What changed in this filing

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Item 1. Financial Statements

2020-05-11 compared with 2020-02-07 · 334 added, 237 removed, 639 unchanged (47% of the section changed)

5 unchanged sentences

Cash and cash equivalents

Accounts receivable, net of allowances of $8,825 and $8,906 at December 31, 2019 and June 30, 2019, respectively (including amounts receivable from related parties of $17,757 and $13,439 at December 31, 2019 and June 30, 2019, respectively)

Prepaid expenses and other current assets (including receivables from related parties of $24,975 and $21,302 at December 31, 2019 and June 30, 2019, respectively)

Accounts receivable, net of allowances of $10,317 and $8,906 at March 31, 2020 and June 30, 2019, respectively (including amounts receivable from related parties of $11,827 and $13,439 at March 31, 2020 and June 30, 2019, respectively)

Prepaid expenses and other current assets (including receivables from related parties of $21,354 and $21,302 at March 31, 2020 and June 30, 2019, respectively)

Total current assets

4 unchanged sentences

Current liabilities:

Accounts payable (including amounts due to related parties of $75,916 and $59,809 at December 31, 2019 and June 30, 2019, respectively)

Accrued liabilities (including amounts due to related parties of $15,785 and $10,536 at December 31, 2019 and June 30, 2019, respectively)

Accounts payable (including amounts due to related parties of $55,124 and $59,809 at March 31, 2020 and June 30, 2019, respectively)

Accrued liabilities (including amounts due to related parties of $20,270 and $10,536 at March 31, 2020 and June 30, 2019, respectively)

Income taxes payable

3 unchanged sentences

Deferred revenue, non-current

Other long-term liabilities (including related party balance of $3,430 and $3,000 at December 31, 2019 and June 30, 2019, respectively)

Other long-term liabilities (including related party balance of $2,871 and $3,000 at March 31, 2020 and June 30, 2019, respectively)

Total liabilities

3 unchanged sentences

Authorized shares:

Outstanding shares:

51,915,646 and 49,956,288 at March 31, 2020 and June 30, 2019, respectively

Issued shares:

51,923,260 and 51,289,413 at December 31, 2019 and June 30, 2019, respectively

Treasury stock (at cost), 1,333,125 shares at December 31, 2019 and June 30, 2019

53,248,771 and 51,289,413 at March 31, 2020 and June 30, 2019, respectively

Treasury stock (at cost), 1,333,125 shares at March 31, 2020 and June 30, 2019

Accumulated other comprehensive loss

10 unchanged sentences

Three Months Ended

Six Months Ended

Net sales (including related party sales of $21,784 and $16,794 in the three months ended December 31, 2019 and 2018, respectively, and $49,446 and $31,259 in the six months ended December 31, 2019 and 2018, respectively)

Cost of sales (including related party purchases of $75,333 and $74,553 in the three months ended December 31, 2019 and 2018, respectively, and $140,366 and $152,707 in the six months ended December 31, 2019 and 2018, respectively)

Nine Months Ended

Net sales (including related party sales of $21,528 and $17,590 in the three months ended March 31, 2020 and 2019, respectively, and $70,974 and $48,849 in the nine months ended March 31, 2020 and 2019, respectively)

Cost of sales (including related party purchases of $60,387 and $62,624 in the three months ended March 31, 2020 and 2019, respectively, and $200,753 and $215,331 in the nine months ended March 31, 2020 and 2019, respectively)

Operating expenses:

4 unchanged sentences

Income from operations

Other (expense) income, net

Other income (expense), net

Interest expense

Income before income tax provision

Income tax provision

Income tax benefit (provision)

Share of loss from equity investee, net of taxes

6 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

Other comprehensive income (loss), net of tax:

Foreign currency translation gain (loss)

Foreign currency translation (loss) gain

Total other comprehensive income (loss)

4 unchanged sentences

(in thousands, except share amounts)

Three Months Ended December 31, 2019

Three Months Ended March 31, 2020

Common Stock and

4 unchanged sentences

Stockholders’

Balance at September 30, 2019

Exercise of stock options, net of taxes

Balance at December 31, 2019

Exercise of stock options, net of shares withheld for withholding taxes

Release of common stock shares upon vesting of restricted stock units

1 unchanged sentence

Stock-based compensation

Foreign currency translation gain

Balance at December 31, 2019

Three Months Ended December 31, 2018

Foreign currency translation loss

Balance at March 31, 2020

Three Months Ended March 31, 2019

Common Stock and

4 unchanged sentences

Stockholders’

Balance at September 30, 2018

Balance at December 31, 2018

Release of common stock shares upon vesting of restricted stock units

1 unchanged sentence

Stock-based compensation

Foreign currency translation loss

Balance at December 31, 2018

Foreign currency translation gain

Balance at March 31, 2019

See accompanying notes to condensed consolidated financial statements.

2 unchanged sentences

(in thousands, except share amounts)

Six Months Ended December 31, 2019

Nine Months Ended March 31, 2020

Common Stock and

5 unchanged sentences

Balance at June 30, 2019

Exercise of stock options, net of taxes

Exercise of stock options, net of shares withheld for withholding taxes

Release of common stock shares upon vesting of restricted stock units

2 unchanged sentences

Foreign currency translation loss

Balance at December 31, 2019

Six Months Ended December 31, 2018

Balance at March 31, 2020

Nine Months Ended March 31, 2019

Common Stock and

10 unchanged sentences

Foreign currency translation loss

Balance at December 31, 2018

Balance at March 31, 2019

See accompanying notes to condensed consolidated financial statements.

2 unchanged sentences

(in thousands)

Six Months Ended December 31,

Nine Months Ended

OPERATING ACTIVITIES:

8 unchanged sentences

Changes in operating assets and liabilities:

Accounts receivable (including changes in related party balances of ($4,318) and ($10,037) during the six months ended December 31, 2019 and 2018, respectively)

Prepaid expenses and other assets (including changes in related party balances of ($3,673) and ($8,514) during the six months ended December 31, 2019 and 2018, respectively)

Accounts payable (including changes in related party balances of $16,107 and $4,655 during the six months ended December 31, 2019 and 2018, respectively)

Accounts receivable (including changes in related party balances of $1,612 and ($8,813) during the nine months ended March 31, 2020 and 2019, respectively)

Prepaid expenses and other assets (including changes in related party balances of ($52) and $9,741 during the nine months ended March 31, 2020 and 2019, respectively)

Accounts payable (including changes in related party balances of ($4,685) and ($24,882) during the nine months ended March 31, 2020 and 2019, respectively)

Income taxes payable

Deferred revenue

Accrued liabilities (including changes in related party balances of $5,249 and ($4,436) during the six months ended December 31, 2019 and 2018, respectively)

Other long-term liabilities (including changes in related party balances of $430 and $500 during the six months ended December 31, 2019 and 2018, respectively)

Accrued liabilities (including changes in related party balances of $9,734 and ($9,288) during the nine months ended March 31, 2020 and 2019, respectively)

Other long-term liabilities (including changes in related party balances of ($129) and $0 during the nine months ended March 31, 2020 and 2019, respectively)

Net cash provided by operating activities

INVESTING ACTIVITIES:

Purchases of property, plant and equipment (including payments to related parties of $2,274 and $2,980 during the six months ended December 31, 2019 and 2018, respectively)

Purchases of property, plant and equipment (including payments to related parties of $4,384 and $4,203 during the nine months ended March 31, 2020 and 2019, respectively)

Proceeds from sale of investment in a privately-held company

4 unchanged sentences

Net repayment on asset-backed revolving line of credit

Payment of other fees for debt financing

Proceeds from exercise of stock options

1 unchanged sentence

Payments of obligations under finance leases

Net cash used in financing activities

Net cash provided by (used in) financing activities

Effect of exchange rate fluctuations on cash

6 unchanged sentences

Non-cash investing and financing activities:

Unpaid property, plant and equipment purchases (including due to related parties of $1,729 and $1,963 as of December 31, 2019 and 2018, respectively)

Unpaid property, plant and equipment purchases (including due to related parties of $215 and $1,067 as of March 31, 2020 and 2019, respectively)

Contribution of certain technology rights to equity investee

Receivable from exercise of stock options

See accompanying notes to condensed consolidated financial statements.

14 unchanged sentences

Investments in equity securities which do not have readily determinable fair values and for which the Company is not able to exercise significant influence over the investee are accounted for under the measurement alternative which is the cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar securities of the same investee.

The unaudited condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) and include the accounts of Super Micro Computer and its consolidated subsidiaries.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S.

1 unchanged sentence

The unaudited condensed consolidated financial statements included herein reflect all adjustments, including normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the periods presented.

The consolidated results of operations for the three and six months ended December 31, 2019 are not necessarily indicative of the results that may be expected for future quarters or for the fiscal year ending June 30, 2020.

The consolidated results of operations for the three and nine months ended March 31, 2020 are not necessarily indicative of the results that may be expected for future quarters or for the fiscal year ending June 30, 2020.

Use of Estimates

1 unchanged sentence

Such estimates include, but are not limited to:

allowances for doubtful accounts and sales returns, inventory valuation, useful lives of property, plant and equipment, product warranty accruals, stock-based compensation, impairment of investments and long-lived assets, and income taxes.

allowances for doubtful accounts and sales returns, inventory valuation, useful lives of property, plant and equipment, product warranty accruals, stock-based compensation, valuation and recognition of performance awards liability, 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 coronavirus ("COVID-19") pandemic on our critical and significant accounting estimates, including assessment of collectibility of customer contracts, valuation of accounts receivable, provision for excess and obsolete inventory and impairment of long-lived assets.

Collectibility of customer contracts assessment resulted in delaying revenue recognition of $ 3.4 million for certain orders shipped during the three months ended March 31, 2020.

Revenue Recognition

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

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Product sales .

2 unchanged sentences

The Company may use distributors to sell products to end customers.

Revenue from distributors is recognized when the

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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

As part of determining the transaction price in contracts with customers, the Company estimates reserves for future sales returns based on a review of its history of actual returns for each major product line.

Based upon historical experience, a refund liability is recorded at the time of sale for estimated product returns and an asset is recognized for the amount expected to be recorded in inventory upon product return, less the expected recovery costs.

Based upon historical experience, a refund liability is recorded at the time of sale for estimated product returns, with a corresponding decrease in revenue, and an asset is recognized for the amount expected to be recorded in inventory upon product return, less the expected recovery costs, with a corresponding decrease in cost of sales.

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.

22 unchanged sentences

The Company offers product warranties ranging from 15 to 39 months against any defective products.

These standard warranties are assurance type warranties, and the Company does not offer any services beyond the assurance that the product will continue working as specified.

These standard warranties are assurance type warranties, and the Company does not offer any services beyond the assurance that the product

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

will continue working as specified.

Therefore, these warranties are not considered separate performance obligations in the arrangement.

2 unchanged sentences

Accruals for anticipated future warranty costs are charged to cost of sales and included in accrued liabilities and other long-term liabilities.

Warranty accruals are based on estimates that are updated on an ongoing basis taking into consideration inputs such as new product introductions,

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

changes in the volume of claims compared with the Company's historical experience, and the changes in the cost of servicing warranty claims.

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.

Inventories are stated at weighted average cost, subject to lower of cost or net realizable value.

Research and Development

Research and development expenses consist of personnel expenses including:

salaries, benefits, stock-based compensation and incentive bonuses, and related expenses for our research and development personnel, as well as materials and supplies, consulting services, third-party testing services and equipment and facility expenses related to our research and development activities.

All research and development costs are expensed as incurred.

The Company occasionally receives funding from certain suppliers and customers towards its development efforts.

Such amounts are recorded as a reduction of research and development expenses and were $ 0.8 million and $ 2.0 million for the nine months ended March 31, 2020 and 2019, respectively.

Such amounts recorded as a reduction of research and development expenses were not significant for the three months ended March 31, 2020 and 2019.

During the three and nine months ended March 31, 2020, the Company also recorded a $ 9.5 million net settlement fee as a reduction in the research and development expenses related to the reimbursement of previously incurred expenses for one canceled joint product development agreement.

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

The Company evaluates inventory on a quarterly basis for lower of cost or net realizable value and excess and obsolescence and, as necessary, writes down the valuation of inventories based upon the Company's forecasted usage and sales, anticipated selling price, product obsolescence and other factors.

Once inventory is written down, its new value is maintained until it is sold or scrapped.

11 unchanged sentences

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.

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Stock-Based Compensation

The Company measures and recognizes compensation expense for all share-based awards made to employees and non-employees, including stock options and restricted stock units ("RSUs").

The share-based awards granted to non-employees have not been material to date.

The Company is required to estimate the fair value of share-based awards on the date of grant.

The Company 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.

The fair value of RSUs with service conditions or performance conditions is based on the closing market price of the Company's common stock on the date of grant.

The fair value for RSUs with service conditions, or time-based RSUs, is amortized on a straight-line basis over the requisite service period.

The fair value for RSUs with performance conditions ("PRSUs") is recognized on a ratable basis over the requisite service period when it is probable the performance conditions of the awards will be met.

The Company reassesses the probability of vesting at each reporting period and adjusts the total compensation expense of the award based on this probability assessment.

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

PRSUs awards are recognized to expense using an accelerated method only when it is probable that any 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 as 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.

3 unchanged sentences

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.

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

The Company has arrangements for certain of its office, warehouse spaces and other premises, and equipment.

The Company has arrangements for the right to use certain of its office, warehouse spaces and other premises, and equipment.

As of July 1, 2019, the Company determines at inception if an arrangement is or contains a lease.

2 unchanged sentences

Operating Leases

For operating leases with lease terms of more than 12 months, operating lease right-of-use ("ROU") assets are included in other assets, and current and non-current lease liabilities are included in accrued liabilities and other long-term liabilities, respectively, on the condensed consolidated balance sheet.

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 condensed consolidated balance sheet.

The Company's lease term includes options to extend or terminate the lease when it is reasonably certain that it will exercise that option.

3 unchanged sentences

Operating lease ROU assets and liabilities are recognized at lease commencement based on the present value of the remaining lease payments discounted using the Company’s incremental borrowing rate as the interest rate implicit in the lease arrangements is not readily determinable.

The incremental borrowing rate is estimated to be the interest rate on a fully collateralized basis with similar terms and payments and in economic environments where the leased asset is located.

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.

1 unchanged sentence

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 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.

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Finance Leases

Assets under finance leases are included in property, plant and equipment, net and current, and non-current lease liabilities are included in accrued liabilities and other long-term liabilities, respectively, on the condensed consolidated balance sheet.

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 condensed consolidated balance sheet.

Finance lease interest expense is recognized based on an effective interest method and depreciation of assets is recorded on a straight-line basis over the shorter of the lease term and useful life of the asset.

8 unchanged sentences

For leases that contained escalating rent payments, the Company recognized rent expense on a straight-line basis over the lease term, with any lease incentives amortized as a reduction of rent expense over the lease term.

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Variable Interest Entities

16 unchanged sentences

The Company has concluded that the Management Company is a VIE, and the Company is the primary beneficiary as it has the power to direct the activities that are most significant to the Management Company.

For the three and six months ended December 31, 2019 and 2018 , the accounts of the Management Company have been consolidated with the accounts of Super Micro Computer, and a noncontrolling interest has been recorded for Ablecom's interest in the net assets and operations of the Management Company.

For the three and nine months ended March 31, 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 condensed consolidated statements of operations.

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Investment in a Corporate Venture

In October 2016, the Company entered into agreements pursuant to which the Company contributed certain technology rights in connection with an investment in a privately-held company (the "Corporate Venture") located in China to expand the Company's presence in China.

The Corporate Venture is 30 % owned by the Company and 70 % owned by another company in China.

The Corporate Venture is 30 % owned by the Company and 70 % owned by a third party in China.

The transaction was closed in the third fiscal quarter of 2017 and the investment is accounted for using the equity method.

As such, the Corporate Venture is also a related party.

As of December 31, 2019 and June 30, 2019 , the Company's equity investment in the Corporate Venture was $ 1.1 million and $ 1.7 million , respectively, and was recorded under investment in equity investee on the Company's condensed consolidated balance sheet.

The Company's share of losses of the Corporate Venture were $ 1.0 million and $ 1.8 million for the three months ended December 31, 2019 and 2018 , respectively, and $ 0.0 million and $ 3.2 million for the six months ended December 31, 2019 and 2018 , respectively, and were recorded as share of loss from equity investee, net of taxes in the Company’s condensed consolidated statements of operations.

As of March 31, 2020 and June 30, 2019 , the Company's equity investment in the Corporate Venture was $ 0 and $ 1.7 million , respectively, and was recorded under investment in equity investee on the Company's condensed consolidated balance sheets.

The Company's share of losses, net of taxes, of the Corporate Venture were $ 1.1 million and $ 0.4 million for the three months ended March 31, 2020 and 2019 , respectively, and $ 1.1 million and $ 3.6 million for the nine months ended March 31, 2020 and 2019 , respectively, and were recorded as share of loss from equity investee, net of taxes in the Company’s condensed consolidated statements of operations.

The Company does not have an obligation or commitment to share in losses of the Corporate Venture above its investment amounts and will discontinue equity method accounting if the investment carrying value is below zero.

The Company previously recorded a deferred gain related to the contribution of certain technology rights of $ 10.0 million .

The amortization of the deferred gain is being recognized as a credit to research and development expenses in the Company's condensed consolidated statement of operations over a period of five years which represents the estimated period over which the remaining obligations will be fulfilled.

As of December 31, 2019 and June 30, 2019 , the Company had unamortized deferred gain balance of $ 2.0 million and $ 2.0 million , respectively, in accrued liabilities and $ 2.0 million and $ 3.0 million , respectively, in other long-term liabilities in the Company’s condensed consolidated balance sheets.

As of March 31, 2020 and June 30, 2019 , the Company had unamortized deferred gain balance of $ 2.5 million and $ 2.0 million , respectively, in accrued liabilities and $ 1.5 million and $ 3.0 million , respectively, in other long-term liabilities in the Company’s condensed consolidated balance sheets.

The Company monitors the investment for events or circumstances indicative of potential other-than-temporary impairment and makes appropriate reductions in carrying values if it determines that an impairment charge is required.

No impairment charge was recorded for the three and six months ended December 31, 2019 and 2018 , respectively.

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Additionally, the Company sold products worth $ 15.4 million and $ 12.1 million to the Corporate Venture in the three months ended December 31, 2019 and 2018 , respectively, and $ 37.5 million and $ 21.5 million in the six months ended December 31, 2019 and 2018 , respectively, and the Company's share of intra-entity profits on the products that remained unsold by the Corporate Venture as of December 31, 2019 and June 30, 2019 have been eliminated and have reduced the Company's investment in the Corporate Venture.

The Company had $ 15.2 million and $ 13.1 million due from the Corporate Venture in accounts receivable, net as of December 31, 2019 and June 30, 2019 , respectively, in its condensed consolidated balance sheets.

No impairment charge was recorded for the three and nine months ended March 31, 2020 and 2019 , respectively.

In addition, the Company sells products to the Corporate Venture.

The Company's share of intra-entity profits on the products that remained unsold by the Corporate Venture as of each period end is eliminated and recorded as a reduction of the Company's investment balance 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 sold products worth $ 14.0 million and $ 13.7 million to the Corporate Venture in the three months ended March 31, 2020 and 2019 , respectively, and $ 51.5 million and $ 35.2 million in the nine months ended March 31, 2020 and 2019 , respectively.

As of March 31, 2020 , the Company recorded $0.5 million related to unrealized intra-entity profits in accrued liabilities in the Company’s condensed consolidated balance sheet.

The Company had $ 10.4 million and $ 13.1 million due from the Corporate Venture in accounts receivable, net as of March 31, 2020 and June 30, 2019 , respectively, in its condensed consolidated balance sheets.

Concentration of Supplier Risk

1 unchanged sentence

Shortages could occur in these materials due to an interruption of supply or increased demand in the industry.

One supplier accounted for 28.5 % and 23.4 % of total purchases for the three months ended December 31, 2019 and 2018 , respectively, and 28.6 % and 21.5 % for the six months ended December 31, 2019 and 2018 , respectively.

Ablecom and Compuware, related parties of the Company as noted in Note 9, "Related Party Transactions," accounted for 10.3 % and 9.3 % of total cost of sales for the three months ended December 31, 2019 and 2018 , respectively, and 10.0 % and 9.2 % for the six months ended December 31, 2019 and 2018 , respectively.

The COVID-19 pandemic has already and may further disrupt our supply chain.

One supplier accounted for 26.1 % and 20.1 % of total purchases for the three months ended March 31, 2020 and 2019 , respectively, and 27.9 % and 21.2 % for the nine months ended March 31, 2020 and 2019 , respectively.

Ablecom and Compuware, related parties of the Company as noted in Note 9, "Related Party Transactions," accounted for 9.4 % and 9.9 % of total cost of sales for the three months ended March 31, 2020 and 2019 , respectively, and 9.8 % and 9.4 % for the nine months ended March 31, 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 for the three and six months ended December 31, 2019 and 2018 .

No country other than the United States represented greater than 10% of the Company’s total net sales in the three and six months ended December 31, 2019 and 2018 .

No customer accounted for greater than 10% of the Company's accounts receivable, net as of December 31, 2019 , whereas one customer accounted for 17.0 % of accounts receivable, net as of June 30, 2019 .

Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash and cash equivalents, restricted cash, investment in an auction rate security and accounts receivable.

No single customer accounted for 10% or more of the net sales for the three and nine months ended March 31, 2020 and 2019 .

No country other than the United States represented greater than 10% of the Company’s total net sales in the three and nine months ended March 31, 2020 and 2019 .

No customer accounted for greater than 10% of the Company's accounts receivable, net as of March 31, 2020 , whereas one customer accounted for 17.0 % of accounts receivable, net as of June 30, 2019 .

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Accounting Pronouncements Recently Adopted

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The adoption of the guidance did not have a material impact on the Company's consolidated financial statements and related disclosures.

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Accounting Pronouncements Not Yet Adopted

3 unchanged sentences

Early adoption is permitted.

The Company is currently evaluating the effect the guidance will have on its consolidated financial statement disclosures, results of operations and financial position.

The Company has started its accounting assessment of the adoption of the new standard, the process of establishing new accounting policies and evaluation of changes to systems and internal controls necessary to support the requirements of the new standard.

The Company will continue to update its assessment as more information becomes available.

The Company cannot reasonably estimate quantitative information related to the impact of the new guidance on its consolidated financial statements at this time.

In August 2018, the FASB issued amended guidance, Fair Value Measurement:

1 unchanged sentence

The new standard is effective for the Company from July 1, 2020.

The Company is currently evaluating the effect the guidance will have on its consolidated financial statement disclosures.

In August 2018, the FASB issued amended guidance to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license).

The adoption of the new guidance will simplify the disclosure of the fair value measurements for the Company's financial assets and liabilities.

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 with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license).

The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments.

2 unchanged sentences

The new standard is effective for the Company from July 1, 2020.

The Company is currently evaluating the effect the guidance will have on its consolidated financial statement disclosures, results of operations and financial position.

The Company will adopt the new guidance on a prospective basis for any new hosting arrangement entered into after July 1, 2020.

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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.

3 unchanged sentences

The Company is currently evaluating the effect the guidance will have on its consolidated financial statement disclosures, results of operations and financial position.

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 15, 2022.

The LIBOR is used to calculate the interest on borrowings under the Company's 2018 Bank of America Credit Facility.

As the 2018 Bank of America Credit Facility terminates on June 30, 2020 before the phase out of LIBOR, the Company does not expect the adoption of the guidance to have an impact on its consolidated financial statement disclosures, results of operations and financial position.

Disaggregation of Revenue

3 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

Server and storage systems

2 unchanged sentences

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

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

International net sales are based on the country and region to which the products were shipped.

The following is a summary for the three and six months ended December 31, 2019 and 2018 , of net sales by geographic region (in thousands):

The following is a summary for the three and nine months ended March 31, 2020 and 2019 , of net sales by geographic region (in thousands):

Three Months Ended

Six Months Ended

Nine Months Ended

United States

The following table presents the percentages of net sales from products sold through the Company's indirect sales channel and to its direct customers and OEMs for the three and six months ended December 31, 2019 and 2018 :

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table presents the net sales from products sold through the Company's indirect sales channel and to its direct customers and OEMs for the three and nine months ended March 31, 2020 and 2019 (in thousands):

Three Months Ended

Six Months Ended

Nine Months Ended

Indirect sales channel

4 unchanged sentences

In certain instances, customers may prepay for products and services in advance of delivery.

Receivables relate to the Company’s right to consideration for performance obligations completed (or partially completed) for which the Company has an unconditional right to consideration.

Accounts receivable relate to the Company’s right to consideration for performance obligations completed (or partially completed) for which the Company has an unconditional right to consideration.

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

2 unchanged sentences

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 the three and six months ended December 31, 2019 , which was included in the opening deferred revenue balance as of June 30, 2019, was $ 23.2 million and $ 48.7 million , respectively.

Deferred revenue decreased during the six months ended December 31, 2019 because the recognition of revenue from contracts entered into in prior periods exceeded the amounts for service contracts invoiced during the period.

Revenue recognized during the three and nine months ended March 31, 2020 , which was included in the opening deferred revenue balance as of June 30, 2019, was $ 22.9 million and $ 71.6 million , respectively.

Deferred revenue increased during the nine months ended March 31, 2020 because the amounts for service contracts invoiced during the period exceeded the recognition of revenue from contracts entered into in prior periods.

Transaction Price Allocated to the Remaining Performance Obligations

1 unchanged sentence

The Company applies the optional exemption to not disclose information about remaining performance obligations that are part of a contract that has an original expected duration of one year or less.

These performance obligations generally consist of services, such as on-site integration services that are contracted for one year or less, and products for which control has not yet been transferred.

The value of the transaction price allocated to remaining performance obligations as of December 31, 2019 was approximately $ 215.6 million .

These performance obligations generally consist of services, such as on-site 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 March 31, 2020 was approximately $ 205.5 million .

The Company expects to recognize approximately 53 % of remaining performance obligations as revenue in the next 12 months , and the remainder thereafter.

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Stock-based Compensation

Equity Incentive Plan

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

The 2016 Plan was approved by the stockholders of the Company and became effective on March 8, 2016.

As of the date the 2016 Plan became effective, 8,696,444 shares of common stock were reserved for outstanding awards under the Company's 2006 Equity Incentive Plan (the "2006 Plan").

Such awards remained outstanding under the 2006 Plan following the adoption of the 2016 Plan, although no further awards have been or will be granted under the 2006 Plan.

Up to 2,800,000 shares subject to awards that remained outstanding under the 2006 Plan at the time the 2016 Plan became effective, if those awards were or are forfeited at any time after the 2016 Plan became effective, became available or will become available for use under the 2016 Plan.

At the time the 2016 Plan became effective, all remaining ungranted shares under the 2006 Plan were canceled.

Under the 2016 Plan, the exercise price per share for incentive stock options granted to employees owning shares representing more than 10 % of the Company's outstanding voting stock at the time of grant cannot be less than 110 % of the fair value of the underlying shares on the grant date.

Commencing March 8, 2016, the Company began granting stock options, RSUs, PRSUs and other equity-based awards under the 2016 Equity Incentive Plan (the "2016 Plan").

The exercise price per share for incentive stock options granted to employees owning shares representing more than 10 % of the Company's outstanding voting stock at the time of grant cannot be less than 110 % of the fair value of the underlying shares on the grant date.

Nonqualified stock options and incentive stock options granted to all other persons are granted at a price not less than 100 % of the fair value.

1 unchanged sentence

Stock options and RSUs generally vest over four years ;

25% at the end of one year and one sixteenth per quarter thereafter.

Under the 2016 Plan, the Company granted PRSUs to its Chief Executive Officer, 50% of which vest based on the achievement of certain performance metrics at the end of the performance period while the remainder vest in equal amounts over the following ten quarters provided he continues to be employed by the Company.

As of December 31, 2019 , the Company had 463,411 authorized shares available for future issuance under the 2016 Plan.

25% at the end of one year and one

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

sixteenth per quarter thereafter.

As of March 31, 2020 , the Company had 231,312 authorized shares available for future issuance under the 2016 Plan.

Determining Fair Value

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

The fair value of stock option grants for the three and six months ended December 31, 2019 and 2018 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

The fair value of stock option grants for the three and nine months ended March 31, 2020 and 2019 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

Three Months Ended

Six Months Ended

Nine Months Ended

Risk-free interest rate

1 unchanged sentence

0.53% - 1.72%

2.56% - 2.97%

Expected term

2 unchanged sentences

49.61% - 50.46%

47.34% - 50.25%

Weighted-average fair value

The following table shows total stock-based compensation expense included in the condensed consolidated statements of operations for the three and six months ended December 31, 2019 and 2018 (in thousands):

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table shows total stock-based compensation expense included in the condensed consolidated statements of operations for the three and nine months ended March 31, 2020 and 2019 (in thousands):

Three Months Ended

Six Months Ended

Nine Months Ended

Cost of sales

5 unchanged sentences

Stock-based compensation expense, net

As of December 31, 2019 , $ 6.5 million of unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 2.53 years , $ 32.6 million of unrecognized compensation cost related to unvested RSUs is expected to be recognized over a weighted-average period of 2.81 years and $ 0.1 million of unrecognized compensation cost related to unvested PRSUs is expected to be recognized over a period of 1.0 year .

As of March 31, 2020 , $ 6.5 million of unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 2.32 years, $ 34.2 million of unrecognized compensation cost related to unvested RSUs is expected to be recognized over a weighted-average period of 2.63 years and $ 0.7 million of unrecognized compensation cost related to unvested PRSUs is expected to be recognized over a period of 1.04 years.

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Stock Option Activity

The following table summarizes stock option activity during the six months ended December 31, 2019 under all plans:

The following table summarizes stock option activity during the nine months ended March 31, 2020 under all plans:

Term (in Years)

1 unchanged sentence

Forfeited/Cancelled

Balance as of December 31, 2019

Options vested and exercisable at December 31, 2019

Balance as of March 31, 2020

Options vested and exercisable at March 31, 2020

RSU and PRSU Activity

4 unchanged sentences

The first award was a one-year PRSU and the second award was a two-year PRSU.

The one-year PRSUs would be earned based on the Company’s performance as it relates to a revenue growth metric and a minimum non-GAAP operating margin metric during the fiscal year ended June 30, 2018 with eligibility up to 200 % of the targeted number of units based on revenue growth if the minimum non-GAAP operating margin is achieved.

The one-year PRSUs would be earned based on the Company’s performance as it relates to a revenue growth metric and a minimum non-GAAP operating margin metric during the fiscal year ended June 30, 2018 with eligibility up to 200 % of the targeted 30,000 units based on revenue growth if the minimum non-GAAP operating margin is achieved.

If the performance metrics were met, 50 % of the PRSUs would vest at June 30, 2018 while the remainder would vest in equal amounts over the following ten quarters if the Company's Chief Executive Officer continued to be employed during those ten quarters.

In December 2019, the Compensation Committee of the Company's Board of Directors determined that the Company achieved the revenue and non-GAAP operating margin metrics for the fiscal year ended June 30, 2018 at a level that entitled the Chief Executive Officer to 200 % of the originally targeted number of shares subject to the one-year PRSU.

50 % of the PRSUs so earned were vested as of June 30, 2018, and an additional 30 % of the PRSUs vested during the six quarters ended December 31, 2019, in accordance with the terms of the grant.

In December 2019, the Compensation Committee of the Company's Board of Directors (the "Board") determined that the Company achieved the revenue and non-GAAP operating margin metrics for the fiscal year ended June 30, 2018 at a level that entitled the Chief Executive Officer to 200 % of the originally targeted number of shares subject to the one-year PRSU.

50 % of the PRSUs so earned were vested as of June 30, 2018, and an additional 35 % of the PRSUs vested during the seven quarters ended March 31, 2020, in accordance with the terms of the grant.

The two-year PRSUs would be earned based on the Company’s performance for the average non-GAAP operating margin metric for the two fiscal years ended June 30, 2019 with eligibility up to 100 % of the targeted number of units.

If the performance metrics would have been met, 50 % of the PRSUs would have vested at June 30, 2019 while the remainder would have been vested in equal amounts over the following ten quarters if the Chief Executive Officer continued to be employed during those ten quarters.

In December 2019, the Compensation Committee of the Company's Board of Directors has

If the performance metrics were met, 50 % of the PRSUs would have vested at June 30, 2019 while the remainder would have vested in equal amounts over the following ten quarters if the Chief Executive Officer continued to be employed during those ten quarters.

In December 2019, the Compensation Committee of the Board determined that the Company did not achieve the required performance metrics for the two-year PRSUs and none of the two-year PRSUs vested.

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.

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

determined that the Company did not achieve the required performance metrics for these two-year PRSUs to be earned and none of the two-year PRSUs vested .

The following table summarizes RSUs and PRSUs activity during the six months ended December 31, 2019 under all plans:

The following table summarizes RSU and PRSU activity during the nine months ended March 31, 2020 under all plans:

Time-Based RSUs

2 unchanged sentences

Balance as of June 30, 2019

Balance as of December 31, 2019

Balance as of March 31, 2020

__________________________

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

The number of shares released excludes 96,000 PRSUs that were vested but not released as of December 31, 2019 , of which 6,000 PRSUs vested during the three months ended December 31, 2019 .

Net Income Per Common Share

The following table shows the computation of basic and diluted net income per common share for the three and six months ended December 31, 2019 and 2018 (in thousands, except per share amounts):

The following table shows the computation of basic and diluted net income per common share for the three and nine months ended March 31, 2020 and 2019 (in thousands, except per share amounts):

Three Months Ended

Six Months Ended

Nine Months Ended

Weighted-average shares outstanding

3 unchanged sentences

Diluted net income per common share

For the three and six months ended December 31, 2019 and 2018 , the Company had stock options and RSUs outstanding that could potentially dilute basic earnings per share in the future, but were excluded from the computation of diluted net income per share in the periods presented, as their effect would have been anti-dilutive.

The anti-dilutive common share equivalents resulting from outstanding equity awards were 2,501,684 and 3,171,619 for three and six months ended December 31, 2019 , respectively, and 5,785,490 and 4,385,154 for the three and six months ended December 31, 2018 , respectively.

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three and nine months ended March 31, 2020 and 2019 , the Company had stock options and RSUs outstanding that could potentially dilute basic earnings per share in the future, but were excluded from the computation of diluted net income per share in the periods presented, as their effect would have been anti-dilutive.

The anti-dilutive common share equivalents resulting from outstanding equity awards were 1,882,238 and 2,305,538 for three and nine months ended March 31, 2020 , respectively, and 4,443,127 and 4,194,283 for the three and nine months ended March 31, 2019 , respectively.

Balance Sheet Components

4 unchanged sentences

Total inventories

The Company recorded a provision for excess and obsolete inventory to cost of sales totaling $ 6.8 million and $ 16.9 million in the three and six months ended December 31, 2019 , respectively, and $ 4.6 million and $ 12.6 million in the three and six months ended December 31, 2018 , respectively.

These amounts exclude a (recovery) provision for adjusting the cost of certain inventories to net realizable value of $( 0.9 ) million and $( 2.7 ) million for the three and six months ended December 31, 2019 , respectively, and $ 1.5 million for the six months ended December 31, 2018 .

The provision for adjusting the cost of certain inventories to net realizable value for the three months ended December 31, 2018 was not material.

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company recorded a provision for excess and obsolete inventory to cost of sales totaling $ 4.7 million and $ 21.6 million in the three and nine months ended March 31, 2020 , respectively, and $ 4.7 million and $ 17.3 million in the three and nine months ended March 31, 2019 , respectively.

These amounts exclude a (recovery) provision for adjusting the cost of certain inventories to net realizable value of $( 0.8 ) million and $( 3.5 ) million for the three and nine months ended March 31, 2020 , respectively, and $ 5.7 million and $ 7.3 million for the three and nine months ended March 31, 2019 , respectively.

Prepaid Expenses and Other Current Assets:

6 unchanged sentences

__________________________

(1) Includes receivables from contract manufacturers based on certain buy-sell arrangements of $ 85.6 million and $ 82.0 million as of December 31, 2019 and June 30, 2019 , respectively.

(1) Includes receivables from contract manufacturers based on certain buy-sell arrangements of $ 87.1 million and $ 82.0 million as of March 31, 2020 and June 30, 2019 , respectively.

(2) Includes input value added tax (“VAT”) paid for inventories purchased in Taiwan of $ 8.4 million and $ 0 as of March 31, 2020 and June 30, 2019 , respectively.

Cash, cash equivalents and restricted cash:

3 unchanged sentences

Total cash, cash equivalents and restricted cash

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Property, Plant, and Equipment:

7 unchanged sentences

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

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Other Assets:

1 unchanged sentence

Deferred service costs, non-current

Prepaid expense, non-current

Restricted cash, non-current

1 unchanged sentence

Non-marketable equity securities

Prepaid expense, non-current

Total other assets

Accrued Liabilities:

Contract manufacturers liability

Contract manufacturing liabilities

Accrued payroll and related expenses

Accrued legal liabilities (Note 11)

Customer deposits

Performance awards liability, current

Accrued warranty costs

Accrued cooperative marketing expenses

Accrued professional fees

Operating lease liability

Accrued professional fees

Others (accrued liabilities)

Total accrued liabilities

Performance Awards Liability

In March 2020, the Board approved $ 25.3 million one-time performance bonuses to employees, which include $ 8.0 million payable in cash during the fourth quarter of fiscal year 2020 and $ 17.3 million payable in cash if the average closing price for the Company’s common stock equals or exceeds $ 21.39 for any period of 10 consecutive trading days following March 26, 2020.

The target price criteria were achieved in April 2020.

Therefore, the Company expects to pay the entire amount of the one-time performance bonuses to employees in the fourth fiscal quarter 2020.

The Board also 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 and the date that the payment is made.

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 and the date that the payment is made.

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 can earn an aggregate cash payment up to $ 0.1 million and the two members of the Board can earn aggregate cash payments of $ 0.3 million .

The target average closing price ranges from $ 25.80 to $ 32.99 per share.

These awards expire in two equal amounts at September 30, 2021 and June 30, 2022 for the two Board members' awards, and in September 30, 2022 for the senior executive’s award.

Except for cash bonuses of $ 8.0 million to employees, the Company accounts for these 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 condensed consolidated statement of operations in cost of sales and 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 through 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 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.

As of March 31, 2020, the Company recorded a $ 10.3 million compensation expense related to performance bonuses, which amount includes the $ 8.0 million in cash payable in the fourth quarter of fiscal year 2020.

An unrecognized compensation expense of $ 15.6 million will be recorded over the remaining service periods from one month for employees’ awards to 1.43 years for the first 50 % of the Chief Executive Officer’s award.

The unrecognized expense and remaining service periods will be remeasured each reporting period.

As of March 31, 2020, the Company recorded $ 10.3 million in accrued liabilities and $ 0.1 million in other long-term liabilities in its condensed consolidated balance sheet.

Other Long-term Liabilities:

Accrued unrecognized tax benefits including related interest and penalties

Operating lease liability, non-current

Accrued unrecognized tax benefits including related interest and penalties

Accrued warranty costs, non-current

1 unchanged sentence

Product Warranties:

Three Months Ended December 31,

Six Months Ended December 31,

Three Months Ended March 31,

Nine Months Ended March 31,

Balance, beginning of the period

5 unchanged sentences

Non-current portion

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Fair Value Disclosure

The financial assets of the Company measured at fair value on a recurring basis are included in cash equivalents and other assets.

The Company classifies its cash equivalents and other assets, except for its investment in an auction rate security, within Level 1 or Level 2 in the fair value hierarchy because the Company uses quoted prices in active markets or alternative pricing sources and models using market observable inputs to determine their fair value.

The Company’s investment in an auction rate security is classified within Level 3 of the fair value hierarchy as the determination of its fair value was not based on observable inputs as of December 31, 2019 and June 30, 2019 .

The Company used discounted cash flows to estimate the fair value of the auction rate security as of December 31, 2019 and June 30, 2019 .

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.

The Company used discounted cash flows to estimate the fair value of the auction rate security as of March 31, 2020 and June 30, 2019 .

The material factors used in preparing the discounted cash flows are (i) the discount rate utilized to present value the cash flows, (ii) the time period until redemption and (iii) the estimated rate of return.

Financial Assets and Liabilities Measured on a Recurring Basis

The following table sets forth the Company’s cash equivalents, certificates of deposit and investment in an auction rate security as of December 31, 2019 and June 30, 2019 , which are measured at fair value on a recurring basis by level within the fair value hierarchy.

The following table sets forth the Company’s cash equivalents, certificates of deposit, investment in an auction rate security and performance awards liability as of March 31, 2020 and June 30, 2019 , which are measured at fair value on a recurring basis by level within the fair value hierarchy.

These are classified based on the lowest level of input that is significant to the fair value measurement (in thousands):

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2019

March 31, 2020

Money market funds (1)

2 unchanged sentences

Total assets measured at fair value

Performance awards liability (3)

Total liabilities measured at fair value

June 30, 2019

4 unchanged sentences

__________________________

(1) $ 0.4 million and $ 0.4 million in money market funds are included in cash and cash equivalents and $ 0.8 million and $ 0.8 million in money market funds are included in restricted cash, non-current in other assets in the condensed consolidated balance sheets as of December 31, 2019 and June 30, 2019 , respectively.

(2) $ 0.2 million and $ 0.2 million in certificates of deposit are included in cash and cash equivalents and $ 1.1 million and $ 1.1 million in certificates of deposit are included in restricted cash, non-current in other assets in the condensed consolidated balance sheets as of December 31, 2019 and June 30, 2019 , respectively.

The above table excludes $ 308.4 million and $ 247.6 million of cash included in cash and cash equivalents, $ 12.7 million and $ 11.7 million of restricted cash included in prepaid expenses and other current assets, and $ 0.4 million and $ 0.4 million of restricted cash, non-current included in other assets in the condensed consolidated balance sheets as of December 31, 2019 and June 30, 2019 , respectively.

There were no transfers between Level 1, Level 2 or Level 3 securities in the three and six months ended December 31, 2019 and 2018 .

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 the three and six months ended December 31, 2019 and 2018 .

The following is a summary of the Company’s investment in an auction rate security as of December 31, 2019 and June 30, 2019 (in thousands):

December 31, 2019 and June 30, 2019

(2) $ 0.2 million and $ 0.2 million in certificates of deposit are included in cash and cash equivalents and $ 0.4 million and $ 1.1 million in certificates of deposit are included in restricted cash, non-current in other assets in the condensed consolidated balance sheets as of March 31, 2020 and June 30, 2019 , respectively.

(3) As of March 31, 2020 , the current portion of the performance awards liability of $ 2.2 million is included in accrued liabilities and the noncurrent portion of $ 0.1 million is included in other long-term liabilities in the condensed consolidated balance sheets.

There was no such liability outstanding as of June 30, 2019 .

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The performance awards liability consists of one-time employee performance bonuses for the Company's Chief Executive Officer, a senior executive, two members of the Board, and other employees that are payable when specified market and performance conditions are achieved.

The Company estimated the fair value of these 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 March 31, 2020 are as follows:

Stock Price as of Period End

Performance Period

Risk-free Rate

Dividend Yield

1.5 - 2.5 years

There were no transfers between Level 1, Level 2 or Level 3 financial instruments in the three and nine months ended March 31, 2020 and 2019 .

The following is a summary of the Company’s investment in an auction rate security as of March 31, 2020 and June 30, 2019 (in thousands):

March 31, 2020 and June 30, 2019

Auction rate security

The Company measures the fair value of outstanding debt for disclosure purposes on a recurring basis.

As of December 31, 2019 and June 30, 2019 , total debt of $ 23.3 million and $ 23.6 million , respectively, are reported at amortized cost.

As of March 31, 2020 and June 30, 2019 , total debt of $ 33.2 million and $ 23.6 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.

Financial Assets Measured on a Non-recurring Basis

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.

During the three and six months ended December 31, 2019 and 2018 , the Company did not record any upward or downward adjustments to the carrying values of the non-marketable equity securities.

The Company also did not record any impairment to the carrying values of the non-marketable equity securities during the three and six months ended December 31, 2019 and 2018.

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 three and nine months ended March 31, 2020 and 2019 , 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 the three and nine months ended March 31, 2020 .

During the three and nine months ended March 31, 2019, the Company recorded impairment charges of $ 0.7 million for its non-marketable equity securities which had an initial cost basis of $ 0.7 million as it was determined the carrying value of the investments were not recoverable.

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

There were no transfers of financial assets measured on a non-recurring basis between Level 1, Level 2 or Level 3 securities during the three and six months ended December 31, 2019 and 2018 .

Short-term Debt

Short-term debt obligations as of December 31, 2019 and June 30, 2019 consisted of the following (in thousands):

Bank of America line of credit

Short-term debt obligations as of March 31, 2020 and June 30, 2019 consisted of the following (in thousands):

Line of credit:

Bank of America

Total line of credit

CTBC Bank term loan

Total short-term debt

Activities under Revolving Lines of Credit and Term Loans

Bank of America

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Under the terms of the 2018 Bank of America Credit Facility, the Company is not permitted to either repurchase its common stock or pay any dividends.

In the fourth fiscal quarter of 2018, the Company paid $ 3.2 million in fees to the lenders and third parties in connection with the 2018 Bank of America Credit Facility.

The replacement of the 2016 Bank of America Credit Facility by the 2018 Bank of America Credit Facility is accounted for as a modification of the then-existing credit facility to the extent the lenders before and after the modification were the same.

Any unamortized fees relating to the 2016 Bank of America Credit Facility and the fees paid for the 2018 Bank of America Credit Facility are amortized over the term of the 2018 Bank of America Credit Facility as interest expense in the Company's consolidated statements of operation and any unamortized amounts are classified within prepaid and other current assets in the Company's consolidated balance sheets.

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

On June 27, 2019, the Company entered into a second amendment of the 2018 Bank of America Credit Facility that extended the maturity date from June 30, 2019 to June 30, 2020.

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2019 , the Company had no outstanding borrowings under the 2018 Bank of America Credit Facility.

The Company is in the process of negotiating an extension of its credit facility with Bank of America and expects this process will be completed by the end of May, 2020.

As of March 31, 2020 , the Company had no outstanding borrowings under the 2018 Bank of America Credit Facility.

As of June 30, 2019 , the total outstanding borrowings under the 2018 Bank of America Credit facility were $ 1.1 million .

The interest rates under the 2018 Bank of America Credit Facility as of December 31, 2019 and June 30, 2019 were 3.75 % per annum and 4.50 % per annum, respectively.

The interest rates under the 2018 Bank of America Credit Facility as of March 31, 2020 and June 30, 2019 were 3.63 % per annum and 4.50 % per annum, respectively.

In October 2018, a $ 3.2 million letter of credit was issued under the 2018 Bank of America Credit Facility.

In October 2019, the letter of credit amount was increased from $ 3.2 million to $ 6.4 million .

The balance of debt issuance costs outstanding were immaterial as of December 31, 2019 and June 30, 2019 .

As of December 31, 2019 , the Company's available borrowing capacity under the 2018 Bank of America Credit Facility was $ 243.6 million , subject to the borrowing base limitation and compliance with other applicable terms.

The balance of debt issuance costs outstanding were immaterial as of March 31, 2020 and June 30, 2019 .

As of March 31, 2020 , the Company's

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

available borrowing capacity under the 2018 Bank of America Credit Facility was $ 243.6 million , subject to the borrowing base limitation and compliance with other applicable terms.

In January 2018, the Company entered into a credit agreement with CTBC Bank that provided for (i) a 12 -month NTD $ 700.0 million ( $ 23.6 million U.S.

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dollar equivalent) with an annual fee equal to 0.50 % per annum, (ii) a 180 -day NTD $ 1,500.0 million ( $ 48.2 million U.S.

dollar equivalent) term loan facility up to 100 % of eligible accounts receivable in an aggregate amount with an interest rate equal to the lender's established NTD interest rate ranging from 0.30 % to 0.50 % per annum which is adjusted monthly, and (ⅲ) a 12 -month revolving line of credit of up to 100 % of eligible accounts receivable in an aggregate amount of up to $ 50.0 million with an interest rate equal to the lender's established USD interest rate plus an interest rate ranging from 0.30 % to 0.50 % per annum which is adjusted monthly (collectively, the “2019 CTBC Credit Facility”).

dollar equivalent) term loan facility up to 100 % of eligible accounts receivable in an aggregate amount with an interest rate equal to the lender's established NTD interest rate ranging from 0.30 % to 0.50 % per annum which is adjusted monthly, and (iii) a 12 -month revolving line of credit of up to 100 % of eligible accounts receivable in an aggregate amount of up to $ 50.0 million with an interest rate equal to the lender's established USD interest rate plus an interest rate ranging from 0.30 % to 0.50 % per annum which is adjusted monthly (collectively, the “2019 CTBC Credit Facility”).

The total borrowings allowed under the 2019 CTBC Credit Facility was capped at $ 50.0 million .

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The total outstanding borrowings under the 2019 CTBC Credit Facility term loan were denominated in NTD and remeasured into U.S.

dollars of $ 23.3 million and $ 22.5 million at December 31, 2019 and June 30, 2019 , respectively.

The interest rate for these loans were 0.91 % per annum as of December 31, 2019 and 0.93 % per annum as of June 30, 2019 .

At December 31, 2019 , the amount available for future borrowing under the 2019 CTBC Credit Facility was $ 26.7 million .

As of December 31, 2019 , the net book value of land and building located in Bade, Taiwan, collateralizing the 2019 CTBC Credit Facility term loan was $ 25.6 million .

dollars of $ 23.2 million and $ 22.5 million at March 31, 2020 and June 30, 2019 , respectively.

As of March 31, 2020 , the total outstanding borrowings under the 2019 CTBC Credit Facility revolving line of credit were $ 10.0 million in U.S.

At June 30, 2019 , the Company did not have any outstanding balance under the 2019 CTBC Credit Facility revolving line of credit.

The interest rate for these loans were 0.91 % per annum as of March 31, 2020 and 0.93 % per annum as of June 30, 2019 .

At March 31, 2020 , the amount available for future borrowing under the 2019 CTBC Credit Facility was $ 16.8 million .

As of March 31, 2020 , the net book value of land and building located in Bade, Taiwan, collateralizing the 2019 CTBC Credit Facility term loan was $ 25.5 million .

Covenant Compliance

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

On January 31,

On January 31, 2019, the Company entered into an amendment of the loan and security agreement with respect to the 2018 Bank of America Credit Facility to, among other matters, (a) extend the delivery date of the Company's audited consolidated financial statements, compliance certificates and other material reports for the fiscal year ended June 30, 2018 to June 30, 2019, and (b) require the delivery, by no later than March 31, 2019 of the Company's audited consolidated financial statements for the fiscal year ended

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2019, the Company entered into an amendment of the loan and security agreement with respect to the 2018 Bank of America Credit Facility to, among other matters, (a) extend the delivery date of the Company's audited consolidated financial statements, compliance certificates and other material reports for the fiscal year ended June 30, 2018 to June 30, 2019, and (b) require the delivery, by no later than March 31, 2019 of the Company's audited consolidated financial statements for the fiscal year ended June 30, 2019.

June 30, 2017.

In April 2019, the Company paid a fee to extend the delivery to June 30, 2019 of its audited consolidated financial statements for the fiscal year ended June 30, 2017.

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These operating lease ROU assets relate to offices, warehouses and other premises leased under non-cancelable operating leases expiring through June 2026 and vehicles and certain equipment leased under non-cancelable operating leases expiring through August 2023.

Operating lease expense recognized and supplemental cash flow information related to operating leases for the three and six months ended December 31, 2019 were as follows (in thousands):

Operating lease expense recognized and supplemental cash flow information related to operating leases for the three and nine months ended March 31, 2020 were as follows (in thousands):

Three Months Ended

Six Months Ended

December 31, 2019

Operating lease expense (including expense for lease agreements with related parties of $362 and $727 for the three and six months ended December 31, 2019, respectively)

Cash payments for operating leases (including payments to related parties of $380 and $737 for the three and six months ended December 31, 2019, respectively)

Nine Months Ended

March 31, 2020

Operating lease expense (including expense for lease agreements with related parties of $359 and $1,086 for the three and nine months ended March 31, 2019, respectively)

Cash payments for operating leases (including payments to related parties of $369 and $1,106 for the three and nine months ended March 31, 2019, respectively)

New operating lease assets obtained in exchange for operating lease liabilities

During the three and six months ended December 31, 2019 , the Company's costs related to short-term lease arrangements for real estate and non-real estate assets were immaterial.

Variable payments expensed in the three months and six months ended December 31, 2019 were $ 0.4 million and $ 0.7 million , respectively.

As of December 31, 2019 , the weighted average remaining lease term for operating leases was 4.1 years and the weighted average discount rate was 3.9 % .

Future minimum lease payments under noncancelable operating lease arrangements as of December 31, 2019 were as follows (in thousands):

During the three and nine months ended March 31, 2020 , the Company's costs related to short-term lease arrangements for real estate and non-real estate assets were immaterial.

Variable payments expensed in the three and nine months ended March 31, 2020 were $ 0.2 million and $ 0.9 million , respectively.

As of March 31, 2020 , the weighted average remaining lease term for operating leases was 4.7 years and the weighted average discount rate was 3.6 % .

Future minimum lease payments under noncancelable operating lease arrangements as of March 31, 2020 were as follows (in thousands):

SUPER MICRO COMPUTER, INC.

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Present value of operating lease liabilities

As of December 31, 2019 , commitments under short-term lease arrangements were $ 0.3 million .

As of December 31, 2019 , operating and financing leases that have not yet commenced were $ 0.3 million .

As of March 31, 2020 , commitments under short-term lease arrangements were immaterial.

As of March 31, 2020 , operating and financing leases that have not yet commenced were immaterial.

The Company has entered into lease agreements with related parties.

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Compuware is both a distributor of the Company’s products and a contract manufacturer for the Company.

Ablecom’s Chief Executive Officer, Steve Liang, is the brother of Charles Liang, the Company’s President, Chief Executive Officer and Chairman of the Board of Directors.

As of December 31, 2019 , Charles Liang and his spouse, Sara Liu, who is also an officer and director of the Company, collectively owned approximately 10.5 % of Ablecom’s capital stock.

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.

As of March 31, 2020 , 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.

The Company does not own, nor has it ever owned, any of Ablecom’s capital stock.

Steve Liang and his family members owned approximately 28.8 % of Ablecom’s stock as of December 31, 2019 .

Steve Liang and his family members owned approximately 28.8 % of Ablecom’s stock as of March 31, 2020 .

Bill Liang, a brother of both Charles Liang and Steve Liang, is a member of the Board of Directors of Ablecom.

5 unchanged sentences

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 97.5 % and 94.8 % of the chassis included in the products sold by the Company during the three months ended December 31, 2019 and 2018 , respectively;

and approximately 95.4 % and 95.3 % of the chassis included in the products sold by the Company during the six months ended December 31, 2019 and 2018 , respectively.

Ablecom manufactured approximately 95.1 % and 96.0 % of the chassis included in the products sold by the Company during the three months ended March 31, 2020 and 2019 , respectively;

and approximately 95.3 % and 95.5 % of the chassis included in the products sold by the Company during the nine months ended March 31, 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.

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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

For the components purchased from the

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

components to Ablecom.

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.

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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 $ 49.4 million and $ 31.0 million at December 31, 2019 and June 30, 2019 , respectively, representing the maximum exposure to financial loss.

Outstanding purchase orders from the Company to Ablecom were $ 60.0 million and $ 31.0 million at March 31, 2020 and June 30, 2019 , 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.

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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 $ 84.6 million and $ 70.6 million at December 31, 2019 and June 30, 2019 , respectively, representing the maximum exposure to financial loss.

Outstanding purchase orders from the Company to Compuware were $ 111.2 million and $ 70.6 million at March 31, 2020 and June 30, 2019 , 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 three and six months ended December 31, 2019 and 2018 , are as follows (in thousands):

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Three months ended December 31,

Six months ended December 31,

The Company’s results from transactions with Ablecom and Compuware for each of the three and nine months ended March 31, 2020 and 2019 , are as follows (in thousands):

Three Months Ended

Nine Months Ended

Purchases (1)

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

The Company's net sales to Ablecom were not material for the three and six months ended December 31, 2019 and 2018 .

The Company had the following balances related to transactions with Ablecom and Compuware as of December 31, 2019 and June 30, 2019 (in thousands):

The Company's net sales to Ablecom were not material for the three and nine months ended March 31, 2020 and 2019 .

The Company had the following balances related to transactions with Ablecom and Compuware as of March 31, 2020 and June 30, 2019 (in thousands):

Accounts receivable and other receivables (1)

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____________________________

(1) Other receivables include receivables from vendors.

(2) Includes current portion of operating lease liabilities.

(3) Represents non-current portion of operating lease liabilities.

In October 2016, the Company entered into agreements pursuant to which the Company contributed certain technology rights in connection with an investment in the Corporate Venture, which is accounted for using the equity method.

See Note 1, "Organization and Summary of Significant Accounting Policies" for a discussion of the investment and the transactions that took place during the three and six months ended December 31, 2019 and 2018 .

The Company recorded provisions for income taxes of $ 2.1 million and $ 10.7 million for the three and six months ended December 31, 2019 , respectively, and $ 4.5 million and $ 10.0 million for the three and six months ended December 31, 2018 , respectively.

The effective tax rate was 7.9 % and 17.6 % for the three and six months ended December 31, 2019 , respectively, and 18.4 % and 19.8 % for the three and six months ended December 31, 2018 , respectively.

The effective tax rate for the three and six months ended December 31, 2019 is lower than that for the three and six months ended December 31, 2018 , due to the release of unrecognized tax benefits after the settlement on a Taiwan tax audit.

See Note 1, "Organization and Summary of Significant Accounting Policies" for a discussion of the transactions and balances in the Company’s Corporate Venture.

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company recorded a benefit for income taxes of $ 0.9 million for the three months ended March 31, 2020, and a provision for income taxes of $ 9.8 million for the nine months ended March 31, 2020.

The Company recorded provisions for income taxes of $ 0.5 million and $ 10.5 million for the three and nine months ended March 31, 2019 , respectively.

The effective tax rate was ( 5.6 )% and 12.8 % for the three and nine months ended March 31, 2020 , respectively, and 4.3 % and 16.9 % for the three and nine months ended March 31, 2019 , respectively.

The effective tax rate for the three and nine months ended March 31, 2020 is lower than that for the three and nine months ended March 31, 2019 , primarily due to the tax benefit from employees’ exercises of stock options.

As a result of the 2017 Tax Reform Act, in December 2019, the Company realigned its international business operations and group structure.

1 unchanged sentence

This tax restructuring is not expected to have a material impact on the estimated annual effective tax rate.

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2019 , the Company had a liability for gross unrecognized tax benefits of $ 27.4 million , substantially all of which, if recognized, would affect the Company's effective tax rate.

During the six months ended December 31, 2019 , there were no material changes in the total amount of the liability for gross unrecognized tax benefits.

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 and 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 is not expected to have a material impact on the Company.

As of March 31, 2020 , the Company had a liability for gross unrecognized tax benefits of $ 25.8 million , substantially all of which, if recognized, would affect the Company's effective tax rate.

During the nine months ended March 31, 2020 , there were no material changes in the total amount of the liability for gross unrecognized tax benefits.

The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the provision for taxes on the condensed consolidated statements of operations.

As of December 31, 2019 , the Company had accrued $ 1.6 million of interest and penalties relating to unrecognized tax benefits.

As of March 31, 2020 , the Company had accrued $ 2.0 million of interest and penalties relating to unrecognized tax benefits.

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.

3 unchanged sentences

In October 2019, the Taiwan tax authority completed its audit in Taiwan for fiscal year 2018 and proposed a transfer pricing adjustment on the Company which resulted in additional tax liability of $ 1.6 million .

The Company accepted the proposed adjustment in October 2019 and intends to pay the $ 1.6 million tax liability when it receives the tax assessment notice, which is expected to be issued in February 2020.

The impact of this adjustment on the income statement has been offset by the recognition of previously unrecognized tax benefits for the three months ended December 31, 2019 .

The Company accepted the proposed adjustment in October 2019 and paid the $ 1.6 million tax liability in accordance with the tax assessment notice issued in February 2020.

The impact of this adjustment on the income statement has been offset by the recognition of previously unrecognized tax benefits for the three months ended March 31, 2020 .

In February 2020, the Taiwan tax authority proposed an adjustment to the Company’s fiscal year 2019 transfer pricing 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 this adjustment on the income statement has been offset by the recognition of previously unrecognized tax benefits for the three months ended March 31, 2020 .

The Company believes that it has adequately provided reserves for all uncertain tax positions;

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The Company does not expect its unrecognized tax benefits to change materially over the next 12 months, except for the reductions arising from the lapse of the statute of limitations.

It is reasonably possible that our gross unrecognized tax benefits will decrease by approximately $ 3.2 million in the next 12 months, primarily due to the lapse of the statute of limitations and settlement with the Tax Authorities.

It is reasonably possible that our gross unrecognized tax benefits will decrease by approximately $ 5.5 million in the next 12 months, primarily due to the lapse of the statute of limitations and

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

settlement with the Tax Authorities.

These adjustments, if recognized, would positively impact our effective tax rate, and would be recognized as additional tax benefits.

11 unchanged sentences

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, which motion remains pending with the court.

The Company believes the allegations filed are without merit, and intends to vigorously defend against the lawsuit.

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.

The Company believes the claims are without merit and intends to vigorously defend against the lawsuit.

SEC Matter — The Company has cooperated with the SEC in its investigation of marketing expenses that contained certain irregularities discovered by the Company’s management, which irregularities were disclosed on August 31, 2015.

In addition, the Company received subpoenas from the SEC in connection with the matters underlying its inability to timely file the Company's Form 10-K for the fiscal year ended June 30, 2017.

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

The Company has cooperated fully to comply with these government requests.

The Company has reached an agreement in principle regarding a proposed settlement of these matters with the staff of the SEC, subject to final approval by the Commissioners of the SEC.

Under the terms of the proposed resolution, the Company will pay a penalty of $ 17.5 million .

In addition, the Company’s Chief Executive Officer has reached an agreement in principle regarding a proposed settlement of these matters with the staff of the SEC, subject to final approval by the Commissioners of the SEC.

Under the terms of the proposed resolution, the Chief Executive Officer will pay 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.

As of March 31, 2020, the Company recorded a liability of $ 17.5 million for the Company’s potential SEC settlement included in general and administrative expenses and accrued liabilities in the condensed consolidated financial statements.

The Chief Executive Officer’s potential payment of $ 2,122,000 to the Company is a contingent gain and will be recorded if and when it is realized.

The Company and the Chief Executive Officer have not reached final resolutions of these matters with the SEC and the Company cannot predict when settlements, if finally agreed, would become final, nor whether any of the proposed terms may change in connection with final resolutions.

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.

In management’s opinion, the resolution of any matters will not have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity.

The 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 March 31, 2020 and any prior periods.

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

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Purchase Commitments — The Company has agreements to purchase inventory and non-inventory items primarily through the next 12 months.

As of December 31, 2019 , these remaining noncancelable commitments were $ 579.2 million , including $ 134.0 million for related parties.

Standby Letter of Credit — In October 2018, Bank of America issued a standby letter of credit on behalf of the Company to a beneficiary for an initial value of $ 3.2 million to facilitate the ongoing operations of the Company.

The standby letter of credit is automatically extended without amendment for successive one-year periods from the original expiration date of November 1, 2019 and will do so until canceled through written notice from the issuer.

In October 2019, upon the Company's request, Bank of America increased the amount under the letter of credit issued to the beneficiary to $ 6.4 million .

As of March 31, 2020 , these remaining noncancelable commitments were $ 381.1 million , including $ 122.2 million for related parties.

SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Standby Letter of Credit — In October 2019, Bank of America increased the value of a previously issued standby letter of credit 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.

7 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements