What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-08-29 compared with 2021-08-27 · 125 added, 160 removed, 266 unchanged (52% of the section changed)

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

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

Our solutions include complete servers, storage systems, modular blade servers, blades, workstations, full racks, networking devices, server management software, and server sub-systems.

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

Our Total IT Solutions include complete servers, storage systems, modular blade servers, blades, workstations, full rack scale solutions, networking devices, server sub-systems, server management and security software.

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

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This also impacts our research and development expenditures as we continue to invest more in our current and future product development efforts.

Coronavirus (COVID-19) Pandemic Impact

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

In an effort to contain COVID-19 or slow its spread, governments around the world have enacted various measures, including orders that govern the operations of businesses, require masks be worn and define shelter in place and social distancing protocols.

COVID-19 Pandemic Impact

COVID-19 and its variants have continued to create volatility, uncertainty and economic disruption for many businesses worldwide.

In an effort to contain COVID-19 or slow its spread, governments around the world have enacted various measures, including orders that govern the operations of businesses.

We are an essential critical infrastructure (information technology) business under the relevant federal, state and county regulations.

Accordingly, in late March 2020, we responded to the directives from Santa Clara County and the State of California regarding instructions to combat the spread of COVID-19.

Our first priority is the safety of our workforce and we have implemented numerous health precautions and work practices to be in compliance with the law and to operate in a safe manner.

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

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

We continue to see ongoing demand and do not have significant direct exposure to industries such as retail, oil and gas and hospitality, which have been impacted the greatest.

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

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

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

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

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

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

Our first priority is the safety of our workforce and we have therefore implemented numerous health precautions and work practices to be in compliance with the law and to operate in a safe manner.

We have continued to see ongoing demand for our IT solutions and do not have significant direct exposure to industries which have been impacted the greatest.

The COVID-19 pandemic has created additional demand for many server applications that support the global movement towards a digital economy.

These applications include greater use of online transactions for everyday purchases by consumers of food, clothing, entertainment from gaming and video streaming, as well as tele-health, social networking, messaging, email, autonomous driving solutions and video conferencing companies.

We have actively managed our supply chain for potential shortage risk by building inventories of critical components required such as CPUs, memory, SSDs and GPUs to support our ability to fulfill customer orders.

Our architecture, which is based on a “Building Block Solutions” design approach, has also assisted us during the COVID-19 pandemic, to qualify different components for compatibility with our systems to help us overcome some shortages.

Logistics has continued to be a challenge during the COVID-19 pandemic as the global transportation industry, and particularly ocean transportation, has been constrained by shortages of containers, labor, truckers and crowded ports.

As a result, shipping by air, has been used more frequently despite that it is more expensive and there are fewer flights during the COVID-19 pandemic than there were previously.

We have experienced increased costs in freight.

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

We expect both of these trends to continue until the COVID-19 pandemic and other macroeconomic factors exacerbated by the COVID-19 pandemic end.

SMCI | 2022 Form 10-K | 37

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

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

In December 2020, our Taiwan subsidiary entered into a general credit agreement with E.SUN Bank in Taiwan.

This general credit agreement provides for the issuance of loans, advances, acceptances, bills, bank guarantees, overdrafts, letters of credit, and other types of drawdown instruments up to a credit limit of $30 million.

The term of this general credit agreement was through September 18, 2021.

In June 2021, we negotiated an extension of our credit facility with Bank of America to extend the maturity date to June 2026.

In July 2021, we replaced our prior credit facility and term loan facility with China Trust and Bank Corp ("CTBC Bank"), with a new facility for omnibus credit lines.

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

Currently, there are positive signs with vaccine availability and reductions in infection rates;

however, with the possibility of new virus strains and vaccine supply constraints, we are unable to predict the ultimate extent to which the global COVID-19 pandemic may further impact our business operations, financial performance and results of operations within the next 12 months.

See also “Business–Employees and Human Capital Resources.”

In June 2021, we negotiated an extension of our credit facility with Bank of America to extend the maturity date to June 2026 and, in March 2022, further negotiated an increase in the size of our credit facility with Bank of America from $200 million to $350 million.

In July 2021, we replaced our prior credit facility and term loan facility with CTBC Bank, with a new facility for omnibus credit lines.

In September 2021, we replaced our prior credit facility with E.SUN Bank, with new credit facility and term facility.

In September 2021 and April 2022, we entered into a term loan facility and credit line, respectively, with Mega Bank which will be used to support our manufacturing activities (including the purchase of materials and components) and provide medium-term working capital.

In October 2021, we entered into a credit facility with Chang Hwa Bank and in January 2022 we entered into a loan agreement with HSBC Bank, each of which will be used to support the growth of our Taiwan business.

In May 2022, we also entered into a line of credit with Cathay Bank to be used for general corporate purposes to support our growth.

In August 2022, we entered into a new general credit agreement with E.Sun Bank which replaced the prior E.Sun Bank credit facility which will also support the growth of our Taiwan business.

Refer to Part II, Item 8, Note 9, “Short-term and Long-term Debt” in our notes to consolidated financial statements in this Annual Report on Form 10-K for further information on our outstanding debt

Our management team is focused on guiding our company through the ongoing challenges presented by the COVID-19 pandemic, including the emergence of any new variants.

There are positive signs with the expiration of various COVID-19 mandates, vaccine availability and the rollout of boosters;

however, with the possibility of the emergence of other new virus strains and ongoing adverse impacts of the COVID-19 pandemic on economic recovery, we are unable to predict the ultimate extent to which the global COVID-19 pandemic may further impact our business operations, financial performance and results of operations.

Financial Highlights

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• Net sales increased by 46.1% in fiscal year 2022 as compared to fiscal year 2021.

• Gross margin declined to 15.0% in fiscal year 2021 from 15.8% in fiscal year 2020, primarily due to product and customer mix and increased logistic costs.

• Operating expenses declined by 6.8% in fiscal year 2021 as compared to fiscal year 2020, primarily due to the special performance bonuses to our employees and the accrual for our settlement with the SEC incurred in fiscal year 2020.

• Net income increased to $111.9 million in fiscal year 2021 as compared to $84.3 million in fiscal year 2020, which was primarily due to the higher net sales and lower operating expenses in fiscal year 2021 as compared to fiscal year 2020.

• Gross margin increased to 15.4% in fiscal year 2022 from 15.0% in fiscal year 2021, primarily due to product and customer mix and was offset by increased logistic costs.

• Operating expenses increased by 13.2% in fiscal year 2022 as compared to fiscal year 2021, primarily due to the increase in personnel expenses as a result of salary increases and a higher headcount.

• Net income increased to $285.2 million in fiscal year 2022 as compared to $111.9 million in fiscal year 2021, which was primarily due to the higher net sales and lower operating expenses as a percentage of revenues in fiscal year 2022 as compared to fiscal year 2021.

• Our cash and cash equivalents were $267.4 million and $232.3 million at the end of fiscal years 2022 and 2021, respectively.

In fiscal year 2021, we generated net cash of $21.1 million, of which $123.0 million was provided by operating activities related primarily to the increase in net income.

We also invested $58.0 million in purchases of property and equipment, including construction of a new facility in San Jose, California, and used $44.4 million in financing activities primarily due to the repurchase of $130.0 million of our common stock, which was offset by the proceeds from borrowings.

In fiscal year 2022, we generated net cash of $35.1 million and $522.9 million in cash provided by financing activities primarily due to the proceeds from borrowings and invested $45.2 million in purchases of property and equipment.

We used $440.8 million in operating activities primarily related to the increase in inventories and accounts receivables.

SMCI | 2022 Form 10-K | 38

Critical Accounting Policies and Estimates

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We allocate the transaction price for each customer contract to each performance obligation based on the relative SSP for each performance obligation within each contract.

We recognize the amount of transaction price allocated to each performance obligation within a customer contract as revenue as each performance obligation is delivered.

We recognize the amount of transaction price allocated to each performance obligation within a customer contract as revenue at the time the respective performance obligation is satisfied by transferring control of the promised good or service to a customer.

Determining the relative SSP for contracts that contain multiple performance obligations requires significant judgement.

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These estimates and judgements have not fluctuated significantly for the fiscal year ended June 30, 2022 compared to prior fiscal years.

SMCI | 2022 Form 10-K | 39

Inventories are stated at lower of cost, using weighted average cost method, or net realizable value.

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These differences result in deferred tax assets, which are included in our consolidated balance sheets.

In general, deferred tax assets

represent future tax benefits to be received when certain expenses previously recognized in our consolidated statements of income become deductible expenses under applicable income tax laws, or when loss or credit carryforwards are utilized.

In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in our consolidated statements of income become deductible expenses under applicable income tax laws, or when loss or credit carryforwards are utilized.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized.

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This evaluation is based on the consideration of several factors, including changes in facts or circumstances, changes in applicable tax law, settlement of issues under audit and new exposures.

If we later determine that our exposure is lower or that the liability is not sufficient to cover our revised expectations, we adjust the liability and effect a related charge in our tax provision during the period in which we make such a determination.

If we later determine that our exposure is lower or that the liability is not sufficient to cover our revised expectations, we adjust the liability and reflect a related charge in our tax provision during the period in which we make such a determination.

Stock-Based Compensation

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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.

SMCI | 2022 Form 10-K | 40

The fair value of RSUs and PRSUs is based on the closing market price of our common stock on the date of grant.

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In performing this analysis, we considered our explicit arrangements with Ablecom and Compuware, including all contractual arrangements with these entities.

Also, as a result of the substantial related party relationships between us and

these two companies, we considered whether any implicit arrangements exist that would cause us to protect these related parties’ interests from suffering losses.

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

We determined that no material implicit arrangements exist with Ablecom, Compuware, or their shareholders.

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Subsequent evaluations of the primary beneficiary of a VIE may require the use of different assumptions that could lead to identification of a different primary beneficiary, resulting in a different consolidation conclusion than what was determined at inception of the arrangement.

SMCI | 2022 Form 10-K | 41

Results of Operations

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Income tax provision (1.0) % (0.2) % (0.1) %

Share of income (loss) from equity investee, net of taxes — % 0.1 % (0.1) %

Share of income from equity investee, net of taxes — % — % 0.1 %

Net income 5.6 % 3.1 % 2.5 %

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As with most electronics-based product life cycles, average selling prices typically are highest at the time of introduction of new products that utilize the latest technology and tend to decrease over time as such products mature in the market and are replaced by next generation products.

Additionally, in order to remain competitive throughout all industry cycles, we actively change our selling price per unit in response to changes in costs for key components such as memory and SSDs.

Additionally, in order to remain competitive throughout all industry cycles, we actively change our selling price per unit in response to changes in costs for key components such as CPU/GPU, memory and storage.

The following table presents net sales by product type for fiscal years 2022, 2021 and 2020 (dollars in millions):

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Total net sales $ 5,196.1 $ 3,557.4 $ 3,339.3 $ 1,638.7 46.1 % $ 218.1 6.5 %

SMCI | 2022 Form 10-K | 42

Fiscal Year 2022 Compared with Fiscal Year 2021

During fiscal year 2022 we experienced increased revenue from server and storage systems, particularly from our large enterprise and datacenter customers.

The year-over-year increase in net sales of server and storage systems was primarily due to an increase of average selling prices per compute node by approximately 32% as well as an increase of approximately 23% in the number of units of compute nodes sold.

The year-over-year decrease in net sales of subsystems and accessories was primarily due to our emphasis on selling full systems and servers.

Our services and software revenue, included in server and storage systems revenue, increased by $2.5 million year-over-year.

Fiscal Year 2021 Compared with Fiscal Year 2020

During fiscal year 2021 we experienced increased revenue from server and storage systems, particularly from our large enterprise and datacenter customers.

The year-over-year increase in net sales of server and storage systems was primarily due to an increase of average selling prices per compute node by approximately 17%, offset by a decrease of approximately 9% in the number of units of compute nodes sold.

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The increase in average selling prices was primarily due to significant inventory component price increases resulting from component shortages during fiscal year 2021.

The year-over-year increase in net sales of subsystems and accessories was primarily due to an increase of approximately 5% in the volume of subsystems and accessories sold, mainly due to increased demand and approximately 2% increase in average selling prices due primarily to the increase in costs of the components.

Our services and software revenue, included in server and storage systems revenue, increased by $0.2 million year-over-year.

Fiscal Year 2020 Compared with Fiscal Year 2019

During fiscal year 2020 we continued to experience a steady demand for server and storage systems, particularly from our large enterprise and datacenter customers.

The year-over-year decrease in net sales of server and storage systems was primarily due to a decrease of average selling prices per compute node by approximately 11%, offset by a slight increase in the number of units of compute nodes sold.

We typically adjust our prices as component costs rise and fall.

The decline in average selling prices was primarily due to substantially lower costs for key components, specifically for memory and storage, as compared to the previous fiscal year.

The year-over-year increase in net sales of subsystems and accessories was primarily due to an increase of approximately 19% in the volume of subsystems and accessories sold, mainly due to increased demand from our indirect sales channel offset by an approximately 6% decrease in average selling prices due primarily to the decrease in costs of the components.

The year-over-year increase in net sales of subsystems and accessories was primarily due to an increase of approximately 5% in the volume of subsystems and accessories sold, mainly due to increased demand and an approximately 2% increase in average selling prices due primarily to the increase in costs of the components.

Our services and software revenue, included in server and storage systems revenue, increased by $0.2 million year-over-year.

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Fiscal Year 2022 Compared with Fiscal Year 2021

The year over year increase in overall net sales is the result of increased selling prices and quantities of product shipments.

Asia experienced the highest percentage growth among all regions.

China, Japan and Korea exceeded the overall regional average of growth, which was the primary driver of the increases in net sales in Asia.

Russia experienced a year over year decrease due to the conflict in that region, which decrease had an immaterial impact on our overall performance.

Fiscal Year 2021 Compared with Fiscal Year 2020

The year-over-year increase in net sales in the United States was primarily due to an increase in net sales of our server and storage systems.

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The year-over-year increase in net sales in Europe was primarily due to an increase in net sales of our server and storage systems in the Germany, UK and France, partially offset by a decrease in net sales in the Netherlands and Russia.

Fiscal Year 2020 Compared with Fiscal Year 2019

The year-over-year decrease in net sales in the United States was primarily due to a decrease in net sales of our server and storage systems to our direct customers and OEMs.

The year-over-year decrease in net sales in Asia was primarily due to a decrease in net sales of our server and storage systems to OEMs in China, India and Japan, partially offset by a slight increase in the net sales of subsystems and accessories in China and of server and storage systems in the rest of Asia region.

The year-over-year decrease in net sales in Europe was primarily due to a decrease in net sales of our server and storage systems to our direct customers and OEMs in the Netherlands, partially offset by an increase in net sales of our subsystems and accessories to our indirect sales channel in Germany and an increase in sales to our indirect sales channel in France.

SMCI | 2022 Form 10-K | 43

Cost of Sales and Gross Margin

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We use several suppliers and contract manufacturers to design and manufacture subsystems in accordance with our specifications, with most final assembly and testing predominantly performed at our manufacturing facilities in the same region where our products are sold.

During the fiscal year 2021, we continued to expand manufacturing and service operations in Taiwan primarily to support our Asian and European customers and have continued to work on improving our utilization of our overseas manufacturing capacity.

We work with Ablecom, one of our key contract manufacturers and also a related party to optimize modular designs for our chassis and certain of other components.

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Fiscal Year 2022 Compared with Fiscal Year 2021

The year-over-year increase in cost of sales was primarily attributable to an increase of $244.1 million in costs of

materials and contract manufacturing expenses primarily related to the increase in net sales volume and an increase of $8.9 million of freight.

The year-over-year increase in cost of sales was primarily attributed to an increase of $1,262.6 million in costs of materials and contract manufacturing expenses primarily related to the increase in net sales volume, a $54.9 million increase in freight charges, a $23.6 million increase in overhead costs, a $18.9 million increase due to lower cost recovery of cost paid in prior periods, a $8.3 million increase in excess and obsolete inventory charges and a $4.9 million increase in other cost of sales.

The year-over-year increase in the gross margin percentage was primarily due to sales prices increases, product and customer mix and higher capitalization of manufacturing overhead due to higher inventory levels, offset by higher costs from freight, overhead, other cost of sales, excess and obsolete inventory charges, and lower recovery of costs from prior periods.

Since the start of the COVID-19 pandemic, we have experienced an increase in costs of sales, logistics costs as well as direct labor costs as we incentivize our employees.

This increase in costs negatively impacts our gross margin, and we expect these higher costs to continue for the duration of the COVID-19 pandemic.

Fiscal Year 2021 Compared with Fiscal Year 2020

The year-over-year increase in cost of sales was primarily attributable to an increase of $244.1 million in costs of materials and contract manufacturing expenses primarily related to the increase in net sales volume and an increase of $8.9 million in the cost of freight.

This was offset by a decrease of $29.5 million in overhead costs attributable primarily to a recovery of costs paid in prior periods, a decrease of $12.4 million in the provision of excess inventory and obsolescence and a decrease of $2.6 million in personnel expenses due to a decrease in special performance bonuses in the fiscal year 2021.

Warranty and repairs costs also decreased by $3.4 million in the fiscal year 2021 as compared to the fiscal year 2020.

SMCI | 2022 Form 10-K | 44

The period-over-period decrease in the gross margin percentage was primarily due to sales prices increasing at a slower rate than the increase in the costs of components and due to the decrease in services and software revenue which have higher margins than product sales.

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This increase in costs negatively impacts our gross margins, and we expect these higher costs to continue for the duration of the COVID-19 pandemic.

Fiscal Year 2020 Compared with Fiscal Year 2019

The year-over-year decrease in cost of sales was primarily attributable to a decrease of $214.3 million in inventory costs related primarily to the decrease in the prices of components and a decrease of $14.6 million in the provision of excess inventory and obsolescence due to fewer excess and obsolescence items identified in the fiscal year 2020.

This was offset by an increase of $19.6 million in overhead costs attributable primarily to increased tariffs and an increase of $11.3 million in personnel expenses, which included a special performance bonus of $4.1 million.

Warranty and repairs costs also increased by $5.7 million in the fiscal year 2020 as compared to the fiscal year 2019.

The period-over-period increase in the gross margin percentage was primarily due to sales prices declining at a slower rate than the decline in the costs of components and due to the increase in services and software revenue which have higher margins than product sales.

Since the start of the COVID-19 pandemic, we have experienced an increase in both logistics costs as well as direct labor costs as we incentivize our employees to continue to work and assist us in serving our customers.

This increase in costs negatively impacts our gross margins, and we expect these higher costs to continue for the duration of the COVID-19 pandemic.

Operating Expenses

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These amounts offset a portion of the related research and development expenses and have the effect of reducing our reported research and development expenses.

Sales and marketing expenses consist primarily of personnel expenses, including salaries, benefits, stock-based compensation and incentive bonuses, and related expenses for our sales and marketing personnel, costs for tradeshows, independent sales representative fees and marketing programs.

From time to time, we receive cooperative marketing funding from certain suppliers.

Sales and marketing expenses consist primarily of personnel expenses, including salaries, benefits, stock-based compensation and incentive bonuses, and related expenses for our sales and marketing personnel, cost for tradeshows, independent sales representative fees and marketing programs.

From time to time, we receive marketing development funding from certain suppliers.

Under these arrangements, we are reimbursed for certain marketing costs that we incur as part of the joint promotion of our products and those of our suppliers.

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Research and development $ 272.3 $ 224.4 $ 221.5 $ 47.9 21.3 % $ 2.9 1.3 %

Percentage of total net sales 5.2 % 6.3 % 6.6 %

Sales and marketing 90.1 85.7 85.1 4.4 5.1 % 0.6 0.7 %

Percentage of total net sales 1.7 % 2.4 % 2.5 %

General and administrative 102.4 100.5 133.9 1.9 1.9 % (33.4) (24.9) %

Percentage of total net sales 2.0 % 2.8 % 4.0 %

Total operating expenses $ 464.8 $ 410.6 $ 440.5 54.2 13.2 % (29.9) (6.8) %

Fiscal Year 2022 Compared with Fiscal Year 2021

The year-over-year increase in research and development expenses was primarily due to a $40.8 million increase in personnel expenses due to salary increases and a higher headcount, $3.7 million lower research and development credits from certain suppliers and customers towards our development efforts and a $3.4 million increase in product development costs.

The year-over-year increase in sales and marketing expenses was primarily due to a $9.6 million increase in personnel expenses due to salary increases and a higher headcount, offset by a $5.7 million increase in marketing development funds received and a $0.5 million increase in advertising and other expenses.

SMCI | 2022 Form 10-K | 45

The year-over-year increase in general and administrative expenses was primarily due to a $4.1 million increase in legal and litigation settlement expenses and $6.6 million increase in personnel and other expenses due to salary increases and a higher headcount offset by decrease of $1.5 million in professional fees driven by lower expenses incurred to remediate the causes that led to the delay in filing our periodic reports with the SEC and the associated restatement of our previously issued financial statements and a $7.3 million decrease in expense from special performance awards.

Fiscal Year 2021 Compared with Fiscal Year 2020

The year-over-year increase in research and development expenses was primarily due to an increase of $11.6 million in costs mainly related to materials, supplies and equipment used in product development.

During the fiscal year 2020, we recorded a $9.5 million net settlement fee as a reduction in the research and development expenses related to the reimbursement of previously incurred materials, supplies and equipment costs for one canceled joint product development agreement.

Personnel expenses increased $1.7 million as a result of an increase in the number of research and development employees, These increases were partially offset by an increase of $8.8 million in research and development credits from certain suppliers and customers towards our development efforts and a $1.5 million decrease in trade shows and business travel as a result in a change in our operations in response to the COVID-19 pandemic.

During fiscal year 2020, we recorded a $9.5 million net settlement fee as a reduction in the research and development expenses related to the reimbursement of previously incurred materials, supplies and equipment costs for one canceled joint product development agreement.

Personnel expenses increased $1.7 million as a result of an increase in the number of research and development employees.

These increases were partially offset by an increase of $8.8 million in research and development credits from certain suppliers and customers towards our development efforts and a $1.5 million decrease mainly due to decrease in travel expenses as a result of change in our operations in response to the COVID-19 pandemic.

The year-over-year increase in sales and marketing expenses was primarily due to an increase of $1.2 million in advertising expenses, a $1.0 million increase in other sales and marketing expenses, offset by a $1.7 million decrease in trade shows and business travel as a result in a change in our operations in response to the COVID-19 pandemic.

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We anticipate the above expenses impacted by the COVID-19 pandemic to normalize if and when the COVID-19 pandemic is over.

Fiscal Year 2020 Compared with Fiscal Year 2019

The year-over-year increase in research and development expenses was primarily due to an increase of $41.3 million in personnel expenses as a result of an increase in the number of research and development employees and a special performance bonus of $17.3 million, a decrease of $0.7 million in reimbursements received for certain research and development costs that we incurred as part of joint product development;

an increase of $6.7 million in costs mainly related to materials, supplies and equipment used in product development, and an increase of $1.8 million in facilities expenses.

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

The year-over-year increase in sales and marketing expenses was primarily due to an increase of $8.1 million in personnel expenses as a result of an increase in the number of sales and marketing personnel and a special performance bonus of $1.8 million.

The year-over-year decrease in general and administrative expenses was due to a decrease of $33.9 million in professional fees that were primarily incurred to investigate, assess and begin remediating the causes that led to the delay in filing our periodic reports with the SEC and the associated restatement of certain of our previously issued financial statements;

a decrease of $10.2 million in bad debt provision expenses due to recovery of previously provisioned receivables from certain international customers, offset by an increase of $17.5 million related to an expense accrual for the settlement with the SEC;

an increase of $14.1 million in personnel expenses as a result of an increase in the number of personnel and a special performance bonus of $4.5 million;

an increase of $3.2 million in insurance expense;

and an increase of $1.7 million related primarily to facilities expenses.

Interest and Other Expense, Net

Other (expense) income, net consists primarily of interest earned on our investment and cash balances and foreign exchange gains and losses.

Interest and Income (Expense), Net

Other income (expense), net consists primarily of interest earned on our investment and cash balances and foreign exchange gains and losses.

Interest expense represents interest expense on our term loans and lines of credit.

Interest and other expense, net for fiscal years 2021, 2020 and 2019 are as follows (dollars in millions):

Interest and other income (expense), net for fiscal years 2022, 2021 and 2020 are as follows (dollars in millions):

Years Ended June 30, 2022 over 2021 Change 2021 over 2020 Change

2022 2021 2020 $ % $ %

Other (expense) income, net $ (2.8) $ 1.4 $ (1.0) $ (4.2) (300.0) % $ 2.4 (240.0) %

Other income (expense), net $ 8.1 $ (2.8) $ 1.4 $ 10.9 (389.3) % $ (4.2) (300.0) %

Interest expense (6.4) (2.5) (2.2) (3.9) 156.0 % (0.3) 13.6 %

Interest and other expense, net $ (5.3) $ (0.8) $ (7.7) $ (4.5) 562.5 % $ 6.9 (89.6) %

Interest and other income (expense), net $ 1.7 $ (5.3) $ (0.8) $ 7.0 (132.1) % $ (4.5) 562.5 %

Fiscal Year 2022 Compared with Fiscal Year 2021

The change of $4.2 million in other (expense) income, net was attributable to a decrease of $2.4 million in interest income on our interest-bearing deposits due primarily to lower yields on investments and an increase of $1.8 million in foreign exchange loss due to unfavorable foreign currency fluctuations.

The change of $7.0 million in interest and other (expense) income, net was primarily attributable to a $10.9 million increase in foreign exchange gain due to favorable currency fluctuations primarily related to our borrowing facilities in Taiwan offset by a $3.9 million increase in interest expense due to increase in loan balances and interest rates.

Fiscal Year 2021 Compared with Fiscal Year 2020

The year-over-year change in interest expense of $4.5 million is primarily a result of lower interest rates and reduced levels of borrowings in fiscal year 2020 as compared to fiscal year 2019.

The change of $2.4 million in other (expense) income, net was attributable to an increase of $1.6 million in interest income on our interest bearing deposits and a decrease of $0.8 million in other expenses.

The change of $4.5 million in interest expense and other (expense) income, net was attributable to a decrease of $2.4 million in interest income on our interest-bearing deposits due primarily to lower yields on investments and an increase of $1.8 million in foreign exchange loss due to unfavorable foreign currency fluctuations.

SMCI | 2022 Form 10-K | 46

Provision for Income Taxes

Our income tax provision is based on our taxable income generated in the jurisdictions in which we operate, primarily the United States, Taiwan, and the Netherlands.

Our effective tax rate differs from the statutory rate primarily due to research and development tax credits, uncertain tax positions, tax benefits from foreign derived intangible income and stock based compensation.

Our income tax provision is based on our taxable income generated in the jurisdictions in which we operate, which primarily include the United States, Taiwan, and the Netherlands.

Our effective tax rate differs from the statutory rate primarily due to research and development tax credits, certain non-deductible expenses, tax benefits from foreign derived intangible income and stock-based compensation.

A reconciliation of the federal statutory income tax rate to our effective tax rate is set forth in Part II, Item 8, Note 14, “Income Taxes” to the consolidated financial statements in this Annual Report.

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Income tax provision $ 52.9 $ 6.9 $ 2.9 $ 46.0 666.7 % $ 4.0 137.9 %

Percentage of total net sales 1.0 % 0.2 % 0.1 %

Effective tax rate 15.7 % 5.8 % 3.4 %

Fiscal Year 2022 Compared with Fiscal Year 2021

The year-over-year increase in the effective tax rate was primarily due to a release of reserve from uncertain tax positions in the prior year.

The year-over-year increase in the effective tax rate was primarily due to a significant increase in revenue and income before tax.

Total effective tax rate increased by 9.5% from 5.8% for the fiscal year ended June 30, 2021 to 15.7% for the fiscal year ended June 30, 2022.

This increase was driven by a 15.4% increase in the overall effective tax rate.

R&D credit reduced the effective tax rate by 3.5% and foreign derived income reduced the effective tax rate by 1.4%.

Fiscal Year 2021 Compared with Fiscal Year 2020

The year-over-year decrease in the effective tax rate was primarily due to an increase in tax benefits from research and development tax credits, stock based compensation, releases of uncertain tax positions, and U.S.

sales to foreign jurisdictions, partially offset by the tax impact from the non-deductible settlement with the SEC.

Share of (Loss) from Equity Investee, Net of Taxes

The year-over-year increase in the effective tax rate was primarily due to a release of reserve from uncertain tax positions in the prior year.

Share of Income from Equity Investee, Net of Taxes

Share of income from equity investee, net of taxes represents our share of income from the Corporate Venture in which we have a 30% ownership.

Share of income from equity investee, net of taxes for fiscal years 2022, 2021 and 2020 are as follows (dollars in millions):

Years Ended June 30, 2022 over 2021 Change 2021 over 2020 Change

2022 2021 2020 $ % $ %

Share of income (loss) from equity investee, net of taxes $ 0.2 $ 2.4 $ (2.7) $ (2.2) (91.7) % $ 5.1 188.9 %

Share of income from equity investee, net of taxes $ 1.2 $ 0.2 $ 2.4 $ 1.0 500.0 % $ (2.2) 91.7 %

Percentage of total net sales — % — % — %

Fiscal Year 2022 Compared with Fiscal Year 2021

The year-over-year decrease of $2.2 million in share of income from equity investee, net of taxes was primarily due to lower net income recognized by the Corporate Venture in the fiscal year 2021 as compared to 2020.

The period-over-period increase of $1.0 million in share of income from equity investee, net of taxes was primarily due to more net income recognized by the Corporate Venture.

Fiscal Year 2021 Compared with Fiscal Year 2020

The year-over-year increase of $5.1 million from share of (loss) to income from equity investee, net of taxes was primarily due to net income recognized by the Corporate Venture in the fiscal year 2020 as compared to net loss in the fiscal year 2019.

SMCI | 2022 Form 10-K | 47

Liquidity and Capital Resources

We have financed our growth primarily with funds generated from operations, in addition to utilizing borrowing facilities, particularly in relation to the financing of real property acquisitions as well as an increase in the need for working capital due to longer supply chain manufacturing and delivery times.

We have financed our growth primarily with funds generated from operations, in addition to utilizing borrowing facilities, particularly in relation to an increase in the need for working capital due to longer supply chain manufacturing and delivery times as well as the financing of real property acquisitions and funds received from the exercise of employee stock options.

Our cash and cash equivalents were $267.4 million and $232.3 million as of June 30, 2022 and 2021, respectively.

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We believe that our current cash, cash equivalents, borrowing capacity available from our credit facilities and internally generated cash flows will be sufficient to support our operating businesses and maturing debt and interest payments for the twelve months following the issuance of these consolidated financial statements.

We expect to pay a special performance bonus of approximately $4.0 million to our CEO within the next year.

During the fiscal year 2021, the target average closing price of our common stock condition for the bonus was satisfied but no determination has been made if the specified performance condition has been satisfied.

During the fiscal year ended June 30, 2021, we retired 1,333,125 shares of common stock repurchased in prior years.

Additionally, we repurchased and retired 4,209,211 shares of common stock for an aggregated $130.0 million under multiple share repurchase programs.

All programs were completed during the fiscal year except for the program approved on January 29, 2021 to repurchase up to an aggregate of $200.0 million of our common stock at market prices.

The program is effective until July 31, 2022 or if earlier, until the maximum amount of common stock is repurchased.

As of June 30, 2021, we still had $150.0 million available to be used by July 31, 2022.

In August 2022, we entered into a new general credit agreement with E.Sun Bank.

This New E.SUN Bank Credit Facility permits borrowings of up to (i) NTD 1.8 billion ($61.0 million U.S.

dollar equivalent) and (ii) US$30.0 million in loans that will support the growth of our Taiwan business.

On January 29, 2021, a duly authorized subcommittee of the Board of Directors approved the Prior Repurchase Program, which permitted us to repurchase up to an aggregate of $200.0 million of our common stock at market prices.

The program was effective until the earlier of July 31, 2022 or the date when the maximum amount of common stock is repurchased.

We had $150.0 million of remaining availability under the Prior Repurchase Program as of June 30, 2022.

Subsequently, on August 3, 2022, after the expiration of the Prior Repurchase Program, a duly authorized subcommittee of our Board approved a new share repurchase program to repurchase shares of common stock for up to $200 million at prevailing prices in the open market.

The share repurchase program is effective until January 31, 2024 or until the maximum amount of common stock is repurchased, whichever occurs first.

Our key cash flow metrics were as follows (dollars in millions):

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2022 2021 2020

Net cash provided by (used in) operating activities $ 123.0 $ (30.3) $ 262.6 $ 153.3 $ (292.9)

Net cash (used in) provided by operating activities $ (440.8) $ 123.0 $ (30.3) $ (563.8) $ 153.3

Net cash used in investing activities $ (46.3) $ (58.0) $ (43.6) $ 11.7 $ (14.4)

Net cash (used in) provided by financing activities $ (44.4) $ 23.8 $ (95.8) $ (68.2) $ 119.6

Net cash provided by (used in) financing activities $ 522.9 $ (44.4) $ 23.8 $ 567.3 $ (68.2)

Net increase (decrease) in cash, cash equivalents and restricted cash $ 35.1 $ 21.1 $ (49.8) $ 14.0 $ 70.9

Operating Activities

Net cash provided by operating activities decreased by $563.8 million for fiscal year 2022 as compared to fiscal year 2021.

The decrease was primarily due to an increase in net cash required for net working capital of $739.6 million to meet customer demand, support expected business growth and mitigate supply chain risk as a result of the COVID-19 pandemic environment and a $16.2 million decrease in unrealized gain and loss.

These decreases are partially offset by increases in provision for excess and obsolete inventories of $8.3 million, depreciation and amortization expense of $4.3 million, stock-based compensation expense of $4.3 million and net income of $173.3 million.

Since the beginning of the COVID-19 pandemic and the accompanying supply chain disruptions our management decided to increase our holdings of all components of our inventory (finished goods, work in process and purchased parts and raw materials).

This decision reflected our belief that we had opportunities to increase our net sales if we could mitigate the risk of being unable to satisfy customer demand because of these supply chain disruptions, including longer lead times.

We expect disruption of the supply chain and longer lead times to continue for the foreseeable future and therefore expect to continue to carry larger amounts of inventory than we would if the supply chain were functioning more normally and predictably.

SMCI | 2022 Form 10-K | 48

Net cash provided by operating activities increased by $153.3 million for fiscal year 2021 as compared to fiscal year 2020.

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These increases in the cash flow from operating activities were partially offset by the decrease of $11.6 million in previously reserved excess and obsolete inventory.

Net cash provided by operating activities decreased by $292.9 million for fiscal year 2020 as compared to fiscal year 2019.

While net income increased by $12.4 million in fiscal year 2020 as compared to fiscal year 2019, the decrease in cash flows from operating activities was due primarily to an increase of cash used for net working capital requirements of $281.3 million, including a $181.3 million increase in inventories to meet customer demand, support expected business growth and mitigate supply chain risk due to the COVID-19 pandemic environment.

Non-cash charges related to excess and obsolete inventory decreased by $14.6 million, related to bad debt reserve decreased by $10.1 million, related to income (loss) from equity investee decreased by $5.1 million, and related to impairment of investments decreased by $2.7 million in fiscal year 2020 compared to fiscal year 2019.

These decreases were offset by an increase of $8.9 million in the non-cash charges related to the change in our deferred income tax assets, unrealized losses on our foreign currency-denominated credit facilities, and depreciation and amortization expense resulting from the amortization of operating lease right-of-use assets.

Investing Activities

Net cash used in investing activities was $58.0 million, $43.6 million and $24.8 million for the fiscal years 2021, 2020 and 2019, respectively, as we invested in our Green Computing Park in San Jose to expand our capacity and office space we purchased and expanded our Bade Facility in Taiwan and made purchases of property, plant and equipment.

Net cash used in investing activities was $46.3 million, $58.0 million and $43.6 million for fiscal years 2022, 2021 and 2020, respectively, as we invested in our Green Computing Park in San Jose to expand our capacity and office space we purchased and expanded our Bade Facility in Taiwan and made purchases of property, plant and equipment.

Financing Activities

Net cash used in financing activities increased by $567.3 million for fiscal year 2022 as compared to fiscal year 2021 primarily due to an increase of $446.2 million in proceeds from borrowings net of repayment, offset by a $130.0 million decrease in stock repurchases.

Net cash used in financing activities increased by $68.2 million for fiscal year 2021 as compared to fiscal year 2020 primarily due to an increase of $130.0 million in repurchase of our common stock, partially offset by an increase of $61.9 million in proceeds from borrowings net of repayment.

Net cash used in financing activities decreased by $119.6 million for fiscal year 2020 as compared to fiscal year 2019 primarily due to decreased net repayments of debt of $96.4 million, and cash receipts from exercises of stock options of $28.3 million offset by increased cash payments for withholding taxes from the vesting of restricted stock of $5.2 million.

Other Factors Affecting Liquidity and Capital Resources

2018 Bank of America Credit Facility

In April 2018, we entered into a revolving line of credit with Bank of America for up to $250.0 million (as amended from time to time, the "2018 Bank of America Credit Facility").

On June 28, 2021, the 2018 Bank of America Credit Facility was amended to, among other items, extend the maturity to June 28, 2026, reduce the size of the facility from $250.0 million to $200.0 million, increase the maximum amount that we can request the facility be increased (the accordion feature) from $100.0 million to $150.0 million, and update provisions relating to erroneous payments and LIBOR replacement mechanics.

In addition, the amendment reduced both the unused line fee from 0.375% per annum to 0.2% or 0.3% per annum (depending upon amount drawn under the facility) and the interest rate applicable to the facility from LIBOR plus 2.00% or 3.00% per annum (depending upon amount drawn under the facility) to LIBOR plus 1.375% or 1.625% per annum.

As of June 30, 2021, we had no outstanding borrowings.

Our available borrowing capacity was $200.0 million, subject to the borrowing base limitation and compliance with other applicable terms.

Interest accrued on any loans under the 2018 Bank of America Credit Facility is due on the first day of each month, and the loans are due and payable in full on the termination date of the 2018 Bank of America Credit Facility.

Voluntary prepayments are permitted without early repayment fees or penalties.

The 2018 Bank of America Credit Facility is secured by substantially all of Super Micro Computer’s assets, other than real property assets.

In addition, we are not permitted to pay any dividends.

Under the terms of the 2018 Bank of America Credit Facility agreement, we are required to maintain a certain fixed charge ratio and we have been in compliance with all covenants under the 2018 Bank of America Credit Facility.

2020 CTBC Credit Facility

In August 2020, we entered into a credit agreement with CTBC Bank in Taiwan that provides for term loans of up to $50.0 million (the "2020 CTBC Credit Facility"), which had a maturity date of August 2021.

As of June 30, 2021, the outstanding borrowings under the CTBC Credit Facility revolving line of credit were $18.0 million and the interest rates for these loans were 0.98% per annum.

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

dollars of $25.1 million at June 30, 2021 and the interest rates for these loans were 0.75% per annum.

The amount available for future borrowing under the CTBC Credit Facility was $6.9 million as of June 30, 2021.

The term loans are secured by certain of our assets, including certain property, plant, and land.

There are no financial covenants under the 2020 CTBC Credit Facility.

2020 CTBC Term Loan Facility due June 4, 2030

In May 2020, we entered into a ten-year, non-revolving term loan facility (the “2020 CTBC Term Loan Facility”) to obtain up to NTD 1.2 billion ($40.7 million in U.S.

dollar equivalents) in financing for use in the expansion and renovation of our Bade Manufacturing Facility located in Taiwan.

Draw downs on the 2020 CTBC Term Loan Facility are based on 80% of balances owed on commercial invoices from the contractor and are drawn according to the progress of the renovations.

Borrowings under the 2020 CTBC Term Loan Facility are available through June 2022.

We are required to pay against total outstanding principal and interest in equal monthly installments starting June 2023 and continuing through the maturity date of June 2030.

The 2020 CTBC Term Loan Facility is secured by the Bade Manufacturing Facility, including any expansion.

Fees paid to the lender as debt issuance costs were immaterial.

We borrowed $ 29.0 million in the fiscal year ended June 30, 2021 with a rate of 0.45% per annum.

As of June 30, 2021, the amount outstanding under the 2020 CTBC Term Loan Facility was $34.7 million and the net book value of the property serving as collateral was $45.9 million.

We have financial covenants

requiring our current ratio, debt service coverage ratio, and financial debt ratio, to be maintained at certain levels.

As of June 30, 2021, we were in compliance with all financial covenants under the 2020 CTBC Term Loan Facility.

2021 CTBC Credit Lines

On July 20, 2021 (the “Effective Date”), we entered into a general agreement for omnibus credit lines with CTBC Bank, which replaced the 2020 CTBC Credit Facility and 2020 CTBC Term Loan Facility (the “Prior CTBC Credit Lines”) in their entirety and permits borrowings, from time to time, of (i) a term loan facility of up to NTD1,550.0 million ( $55.4 million in U.S.

dollar equivalents) and (ii) a line of credit facility of up to US$105.0 million (the “2021 CTBC Credit Lines”).

Interest rates are to be established according to individual credit arrangements established pursuant to the 2021 CTBC Credit Lines, which interest rates shall be subject to adjustment depending on the satisfaction of certain conditions.

Term loans made pursuant to the 2021 CTBC Credit Lines are secured by certain of our assets, including certain property, land, plant, and equipment located in Bade, Taiwan .

We are subject to various financial covenants under the 2021 CTBC Credit Lines, including current ratio, debt service coverage ratio, and financial debt ratio requirements.

Amounts outstanding under the Prior CTBC Credit Lines on the Effective Date were assumed by the 2021 CTBC Credit Lines.

E.SUN Credit Facility

In December 2020, Super Micro Computer Inc, Taiwan, our wholly-owned Taiwan subsidiary, entered into a General Credit Agreement (the “E.SUN Credit Facility”) with E.SUN Bank in Taiwan.

The E.SUN Credit Facility provides for the issuance of loans, advances, acceptances, bills, bank guarantees, overdrafts, letters of credit, and other types of drawdown instruments up to a credit limit of $30.0 million.

Terms for specific drawdowns are set forth in separate Notification and Confirmation of Credit Conditions by and between us and E.SUN Bank.

The E.SUN Credit Facility expires September 18, 2021.

There are no financial covenants associated with the E.SUN Credit Facility.

A Notification and Confirmation Agreement was entered into on December 2, 2020 for a $30.0 million import loan (the “Import Loan”) under the E.

SUN Credit Facility with a tenor of 120 days bearing interest at a rate based on LIBOR or TAIFX plus a fixed margin.

As of June 30, 2021, the amounts outstanding under the E.SUN Credit Facility were $20.4 million and the interest rates for these loans ranged from approximately .0% to1.29% per annum.

As of June 30, 2021, the amount available for future borrowing under the E.SUN Credit Facility was $9.6 million.

Refer to Part I, Item 1, Note 10, “Short-term and Long-term Debt” in our notes to consolidated financial statements in this Annual Report on Form 10-K for further information on our outstanding debt.

Capital Expenditure Requirements

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Our estimated future obligations as of June 30, 2022, include both current and long term obligations.

For our long-term debt as noted in Part I, Item 1, Note 10, “Short-term and Long-term Debt”, we have a current obligation of $63.5 million and a long-term obligation of $34.7 million.

Under our operating leases as noted in Note 12, "Leases", we have a current obligation of $6.3 million and a long-term obligation of $14.5 million.

As noted in Note 16, "Commitments and Contingencies", we have current obligations related to noncancelable purchase commitments of $569.8 million.

For our long-term debt as noted in Part II, Item 8, Note 9, “Short-term and Long-term Debt”, we have a current obligation of $449.1 million and a long-term obligation of $147.6 million.

Under our operating leases as noted in Part II, Item 8, Note 11, "Leases", we have a current obligation of $7.7 million and a long-term obligation of $17.4 million.

As noted in Part II, Item 8, Note 15, "Commitments and Contingencies", we have current obligations related to noncancelable purchase commitments of $562.9 million.

Recent Accounting Pronouncements

For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see Part II, Item 8, Note 1, “Organization and Summary of Significant Accounting Policies” to the consolidated financial statements in this Annual Report.

SMCI | 2022 Form 10-K | 49

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-K

Item 7. Management’s Discussion and Analysis