None of the
tranches under the 2021 CEO Performance Award would have been earned thereunder for a change in control occurring on June
30, 2021 (based on the closing stock price of $35.18 on such date, plus a reasonable assumption that any aggregate
consideration per share in a hypothetical change of control occurring on such date would have been less than $45), and
therefore there is no change in control value attributed to the award for a hypothetical change of control situation.
Prior to ceasing employment with the Company as Chief Financial Officer, in February 2021 Mr. Bauer entered into a
consulting arrangement with the Company, and the Company provided certain provisions with respect to his equity awards
following the termination of his employment relationship with the Company. See “- Former CFO Consulting Arrangement.”
Fiscal Year 2021 Chief Executive Officer Pay Ratio
For fiscal year 2021, the ratio of the annual total compensation of Mr. Liang, our Chief Executive Officer (“2021 CEO
Compensation”), to the median of the annual total compensation of all of our employees and those of our consolidated
subsidiaries other than Mr. Liang (“2021 Median Annual Compensation”), was 268 to 1. For purposes of this pay ratio
disclosure, 2021 CEO Compensation was determined to be $20,127,913, which represents the total compensation reported for
Mr. Liang under the “Fiscal Year 2021 Summary Compensation Table,” plus the Company’s contribution to certain non-
discriminatory group health and welfare benefits provided to Mr. Liang. 2021 Median Annual Compensation for the identified
median employee was determined to be $75,171, also including the Company’s contribution to the same non-discriminatory
group health and welfare benefits provided to the median employee.
Due to our permitted use of reasonable estimates and assumptions in preparing this pay ratio disclosure, the disclosure
may involve a degree of imprecision, and thus this pay ratio disclosure is a reasonable estimate.
To identify the median employee, we examined our total employee population as of June 30, 2021 (the “Determination
Date”). We included all 2,367 U.S. full-time, part-time, seasonal and temporary employees of the Company and our
consolidated subsidiaries. We also included all 1,665 full-time, part-time, seasonal and temporary employees of the Company
and our consolidated subsidiaries in The Netherlands and Taiwan. We excluded independent contractors and “leased” workers.
We also excluded all our employees in European countries, which together represented approximately 1% of our total
employees worldwide (4,155 individuals), which countries consisted of France (8 individuals), Germany (13 individuals), Italy
(5 individuals), Spain (1 individual) and United Kingdom (15 individuals). We also excluded all our employees in China (46
individuals), Japan (30 individuals), and South Korea (5 individuals), which together represented an additional approximately
2% of our total employees worldwide. Our analysis identified 4,032 individuals who were not excluded.
To determine the median of the annual total compensation of all of such employees, other than Mr. Liang, we generally
reviewed compensation for the period beginning on July 1, 2020 and ending on the Determination Date. We totaled, for each
included employee other than Mr. Liang, base earnings (salary, hourly wages and overtime, as applicable) and cash bonuses
paid during the measurement period, plus the Company’s contribution to group health and welfare benefits. We did not use any
statistical sampling or cost-of-living adjustments for those purposes. A portion of our employee workforce (full-time and part-
time) worked for less than the full fiscal year (due to mid-measurement period start dates, disability status or similar factors,
etc.). In determining the median employee, we generally annualized the total compensation for such individuals other than
temporary or seasonal employees (but avoided creating full-time equivalencies) based on reasonable assumptions and estimates
relating to our employee compensation program.
Compensation Program Risk Assessment
120
We have assessed our compensation programs for fiscal year 2021 and have concluded that risks arising from our
compensation policies and practices are not reasonably likely to have a material adverse effect on us. We concluded that our
compensation policies and practices do not encourage excessive or inappropriate risk-taking. We believe our programs are
appropriately designed to encourage our employees to make decisions that result in positive short-term and long-term results for
our business and our stockholders.
2021 Director Compensation
DIRECTOR COMPENSATION
Under our director compensation policy, we reimburse non-employee directors for reasonable expenses in connection
with attendance at Board and committee meetings. Charles Liang and Sara Liu, who are employees and also serve as directors,
do not receive any additional compensation from us specifically for their service as directors.
For their service during fiscal year 2021, our non-employee directors received an annual retainer of $60,000, payable
quarterly in cash. In addition, the Chairperson of our Audit Committee received an additional annual retainer of $30,000 and the
Chairperson of each of our Compensation Committee and our Governance Committee received an additional annual retainer of
$20,000 and $15,000, respectively, in each case payable quarterly in cash. Each director serving in a non-chairperson capacity
on our Audit Committee received an additional annual retainer of $15,000, each director serving in a non-chairperson capacity
on our Compensation Committee received an additional annual retainer of $10,000 and each director serving in a non-
chairperson capacity on our Governance Committee received an additional annual retainer of $7,500, in each case payable
quarterly in cash. Finally, non-employee directors were entitled to $2,000 per meeting for each meeting attended in excess of
(1) the regular meetings of the Board and (2) up to 10 additional meetings beyond such regular meetings, provided that notice
of the meeting was properly given, a quorum was present and the meeting was recorded (“Excess Meetings”). During fiscal
year 2021, Mr. Fairfax attended 14 Excess Meetings, Mr. Tsai attended 14 Excess Meetings, Mr. McAndrews attended 11
Excess Meetings, Ms. Tseng attended three Excess Meetings, and Mr. Liu attended 15 Excess Meetings. Mr. Tuan and Mr.
Chan did not attend any Excess Meetings during fiscal year 2021.
As disclosed in our prior Annual Report on Form 10-K for the fiscal year ended June 30, 2020, in March 2020, the
Board provided special performance-based cash incentive award opportunities to two non-employee directors, Mr. Sherman
Tuan and Mr. Fred Tsai. These awards provided a cash incentive opportunity of up to $194,150 and $103,095, respectively,
subject to the following conditions: (1) 50% of the opportunity will be earned if the average closing price for the Company’s
common stock equals or exceeds $31.61 (representing a 15% premium over the average closing price of the Company’s
common stock for the 20 consecutive trading days preceding March 4, 2020) for any period of 20 consecutive trading days
prior to September 30, 2021 (the “First Price Target”); and (2) an additional 50% of the opportunity will be earned if the
average closing price for the Company’s common stock equals or exceeds $32.99 (representing a 20% premium over the
average closing price of the Company’s common stock for the 20 consecutive trading days preceding March 4, 2020) for any
period of 20 consecutive trading days prior to June 30, 2022 (the “Second Price Target”). The relevant stock price goals were
not met during fiscal year 2020, and no portion of these amounts were paid to Mr. Tuan or Mr. Tsai during fiscal year 2020,
However, during fiscal year 2021, the First Price Target was achieved based upon stock price performance from December 22,
2020 through January 21, 2021, and the Second Price Target was achieved based upon stock price performance from February
8, 2021 through March 8, 2021. As a result, payment of the full amount of the cash incentive opportunities were made to each
of Mr. Tuan and Mr. Tsai during fiscal year 2021.
Our director compensation policy also provides for annual RSU grants to the non-employee directors with a value
equal to $220,000, with the ultimate number of RSUs granted based on our closing stock price on the date of grant. For fiscal
year 2021, we made such grants for non-employee director service under our 2020 Equity and Incentive Compensation Plan on
August 21, 2020 to such persons serving on such date, which grants had a vesting date of June 30, 2021. Two non-employee
directors, Mr. Michael McAndrews and Mr. Fred Tsai, who served during fiscal year 2021 and received such grants, were not
nominated for re-election at our annual general meeting of stockholders held on May 28, 2021 and ceased being directors on
such date. Prior to the end of their service, the Compensation Committee exercised discretion to accelerate the vesting date of
the awards granted to Mr. McAndrews and Mr. Tsai to May 28, 2021. Awards granted to the other non-employee directors
vested on June 30, 2021.
Mr. Shiu Leung (Fred) Chan was appointed as a non-employee director on October 28, 2020. In connection with his
appointment, Mr. Chan received during fiscal year 2021 a pro-rated portion of the annual non-employee director retainer and,
on November 5, 2020, an RSU grant with a value equal to a pro-rated portion of $220,000 with a vesting date of June 30, 2021.
121
The following table shows for fiscal year 2021 certain information with respect to the compensation of all of our non-
employee directors who served in such capacities during fiscal year 2021:
FISCAL YEAR 2021 DIRECTOR COMPENSATION
Name
Daniel Fairfax
Hwei-Ming (Fred) Tsai(1)
Michael McAndrews(1)
Saria Tseng
Sherman Tuan
Shiu Leung (Fred) Chan(2)
Tally Liu
__________________________
(1)
(2)
(3)
Fees
Earned
or Paid in
Cash
($)(3)
Stock
Awards
($)(4)(5)
Non-Equity
Incentive Plan
Compensation
($)(6)
Total
($)
$ 103,000 $ 219,990 $
287,960
287,960
219,990
219,990
148,270
219,990
118,934
90,201
83,500
87,500
40,435
120,000
— $ 322,990
509,989
378,161
303,490
501,640
188,705
339,990
103,095
—
—
194,150
—
—
Each of Mr. Hwei-Ming (Fred) Tsai and Mr. Michael McAndrews served as a director until May 28, 2021.
Mr. Shiu Leung (Fred) Chan was appointed to the Board in October 2020.
This column consists of annual director fees, non-employee committee chairman fees, and other committee member fees, in each
case earned for fiscal year 2021.
The dollar amounts in this column represent the aggregate grant date fair values of the RSU awards granted during fiscal year 2021
calculated in accordance with ASC Topic 718. Assumptions used in the calculation of the grant date fair value amounts are included
in Part II, Item 8, "Financial Statements and Supplementary Data", and Item II, Part 8, Note 14, “Stock-based Compensation and
Stockholders’ Equity” to our consolidated financial statements for fiscal year 2021 included in this Annual Report on Form 10-K.
Each grant of 8,289 RSUs to each of the directors other than Mr. Chan had a grant date fair value of $26.54 per share, and Mr.
Chan’s grant of 5,168 RSUs had a grant date fair value of $28.69 per share.
The value disclosed in this row under the “Stock Awards” column also reflects, for each of Messrs. Tsai and McAndrews, the
modification fair value ($67,970) for the acceleration of the vesting date of his fiscal year 2021 RSU grant from June 30, 2021 to
May 28, 2021. This acceleration was approved because each of these non-employee directors was not nominated for re-election at
our annual general meeting of stockholders held on May 28, 2021 and ceased being directors on such date, as further described
above.
This column consists of, for Mr. Tsai and Mr. Tuan, amounts earned during fiscal year 2021 from special performance-based cash
incentive award opportunities granted in March 2020 following the achievement of the performance conditions. Please see the
discussion above for more information about these awards.
(4)
(5)
(6)
The table below sets forth the aggregate number of shares underlying stock and option awards held by our non-
employee directors as of June 30, 2021.
Name
Daniel Fairfax
Saria Tseng
Sherman Tuan
Shiu Leung (Fred) Chan
Tally Liu
Stock Awards
Option Awards
8,289
8,289
8,289
5,168
8,289
—
—
—
—
—
Compensation Committee Interlocks and Insider Participation
None of the members of the Compensation Committee is a current or former officer or employee of our Company or
had any relationship with our Company requiring disclosure, except for Saria Tseng, who serves as Vice President of Strategic
Corporate Development, General Counsel and Secretary of MPS, with which we have engaged in certain transactions. See “Part
III. Item 13. Certain Relationships and Related Transactions and Director Independence-Transactions with Monolithic Power
Systems.” In addition, during fiscal year 2021, none of our executive officers served as a member of the compensation
committee of the board of directors of any other entity that has one or more executive officers who served on our Compensation
Committee of the Board. Hwei-Ming (Fred) Tsai, Saria Tseng and Sherman Tuan served on the Compensation Committee
during fiscal year 2021, with Mr. Tsai’s service on such committee ending on May 28, 2021.
122
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information known to us regarding beneficial ownership of our common stock as
of July 31, 2021 by:
• Each of the named executive officers during fiscal year 2021;
• Each of our directors;
• All directors and executive officers as a group; and
• All persons known to us who beneficially own 5% or more of our outstanding common stock.
Name and Address of Beneficial Owner(1)
Executive Officers and Directors:
Charles Liang(4)
Don Clegg(5)
George Kao(6)
Alex Hsu(7)
David Weigand(8)
Saria Tseng(9)
Sherman Tuan(10)
Sara Liu(11)
Tally Liu
Daniel Fairfax
Shiu Leung (Fred) Chan
Kevin Bauer(12)
All directors and executive officers as a group (12 persons)(13)
5% Holders Not Listed Above:
Empyrean Capital Overseas Master Fund, Ltd.(14)
Disciplined Growth Investors Inc.(15)
BlackRock Inc.(16)
The Vanguard Group(17)
Total executives, directors & 5% or more stockholders
Amount and
Nature of
Beneficial
Ownership(2)
Percent of
Common Stock
Outstanding(3)
7,441,827
43,999
32,445
66,137
25,022
56,889
57,586
7,441,827
23,589
11,263
5,168
14,397
7,778,322
3,000,459
3,645,912
3,146,769
3,999,148
14.5 %
*
*
*
*
*
*
14.5 %
*
*
*
*
15.1 %
5.9 %
7.2 %
6.2 %
7.9 %
42.4 %
__________________________
* Represents beneficial ownership of less than one percent of the outstanding shares of common stock
(1)
Except as otherwise indicated, to our knowledge the persons named in this table have sole voting and investment power with
respect to all shares of common stock shown as beneficially owned by them, subject to community property laws applicable and to
the information contained in the footnotes to this table. Except as otherwise provided, the address of each stockholder listed in the
table is 980 Rock Avenue, San Jose, CA 95131.
Under the SEC rules, a person is deemed to be the beneficial owner of shares that can be acquired by such person within 60 days
upon the exercise of options or RSUs subject to vesting.
Calculated on the basis of 50,590,466 shares of common stock outstanding as of July 31, 2021, provided that any additional shares
of common stock that a stockholder has the right to acquire within 60 days after July 31, 2021 are deemed to be outstanding for the
purposes of calculating that stockholder’s percentage of beneficial ownership.
Includes 528,010 shares issuable upon the exercise of options exercisable within 60 days after July 31, 2021. Also includes
2,663,752 shares jointly held by Mr. Liang and Sara Liu, his spouse, 144,412 shares held directly by Ms. Liu and 63,625 options
exercisable and 197 RSU shares issuable within 60 days after July 31, 2021. See footnote 11.
Includes 35,393 options exercisable and 586 RSU shares issuable within 60 days after July 31,2021.
Includes 25,155 options exercisable and 211 RSU shares issuable within 60 days after July 31, 2021.
Includes 59,231 options exercisable and 237 RSU shares issuable within 60 days after July 31, 2021. Mr. Hsu served as Senior Vice
President, Chief Operating Officer until March 2021. In March 2021, Mr. Hsu transitioned to the role of Senior Chief Executive,
Strategic Business.
Includes 18,750 options exercisable and 850 RSU share issuable within 60 days after July 31, 2021.
(2)
(3)
(4)
(5)
(6)
(7)
(8)
123
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
Includes 27,000 shares issuable upon the exercise of options exercisable within 60 days after July 31, 2021.
Includes 25,000 shares issuable upon the exercise of options exercisable within 60 days after July 31, 2021.
Includes 63,625 options exercisable and 197 RSU shares issuable within 60 days after July 31, 2021. Also includes 2,663,752 shares
jointly held by Ms. Liu and Mr. Liang, her spouse, 4,035,177 shares held by Charles Liang, and 528,010 shares issuable upon the
exercise of options exercisable within 60 days after July 31, 2021. See footnote 4.
Mr. Bauer resigned as our Chief Financial Officer in January 2021, and Mr. Weigand has assumed such role.
Includes 789,245 shares issuable upon the exercise of options exercisable within 60 days after July 31, 2021.
The information is based solely on the Schedule 13G filed on February 11, 2021 by (i) Empyrean Capital Overseas Master Fund,
Ltd. (“ECOMF”), which has shared voting power and dispositive power over 3,000,459 shares of common stock, (ii) Empyrean
Capital Partners, LP (“ECP”), which has shared voting power and dispositive power over 3,000,459 shares of common stock, and
(iii) Amos Meron, who has shared voting power and dispositive power over 3,000,459 shares of common stock. ECP serves as
investment manager to ECOMF with respect to the common stock directly held by ECOMF. Mr. Amos serves as the managing
member of Empyrean Capital, LLC, the general partner of ECP, with respect to the common stock directly held by ECOMF. The
address of the business office of each of the reporting persons is c/o Empyrean Capital Partners, LP, 10250 Constellation Boulevard,
Suite 2950, Los Angeles, CA 90067.
The information is based solely on the Schedule 13-F filed on May 17, 2021. The address for the reporting person is 150 S. Fifth St.
Suite 2550, Minneapolis, MN 55402.
The information is based solely on the Schedule 13G filed on February 2, 2021. The address for the reporting person is 55 East
52nd Street, New York, New York 10055.
The information is based solely on the Schedule 13G filed on February 10, 2021. The Vanguard Group has shared voting power
over 64,744 shares of common stock, sole dispositive power over 3,900,105 shares of common stock and shared dispositive power
over 99,043 shares of common stock. The address for the reporting person is 100 Vanguard Blvd., Malvern, Pennsylvania 19355.
Equity Compensation Plan Information
We currently maintain three compensation plans that provide for the issuance of our Common Stock to officers and
other employees, directors and consultants. These consist of the 2006 Equity Incentive Plan, the 2016 Equity Incentive Plan and
the 2020 Plan. All three of these plans have been approved by our stockholders. We no longer grant any equity-based awards
under the 2006 Equity Incentive Plan or the 2016 Equity Incentive Plan. The following table sets forth information regarding
outstanding options, RSUs, and PRSUs and shares reserved and remaining available for future issuance under the foregoing
plans as of June 30, 2021:
Plan Category
Equity compensation plans approved by security
holders
Equity compensation plans not approved by security
holders
Total
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)(1)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)(2)(3)
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in
column (a)(c)
7,045,510 $
26.17
2,730,277
—
7,045,510
—
2,730,277
__________________________
(1)
This number includes 5,175,554 shares subject to outstanding options, 1,854,956 shares subject to outstanding RSU
awards, and 15,000 shares subject to outstanding PRSU awards.
The weighted average exercise price is calculated based solely on the exercise prices of the outstanding options and
does not reflect the shares that will be issued upon the vesting of outstanding awards of RSUs and PRSUs, which have
no exercise price.
The weighted-average remaining contractual term of our outstanding options as of June 30, 2021 was 5.36 years.
(2)
(3)
Item 13.
Certain Relationships and Related Transactions and Director Independence
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Procedures for Approval of Related Person Transactions
Pursuant to our Audit Committee charter, the Audit Committee has the responsibility for the review and approval of
any related person transactions; provided that if the matter or transaction involves employment or compensation terms for
services to our company, including retention or payment provisions relating to expert services, then it is presented to the
Compensation Committee. In approving or rejecting a proposed transaction, or a relationship that encompasses many similar
124
transactions, our Audit Committee will consider the relevant facts and circumstances available and deemed relevant, including
but not limited to the risks, costs and benefits to us, the terms of the transaction, the availability of other sources for comparable
services or products, and, if applicable, the impact on a director’s independence. Our Audit Committee approves only those
transactions that, in light of known circumstances are not inconsistent with our best interests, as the Audit Committee
determines in the good faith exercise of its discretion. In addition, we annually require each of our directors and executive
officers to complete a directors’ and officers’ questionnaire that elicits information about related party transactions as such term
is defined by SEC rules and regulations. These procedures are intended to determine whether any such related party transaction
impairs the independence of a director or presents a conflict of interest on the part of a director, employee or officer.
Transactions with Related Parties, Promoters and Certain Control Persons
Director and Officer Indemnification
We have entered into agreements to indemnify our directors and executive officers to the fullest extent permitted under
Delaware law. In addition, our certificate of incorporation contains provisions limiting the liability of our directors and our
bylaws contain provisions requiring us to indemnify our officers and directors.
Equity-Based Awards
Please see the “Grants of Plan-Based Awards” table and the “Director Compensation” table above for information on
stock option and restricted stock unit grants to our directors and named executive officers in fiscal year 2021.
Employment Relationships
Hung-Fan (Albert) Liu, who is a brother of Sara Liu, our Co-Founder and Senior Vice President and a director, is
employed in our operations organization in San Jose, California. Mr. Liu received total compensation of approximately
$426,054 in fiscal year 2021. The total compensation includes salary, bonus and equity awards. Mr. Albert Liu reports to Mr.
Kao, our Senior Vice President of Operations. Mr. Liu also received options and RSU awards in fiscal year 2021 totaling
$148,776.
Shao Fen (Carly) Kao, who is a sister-in-law of Sara Liu, our Co-Founder and Senior Vice President and a director, is
employed in our finance and accounting organization in San Jose, California. Ms. Kao received total compensation of
approximately $140,315 in fiscal year 2021. The total compensation includes salary, bonus and equity awards. Ms. Kao reports
through the finance and accounting organization, which reports to Mr. Weigand, our Chief Financial Officer.
Sara Liu, who is Charles Liang's spouse and is related to Mr. Liu and Ms. Kao as outlined above, is a Co-Founder,
Senior Vice President, and director of the Company, and received total compensation of approximately $415,110 in fiscal year
2021.
Transactions with Ablecom and Compuware
We have entered into a series of agreements with Ablecom Technology Inc. ("Ablecom"), a Taiwan corporation, and
one of its affiliates, Compuware Technology, Inc ("Compuware"). Ablecom’s ownership of Compuware is below 50% but
Compuware remains a related party as Ablecom still has significant influence over the operations. Ablecom’s Chief Executive
Officer, Steve Liang, is the brother of Charles Liang, our President, Chief Executive Officer and Chairman of the Board. Steve
Liang and his family members owned approximately 28.8% of Ablecom’s stock and Charles Liang and his spouse, Sara Liu,
who is also an officer and director of our company, collectively owned approximately 10.5% of Ablecom’s capital stock as of
June 30, 2021. Bill Liang, a brother of both Charles Liang and Steve Liang, is a member of the Board of Directors of Ablecom.
Bill Liang is also the Chief Executive Officer of Compuware, a member of Compuware’s Board of Directors and a holder of a
significant equity interest in Compuware. Steve Liang is also a member of Compuware’s Board of Directors and is an equity
holder of Compuware. Neither Charles Liang nor Sara Liu own any capital stock of Compuware and the Company does not
own any of Ablecom or Compuware's capital stock.
We have entered into a series of agreements with Ablecom, including multiple product development, production and
service agreements, product manufacturing agreements, manufacturing services agreements and lease agreements for
warehouse space.
Under these agreements, we outsource a portion of our design activities and a significant part of our server chassis
manufacturing of components such as server chassis to Ablecom. Ablecom agrees to design products according to our
125
specifications. Additionally, Ablecom agrees to build the tools needed to manufacture the products. We have agreed to pay for
the cost of chassis and related product tooling and engineering services and will pay for those items when the work has been
completed.
We entered into a distribution agreement with Compuware, under which we appointed Compuware as a non-exclusive
distributor of our products in Taiwan, China and Australia. We believe that the pricing and terms under the distribution
agreement are similar to the pricing and terms of distribution arrangements we have with similar third-party distributors.
We have also entered into a series of agreements with Compuware, including a multiple product development,
production and service agreements, product manufacturing agreements, and lease agreements for office space. Under these
agreements, we outsource to Compuware a portion of our design activities and a significant part of our manufacturing of
components, particularly power supplies. With respect to design activities, Compuware generally agrees to design certain
agreed-upon products according to our specifications, and further agrees to build the tools needed to manufacture the products.
We pay Compuware for the design and engineering services, and further agree to pay Compuware for the tooling.
We retain full ownership of any intellectual property resulting from the design of these products and tooling. With
respect to the manufacturing aspects of the relationship, Compuware purchases most of materials needed to manufacture the
power supplies from outside markets and uses these materials to manufacture the products and then sell to us. We review and
frequently negotiate with Compuware the prices of the power supplies that we purchase from Compuware. Compuware also
manufactures motherboards, backplanes and other components used on our printed circuit boards. We sell to Compuware most
of the components needed to manufacture the above products. Compuware uses these components to manufacture and then sells
back the products to us at a purchase price equal to the price at which we sold the components to Compuware, plus a
“manufacturing value added” fee and other miscellaneous material charges and costs. We frequently review and negotiate with
Compuware the amount of the “manufacturing value added” fee that will be included in the price of the products we purchase
from Compuware.
Ablecom’s sales to us comprise a substantial majority of Ablecom’s net sales. For fiscal years ended June 30, 2021,
2020 and 2019, we purchased products from Ablecom totaling $122.2 million, $152.5 million and $137.9 million, respectively.
Amounts owed to Ablecom by us as of June 30, 2021 and 2020, were $41.2 million and $40.1 million, respectively. For the
fiscal years ended June 30, 2021, 2020 and 2019, we paid Ablecom $8.6 million, $7.6 million and $7.4 million, respectively, for
design services, tooling assets and miscellaneous costs.
Compuware’s sales of our products to others comprise a majority of Compuware’s net sales. For fiscal years ended
June 30, 2021, 2020 and 2019, we sold products to Compuware totaling $27.9 million, $23.9 million and $17.7 million,
respectively. Amounts owed to us by Compuware as of June 30, 2021 and 2020, were $18.4 million and $14.3 million,
respectively. The price at which Compuware purchases the products from us is at a discount from our standard price for
purchasers who purchase specified volumes from us. In exchange for this discount, Compuware assumes the responsibility to
install our products at the site of the end customer and administers first-level customer support. For the fiscal years ended June
30, 2021, 2020 and 2019, we purchased products from Compuware totaling $113.4 million, $130.6 million and $138.9 million,
respectively. Amounts we owed to Compuware as of June 30, 2021 and 2020, were $46.4 million and $46.5 million,
respectively. For the fiscal years ended June 30, 2021, 2020 and 2019, we paid Compuware $1.8 million, $1.2 million and $0.7
million, respectively, for design services, tooling assets and miscellaneous costs.
Our exposure to financial loss as a result of our involvement with Ablecom is limited to potential losses on our
purchase orders in the event of an unforeseen decline in the market price and/or demand for our products such that we incur a
loss on the sale or cannot sell the products. Our outstanding purchase orders to Ablecom were $40.2 million and $23.2 million
at June 30, 2021 and 2020, respectively, representing the maximum exposure to financial loss. We do not directly or indirectly
guarantee any obligations of Ablecom, or any losses that the equity holders of Ablecom may suffer.
Our exposure to financial loss as a result of our involvement with Compuware is limited to potential losses on our
purchase orders in the event of an unforeseen decline in the market price and/or demand for our products such that we incur a
loss on the sale or cannot sell the products. Our outstanding purchase orders to Compuware were $71.0 million and $45.7
million at June 30, 2021 and 2020, respectively, representing the maximum exposure to financial loss. We do not directly or
indirectly guarantee any obligations of Compuware, or any losses that the equity holders of Compuware may suffer.
Loans
In October 2018, our Chief Executive Officer, Charles Liang, personally borrowed approximately $12.9 million from
Chien-Tsun Chang, the spouse of Steve Liang. The loan is unsecured, has no maturity date and bore interest at 0.8% per month
for the first six months, increased to 0.85% per month through February 28, 2020, and reduced to 0.25% effective March 1,
126
2020. The loan was originally made at Mr. Liang's request to provide funds to repay margin loans to two financial institutions,
which loans had been secured by shares of our common stock that he held. The lenders called the loans in October 2018,
following the suspension of our common stock from trading on NASDAQ in August 2018 and the decline in the market price of
our common stock in October 2018. As of June 30, 2021, the amount due on the unsecured loan (including principal and
accrued interest) was approximately $15.3 million.
Transactions with Monolithic Power Systems
MPS is a supplier that provides high-performance analog and mixed signal semiconductors for use in our products.
Saria Tseng, who serves as a member on the Board of Directors, also serves as Vice President of Strategic Corporate
Development, General Counsel and Secretary of MPS. We purchased $3.9 million, $5.2 million and $3.7 million of
semiconductor products from MPS for use in our manufacturing process during the years ended June 30, 2021, 2020 and 2019,
respectively. The amounts due to MPS as of June 30, 2021 and 2020 were not material.
127
Item 14.
Principal Accounting Fees and Services
The Audit Committee appointed Deloitte & Touche LLP as our independent registered public accounting firm for the
fiscal year 2021.
Independent Registered Public Accounting Firm Fees and Services
The following table sets forth the aggregate audit fees billed to us by our independent registered public accounting
firm, Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates (collectively,
“Deloitte”), and fees paid to Deloitte for services in the fee categories indicated below for fiscal years 2021 and 2020. The
Audit Committee has considered the scope and fee arrangements for all services provided by Deloitte, taking into account
whether the provision of non-audit services is compatible with maintaining Deloitte’s independence, and has pre-approved the
services described below.
Amounts in '000s
Audit Fees(1)
Audit-Related Fees
Tax Fees
All Other Fees
Total
Years Ended
June 30, 2021
June 30, 2020
$
$
4,405 $
—
225
2
4,632 $
8,633
—
383
2
9,018
__________________________
(1)
Audit fees consist of the aggregate fees for professional services rendered for the audit of our consolidated financial statements, review of interim
condensed consolidated financial statements and certain statutory audits.
Audit Committee Pre-Approval Policies and Procedures
The Audit Committee has determined that all services performed by Deloitte & Touche LLP are compatible with
maintaining the independence of Deloitte & Touche LLP. The Audit Committee’s policy on approval of services performed by
the independent registered public accounting firm is to pre-approve all audit and permissible non-audit services to be provided
by the independent registered public accounting firm during the fiscal year. The Audit Committee reviews each non-audit
service to be provided and assesses the impact of the service on the firm’s independence.
Item 15.
Exhibits and Financial Statement Schedules
(a) 1. Financial Statements
PART IV
See Index to consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K, which is
incorporated herein by reference.
2. Financial Statement Schedules
All financial statement schedules have been omitted because they are either not applicable or the required information
is shown in the consolidated financial statements or notes thereto.
3. Exhibits
See the Exhibit Index which precedes the signature page of this Annual Report, which is incorporated herein by
reference.
(b) Exhibits
See Item 15(a)(3) above.
(c) Financial Statement Schedules
128
See Item 15(a)(2) above.
EXHIBIT INDEX
Exhibit
Number
3.3
3.4
4.1
4.5
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16
10.17
10.18
10.19*‡
10.20*‡
10.21*‡
10.22*‡
10.23
10.24*
10.25
10.26
10.27*
10.28*
10.29*
10.30*
10.31*
10.32
10.33
10.34*
Description
Amended and Restated Certificate of Incorporation of Super Micro Computer, Inc.(1)
Amended and Restated Bylaws of Super Micro Computer, Inc.(1)
Specimen Stock Certificate for Shares of Common Stock of Super Micro Computer, Inc.(1)
Description of Securities(10)
Form of Restricted Stock Agreement under Super Micro Computer, Inc. 2006 Equity Incentive Plan(18)
Form of Restricted Stock Unit Agreement under Super Micro Computer, Inc. 2006 Equity Incentive Plan(19)
Form of Directors’ and Officers’ Indemnity Agreement(20)
Offer Letter for Sara Liu(21)
Offer Letter for Alex Hsu(22)
Product Manufacturing Agreement dated January 8, 2007 between Super Micro Computer, Inc. and Ablecom
Technology Inc.(24)
Form of Notice of Grant of Stock Option under 2006 Equity Incentive Plan(2)
Form of Notice of Grant of Restricted Stock under 2006 Equity Incentive Plan(2)
Form of Notice of Grant of Restricted Stock Unit under 2006 Equity Incentive Plan(2)
2006 Equity Incentive Plan, as amended(3)
2016 Equity Incentive Plan(4)
Form of Notice of Grant of Stock Option under 2016 Equity Incentive Plan(5)
Form of Stock Option Agreement under 2016 Equity Incentive Plan(5)
Form of Notice of Grant of Restricted Stock Units under 2016 Equity Incentive Plan(5)
Form of Restricted Stock Units Agreement under 2016 Equity Incentive Plan(5)
Loan and Security Agreement with Bank of America, N.A., dated April 19, 2018(6)
Extension of Loan and Security Agreement with Bank of America, N.A., dated September 7, 2018(7)
Second Amendment to Loan and Security Agreement, dated as of June 27, 2019(9)
Offer Letter for Kevin Bauer(11)
Offer Letter for Don Clegg(12)
Offer Letter for George Kao(13)
Offer Letter for David Weigand(14)
Letter Agreement with Bank of America, N.A., dated October 28, 2019(15)
Super Micro Computer, Inc. 2020 Equity and Incentive Compensation Plan(16)
Third Amendment to Loan and Security Agreement with Bank of America, N.A. dated May 12, 2020, by and
among Super Micro Computer, Inc., the lenders party thereto and Bank of America, N.A., as administrative
agent for the lenders(17)
Summary of Terms & Conditions 10-Year Term Loan Facility, dated May 6, 2020, between Super Micro
Computer Inc. Taiwan and CTBC Bank(31)
Form of Notice of Grant of Stock Option under 2020 Equity and Incentive Compensation Plan(32)
Form of Notice of Incentive Stock Option Agreement under 2020 Equity and Incentive Compensation Plan(33)
Form of Nonqualified Stock Option Agreement under 2020 Equity and Incentive Compensation Plan(34)
Form of Notice of Grant of Restricted Stock Units under 2020 Equity and Incentive Compensation Plan(35)
Form of Restricted Stock Units Agreement under 2020 Equity and Incentive Compensation Plan(36)
General Credit Agreement dated as of December 2, 2020 between Super Micro Computer, Inc. Taiwan and
E.SUN Bank(24)
Notification and Confirmation of Conditions for Import Loan, dated as of December 2, 2020 between Super
Micro Computer, Inc. Taiwan and E.SUN Bank(25)
Form of Notice of Grant of Performance Based Stock Option to Mr. Charles Liang dated March 2, 2021(26)
129
10.35*
10.36
10.37
10.38+
10.39
14.1+
21.1+
23.1+
24.1+
31.1+
31.2+
32.1+
32.2+
Nonqualified Stock Option Award Agreement associated with the Notice of Grant of Performance Based Stock
Option to Mr. Charles Liang dated March 2, 2021(27)
Fourth Amendment to Loan and Security Agreement with Bank of America, N.A. dated to be effective as of
June 28, 2021 by and among Super Micro Computer, Inc., the lenders party thereto, and Bank of America,
N.A., as administrative agent for the lenders(28)
General Agreement for Omnibus Credit Lines dated as of July 20, 2021 between Super Micro Computer, Inc.
Taiwan and CTBC Bank Co., Ltd.(29)
Agreement for Individually Negotiated Terms and Conditions dated as of July 20, 2021 between Super Micro
Computer, Inc. Taiwan and CTBC Bank Co., Ltd. (corrected version of previously filed exhibit)
Summary of Short-Term Credit Facilities and 75 Month Term Loan Facility from CTBC Bank Co., Ltd. dated
as of July 7, 2021.(30)
Code of Business Conduct and Ethics
Subsidiaries of Super Micro Computer, Inc.
Consent of Independent Registered Public Accounting Firm
Power of Attorney (included in signature pages)
Certification of Charles Liang, President and CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(3)
(2)
Certification of David Weigand, CFO and Secretary Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
Certification of Charles Liang, President and CEO Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002(8)
Certification of David Weigand, CFO and Secretary Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002(8)
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
101.INS+
101.SCH+
101.CAL+
101.DEF+
101.LAB+
101.PRE+
__________________________
Filed herewith
+
Incorporated by reference to the same number exhibit filed with the Registrant’s Registration Statement on Form S-1
(1)
(Registration No. 333-138370), declared effective by the Securities and Exchange Commission on March 28, 2007.
Incorporated by reference to the Company’s registration statement on Form S-8 (Commission File No. 333-142404)
filed with the Securities and Exchange Commission on April 27, 2007.
Incorporated by reference to Appendix A from the Company’s Definitive Proxy Statement on Schedule 14A
(Commission File No. 001-33383) filed with the Securities and Exchange Commission on January 18, 2011.
Incorporated by reference to the Company's Current Report on Form 8-K (Commission File No. 001-33383) filed with
the Securities and Exchange Commission on March 14, 2016.
Incorporated by reference to the Company's registration statement on Form S-8 (Commission File No.333-210881)
filed with the Securities and Exchange Commission on April 22, 2016.
Incorporated by reference to Exhibit 10.51 from the Company's Annual Report on Form 10-K (Commission File No.
001-33383) filed with the Securities and Exchange Commission on May 17, 2019.
Incorporated by reference to Exhibit 10.1 from the Company’s Current Report on 8-K (Commission File No. 001-
33383) filed with the Securities and Exchange Commission on September 12, 2018.
The certifications attached as Exhibit 32.1 and 32.2 accompany the Annual Report on Form 10-K pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by Super Micro Computer, Inc. for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
Incorporated by reference to Exhibit 10.1 from the Company's Current report on 8-K (Commission File No. 001-
33383) filed with the Securities and Exchange Commission on July 2, 2019.
Incorporated by reference to Exhibit 4.5 from the Company’s Annual Report on Form 10-K (Commission File No.
001-33383) filed with the Securities and Exchange Commission on December 19, 2019.
Incorporated by reference to Exhibit 10.55 from the Company’s Annual Report on Form 10-K (Commission File No.
001-33383) filed with the Securities and Exchange Commission on December 19, 2019.
Incorporated by reference to Exhibit 10.56 from the Company’s Annual Report on Form 10-K (Commission File No.
001-33383) filed with the Securities and Exchange Commission on December 19, 2019.
(11)
(10)
(12)
(9)
(8)
(7)
(6)
(5)
(4)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
(20)
(21)
(22)
(23)
(24)
(25)
(26)
(27)
(28)
(29)
(30)
(31)
(32)
(33)
(34)
(35)
(36)
*
‡
Incorporated by reference to Exhibit 10.57 from the Company’s Annual Report on Form 10-K (Commission File No.
001-33383) filed with the Securities and Exchange Commission on December 19, 2019.
Incorporated by reference to Exhibit 10.58 from the Company’s Annual Report on Form 10-K (Commission File No.
001-33383) filed with the Securities and Exchange Commission on December 19, 2019.
Incorporated by reference to Exhibit 10.59 from the Company’s Annual Report on Form 10-K (Commission File No.
001-33383) filed with the Securities and Exchange Commission on December 19, 2019.
Incorporated by reference to Appendix A in the Company’s Definitive Proxy Statement on Schedule 14A (Commission
File No. 001-33383) filed with the Securities and Exchange Commission on April 21, 2020.
Incorporated by reference to Exhibit 10.1 from the Company’s Current Report on Form 8-K (Commission File No.
001-33383) filed with the Securities and Exchange Commission on May 13, 2020.
Incorporated by reference to Exhibit 10.7 from the Company’s Registration Statement on Form S-1 (Registration
No. 333-138370), declared effective by the Securities and Exchange Commission on March 28, 2007.
Incorporated by reference to Exhibit 10.8 from the Company’s Registration Statement on Form S-1 (Registration
No. 333-138370), declared effective by the Securities and Exchange Commission on March 28, 2007.
Incorporated by reference to Exhibit 10.9 from the Company’s Registration Statement on Form S-1 (Registration
No. 333-138370), declared effective by the Securities and Exchange Commission on March 28, 2007.
Incorporated by reference to Exhibit 10.20 from the Company’s Registration Statement on Form S-1 (Registration
No. 333-138370), declared effective by the Securities and Exchange Commission on March 28, 2007.
Incorporated by reference to Exhibit 10.21 from the Company’s Registration Statement on Form S-1 (Registration
No. 333-138370), declared effective by the Securities and Exchange Commission on March 28, 2007.
Incorporated by reference to Exhibit 10.24 from the Company’s Registration Statement on Form S-1 (Registration
No. 333-138370), declared effective by the Securities and Exchange Commission on March 28, 2007.
Incorporated by reference to Exhibit 10.41 from the Company’s Current Report on 8-K (Commission File No. 001-
33383) filed with the Securities and Exchange Commission on December 4, 2020.
Incorporated by reference to Exhibit 10.2 from the Company’s Current Report on 8-K (Commission File No. 001-
33383) filed with the Securities and Exchange Commission on December 4, 2020
Incorporated by reference to Exhibit 10.1 from the Company’s Current Report on 8-K (Commission File No. 001-
33383) filed with the Securities and Exchange Commission on March 1, 2021
Incorporated by reference to Exhibit 10.2 from the Company’s Current Report on 8-K (Commission File No. 001-
33383) filed with the Securities and Exchange Commission on March 1, 2021
Incorporated by reference to Exhibit 10.1 from the Company’s Current Report on 8-K (Commission File No. 001-
33383) filed with the Securities and Exchange Commission on June 29, 2021
Incorporated by reference to Exhibit 10.1 from the Company’s Current Report on 8-K (Commission File No. 001-
33383) filed with the Securities and Exchange Commission on July 26, 2021
Incorporated by reference to Exhibit 10.3 from the Company’s Current Report on 8-K (Commission File No. 001-
33383) filed with the Securities and Exchange Commission on July 26, 2021
Incorporated by reference to Exhibit 10.28 from the Company’s Annual Report on Form 10-K (Commission File No.
001-33383) filed with the Securities and Exchange Commission on August 31, 2020
Incorporated by reference to Exhibit 10.31 from the Company’s Annual Report on Form 10-K (Commission File No.
001-33383) filed with the Securities and Exchange Commission on August 31, 2020
Incorporated by reference to Exhibit 10.32 from the Company’s Annual Report on Form 10-K (Commission File No.
001-33383) filed with the Securities and Exchange Commission on August 31, 2020
Incorporated by reference to Exhibit 10.33 from the Company’s Annual Report on Form 10-K (Commission File No.
001-33383) filed with the Securities and Exchange Commission on August 31, 2020
Incorporated by reference to Exhibit 10.34 from the Company’s Annual Report on Form 10-K (Commission File No.
001-33383) filed with the Securities and Exchange Commission on August 31, 2020
Incorporated by reference to Exhibit 10.35 from the Company’s Annual Report on Form 10-K (Commission File No.
001-33383) filed with the Securities and Exchange Commission on August 31, 2020
Management contract, or compensatory plan or arrangement
Certain portions of this document, the disclosure of which would constitute a clearly unwarranted invasion of personal
privacy, have been redacted in accordance with Regulation S-K Item 606(a)(6).
Item 16.
Form 10-K Summary
None.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: August 27, 2021
SUPER MICRO COMPUTER, INC.
/s/ CHARLES LIANG
Charles Liang
President, Chief Executive Officer and Chairman of the
Board
(Principal Executive Officer)
132
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Charles Liang and David Weigand, jointly and severally, his or her attorney-in-fact, each with the full power of
substitution, for such person, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K,
and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might do or
could do in person hereby ratifying and confirming all that each of said attorneys-in-fact and agents, or his or her substitute,
may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated and on the dates indicated.
Signature
/s/ CHARLES LIANG
Charles Liang
/s/ DAVID WEIGAND
David Weigand
/s/ SARA LIU
Sara Liu
/s/ DANIEL W. FAIRFAX
Daniel W. Fairfax
/s/ SARIA TSENG
Saria Tseng
/s/ SHERMAN TUAN
Sherman Tuan
/s/ SHIU LEUNG (FRED) CHAN
Shiu Leung (Fred) Chan
/s/ TALLY LIU
Tally Liu
Title
President, Chief Executive Officer and Chairman
of the Board (Principal Executive Officer)
Senior Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
Director
Director
Date
August 27, 2021
August 27, 2021
August 27, 2021
August 27, 2021
August 27, 2021
August 27, 2021
August 27, 2021
August 27, 2021
133
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GLOBAL EXPANSION
Providing Greater Economies of Scale and Accelerated Support to Data Center,
Cloud Computing, AI, Enterprise IT, HPC, 5G, Hyperscale,
and Embedded Solutions Customers Worldwide
Worldwide Headquarters
San Jose, California
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P
O
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America
• Supermicro’s Headquarters expansion: Over 1.5 million square
foot Green Computing Park in San Jose, California signals the
company’s increasing leadership in the IT industry
• One of the largest high-tech R&D, manufacturing, and business
hubs in Silicon Valley
• East Coast Sales and Service Office
APAC
Supermicro’s Asia Science and Technology Park is a key
milestone in the company’s growth as a true global leader
in the development of advanced, power saving computing
technologies
Silicon Valley
Expanded manufacturing, command center
EMEA
Supermicro’s system integration facility and services in
The Netherlands serves the dynamic, rapidly growing
EMEA market with localized supply and time-to-market
advantages
Worldwide Headquarters
Super Micro Computer, Inc.
980 Rock Ave.
San Jose, CA 95131, USA
Tel: +1-408-503-8000
EMEA Headquarters
Super Micro Computer, B.V.
Het Sterrenbeeld 12, 5215 ML,
‘s-Hertogenbosch, The Netherlands
Tel: +31-73-640-0390
APAC Headquarters
Super Micro Computer, Taiwan Inc.
3F, No. 150, Jian 1st Rd., Zhonghe Dist.,
New Taipei City 235, Taiwan
Tel: +886-2-8226-3990
www.supermicro.com
© Super Micro Computer, Inc. Specifications subject to change without notice. All other brands and names are the property of their respective owners.
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