What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2023-08-28 compared with 2022-08-29 · 86 added, 128 removed, 263 unchanged (45% of the section changed)

3 unchanged sentences

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 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.

8 unchanged sentences

In this regard, we work closely with microprocessor and other key component vendors to take advantage of new technologies as they are introduced.

Historically, our ability to introduce new products rapidly has allowed us to benefit from technology transitions such as the introduction of new microprocessors and storage technologies, and as a result, we monitor the introduction cycles of NVIDIA Corporation, Intel Corporation, Advanced Micro Devices, Inc., Samsung Electronics Company Limited, Micron Technology, Inc.

Historically, our ability to introduce new products rapidly has allowed us to benefit from technology transitions such as the introduction of new microprocessors and storage technologies, and as a result, we monitor the product introduction cycles of Intel Corporation, NVIDIA Corporation, Advanced Micro Devices, Inc., Samsung Electronics Company Limited, Micron Technology, Inc.

and others closely and carefully.

1 unchanged sentence

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.

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 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.

Our business and financial outlook have experienced, and may continue to face, challenges due to adverse macroeconomic conditions and uncertainties.

These factors encompass labor shortages, disruptions in the supply chain, inflation, higher interest rates, and fluctuations in capital markets.

The global business landscape encountered widespread disruption as a consequence of the COVID-19 pandemic, which commenced in early 2020.

The extent of its direct or indirect impact on general market conditions, as well as our business, results of operations, cash flows, and financial condition, is contingent upon uncertain future developments, including the emergence of new variants.

We remain committed to continuously assessing the nature and extent of the impact of general macroeconomic conditions and the ongoing COVID-19 pandemic on our business.

For a more comprehensive discussion, please refer to the "Risk Factors" included in Part I, Item 1A of this Annual Report on Form 10-K.

Financial Highlights

1 unchanged sentence

• Net sales increased by 37.1% in fiscal year 2023 as compared to fiscal year 2022.

• 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.

• Gross margin increased to 18.0% in fiscal year 2023 from 15.4% in fiscal year 2022, primarily due to product and customer mix and decreased logistic costs.

• Operating expenses increased by 12.3% in fiscal year 2023 as compared to fiscal year 2022, primarily due to the increase in personnel expenses as a result of salary increases, equity grants and a higher headcount.

SMCI | 2023 Form 10-K | 37

• Net income increased to $640.0 million in fiscal year 2023 as compared to $285.2 million in fiscal year 2022, which was primarily due to the higher net sales and lower operating expenses as a percentage of revenues in fiscal year 2023 as compared to fiscal year 2022.

• Our cash and cash equivalents were $440.5 million and $267.4 million at the end of fiscal years 2023 and 2022, respectively.

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

In fiscal year 2023, we generated net cash of $172.4 million, comprised of $663.6 million provided by operating activities primarily due to increased net income, $448.3 million used in financing activities primarily due to repayment of debt and stock repurchase, and $39.5 million cash used in investing activities primarily due to $36.8 million in purchases of property and equipment.

Critical Accounting Policies and Estimates

1 unchanged sentence

The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, net sales and expenses.

We evaluate our estimates on an on-going basis and base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making the judgments we make about the carrying values of assets and liabilities that are not readily apparent from other sources.

We evaluate our estimates on an on-going basis based on a) historical experience, b) assumptions we believe to be reasonable under the circumstances and are not readily apparent from other sources, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Because these estimates can vary depending on the situation, actual results may differ from the estimates.

1 unchanged sentence

Should any of these estimates and assumptions change or prove to have been incorrect, it could have a material impact on our results of operations, financial position and statement of cash flows.

These estimates and judgements have not fluctuated significantly for the fiscal year ended June 30, 2023 compared to prior fiscal years.

A summary of significant accounting policies is included in Part II, Item 8, Note 1, “Organization and Summary of Significant Accounting Policies” in our notes to the consolidated financial statements in this Annual Report.

9 unchanged sentences

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

We also estimate the costs of customer and distributor programs and incentive offerings such as price protection, rebates, as well as the estimated costs of cooperative marketing arrangements where the fair value of the benefit derived from the costs cannot be reasonably estimated.

We also estimate the costs of customer and distributor programs and incentive offerings such as price protection, customer rebates, as well as the estimated costs of cooperative marketing arrangements where the fair value of the benefit derived from the costs cannot be reasonably estimated.

Any provision is recorded as a reduction of revenue at the time of sale based on an evaluation of the contract terms and historical experience.

SMCI | 2023 Form 10-K | 38

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.

6 unchanged sentences

SSP for our products and services can evolve over time due to changes in our pricing practices, internally approved pricing guidelines with respect to geographies, customer type, internal costs, and gross margin objectives for the related performance obligations which can also be influenced by intense competition, changes in demand for our products and services, economic and other factors.

These estimates and judgements have not fluctuated significantly for the fiscal year ended June 30, 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.

21 unchanged sentences

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.

SMCI | 2023 Form 10-K | 39

Stock-Based Compensation

8 unchanged sentences

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.

7 unchanged sentences

If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future.

Variable Interest Entities

We determine at the inception of each arrangement whether an entity in which we hold an investment or in which we have other variable interests is considered a variable interest entity ("VIE").

We consolidate VIEs when we are the primary beneficiary.

The primary beneficiary of a VIE is the party that meets both of the following criteria:

(1) has the power to make decisions that most significantly affect the economic performance of the VIE and (2) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE.

Periodically, we assess whether any changes in the interest or relationship with the entity affect the determination of whether the entity is still a VIE and, if so, whether we are the primary beneficiary.

If we are not the primary beneficiary in a VIE, we account for the investment or other variable interest in accordance with applicable GAAP.

We have concluded that Ablecom and its affiliate, Compuware, are VIEs;

however, we are not the primary beneficiary as we do not have the power to direct the activities that are most significant to the entities and therefore, we do not consolidate these entities.

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

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

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

Our ability to assess correctly our influence or control over an entity at inception of our involvement or on a continuous basis when determining the primary beneficiary of a VIE affects the presentation of these entities in our consolidated financial statements.

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

SMCI | 2022 Form 10-K | 41

Results of Operations

11 unchanged sentences

Income from operations 10.7 % 6.5 % 3.5 %

Other (expense) income, net 0.2 % (0.1) % — %

Other income (expense), net 0.1 % 0.2 % (0.1) %

Interest expense (0.1) % (0.1) % (0.1) %

1 unchanged sentence

Income tax provision (1.6) % (1.0) % (0.2) %

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

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

Net income 9.0 % 5.6 % 3.1 %

SMCI | 2023 Form 10-K | 40

Net sales consist of sales of our server and storage solutions, including systems and related services and subsystems and accessories.

16 unchanged sentences

Total net sales $ 7,123.5 $ 5,196.1 $ 3,557.4 $ 1,927.4 37.1 % $ 1,638.7 46.1 %

SMCI | 2022 Form 10-K | 42

Fiscal Year 2023 Compared with Fiscal Year 2022

During fiscal year 2023 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 increase in net sales of server and storage systems was primarily due to the strong demands from such customers for GPU, high performance computing (“HPC”), and rack-scale solutions which are generally more complex and of higher value, resulting in an increase of average selling prices.

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

2 unchanged sentences

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 17%, offset by a decrease of approximately 9% in the number of units of compute nodes sold.

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

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

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

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.

SMCI | 2023 Form 10-K | 41

The following table presents percentages of net sales by geographic region for fiscal years 2023, 2022 and 2021 (dollars in millions):

11 unchanged sentences

Fiscal Year 2023 Compared with Fiscal Year 2022

The year-over-year increase in overall net sales is the result of increased selling prices and units shipped of product sold especially to large enterprise and datacenter customers.

The United States experienced the highest percentage growth among all regions.

This is due to increased demand from datacenter customers in the United States for GPU, high performance computing (“HPC”), and rack-scale solutions.

The year-over-year decrease in Asia is mainly due to economic slowdown in China and Japan during fiscal year 2023 which heavily reduced the sales activities in that region.

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.

2 unchanged sentences

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.

The year-over-year increase in net sales in Asia was primarily due to an increase in net sales of our server and storage systems in China, Singapore, India and Japan, partially offset by a decrease in the net sales in Taiwan.

The year-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.

SMCI | 2022 Form 10-K | 43

Cost of Sales and Gross Margin

Cost of sales primarily consists of the costs to manufacture our products, including the costs of materials, contract manufacturing, shipping, personnel expenses, including salaries, benefits, stock-based compensation and incentive bonuses, equipment and facility expenses, warranty costs and inventory excess and obsolescence provisions.

The primary factors that impact our cost of sales are the mix of products sold and cost of materials, which include purchased parts and material costs, shipping costs, salary and benefits and overhead costs related to production.

Cost of sales as a percentage of net sales may increase over time if decreases in average selling prices are not offset by corresponding decreases in our costs.

Cost of sales as a percentage of net sales may increase or decrease over time if the changes in average selling prices are not matched by corresponding changes in our costs.

Our cost of sales as a percentage of net sales is also impacted by the extent to which we are able to efficiently utilize our expanding manufacturing capacity.

Because we generally do not have long-term fixed supply agreements, our cost of sales is subject to change based on the cost of materials and market conditions.

As a result, our cost of sales as a percentage of net sales in any period can increase due to significant component price increases resulting from component shortages.

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

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

We also outsource to Compuware, also a related party, a portion of our design activities and a significant part of our manufacturing of components, particularly power supplies.

Because we generally do not have long-term fixed supply agreements, our cost of sales is subject to frequent change based on the availability of materials and other market conditions.

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

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

We also outsource to Compuware, also a related party, a portion of our design activities and a significant part of the manufacturing of components, particularly power supplies.

Our purchases of products from Ablecom and Compuware combined represented 6.6%, 8.3% and 7.8% of our cost of sales for fiscal years 2023, 2022 and 2021, respectively.

For further details on our dealings with related parties, see Part II, Item 8, Note 9, “Related Party Transactions.”

SMCI | 2023 Form 10-K | 42

Cost of sales and gross margin for fiscal years 2023, 2022 and 2021, are as follows (dollars in millions):

5 unchanged sentences

Fiscal Year 2023 Compared with Fiscal Year 2022

The year-over-year increase in cost of sales was primarily attributed to an increase of $1,379.6 million in costs of materials and contract manufacturing expenses primarily related to the increased shipments of our products and solutions, a $59.2 million increase in overhead costs which includes labor costs attributed to increase of operation activities, a $36.6 million increase in inventory reserves, and a $13.6 million increase in other cost of sales partially offset by a $44.6 million decrease in freight charges due to a reduced need to expedite shipments due to disruptions in the supply chain caused by the COVID-19 pandemic.

The year-over-year increase in the gross margin percentage was primarily due to favorable product and customer mix and lower other cost of goods sold as a percentage of sales, based on higher volumes.

Fiscal Year 2022 Compared with Fiscal Year 2021

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.

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 incentivized 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.

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

1 unchanged sentence

All research and development costs are expensed as incurred.

We occasionally receive non-recurring engineering funding from certain suppliers and customers for joint development.

We occasionally receive non-recurring engineering ("NRE") funding from certain suppliers and customers for joint development.

Under these arrangements, we are reimbursed for certain research and development costs that we incur as part of the joint development efforts with our suppliers and customers.

6 unchanged sentences

Spending on cooperative marketing, reimbursed by our suppliers, typically increases in connection with new product releases by our suppliers.

SMCI | 2023 Form 10-K | 43

General and administrative expenses consist primarily of general corporate costs, including personnel expenses such as salaries, benefits, stock-based compensation and incentive bonuses, and related expenses for our general and administrative personnel, financial reporting, information technology, corporate governance and compliance, outside legal, audit, tax fees, insurance and bad debt reserves on accounts receivable.

10 unchanged sentences

Fiscal Year 2023 Compared with Fiscal Year 2022

The year-over-year increase in research and development expenses was primarily driven by a $43.5 million increase in compensation expenses due to salary increases, higher headcount and the cost of equity awards as we expanded our workforce and invested in key talent, and a $2.6 million increase in product development costs to support the development of next generation products and technologies, offset by a $11.1 million increase in research and development credits received from certain suppliers and customers.

The year-over-year increase in sales and marketing expenses was primarily driven by a $23.8 million increase in compensation expenses due to salary increases, higher headcount and the cost of equity awards and a $4.6 million increase in travel and trade show expenses to drive new sales opportunities for our products and customer support, offset by a $3.5 million increase in marketing development funds received.

The year-over-year decrease in general and administrative expenses was primarily due to a $5.2 million decrease in professional fees and other, a $2.0 million decrease in litigation settlement expenses relating to a derivative lawsuit, partially offset by an increase of $4.4 million in compensation expenses associated with the cost of equity awards.

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 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.

The year-over-year decrease in general and administrative expenses was due to a decrease of $41.8 million in professional fees incurred to investigate, assess and remediate the causes that led to the delay in filing our periodic reports with the SEC and the associated restatement of certain of our previously issued financial statements, a decrease of $3.4 million in other expenses related to the COVID-19 pandemic and a $1.1 million decrease in supplies costs.

These decreases were partially offset by a $12.9 million increase in personnel expenses due to increased full time personnel and bonuses.

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

Interest and Income (Expense), Net

Interest and Other 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.

SMCI | 2023 Form 10-K | 44

Interest and other income (expense), net for fiscal years 2023, 2022 and 2021 are as follows (dollars in millions):

5 unchanged sentences

Fiscal Year 2023 Compared with Fiscal Year 2022

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.

The change of $8.6 million in interest and other income (expense), net was primarily attributable to a $4.5 million decrease in foreign exchange gain due to unfavorable currency fluctuations primarily related to our borrowing facilities in Taiwan and a $4.1 million increase in interest expense due to increase in interest rates on our outstanding loan balances.

Fiscal Year 2022 Compared with Fiscal Year 2021

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

The change of $7.0 million in interest and other income (expense), 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.

Provision for Income Taxes

9 unchanged sentences

Fiscal Year 2023 Compared with Fiscal Year 2022

The year-over-year decrease in the effective tax rate is attributable to higher tax deductions from disqualified disposition of stock-based compensation, an increase in the R&D tax credit, and an increase in foreign-derived income.

As a result of these favorable elements which were partially offset by certain unfavorable items including an increase in state taxes, the total effective tax rate decreased by 1%, declining from 15.7% in the fiscal year ended June 30, 2022, to 14.7% in the fiscal year ended June 30, 2023.

Fiscal Year 2022 Compared with Fiscal Year 2021

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

2 unchanged sentences

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 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):

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

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

SMCI | 2023 Form 10-K | 45

Share of income (loss) from equity investee, net of taxes for fiscal years 2023, 2022 and 2021 are as follows (dollars in millions):

Years Ended June 30, 2023 over 2022 Change 2022 over 2021 Change

2023 2022 2021 $ % $ %

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

Share of income (loss) from equity investee, net of taxes $ (3.6) $ 1.2 $ 0.2 $ (4.8) (400.0) % $ 1.0 (500.0) %

Percentage of total net sales — % — % — %

Fiscal Year 2023 Compared with Fiscal Year 2022

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.

The period-over-period decrease of $4.8 million in share of income from equity investee, net of taxes was primarily due to lower net income recognized by the Corporate Venture.

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.

SMCI | 2022 Form 10-K | 47

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.

Liquidity and Capital Resources

11 unchanged sentences

to have a material effect on our overall liquidity, financial condition or results of operations.

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

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.

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 these consolidated financial statements.

On June 17, 2023, the Company through the Taiwan subsidiary, entered into a Notification and Confirmation pursuant to which the Taiwan subsidiary and E.SUN Bank agreed to drawdowns of up to US$30 million for an import o/a financing loan with a tenor of 120 days (the “2023 Import O/A Loan”).

We continue to evaluate financing options that may be required to support the growth of our business, if it occurs more rapidly than anticipated.

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.

We had $150.0 million of remaining availability under the Prior Repurchase Program as of June 30, 2022, and such program subsequently expired on July 31, 2022.

On August 3, 2022, after the expiration of the Prior Share Repurchase Program on July 31, 2022, a duly authorized subcommittee of our Board approved a new share repurchase program to repurchase shares of our 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.

We repurchased 1,553,350 shares of common stock for $150 million during the fiscal year ended June 30, 2023 under this program and had $50.0 million of remaining availability as of June 30, 2023.

SMCI | 2023 Form 10-K | 46

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

1 unchanged sentence

2023 2022 2021

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

Net cash provided by (used in) operating activities $ 663.6 $ (440.8) $ 123.0 $ 1,104.4 $ (563.8)

Net cash used in investing activities $ (39.5) $ (46.3) $ (58.0) $ 6.8 $ 11.7

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

Net cash (used in) provided by financing activities $ (448.3) $ 522.9 $ (44.4) $ (971.2) $ 567.3

Net increase in cash, cash equivalents and restricted cash $ 172.4 $ 35.1 $ 21.1 $ 137.3 $ 14.0

Operating Activities

Net cash provided by operating activities increased by $1,104.4 million for fiscal year 2023 as compared to fiscal year 2022.

The increase was primarily due to an increase in net cash provided from net working capital of $796.7 million, a $354.8 million increase in net income due to the increase in sales of our products and solutions, a $21.6 million increase in stock-based compensation expense as a result of an increase in the cost of equity awards, a $11.1 million decrease in unrealized gain due to currency fluctuation, and a $6.4 million increase in other non-cash items.

These changes are offset by an increase of $86.2 million in deferred income taxes primarily due to increase in capitalized research and development costs.

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

4 unchanged sentences

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.

While net income increased by $27.6 million in fiscal year 2021 as compared to fiscal year 2020, the increase in cash flows from operating activities was due primarily to a decrease of cash used for net working capital requirements of $120.3 million.

Non-cash charges related to stock-based compensation expense increased by $8.4 million, collection of bad debt previously reserved decreased by $2.3 million, income from equity investee decreased by $2.2 million and $5.4 million decrease in the non-cash charges related to the change in our deferred income tax assets.

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

Investing Activities

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.

Net cash used in investing activities was $39.5 million, $46.3 million and $58.0 million for fiscal years 2023, 2022 and 2021, respectively, as we invested in our Green Computing Park in San Jose to expand our manufacturing capacity and office, expanded our Bade Facility in Taiwan and made purchases of property, plant and equipment.

Financing Activities

Net cash used in financing activities increased by $971.2 million for fiscal year 2023 as compared to fiscal year 2022 primarily due to repurchases of our common stock for $150.0 million reflecting our commitment to return value to our shareholders and repayment of net borrowings of $813.2 million.

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.

Other Factors Affecting Liquidity and Capital Resources

Refer to Part II, Item 8, Note 7, “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.

SMCI | 2023 Form 10-K | 47

Capital Expenditure Requirements

We anticipate our capital expenditures in fiscal year 2023 will be approximately $21.2 million, relating primarily to costs associated in our manufacturing capabilities, including tooling for new products, new information technology investments, and facilities upgrades.

We will continue to evaluate new business opportunities and new markets.

We anticipate our capital expenditures in fiscal year 2024 will be in range of $105.0 million to $115.0 million, relating primarily to costs associated with our manufacturing capabilities, including tooling for new products, new information technology investments, and facilities upgrades.

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

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 the acquisition, and we anticipate additional capital expenditures in fiscal year 2024 of $75.0 million (included in the above range) for such initiative.

In addition, we will continue to evaluate new business opportunities and new markets.

As a result, our future growth within the existing business or new opportunities and markets may dictate the need for additional facilities and capital expenditures to support that growth.

1 unchanged sentence

We intend to continue to focus our capital expenditures in fiscal year 2024 to support the growth of our operations.

Our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced software and services offerings, the investments in our office facilities and our systems infrastructure, the continuing market acceptance of our offerings and our planned investments, particularly in our product development efforts, applications or technologies.

Contractual Obligations

2 unchanged sentences

Under our operating leases as noted in Part II, Item 8, Note 8, "Leases", we have a current obligation of $7.8 million and a long-term obligation of $12.2 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.

As noted in Part II, Item 8, Note 12, "Commitments and Contingencies", we have current obligations related to noncancelable purchase commitments of $2.3 billion.

We have not provided a detailed estimate of the payment timing of unrecognized tax benefits due to the uncertainty of

when the related tax settlements will become due.

See Part II, Item 8, Note 11, “Income Taxes” to the consolidated financial statements in this Annual Report for a discussion of income taxes.

Recent Accounting Pronouncements

2 unchanged sentences

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

What changed 10-K

Item 7. Management’s Discussion and Analysis