What changed in this filing

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Item 1A. Risk Factors

2023-08-28 compared with 2022-08-29 · 136 added, 133 removed, 532 unchanged (34% of the section changed)

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Operational and Execution Risks

• The effects of the COVID-19 pandemic and other macroeconomic factors exacerbated by the COVID-19 pandemic adversely affected our business operations, financial condition and results of operations, and there are no assurances adverse effects will not continue.

• Recent events in eastern Europe and the Taiwan Strait present challenges and risks to us, and no assurances can be given that current or future developments would not have a material adverse effect on our business, results of operations and financial condition.

• Adverse economic conditions may harm our business.

• Our quarterly operating results have fluctuated and will likely fluctuate in the future.

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• If we fail to meet any publicly announced financial guidance or other expectations about our business, it could cause our stock to decline in value.

• We may be unable to secure additional financing on favorable terms, or at all, which in turn could impair the rate of our growth.

• Increases in average selling prices for our Total IT Solutions have historically significantly contributed to increases in net sales in some of the periods covered.

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• Any failure to adequately expand or retain our sales force will impede our growth.

• Conflicts of interest may arise between us and Ablecom and Compuware, and those conflicts may adversely affect our operations.

• Conflicts of interest may arise with Ablecom and Compuware, and they may adversely affect our operations.

• Our reliance on Ablecom could be subject to risks associated with our reliance on a limited source of contract manufacturing services and inventory warehousing.

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• Our growth into markets outside the United States exposes us to risks inherent in international business operations.

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• We depend upon the development of new products & enhancements to existing products.

If we fail to predict or respond to emerging technological trends & our customers’ changing needs, our operating results and market share may suffer.

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• The market in which we participate is highly competitive.

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Financial Risks

• We incurred significant expenses related to the matters that led to the delay in the filing of our 2017 10-K and may incur additional expenses related to resulting litigation.

• Our R&D expenditures, as a percentage of our net sales, are considerably higher than many of our competitors.

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• The trading price of our common stock is likely to be volatile.

• Future sales of shares by existing stockholders could cause our stock price to decline.

• Future sales of shares by existing stockholders, including any shares that have vested or may in the future vest under the 2021 CEO Performance Award, could cause our stock price to decline.

• The concentration of our capital stock ownership with insiders likely limits your ability to influence corporate matters.

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• Our business and operations may be impacted by natural disaster events, including those brought on by climate change.

• The use of AI by our workforce may present risks to our business.

• Expectations relating to environmental, social and governance considerations expose us to potential liabilities, reputational harm and other unforeseen adverse effects on our business.

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Operational and Execution Risks

The effects of the COVID-19 pandemic and other macroeconomic factors exacerbated by the COVID-19 pandemic adversely affected our business operations, financial condition and results of operations, and there are no assurances adverse effects will not continue.

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

These measures impacted and may continue to impact our business operations, the operations of our customers, and those of our respective vendors, suppliers, and partners.

During the COVID-19 pandemic, we continued our manufacturing operations and customers’ orders processing and services, although our productivity at times slowed, especially in the United States and in the Netherlands.

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.

The COVID-19 pandemic also adversely impacted shipments to our customers and, to a lesser extent, our ability to provide services and support to our customers.

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.

We have invested capital to procure key components (such as CPUs, memory, SSDs and GPUs) so we can maintain reasonable lead times to fulfill orders for our customers.

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 vaccine supply constraints, we are unable to predict the ultimate extent to which the global COVID-19 pandemic (or other potential infectious diseases, such as the currently spreading monkeypox virus) may further impact our business operations, financial performance and results of operations.

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

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

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

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

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

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

• Factors affecting the availability of human capital, including either shortage of labor and/or heightened unemployment;

• The global economic recession and/or inflation pressures;

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

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

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

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

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

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Recent events in eastern Europe and the Taiwan strait present challenges and risks to us, and no assurances can be given that current or future developments will not have a material adverse effect on our business, results of operations and financial condition.

The crisis in eastern Europe continues to be a challenge to global companies, including us, which have customers in the impacted regions.

and other global governments have placed restrictions on how companies may transact with businesses in these regions, particularly Russia, Belarus and restricted areas in Ukraine.

Because of these restrictions and the growing logistical and other challenges, we have paused sales to Russia, Belarus and the restricted areas in Ukraine.

This decision, which is in line with the approach of other global technology companies, helps us comply with our obligations under the various requirements in the U.S.

and around the world.

While it is difficult to estimate the impact on our business and financial position of both (i) our pause in sales to Russia, Belarus and the restricted areas in Ukraine and the current or future sanctions and (ii) tensions in the Taiwan strait, our pause in sales and these sanctions and continuing rising tensions could have adverse impacts on us in future periods, although they have not been material to date.

For example, with respect to Russia, Belarus and the restricted areas in Ukraine, we do not make a material portion of our sales or acquire a material portion of our parts or components directly from impacted regions;

however, our suppliers and their suppliers may acquire raw materials for parts or components from the impacted regions.

Supply disruptions may make it harder for them to find favorable pricing and reliable sources for materials they need, which may put upward pressure on their costs and increasing the risks that our costs may increase and that it may be more difficult, or we may be unable, to acquire materials needed.

In addition, the crises may further exacerbate inflationary pressures that have indirect impacts on our business, such as further increasing our logistics costs from rising fuel prices and/or continuing to increase our compensation expense.

In addition, no assurances can be given that additional developments in the impacted regions, and responses thereto from the U.S.

and other global governments, would not have a material adverse effect on our business, results of operations and financial condition.

Adverse economic conditions may harm our business.

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General economic weakness may also lead to longer collection cycles for payments due from our customers, an increase in customer bad debt, and impairment of investments.

Furthermore, the continued weakness and uncertainty in worldwide credit markets may harm our customers’ available budgetary spending, which could lead to cancellations or delays in planned purchases of our Total IT Solutions.

If our customers or potential customers experience economic hardship, this could reduce the demand for our Total IT Solutions, delay and lengthen sales cycles, lower prices for our Total IT Solutions, and lead to slower growth or even a decline in our revenues, operating results and cash flows.

Furthermore, continued weakness and uncertainty in worldwide credit markets may harm our customers’ available budgetary spending, which could lead to cancellations or delays in planned purchases of our Total IT Solutions.

If our customers or potential customers experience economic hardship, this could reduce the demand for our Total IT Solutions, delay and lengthen sales cycles, increase requests for customer credit which may increase our risks in the event customers do not pay or make timely payment, lower prices for our Total IT Solutions, and lead to slower growth or even a decline in our revenues, operating results and cash flows.

Inflation in the U.S.

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The Federal Reserve has significantly raised, and may again raise, interest rates in response to concerns over inflation risk, which may increase our own borrowing costs and/or reduce our clients’ access to debt financing, reduce technology expenditures and demand for our Total IT Solutions.

The crisis in eastern Europe continues to pose challenges to global companies, including us, which have customers in the impacted regions.

and other global governments have placed restrictions on how companies may transact with businesses in these regions, particularly Russia, Belarus and restricted areas in Ukraine.

Because of these restrictions and the growing logistical and other challenges, we have paused sales to Russia, Belarus and the restricted areas in Ukraine.

This decision, which is in line with the approach of other global technology companies, helps us comply with our obligations under the various requirements in the U.S.

and around the world.

For example, with respect to Russia, Belarus and the restricted areas in Ukraine, we did not, prior to the imposition of restrictions, make a material portion of our sales or acquire a material portion of our parts or components directly from impacted regions;

however, our suppliers and their suppliers may acquire raw materials for parts or components from the impacted regions.

Supply disruptions may make it harder for them to find favorable pricing and reliable sources for materials they need, which may put further upward pressure on their costs and increasing the risks that our costs may increase and that it may be more difficult, or we may be unable, to acquire materials needed.

In addition, no assurances can be given that additional developments in the impacted regions, and responses thereto from the U.S.

and other global governments, would not have a material adverse effect on our business, results of operations and financial condition.

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

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• Fluctuations based upon seasonality, with the quarters ending March 31 and September 30 typically being weaker;

• The occurrence of global pandemics, including COVID-19, and other events that impact the global economy or one or more sectors of the global economy, such as the global economic downturn and recent events in eastern Europe;

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• Continuing lingering effects from the COVID-19 pandemic, the occurrence of other global pandemics, and other events that impact the global economy or one or more sectors thereof, such as the global economic downturn and recent events in eastern Europe;

• The ability of our customers and suppliers to obtain financing or fund capital expenditures;

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

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• Variability of our margins based on the mix of server and storage systems, subsystems and accessories we sell and the percentage of our sales to internet data center, cloud computing customers or certain geographical regions;

• Fluctuations in availability and costs associated with key components, particularly semiconductors, memory, storage solutions, and other materials needed to satisfy customer requirements, especially during a period of global market disruption, and, in particular, the impact of the extended duration of both the COVID-19 pandemic, the global economic downturn and recent events in eastern Europe on our supply chain and the supply chain of our suppliers;

• Fluctuations in availability and costs associated with key components, particularly semiconductors, memory, storage solutions, and other materials needed to satisfy customer requirements;

• The timing of the introduction of new products by leading microprocessor vendors and other suppliers;

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

• Changes in our product pricing policies, including those made in response to new product announcements;

• The introduction and market acceptance of new technologies and products, and our success in emergent and rapidly evolving markets (such as AI), and incorporating emerging technologies in our products, as well as the adoption of new standards;

• Changes in our product pricing policies, including those made in response to new product announcements and fluctuations in availability and costs of key components;

• Mix of whether customer purchases are of partially or fully integrated systems or subsystems and accessories and whether made directly or through our indirect sales channel partners;

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

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

As a result of a variety of factors discussed in this Annual Report, our revenue and margins for a particular quarter are difficult to predict, especially in light of a challenging and inconsistent global macroeconomic environment, lingering impacts of the COVID-19 pandemic, the global economic downturn, recent events in eastern Europe, volatility in emergent and rapidly evolving markets (such as AI), steps we are taking in response thereto, increased competition, the effects of the ongoing trade disputes between the United States and China and related market uncertainty.

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

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

When we issue credit in connection with large orders, in the event customers to do not pay or make timely payment our ability to collect amounts owed to us creates risk.

We have in the past, and may continue in the future, on a case by case basis, take steps to mitigate collection risks, such as seeking third party insurance with respect to credit issued and taking a security interest in goods we have sold to customers pending collection of any credit given.

However, we cannot assure that such measures will be effective to collect on all or part of any such credit issued.

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

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As we increasingly target larger customers and larger sales opportunities, our customer base may become more concentrated, our cost of sales may increase, our margins may be lower, our borrowings to fund purchases of key components may be higher, we are exposed to inventory risks and our sales may be less predictable.

We have become increasingly dependent upon larger sales to grow our business.

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

No single customer accounted for 10% or more of net sales in any of fiscal years 2022, 2021 or 2020.

While no single customer accounted for 10% or more of net sales in any of fiscal years 2023, 2022 or 2021, we may have customers account for 10% or more of net sales in the future.

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

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

If our largest customers do not purchase our products, or we are unable to supply such customers with products, at the levels, in the timeframes or within the geographies that we expect, including as a result of the global economic downturn, lingering impacts of the COVID-19 pandemic, or recent events in eastern Europe on their or our businesses, our ability to maintain or grow our net sales will be adversely affected.

Increased sales to larger customers may also cause fluctuations in results of operations.

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An actual or perceived inability to meet customer support demands may adversely affect our relationship with such customers, which may affect the likelihood of future purchases of our products.

Larger customers may also request larger amounts of credit or longer payment terms, which, if granted, increases our risks in the event customers to do not pay or make timely payment, which risk is exacerbated in the event our payment terms with major suppliers of necessary components for such orders do not match the payment terms of our customers.

As a result of the above factors, our quarter-to-quarter results of operations may be subject to greater fluctuation and our stock price may be adversely affected.

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If we fail to meet any publicly announced financial guidance or other expectations about our business, it could cause our stock to decline in value.

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There are a number of reasons why we have at times failed to meet guidance in the past and might fail again in the future, including, but not limited to, the factors described in these Risk Factors.

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

We may be unable to secure additional financing on favorable terms, or at all, which in turn could impair the rate of our growth.

We had net income of $640.0 million, $285.2 million and $111.9 million in fiscal years 2023, 2022 and 2021, respectively.

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 12 months following the issuance of the financial statements included in this Annual Report.

Nevertheless, we intend to continue to grow our business, which could require additional capital.

Since our initial public offering, we have funded our growth primarily through the cash raised from our operations and credit facilities with banking institutions.

We may need to expand our existing credit facilities, enter into new credit facilities or engage in equity, debt or other type of financings to secure additional capital to continue or increase our rate of growth.

If we raise additional capital through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we may issue could have rights, preferences and privileges superior to those holders of our common stock.

Any credit facility or debt financing that we secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which could make it more difficult for us to raise additional capital and to pursue our growth strategies.

If we are unable to secure additional funding on favorable terms, or at all, when we seek it, we may not be able to continue the rate of our growth.

In addition, no assurances can be given that in the event that we secure such financing that the proceeds thereof will be used effectively or result in growth.

Increases in average selling prices for our solutions have significantly contributed to increases in net sales in some of the periods covered by this Annual Report.

Such prices are subject to decline if customers do not continue to purchase our latest generation products or additional components, which could harm our results of operations.

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

Recently, the market for key components has become more volatile during the COVID-19 pandemic, the global economic downturn and recent events in eastern Europe.

The market for key components became, and continues to be, more volatile during the global economic downturn, the COVID-19 pandemic and lingering effects thereof, and recent events in eastern Europe.

As with most electronics-based products, average selling prices of server and storage products are typically highest at the time of introduction of new products, which utilize the latest technology, and tend to decrease over time as such products become commoditized and are ultimately replaced by even newer generation products.

We cannot predict the timing or amount of any decline in the average selling prices of our server solutions that we may experience in the future, which may be exacerbated by continued effects from the COVID-19 pandemic, the global economic downturn and recent events in eastern Europe.

We cannot predict the timing or amount of any decline in the average selling prices of our server solutions that we may experience in the future, which may be exacerbated by the global economic downturn, lingering effects from the COVID-19 pandemic, and recent events in eastern Europe.

In some instances, our agreements with our indirect sales channel partners limit our ability to reduce prices unless we make such price reductions available to them, or price protect their inventory.

If we are unable to either (i) decrease the average per unit manufacturing costs faster than the rate at which average selling prices decline or (ii) increase the average selling prices at the same pace at which average per unit manufacturing costs increase, our business, financial condition and results of operations will be harmed.

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

Prices of certain materials and core components utilized in the manufacture of our server and storage solutions, such as serverboards, chassis, CPUs, memory, hard drives and SSDs, represent a significant portion of our cost of sales.

While we have increased our purchases of certain critical materials and core components in response to the supply and demand uncertainties associated with the COVID-19 pandemic, the global economic downturn and recent events in eastern Europe, we do not have long-term supply contracts for all critical materials and core components, but instead often purchase these materials and components on a purchase order basis.

Prices of these core components and materials are volatile, and, as a result, it is difficult to predict expense levels and operating results.

Prices of certain materials and core components utilized in the manufacture of our server and storage solutions, such as GPUs, serverboards, chassis, CPUs, memory, hard drives and SSDs, represent a significant portion of our cost of sales.

While we have increased our purchases of certain critical materials and core components in response to the supply and demand uncertainties, we do not have long-term supply contracts for all critical materials and core components, but instead often purchase these materials and components on a purchase order basis.

Prices and availability of these core components and materials are volatile, and, as a result, it is difficult to predict expense levels and operating results.

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

Because we often acquire materials and key components on an as needed basis, we may be limited in our ability to effectively and efficiently respond to customer orders because of the then-current availability or the terms and pricing of these materials and key components.

Our industry has experienced materials shortages and delivery delays in the past, including as a result of the negative impact of COVID-19, the global economic downturn and recent events in eastern Europe on global supply chains, and we may experience shortages or delays of critical materials or increased logistics costs to obtain necessary materials in a timely manner in the future.

The COVID-19 pandemic and other macroeconomic factors exacerbated by the COVID-19 pandemic has resulted in widely reported shortages of semiconductors.

Our industry has experienced materials shortages and delivery delays in the past, including as a result of increased demand during periods of growth of new emerging markets (such as for AI), the negative impact of COVID-19, the global economic downturn and recent events in eastern Europe on global supply chains, and we may experience shortages or delays of critical materials or increased logistics costs to obtain necessary materials in a timely manner in the future.

The COVID-19 pandemic, other macroeconomic factors exacerbated by the COVID-19 pandemic, lingering effects from the COVID-19 pandemic, and other factors, have in the past resulted in, and may in future result in additional shortages of key semiconductors.

From time to time, we have been forced to delay the introduction of certain of our products or the fulfillment of customer orders as a result of shortages of materials and key components, which can adversely impact our revenue.

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In addition, from time to time we assume greater inventory risk in connection with the purchase or manufacture of more specialized components in connection with higher volume sales opportunities.

There are uncertainties and risks related to COVID-19, the global economic downturn and recent events in eastern Europe, for which we have taken certain actions including our increased purchase of certain critical materials and components as a part of our response planning.

In the past, we have taken certain actions including our increased purchase of certain critical materials and components as a part of our response planning for various uncertainties and risks, such as those related to the COVID-19 pandemic and lingering effects therefrom.

Specifically, we sought to actively manage our supply chain for potential risks of shortage by first building inventories of critical components required for our motherboards and other system printed circuit boards and continued to add to our inventories of key components such as CPUs, memory, SSDs and to a lesser extent GPUs such that customer orders can be fulfilled as they are received.

Nevertheless, no assurances can be given that such efforts will be successful to manage inventory, and we could be exposed to risks of insufficient, excess, or obsolete inventory.

We may continue to take similar actions in the future based upon our assessment of uncertainties and risks.

Nevertheless, no assurances can be given that any such efforts will be successful to manage inventory, and we could be exposed to risks of insufficient, excess, or obsolete inventory.

We have from time to time experienced inventory write downs associated with higher volume sales that were not completed as anticipated.

We expect that we will experience such write downs from time-to-time in the future related to existing and future commitments, and potentially related to our proactive purchase of certain critical materials and components as part of our planning in light of COVID-19, the global economic downturn and recent events in eastern Europe.

We expect that we will experience such write downs from time-to-time in the future related to existing and future commitments, and potentially related to any proactive purchase of certain critical materials and components as part of our planning for uncertainties and risks.

Excess or obsolete inventory levels for these or other reasons could result in unexpected expenses or increases in our reserves against potential future charges which would adversely affect our business, results of operations and financial condition.

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If we are unable to hire, develop and retain sufficient numbers of productive sales personnel, our customer relationships and resulting sales of our server solutions will suffer.

Conflicts of interest may arise between us and Ablecom and Compuware, and those conflicts may adversely affect our operations.

Conflicts of interest may arise with Ablecom and Compuware, and they may adversely affect our operations.

We use Ablecom, a related party, for contract design and manufacturing coordination support and warehousing, and Compuware, also a related party and an affiliate of Ablecom, for distribution, contract manufacturing and warehousing.

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In addition, we have entered into a distribution agreement with Compuware, under which we have appointed Compuware as a nonexclusive distributor of our products in Taiwan, China and Australia.

We have also entered into a tripartite agreement with Ablecom and Compuware related to a three-way purchase of land in proximity to our campus in Bade, Taiwan.

Each of Ablecom and Compuware are also developing campuses in close proximity to the campus we are developing in Malaysia to expand our manufacturing.

Steve Liang, Ablecom’s Chief Executive Officer and largest shareholder, is the brother of Charles Liang, our President, Chief Executive Officer and Chairman of our Board of Directors (the “Board”).

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In order to continue to successfully increase our operations in Taiwan, we must efficiently manage our Taiwan operations from our headquarters in San Jose, California and continue to develop a strong local management team.

If we are unable to successfully ramp up our international manufacturing capacity, including the associated increased logistics and warehousing, we may incur unanticipated costs, difficulties in making timely delivery of products or suffer other business disruptions which could adversely impact our results of operations.

We are also pursuing an expansion of our manufacturing operations into Malaysia.

During the second quarter of fiscal year 2023, we entered into a letter of understanding to acquire land in Malaysia.

A definitive agreement to acquire such land, subject to various conditions, was subsequently executed in January 2023.

We are obtaining early access to such land prior to acquisition, and we anticipate significant capital expenditures will be required for such initiative.

To the extent we are unable to recoup expenditures made during our period of early access to such land and we are subsequently unable to complete the acquisition of the land, we could be materially and adversely affected.

Furthermore, if we are unable to successfully ramp up our international manufacturing capacity in Taiwan, the Netherlands, Malaysia, or any other jurisdictions we pursue, including the associated construction, increased logistics and warehousing, we may incur unanticipated costs, difficulties in making timely delivery of products or suffer other business disruptions which could adversely impact our results of operations.

We may not be able to successfully manage our business for growth and expansion.

We expect to continue to make investments to pursue new customers and expand our product and service offerings to grow our business.

We also expect that our annual operating expenses will continue to increase as we invest in sales and marketing, research and development, manufacturing and production infrastructure, software and product service offerings, and strengthen customer service and support resources for our customers.

We expect to continue to make investments to pursue new customers, expand our product and service offerings to grow our business, and pursue new business markets and opportunities.

We also expect that our annual operating expenses will continue to increase as we invest in sales and marketing, research and development, manufacturing and production infrastructure, software and product service offerings, strengthen customer service and support resources for our customers, and pursue new business markets and opportunities.

Our failure to expand operational and financial or internal control systems timely or efficiently could result in additional operating inefficiencies, which could increase our costs and expenses more than we had planned and prevent us from successfully executing our business plan.

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Additionally, if we increase our operating expenses in anticipation of the growth of our business and this growth does not meet our expectations, our financial results will be negatively impacted.

If our business grows, we will have to manage additional product design projects, materials procurement processes and sales efforts and marketing for an increasing number of SKUs, provide and update an increasing amount of software utilized in our hardware offerings, provide more sophisticated product service offerings to support our customers, and expand the number and scope of our relationships with suppliers, distributors and end customers.

There are also no assurances that investments we make to pursue new business markets and opportunities (such as ecommerce in B2B and B2C markets and data center offerings) will be successful or profitable, given the investment costs necessary to pursue these markets and opportunities, which includes investments in technology, people, time, and other overhead costs.

As our business continues to grows, we will have to manage additional product design projects, materials procurement processes and sales efforts and marketing for an increasing number of SKUs, provide and update an increasing amount of software utilized in our hardware offerings, provide more sophisticated product service offerings to support our customers, expand the number and scope of our relationships with suppliers, distributors and end customers, and (for new business markets and opportunities we pursue) manage different and increasingly complex regulatory landscapes they are subject to.

If we fail to manage these additional responsibilities and relationships successfully, we may incur significant costs, which may negatively impact our operating results.

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If we are not able to predict market trends accurately, we may not benefit from such research and development activities, and our results of operations may suffer.

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Managing our business for long-term growth also requires us to successfully manage our employee headcount.

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If we fail to successfully manage our growth, we will be unable to execute our business plan.

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Our growth into markets outside the United States exposes us to risks inherent in international business operations.

We market and sell our systems and subsystems and accessories both inside and outside the United States.

We intend to expand our international sales efforts, especially into Asia, and we are expanding our business operations in Europe and Asia, particularly in Taiwan, the Netherlands and Japan.

In particular, we have made, and continue to make, substantial investments for the purchase of land and the development of new facilities in Taiwan to accommodate our expected growth and the migration of a substantial portion of our contract manufacturing operations to Taiwan.

We intend to expand our international sales efforts, especially into Asia, and we are expanding our business operations in Europe and Asia, particularly in Taiwan, Malaysia, the Netherlands and Japan.

In particular, we have made, and continue to make, substantial investments for the purchase of land and the development of new facilities in Taiwan and Malaysia to accommodate our expected growth and the migration of a substantial portion of our contract manufacturing operations.

Our international expansion efforts may not be successful.

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The markets for our products are characterized by rapidly changing technology, evolving industry standards, new product introductions, and evolving methods of operations.

While our revenues increased in fiscal year 2022, the global economic downturn may affect customer purchasing trends, and our operating results depend on our ability to develop and introduce new products into existing and emerging markets and to reduce the production costs of existing products.

While our revenues increased in fiscal year 2023, the global economic downturn may affect customer purchasing trends, and our operating results depend on our ability to develop and introduce new products into existing and emerging markets (such as AI) and to reduce the production costs of existing products.

If our customers do not purchase our products, our business will be harmed.

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The process of developing products incorporating new technologies is complex and uncertain, and if we fail to accurately predict customers’ changing needs and emerging technological trends our business could be harmed.

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In addition, our business could be adversely affected in periods surrounding our new product introductions if customers delay purchasing decisions to qualify or otherwise evaluate the new product offerings.

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Furthermore, we may not execute successfully on our vision or strategy because of challenges with regard to product planning and timing, technical hurdles that we fail to overcome in a timely fashion, or a lack of appropriate resources.

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Our principal competitors include global technology companies such as Cisco, Dell, Hewlett-Packard Enterprise and Lenovo.

In addition, we also compete with a number of other vendors who also sell application optimized servers, contract manufacturers/OEMs and original design manufacturers (“ODMs”), such as Foxconn, Inspur, Quanta Computer and Wiwynn Corporation.

In addition, we also compete with a number of other vendors who also sell application optimized servers, contract manufacturers/OEMs and ODMs, such as Foxconn, Inspur, Quanta Computer and Wiwynn Corporation.

ODMs sell server solutions marketed or sold under a third-party brand.

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Many of our competitors enjoy substantial competitive advantages, such as:

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As a result, they may possess sensitive knowledge or experience which may be used against us competitively and/or which may require us to alter our supply arrangements or sources in a way which could adversely impact our cost of sales or results of operations.

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Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements.

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We have no long-term agreements that obligate our suppliers to continue to work with us or to supply us with products.

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Our suppliers’ failure to improve the functionality and performance of materials and key components for our products may impair or delay our ability to deliver innovative products to our customers.

We need our material and key component suppliers, such as Intel, AMD and NVIDIA, to provide us with components that are innovative, reliable and attractive to our customers.

Due to the pace of innovation in our industry, many of our customers may delay or reduce purchase decisions until they believe that they are receiving best of breed products that will not be rendered obsolete by an impending technological development, which may be exacerbated due to the uncertainty of the current global economic environment.

Accordingly, demand for new server and storage systems that incorporate new products and features is significantly impacted by our suppliers’ new product introduction schedules and the functionality, performance and reliability of those new products.

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If our suppliers’ components do not function properly, we may incur additional costs and our relationships with our customers may be adversely affected.

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We rely on a limited number of suppliers for certain components used to manufacture our products.

Certain components used in the manufacture of our products are available from a limited number of suppliers.

Shortages could occur in these essential materials due to an interruption of supply, including interruptions on the global supply chain in connection with COVID-19, the global economic downturn or recent events in eastern Europe, or increased demand in the industry.

Shortages could occur in these essential materials due to an interruption of supply, including interruptions on the global supply chain (such as did occur in connection with the COVID-19 pandemic, the global economic downturn, and recent events in eastern Europe) or increased demand in the industry (such as did occur due to volatility in emergent and rapidly evolving markets, including AI).

Similar future events may cause additional interruptions on the global supply chain.

Two of our suppliers accounted for 13.5% and 30.7% of total purchases for the fiscal year ended June 30, 2023.

Two of our suppliers accounted for 20.3% and 11.8% of total purchases for the fiscal years ended June 30, 2021.

One of our suppliers accounted for 26.8% of total purchases for the fiscal years ended June 30, 2020.

The same two suppliers accounted for 18.1% and 11.4% of total purchases for the fiscal year ended June 30, 2022.

The same two suppliers accounted for 20.3% and 11.8% of total purchases for the fiscal years ended June 30, 2021.

Ablecom and Compuware, related parties, accounted for 6.6% , 8.3% and 7.8% of our total cost of sales for the fiscal years ended June 30, 2023, 2022 and 2021, respectively.

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If we are unable to maintain successful relationships in our indirect sales channel or expand our channel or we experience unexpected changes in payment terms, inventory levels or other practices in our indirect sales channel, our business will suffer.

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Our failure to deliver high quality server and storage solutions could damage our reputation and diminish demand for our products.

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For all of these reasons, customer dissatisfaction with the quality of our products could substantially impair our ability to grow our business.

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Our results of operations may be subject to fluctuations based upon our investment in corporate ventures.

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Costs to comply with and implement these privacy-related and data protection measures could be significant.

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Global privacy legislation, enforcement, and policy activity for privacy and data protection are rapidly expanding and creating a complex regulatory compliance environment.

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These regulations may deter customers from using services such as ours, and may inhibit our ability to expand into those markets or prohibit us from continuing to offer services in those markets without significant financial burden.

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In addition, numerous states in the U.S.

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For example, California’s Consumer Privacy Act (“CCPA”) gives California residents expanded privacy rights and protections and provides for civil penalties for violations and a private right of action for data breaches.

Further, California voters approved the ballot initiative known as the California Privacy Rights Act of 2020 (“CPRA”), enforcement of which begins on July 1, 2023.

Further, California voters approved the ballot initiative known as the California Privacy Rights Act of 2020 (“CPRA”), enforcement of which began on July 1, 2023.

The CPRA significantly expands privacy rights for California consumers and creates additional obligations on businesses, which could subject us to additional compliance costs as well as potential fines, individual claims and commercial liabilities.

The CPRA also establishes the California Privacy Protection Agency (“CPPA”), which has the power to implement and enforce the CCPA and CPRA through administrative actions, including administrative fines.

The CPRA also establishes the California Privacy Protection Agency, which has the power to implement and enforce the CCPA and CPRA through administrative actions, including administrative fines.

The effects of the CCPA and the CPRA are potentially significant and may require us to modify our data collection or processing practices and policies and to incur substantial costs and expenses in an effort to comply and increase our potential exposure to regulatory enforcement and/or litigation.

Certain other state laws, including Virginia, Colorado, Connecticut and Utah data privacy laws, impose similar privacy obligations and will take effect beginning in 2023.

We anticipate that more states may enact legislation similar to the CCPA, by providing consumers with new privacy rights and increasing the privacy and security obligations of entities handling certain personal information of such consumers.

The CCPA has prompted a number of proposals for new federal and state-level privacy legislation.

states have also enacted data privacy laws that began to take effect in 2023 and impose similar privacy obligations to the CCPA and CPRA.

We anticipate that more states may enact legislation similar to these laws, by providing consumers with new privacy rights and increasing the privacy and security obligations of entities handling certain personal information of such consumers.

The CCPA continues to prompt a number of proposals for new federal and state-level privacy legislation.

Such proposed legislation, if enacted, may add additional complexity, variation in requirements, restrictions and potential legal risk, require additional investment of resources in compliance programs, impact strategies and the availability of previously useful data and could result in increased compliance costs and/or changes in business practices and policies.

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In addition to the possibility of fines, lawsuits, breach of contract claims, and other claims and penalties, we could be required to fundamentally change our business activities and practices or modify our solutions, which could materially adversely affect our business, results of operations and financial condition.

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Our operations could involve the use of regulated materials, and we must comply with environmental, health and safety laws and regulations, which can be expensive, and may affect our business, results of operations and financial condition.

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These requirements and best practices can affect the cost and ease of sourcing minerals used in the manufacture of electronics.

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If we are unable to maintain effective internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may decrease.

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We could also become subject to stockholder or other third-party litigation as well as investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources and could result in fines, penalties, trading suspensions or other remedies.

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Failure to comply with the U.S.

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Any future violations could have an adverse impact on our ability to sell our products to United States federal, state and local government and related entities.

We have business relationships with companies in China, Russia, and elsewhere in eastern Europe who have been, or may in the future be, added to the restricted party list.

We have business relationships with companies in China and elsewhere in eastern Europe who have been, or may in the future be, added to the restricted party list.

We take steps to minimize business disruption when these situations arise;

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The United States and other countries continually update their lists of export-controlled items and technologies, and may impose new or more-restrictive export requirements on our products in the future.

As a result of regulatory changes, we may be required to obtain licenses or other authorizations to continue supporting existing customers or to supply existing products to new customers in China, Russia, eastern Europe and elsewhere.

Further escalations in trade restrictions or hostilities, particularly between the United States and China or Russia, could impede our ability to sell or support our products.

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Further escalations in trade restrictions or hostilities, particularly between the United States and China, could impede our ability to sell or support our products.

We do not sell products or provide services to the Russian Federal Security Service (the “FSB”).

We had last recorded revenue from Russia on February 23, 2022.

In addition, while we have implemented policies, internal controls and other measures reasonably designed to promote compliance with applicable anti-corruption and anti-bribery laws and regulations, and certain safeguards designed to ensure compliance with U.S.

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We may not be able to obtain a favorable outcome and may spend considerable resources in our efforts to defend and protect our intellectual property.

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Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain.

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Any claim, regardless of its merits, could be expensive and time consuming to defend against, and divert the attention of our technical and management resources.

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Provisions of our certificate of incorporation and bylaws and Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, as a result, depress the trading price of our common stock.

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These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and cause us to take corporate actions other than those stockholders desire.

Financial Risks

We incurred significant expenses related to the matters that led to the delay in the filing of our 2017 10-K and may incur additional expenses related to resulting litigation.

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

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

Specifically, in connection with these efforts, we incurred professional fees of approximately $4.4 million, $0.5 million and $14.0 million in fiscal years 2022, 2021 and 2020, respectively.

In addition, as of and for the year ended June 30, 2022, we recorded a net litigation settlement cost of $2.0 million associated with the settlement of one of the stockholder actions associated with the delay in the filing of our 2017 10-K and, as of and for the year ended June 30, 2020, we recorded a liability of $17.5 million for our SEC settlement of the investigation into our Company's financial accounting for fiscal years 2014 to 2017.

We have taken a number of steps in order to strengthen our corporate culture, sales processes, and accounting function so as to allow us to be able to provide timely and accurate financial reporting.

To the extent these steps are not successful, we could be required to devote significant additional time and incur significant additional expenses.

Even if these steps are successful, we may incur significant legal fees in future periods as we continue to address litigation arising from the matters that led to the delay in the filing our 2017 10-K.

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

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Financial Risks

Our research and development expenditures, as a percentage of our net sales, are considerably higher than many of our competitors and our earnings will depend upon maintaining revenues and margins that offset these expenditures.

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Our future effective income tax rates could be affected by changes in the relative mix of our operations and income among different geographic regions and by changes in domestic and foreign income tax laws, which could affect our future operating results, financial condition and cash flows.

Following the U.S.

federal government’s enactment of the Tax Cuts and Jobs Act (“2017 Tax Reform Act”), we realigned our international business operations and group structure to take advantage of certain international tax planning opportunities and incentives.

Our future effective income tax rates could be adversely affected if tax authorities challenge our international tax structure or if the relative mix of our United States and international income changes for any reason, or due to changes in U.S.

or international tax laws.

In particular, a substantial portion of our revenue is generated from customers located outside the United States.

The effectiveness of our tax planning activities is based upon certain assumptions that we make regarding our future operating performance and tax laws.

We continue to optimize our tax structure to align with our business operations and growth strategy.

We cannot assure you that we will be able to lower our effective tax rate as a result of our current or future tax planning activities nor that such rate will not increase in the future.

We receive significant tax benefits from sales to our non-U.S.

These benefits are contingent upon existing tax laws and regulations in the U.S.

and in the countries in which our international operations are located.

Future changes in domestic or international tax laws and regulations or a change in how we manage our international operations could adversely affect our ability to continue realizing these tax benefits.

Many countries around the world are beginning to implement legislation and other guidance to align their international tax rules with the Organization for Economic Co-operation and Development’s Base Erosion and Profit Shifting recommendations and related action plans that aim to standardize and modernize global corporate tax policy, including changes to cross-border tax, transfer-pricing documentation rules and nexus-based tax incentive practices.

As a result, many of these changes, if enacted, could increase our worldwide effective tax rate and harm our operating results, financial condition, and cash flows.

Our effective tax rate could also be adversely affected by changes in tax laws and regulations and interpretations of such laws and regulations, which in turn would negatively impact our earnings and cash and cash equivalent balances we currently maintain.

Additionally, our effective tax rate could also be adversely affected if there is a change in international operations, our tax structure and how our operations are managed and structured, and as a result, we could experience harm to our operating results and financial condition.

Backlog does not provide a substantial portion of our net sales in any quarter.

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The trading prices of technology company securities historically have been highly volatile.

In addition, the global markets have experienced volatility as a result of the COVID-19 pandemic, the global economic downturn and recent events in eastern Europe.

In addition, the global markets have been volatile, and experienced volatility as a result of matters such as the COVID-19 pandemic, the global economic downturn and recent events in eastern Europe.

The trading price of our common stock has been and is likely to continue to be subject to wide fluctuations.

Factors, in addition to those outlined elsewhere in this filing, that may affect the trading price of our common stock include:

• The impact of COVID-19, the global economic downturn and recent events in eastern Europe on our business, the global economy and trading markets;

• The outcome of litigation and claims as well as regulatory examinations, investigations, proceedings and orders to which we are subject;

• Actual or anticipated variations in our operating results, including failure to achieve previously provided guidance;

SMCI | 2023 Form 10-K | 30

• Announcements of technological innovations, new products or product enhancements, strategic alliances or significant agreements by us or by our competitors;

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• The financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

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• False or misleading press releases or articles regarding our company or our products;

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• Technological advancements rendering our products less valuable;

• Lawsuits filed against us, including those described in Part I, Item 3, “Legal Proceedings”;

• Lawsuits filed against us;

• Changes in operating performance and stock market valuations of other companies that sell similar products;

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• Market conditions in our industry, the industries of our customers and the economy as a whole;

• Other events or factors, including those resulting from war, incidents of terrorism, political instability or responses to these events.

Future sales of shares by existing stockholders could cause our stock price to decline.

• Other events or factors, including those resulting from war, incidents of terrorism, political instability, pandemics or responses to these events.

Future sales of shares by existing stockholders, including any shares that have vested or may in the future vest under the 2021 CEO Performance Award, could cause our stock price to decline.

Attempts by existing stockholders to sell substantial amounts of our common stock in the public market could cause the trading price of our common stock to decline significantly.

All of our shares are eligible for sale in the public market, including shares held by directors, executive officers and other affiliates, sales of which are subject to volume limitations and other requirements under Rule 144 under the Securities Act.

In addition, shares subject to outstanding options and reserved for future issuance under our stock option plans are eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements.

If these additional shares are sold, or if it is perceived that they will be sold in the public market, the trading price of our common stock could decline.

In addition, shares subject to outstanding options and reserved for future issuance under our stock option plans, including those underlying the 2021 CEO Performance Award that have vested or vest in the future, are eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements.

See “Item 11.

Executive Compensation – Compensation Discussion and Analysis (“CD&A”) – Fiscal Year 2023 CEO Compensation – Discussion and Analysis of 2021 CEO Performance Award.” If these additional shares are sold, or if it is perceived that they will be sold in the public market, the trading price of our common stock could decline.

Furthermore, additional tranches of the 2021 CEO Performance Award may vest, subject to the achievement of specified annualized revenue milestones (the “Annualized Revenue Milestones”) and a matching stock price milestone, and if such additional tranches do vest, they would be subject to the risks discussed above.

In connection therewith, the Company has determined that the Annualized Revenue Milestones that have not yet been achieved are “probable of achievement,” for purposes of determining whether to recognize expense associated with the applicable tranche.

Such determination is based upon management’s subjective judgment and is not a guarantee that it will be achieved.

See Note 10, Stock-based Compensation and Stockholders’ Equity in the Notes to Consolidated Financial Statements.

The concentration of our capital stock ownership with insiders likely limits your ability to influence corporate matters.

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Investors seeking cash dividends in the foreseeable future should not purchase our common stock.

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General Risks

Our products may not be viewed as supporting climate change mitigation in the IT sector.

According to the Journal Nature, the global energy demand of IT equipment is expected to be 20% of global energy demand by 2030.

More than 70% of the Scope 3 (lifecycle) emissions of our server products are attributed to their use in data centers.

Our ability to create energy saving products is key to climate change mitigation, and business success.

Our ability to create energy saving products will be a part of climate change mitigation, and we believe one of the keys to our business success.

In addition, climate change reporting and product certification are increasingly sought by customers and regulators.

If we do not satisfy customer requirements for products that help mitigate climate change, and document how they contribute to such change, it could have a material adverse impact on our business, operating results, and financial conditions.

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Our business and operations may be impacted by natural disaster events, including those brought on by climate change.

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Our most significant business offices, research and development, and manufacturing locations, are in the San Jose, California area and in Taiwan.

We are also in the process of developing manufacturing operations in Malaysia.

Each region is subject to climate change events and known for earthquakes.

While we have adopted a business continuity plan, there is no certainty it will be effective for significant natural disasters, which could have a material adverse impact on business, operating results, and financial condition.

While we have adopted a business continuity plan and are taking steps to further diversify our manufacturing locations, there is no certainty it will be effective for significant natural disasters, which could have a material adverse impact on business, operating results, and financial condition.

The use of AI by our workforce may present risks to our business.

Our workforce may use AI tools on an unauthorized basis which poses additional risks relating to the protection of data, including the potential exposure of our proprietary confidential information to unauthorized recipients and the misuse of our or third-party intellectual property.

Use of AI technology by our workforce may result in allegations or claims against us related to violation of third-party intellectual property rights, unauthorized access to or use of proprietary information and failure to comply with open source software requirements.

AI technology may also produce inaccurate responses that could lead to errors in our decision-making, solution development or other business activities, which could have a negative impact on our business, operating results and financial condition.

Our ability to mitigate these risks will depend on our continued effective training, monitoring and enforcement of appropriate policies and procedures governing the use of AI technology, and compliance by our workforce.

Expectations relating to environmental, social and governance considerations expose us to potential liabilities, reputational harm and other unforeseen adverse effects on our business.

Many governments, regulators, investors, employees, customers and other stakeholders are increasingly focused on environmental, social and governance considerations relating to businesses, including climate change and greenhouse gas emissions, human capital and diversity, equity and inclusion.

We make statements about our environmental, social and governance goals and initiatives through information provided on our website, press statements and other communications Responding to these environmental, social and governance considerations and implementation of these goals and initiatives involves risks and uncertainties and requires ongoing investments.

The success of our goals and initiatives may be impacted by factors that are outside our control.

In addition, some stakeholders may disagree with our goals and initiatives and the focus and views of stakeholders may change and evolve over time and vary depending on the jurisdictions in which we operate.

Any failure, or perceived failure, by us to achieve our goals, further our initiatives, adhere to our public statements, comply with federal, state or international environmental, social and governance laws and regulations, or meet evolving and varied stakeholder expectations and views could materially adversely affect our business, reputation, results of operations, financial position and stock price.

Unresolved Staff Comments

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 1A. Risk Factors