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What changed in Supermicro's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Supermicro's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+271 added−293 removedSource: 10-K (2023-08-28) vs 10-K (2022-08-29)

Top changes in Supermicro's 2023 10-K

271 paragraphs added · 293 removed · 210 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

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Biggest changeWe also provide global support and services to help our customers install, upgrade and maintain their computing infrastructure. We offer our customers a high degree of flexibility and customization by providing a broad array of server models and configurations from which they can choose the best solutions to fit their computing needs.
Biggest changeWe offer our customers a high degree of flexibility and customization by providing a broad array of server models and configurations from which they can choose the best solutions to fit their computing needs. Our server and storage systems, sub-systems and accessories are architecturally designed to provide high levels of reliability, quality, configurability, and scalability.
In addition, we abide by global standards, irrespective of legal requirements, regarding the treatment of workers such as those detailed by the Responsible Business Alliance (“RBA”). These include prevention of excessive working hours and unfair wages, controls to prohibit child labor and human trafficking and bolstering workplace health and safety measures.
In addition, we abide by global standards, irrespective of legal requirements, regarding the treatment of workers such as those detailed by the Responsible Business Alliance. These include prevention of excessive working hours and unfair wages, controls to prohibit child labor and human trafficking and bolstering workplace health and safety measures.
We believe our approach of leveraging an overall architecture that balances data center power requirements, cooling, shared resources and refresh cycles helps the environment and provides total cost of ownership (“TCO”) savings for our customers. SMCI | 2022 Form 10-K | 1 We conduct our operations principally from our Silicon Valley headquarters, Taiwan and Netherlands facilities.
We believe our approach of leveraging an overall architecture that balances data center power requirements, cooling, shared resources and refresh cycles helps the environment and provides total cost of ownership (“TCO”) savings for our customers. SMCI | 2023 Form 10-K | 1 We conduct our operations principally from our Silicon Valley headquarters, Taiwan and Netherlands facilities.
SMCI | 2022 Form 10-K | 6 We are committed to protecting the environment through our “We Keep IT Green” initiative as a first to market innovator in high-performance, high-efficiency server, storage, networking and management total solutions. We recognize the critical importance of talent and culture to our success and ability to fulfill this vision.
SMCI | 2023 Form 10-K | 6 We are committed to protecting the environment through our “We Keep IT Green” initiative as a first to market innovator in high-performance, high-efficiency server, storage, networking and management total solutions. We recognize the critical importance of talent and culture to our success and ability to fulfill this vision.
We have a Safety Committee, which is designed to promote communications regarding health, safety, and emergency response procedures and to help implement improvements to our work areas and practices. SMCI | 2022 Form 10-K | 7 We are committed to complying with applicable laws, including those associated with labor and employment, across all areas of our operations.
We have a Safety Committee, which is designed to promote communications regarding health, safety, and emergency response procedures and to help implement improvements to our work areas and practices. SMCI | 2023 Form 10-K | 7 We are committed to complying with applicable laws, including those associated with labor and employment, across all areas of our operations.
SMCI | 2022 Form 10-K | 3 Supermicro Global Services We provide global service and support offerings for our direct and OEM customers and our indirect sales channel partners directly or through approved distributors and third-party partners. Our services include server and storage system integration, configuration and software upgrades and updates.
SMCI | 2023 Form 10-K | 3 Supermicro Global Services We provide global service and support offerings for our direct and OEM customers and our indirect sales channel partners directly or through approved distributors and third-party partners. Our services include server and storage system integration, configuration and software upgrades and updates.
Financial Information about Segments and Geographic Areas Please see Part II, Item 8, Note 17, “Segment Reporting” to the consolidated financial statements in this Annual Report for information regarding segment reporting and Part II, Item 8, Note 3, “Revenue - Disaggregation of Revenue” to the consolidated financial statements in this Annual Report for information regarding our net sales by geographic region.
Financial Information about Segments and Geographic Areas Please see Part II, Item 8, Note 14, “Segment Reporting” to the consolidated financial statements in this Annual Report for information regarding segment reporting and Part II, Item 8, Note 3, “Revenue - Disaggregation of Revenue” to the consolidated financial statements in this Annual Report for information regarding our net sales by geographic region.
SMCI | 2022 Form 10-K | 2 Products and Services We offer a broad range of accelerated compute platforms that are application-optimized server solutions, rackmount and blade servers, storage, and subsystems and accessories, which can be used to build complete server and storage systems.
SMCI | 2023 Form 10-K | 2 Products and Services We offer a broad range of accelerated compute platforms that are application-optimized server solutions, rackmount and blade servers, storage, and subsystems and accessories, which can be used to build complete server and storage systems.
We leverage our relationships in our indirect sales channel and with our OEMs to penetrate select industry segments where our products can provide better alternatives to existing solutions. SMCI | 2022 Form 10-K | 4 We maintain close contact with our indirect sales channel partners and end customers.
We leverage our relationships in our indirect sales channel and with our OEMs to penetrate select industry segments where our products can provide better alternatives to existing solutions. SMCI | 2023 Form 10-K | 4 We maintain close contact with our indirect sales channel partners and end customers.
In each of fiscal years 2022, 2021 and 2020, no customer represented greater than 10% of our total net sales. Sales and Marketing Our sales and marketing activities are conducted through a combination of our direct sales force and our indirect sales channel partners.
In each of fiscal years 2023, 2022 and 2021, no customer represented greater than 10% of our total net sales. Sales and Marketing Our sales and marketing activities are conducted through a combination of our direct sales force and our indirect sales channel partners.
We work closely with their respective development teams to enhance system performance and reduce system-level issues. Similarly, we work very closely with our customers to identify their needs and develop our new product plans accordingly. Customers During each of fiscal year 2022 and fiscal year 2021, we sold to over 1,000 direct customers in over 100 countries.
We work closely with their respective development teams to enhance system performance and reduce system-level issues. Similarly, we work very closely with our customers to identify their needs and develop our new product plans accordingly. Customers During each of fiscal years 2023, 2022 and 2021, we sold to over 1,000 direct customers in over 100 countries.
Item 1. Business Our Company 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 various markets, including enterprise data centers, cloud computing, artificial intelligence, 5G and edge computing.
Item 1. Business Our Company 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 (“AI”), 5G and edge computing.
Capitalizing on New Applications and Technologies In addition to serving traditional needs for server and storage systems, we have devoted, and will continue to devote, substantial resources to developing systems that support emerging and growing applications including cloud computing, artificial intelligence, 5G/edge computing, storage and others.
Capitalizing on New Applications and Technologies In addition to serving traditional needs for server and storage systems, we have devoted, and will continue to devote, substantial resources to developing systems that support emerging and growing applications including AI, cloud computing, 5G/edge computing, storage and others.
See Part II, Item 8, Note 12, “Related Party Transactions,” to the consolidated financial statements and Part III, Item 13, “Certain Relationships and Related Transactions and Director Independence.” SMCI | 2022 Form 10-K | 5 We monitor our inventory continuously to be able to meet customer delivery requirements and to avoid inventory obsolescence.
See Part II, Item 8, Note 9, “Related Party Transactions,” to the consolidated financial statements and Part III, Item 13, “Certain Relationships and Related Transactions and Director Independence.” SMCI | 2023 Form 10-K | 5 We monitor our inventory continuously to be able to meet customer delivery requirements and to avoid inventory obsolescence.
As of June 30, 2022, we had over 2,000 employees in our research and development organization. These resources, along with our understanding of complex computing and storage requirements, enable us to deliver product innovation featuring advanced functionality and capabilities required by our customers.
As of June 30, 2023, we had over 2,400 employees in our research and development organization. These resources, along with our understanding of complex computing and storage requirements, enable us to deliver product innovation featuring advanced functionality and capabilities required by our customers.
Information contained on our website is not incorporated by reference in, or made part of, this Annual Report or our other filings with, or reports furnished to, the SEC. The SEC also maintains a website that contains our SEC filings. SMCI | 2022 Form 10-K | 9
Information contained on our website is not incorporated by reference in, or made part of, this Annual Report or our other filings with, or reports furnished to, the SEC. The SEC also maintains a website that contains our SEC filings. SMCI | 2023 Form 10-K | 8
Sales to customers located outside of the United States represented 41.6%, 40.7% and 41.4% of net sales in fiscal years 2022, 2021 and 2020, respectively. Marketing Our marketing programs are designed to create a global awareness and branding for our company and products, as well as an understanding of the significant value we bring to customers.
Sales to customers located outside of the United States represented 32.1%, 41.6% and 40.7% of net sales in fiscal years 2023, 2022 and 2021, respectively. Marketing Our marketing programs are designed to create a global awareness and branding for our company and products, as well as an understanding of the significant value we bring to customers.
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 decrease in net sales of subsystems and accessories was primarily due to the emphasis of selling full systems and servers which require utilization of the subcomponents.
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 and corresponding decrease in net sales of subsystems and accessories was primarily due to our emphasis on selling full systems and servers which require utilization of the subcomponents.
These Total IT Solutions and products are designed to serve a variety of markets, such as enterprise data centers, cloud computing, artificial intelligence (“AI”) and 5G/edge computing.
These Total IT Solutions and products are designed to serve a variety of markets, such as enterprise data centers, cloud computing, AI and 5G/edge computing.
The percentage of our net sales represented by sales of server and storage systems increased to 85.9% in fiscal year 2022 compared to 78.4% in fiscal year 2021 and 78.5% in fiscal year 2020, and the percentage of our net sales represented by sales of subsystems and accessories was 14.1% in fiscal year 2022, 21.6% in fiscal year 2021 and 21.5% in fiscal year 2020.
The percentage of our net sales represented by sales of server and storage systems increased to 92.2% in fiscal year 2023 compared to 85.9% in fiscal year 2022 and 78.4% in fiscal year 2021, and the percentage of our net sales represented by sales of subsystems and accessories was 7.8% in fiscal year 2023, 14.1% in fiscal year 2022 and 21.6% in fiscal year 2021.
SMCI | 2022 Form 10-K | 8 Additionally, during the fiscal year 2022, the computer server industry experienced global supply chain shortage, which requires us to carry more inventories to fulfill our customers and partners’ demands and backlogs.
Additionally, during the fiscal year 2023, the computer server industry experienced global supply chain shortage, which requires us to carry more inventories to fulfill our customers and partners’ demands and backlogs.
During fiscal year 2020, we sold to over 820 direct customers. In addition, over the three years ended June 30, 2022, we have sold to thousands of end users through our indirect sales channel. These customers represent a diverse set of market verticals including enterprise data centers, cloud computing, artificial intelligence, 5G and edge computing markets.
In addition, over the three years ended June 30, 2023, we have sold to thousands of end users through our indirect sales channel. These customers represent a diverse set of market verticals including enterprise data centers, cloud computing, AI, 5G and edge computing markets.
As of June 30, 2022, we employed 4,607 full time employees, consisting of 2,089 employees in research and development, 525 employees in sales and marketing, 456 employees in general and administrative and 1,537 employees in manufacturing. Of these employees, 2,222 employees are based in our San Jose facilities.
As of June 30, 2023, we employed 5,126 full time employees, consisting of 2,448 employees in research and development, 585 employees in sales and marketing, 465 employees in general and administrative and 1,628 employees in manufacturing. Of these employees, 2,291 employees are based in our San Jose facilities.
Our solutions, which we refer to as Total IT Solutions, include complete servers, storage systems, modular blade servers, blades, workstations, complete rack scale plug and play solutions delivering pre-defined and pre-tested full rack scale solutions, networking devices, server sub-systems, system management and security software.
Our Total IT Solutions include complete servers, storage systems, modular blade servers, blades, workstations, full rack scale solutions, networking devices, server sub-systems, server management and security software. We also provide global support and services to help our customers install, upgrade and maintain their computing infrastructure.
We believe these actions are appropriate and essential to safeguard our employees, contractors, suppliers, customers, and communities while allowing us to safely continue operations. Board Oversight of Human Capital Management Our Board of Directors, as a part of its overall responsibility to provide oversight, has purview over matters related to human capital management.
Board Oversight of Human Capital Management Our Board of Directors, as a part of its overall responsibility to provide oversight, has purview over matters related to human capital management.
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Our server and storage systems, sub-systems and accessories are architecturally designed to provide high levels of reliability, quality, configurability, and scalability.
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This allows us to offer customers a broad choice of products to match their target application requirements. In fiscal year 2023, we announced more than 50 products supporting Intel’s new Sapphire Rapids data center CPU. During the second half of fiscal year 2023, our product portfolio was enhanced to support AMD’s Genoa data center CPU.
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This allows us to offer customers a broad choice of products to match their target application requirements. In November 2021, we announced the Universal GPU server; which enables customers to choose the most suitable CPUs and GPUs, and switch configurations for their specific applications and workloads.
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In March 2023, we released a high-density petascale class all-flash NVMe server family supporting next-generation EDSFF form factor, including the E3.S and E1.S devices.
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In February 2022, we introduced the SuperEdge multi-node Server for 5G, IoT, and edge applications. This 2U, 3-node, short-depth design increases node density by 50% for high-density computing at the intelligent edge.
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Also in March 2023, we unveiled comprehensive portfolio of GPU systems including servers in 8U, 6U, 5U, 4U, 2U, and 1U form factors, as well as workstations that support the full range of new NVIDIA H100 GPUs.
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From the start of the COVID-19 pandemic, we proactively implemented preventative protocols, which we continuously assess and update for changes in conditions and applicable regulations. These preventative protocols are intended to safeguard our employees, contractors, suppliers, customers, and communities, and to ensure business continuity.
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We are following government policies and recommendations designed to slow the spread of COVID-19 and are committed to the health and safety of anyone in our facilities.
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To respond to the COVID-19 pandemic, we implemented the following precautions: • We require that on-site employees and visitors complete a daily health questionnaire, provide thermometers in all buildings, and adhere to social distance requirements, mask protocols and our internal vaccination mandate; • We exclude employees who test positive for COVID-19 from the workplace, conduct contact tracing, provide self-tests for employee surveillance, disinfect common areas daily and carry out weekly fogging of each building, minimize non-priority business travel, and provide personal HEPA air purifiers for each employee; and • To respond to changing COVID-19 updates, we work closely with our Environmental Health and Safety team to monitor and periodically update our policies.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeFactors that may affect quarterly operating results include: • Fluctuations in demand for our products, in part due to changes in the global economic environment; • Fluctuations based upon seasonality, with the quarters ending March 31 and September 30 typically being weaker; • The occurrence of global pandemics, including COVID-19, and other events that impact the global economy or one or more sectors of the global economy, 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; SMCI | 2022 Form 10-K | 13 • 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; • 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; • Mix of whether customer purchases are of partially or fully integrated systems or subsystems and accessories and whether made directly or through our indirect sales channel partners; • The effect of mergers and acquisitions among our competitors, suppliers, customers, or partners; • General economic conditions in our geographic markets; • Geopolitical tensions, including trade wars, tariffs and/or sanctions in our geographic markets; and • Impact of regulatory changes on our cost of doing business.
Biggest changeFactors that may affect quarterly operating results include: • Fluctuations in demand for our products, in part due to changes in the global economic environment; • Fluctuations based upon seasonality, with the quarters ending March 31 and September 30 typically being weaker; SMCI | 2023 Form 10-K | 11 • 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; • 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; • 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 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; • The effect of mergers and acquisitions among our competitors, suppliers, customers, or partners; • General economic conditions in our geographic markets; • Geopolitical tensions, including trade wars, tariffs and/or sanctions in our geographic markets; and • Impact of regulatory changes on our cost of doing business.
Such prices are subject to decline if customers do not continue to purchase our latest generation products or additional components, which could harm our results of operations. • Our cost structure and ability to deliver server solutions to customers in a timely manner may be adversely affected by volatility of the market for core components and certain materials for our products. • We may lose sales or incur unexpected expenses relating to insufficient, excess or obsolete inventory. • Difficulties we encounter relating to automating internal controls utilizing our ERP systems or integrating processes that occur in other IT applications could adversely impact our controls environment. • System security violations, data protection breaches, cyber-attacks and other related cyber-security issues could disrupt our internal operations or compromise the security of our products, and any such disruption could reduce our expected revenues, increase our expenses, damage our reputation and adversely affect our stock price. • Any failure to adequately expand or retain our sales force will impede our growth. • Conflicts of interest may arise between us and Ablecom and Compuware, and those conflicts may adversely affect our operations. • Our reliance on Ablecom could be subject to risks associated with our reliance on a limited source of contract manufacturing services and inventory warehousing. • If negative publicity arises with respect to us, our employees, our third-party service providers or our partners, our business and operating results could be adversely affected, regardless of whether the negative publicity is true. • If we lose Charles Liang, our President, Chief Executive Officer and Chairman, or any other key employee, we may not be able to implement our business strategy in a timely manner. • Our direct sales efforts may create confusion for our end customers and harm our relationships in our indirect sales channel and with our OEMs. • If we are unable to attract and integrate additional key employees in a manner that enables us to scale our business and operations effectively, or if we do not maintain competitive compensation policies to retain our employees, our ability to operate effectively and efficiently could be limited.
Such prices are subject to decline if customers do not continue to purchase our latest generation products or additional components, which could harm our results of operations. • Our cost structure and ability to deliver server solutions to customers in a timely manner may be adversely affected by volatility of the market for core components and certain materials for our products. • We may lose sales or incur unexpected expenses relating to insufficient, excess or obsolete inventory. • Difficulties we encounter relating to automating internal controls utilizing our ERP systems or integrating processes that occur in other IT applications could adversely impact our controls environment. • System security violations, data protection breaches, cyber-attacks and other related cyber-security issues could disrupt our internal operations or compromise the security of our products, and any such disruption could reduce our expected revenues, increase our expenses, damage our reputation and adversely affect our stock price. • Any failure to adequately expand or retain our sales force will impede our growth. • Conflicts of interest may arise 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. • If negative publicity arises with respect to us, our employees, our third-party service providers or our partners, our business and operating results could be adversely affected, regardless of whether the negative publicity is true. • If we lose Charles Liang, our President, Chief Executive Officer and Chairman, or any other key employee, we may not be able to implement our business strategy in a timely manner. • Our direct sales efforts may create confusion for our end customers and harm our relationships in our indirect sales channel and with our OEMs. • If we are unable to attract and integrate additional key employees in a manner that enables us to scale our business and operations effectively, or if we do not maintain competitive compensation policies to retain our employees, our ability to operate effectively and efficiently could be limited.
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.
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, 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.
Prices of these core components and materials are volatile, and, as a result, it is difficult to predict expense levels and operating results. In addition, if our business growth renders it necessary or appropriate to transition to longer term contracts with materials and core component suppliers, our costs may increase, and our gross margins could correspondingly decrease.
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.
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 take steps to minimize business disruption when these situations arise; however, we may be required to terminate or modify such relationships if our activities are prohibited by U.S. laws.
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; however, we may be required to terminate or modify such relationships if our activities are prohibited by U.S. laws.
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.
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.
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.
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 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. Our international expansion efforts may not be successful.
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.
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.
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.
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.
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.
Steve Liang owned no shares of our common stock as of June 30, 2022, 2021 or 2020. Charles Liang and his spouse, Sara Liu, our Co-Founder, Senior Vice President and Director, jointly owned approximately 10.5% of Ablecom’s capital stock, while Mr. Steve Liang and other family members owned approximately 28.8% of Ablecom’s outstanding common stock as of June 30, 2022.
Steve Liang owned no shares of our common stock as of June 30, 2023, 2022 or 2021. Charles Liang and his spouse, Sara Liu, our Co-Founder, Senior Vice President and Director, jointly owned approximately 10.5% of Ablecom’s capital stock, while Mr. Steve Liang and other family members owned approximately 28.8% of Ablecom’s outstanding common stock as of June 30, 2023.
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.
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 began on July 1, 2023.
While we had greater than normal backlog during certain periods of fiscal year 2022, historically, our net sales are difficult to forecast because we do not have sufficient backlog of unfilled orders or sufficient recurring revenue to meet our quarterly net sales targets at the beginning of a quarter.
While we had greater than normal backlog during certain periods of fiscal year 2023, historically, our net sales are difficult to forecast because we do not have sufficient backlog of unfilled orders or sufficient recurring revenue to meet our quarterly net sales targets at the beginning of a quarter.
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.
Our principal competitors include global technology companies such as Cisco, Dell, Hewlett-Packard Enterprise and Lenovo. In addition, we also compete with a number of other vendors who also sell application optimized servers, contract manufacturers/OEMs and original design manufacturers (“ODMs”), such as Foxconn, Inspur, Quanta Computer and Wiwynn Corporation. ODMs sell server solutions marketed or sold under a third-party brand.
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 ODMs, such as Foxconn, Inspur, Quanta Computer and Wiwynn Corporation. ODMs sell server solutions marketed or sold under a third-party brand.
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.
See Part II, Item 8, Note 12, “Related Party Transactions” to the consolidated financial statements in this Annual Report. We may make investments in other corporate ventures.
See Part II, Item 8, Note 9, “Related Party Transactions” to the consolidated financial statements in this Annual Report. We may make investments in other corporate ventures.
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. The trading price of our common stock has been and is likely to continue to be subject to wide fluctuations.
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.
Many of our competitors enjoy substantial competitive advantages, such as: • Greater name recognition and deeper market penetration; • Longer operating histories; • Larger sales and marketing organizations and research and development teams and budgets; • More established relationships with customers, contract manufacturers and suppliers and better channels to reach larger customer bases and larger sales volume allowing for better costs; • Larger customer service and support organizations with greater geographic scope; • A broader and more diversified array of products and services; and • Substantially greater financial, technical and other resources.
SMCI | 2023 Form 10-K | 22 Many of our competitors enjoy substantial competitive advantages, such as: • Greater name recognition and deeper market penetration; • Longer operating histories; • Larger sales and marketing organizations and research and development teams and budgets; • More established relationships with customers, contract manufacturers and suppliers and better channels to reach larger customer bases and larger sales volume allowing for better costs; • Larger customer service and support organizations with greater geographic scope; • A broader and more diversified array of products and services; and • Substantially greater financial, technical and other resources.
SMCI | 2022 Form 10-K | 20 If we are unable to attract and integrate additional key employees in a manner that enables us to scale our business and operations effectively, or if we do not maintain competitive compensation policies to retain our employees, our ability to operate effectively and efficiently could be limited.
SMCI | 2023 Form 10-K | 19 If we are unable to attract and integrate additional key employees in a manner that enables us to scale our business and operations effectively, or if we do not maintain competitive compensation policies to retain our employees, our ability to operate effectively and efficiently could be limited.
SMCI | 2022 Form 10-K | 19 If negative publicity arises with respect to us, our employees, our third-party service providers or our partners, our business and operating results could be adversely affected, regardless of whether the negative publicity is true.
SMCI | 2023 Form 10-K | 18 If negative publicity arises with respect to us, our employees, our third-party service providers or our partners, our business and operating results could be adversely affected, regardless of whether the negative publicity is true.
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. Failure to comply with the U.S.
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.
SMCI | 2022 Form 10-K | 28 In addition, while we have implemented policies, internal controls and other measures reasonably designed to promote compliance with applicable anti-corruption and anti-bribery laws and regulations, and certain safeguards designed to ensure compliance with U.S. trade control laws, our employees or agents have in the past engaged and may in the future engage in improper conduct for which we could be held responsible.
In addition, while we have implemented policies, internal controls and other measures reasonably designed to promote compliance with applicable anti-corruption and anti-bribery laws and regulations, and certain safeguards designed to ensure compliance with U.S. trade control laws, our employees or agents have in the past engaged and may in the future engage in improper conduct for which we could be held responsible.
SMCI | 2022 Form 10-K | 16 We may lose sales or incur unexpected expenses relating to insufficient, excess or obsolete inventory. To offer greater choices and optimization of our products to benefit our customers, we maintain a high level of inventory.
SMCI | 2023 Form 10-K | 15 We may lose sales or incur unexpected expenses relating to insufficient, excess or obsolete inventory. To offer greater choices and optimization of our products to benefit our customers, we maintain a high level of inventory.
The crisis in eastern Europe continues to be a challenge to global companies, including us, which have customers in the impacted regions. The U.S. 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.
The crisis in eastern Europe continues to pose challenges to global companies, including us, which have customers in the impacted regions. The U.S. 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.
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.
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.
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. SMCI | 2022 Form 10-K | 26 In addition, numerous states in the U.S. are also expanding data protection through legislation.
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. In addition, numerous states in the U.S. are also expanding data protection through legislation.
As of July 31, 2022, our executive officers, directors, current five percent or greater stockholders and affiliated entities together beneficially owned 37.4% of our common stock, net of treasury stock. As a result, these stockholders, acting together, have significant influence over all matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions.
As of July 31, 2023, our executive officers, directors, current five percent or greater stockholders and affiliated entities together beneficially owned 42.3% of our common stock, net of treasury stock. As a result, these stockholders, acting together, have significant influence over all matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions.
As a result of the above factors, our quarter-to-quarter results of operations may be subject to greater fluctuation and our stock price may be adversely affected. If we fail to meet any publicly announced financial guidance or other expectations about our business, it could cause our stock to decline in value.
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. SMCI | 2023 Form 10-K | 13 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.
SMCI | 2022 Form 10-K | 18 Bill Liang is also the Chief Executive Officer of Compuware, a member of Compuware’s Board of Directors and a holder of a significant equity interest in Compuware. Steve Liang is also a member of Compuware’s Board of Directors and is an equity holder of Compuware. Mr.
SMCI | 2023 Form 10-K | 17 Bill Liang is also the Chief Executive Officer of Compuware, a member of Compuware’s Board of Directors and a holder of a significant equity interest in Compuware. Steve Liang is also a member of Compuware’s Board of Directors and is an equity holder of Compuware. Mr.
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 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.
SMCI | 2022 Form 10-K | 12 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.
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.
SMCI | 2022 Form 10-K | 14 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.
SMCI | 2023 Form 10-K | 12 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 increased credit risks, and our sales may be less predictable.
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.
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.
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 with Ablecom and Compuware, and they may adversely affect our operations.
SMCI | 2022 Form 10-K | 23 Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. Competitors may seek to copy our innovations and use cost advantages from greater size to compete aggressively with us on price.
Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. Competitors may seek to copy our innovations and use cost advantages from greater size to compete aggressively with us on price.
We have no long-term agreements that obligate our suppliers to continue to work with us or to supply us with products. Our suppliers’ failure to improve the functionality and performance of materials and key components for our products may impair or delay our ability to deliver innovative products to our customers.
We have no long-term agreements that obligate our suppliers to continue to work with us or to supply us with products. SMCI | 2023 Form 10-K | 23 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.
SMCI | 2022 Form 10-K | 17 We manage and store various proprietary information and sensitive or confidential data relating to our business as well as information from our suppliers and customers.
SMCI | 2023 Form 10-K | 16 We manage and store various proprietary information and sensitive or confidential data relating to our business as well as information from our suppliers and customers.
The lenders called the loans in October 2018, following the suspension of our common stock from trading on NASDAQ in August 2018 and the decline in the market price of our common stock in October 2018. As of June 30, 2022, the amount due on the unsecured loan (including principal and accrued interest) was approximately $15.7 million.
The lenders called the loans in October 2018, following the suspension of our common stock from trading on NASDAQ in August 2018 and the decline in the market price of our common stock in October 2018. As of June 30, 2023, the amount due on the unsecured loan (including principal and accrued interest) was approximately $16.0 million.
Our loss exposure is limited to the remainder of our equity investment in the corporate venture which as of June 30, 2022, and 2021 was $5.3 million and $4.6 million, respectively. We currently do not intend to make any additional investment in this corporate venture.
Our loss exposure is limited to the remainder of our equity investment in the corporate venture which as of June 30, 2023 and 2022 was $2.0 million and $5.3 million, respectively. We currently do not intend to make any additional investment in this corporate venture.
We may not be able to obtain a favorable outcome and may spend considerable resources in our efforts to defend and protect our intellectual property. Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain.
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. SMCI | 2023 Form 10-K | 28 Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain.
SMCI | 2022 Form 10-K | 22 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.
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.
SMCI | 2022 Form 10-K | 32 Our business and operations may be impacted by natural disaster events, including those brought on by climate change. Land, sea and air routes between economic centers are subject to weather events exacerbated by climate change and can disrupt commercial activity.
Our business and operations may be impacted by natural disaster events, including those brought on by climate change. Land, sea and air routes between economic centers are subject to weather events exacerbated by climate change and can disrupt commercial activity.
For all of these reasons, customer dissatisfaction with the quality of our products could substantially impair our ability to grow our business. SMCI | 2022 Form 10-K | 25 Our results of operations may be subject to fluctuations based upon our investment in corporate ventures.
For all of these reasons, customer dissatisfaction with the quality of our products could substantially impair our ability to grow our business. Our results of operations may be subject to fluctuations based upon our investment in corporate ventures.
SMCI | 2022 Form 10-K | 30 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.
SMCI | 2023 Form 10-K | 29 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.
Strategic and Industry Risks • If we do not successfully manage the expansion of our international manufacturing capacity and business operations, our business could be harmed. • We may not be able to successfully manage our business for growth and expansion. • Our growth into markets outside the United States exposes us to risks inherent in international business operations.
Strategic and Industry Risks • If we do not successfully manage the expansion of our international manufacturing capacity and business operations, our business could be harmed. • We may not be able to successfully manage our business for growth and expansion. • Our growth into markets outside the United States exposes us to risks inherent in international business operations. • We depend upon the development of new products & enhancements to existing products.
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.
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.
Costs to comply with and implement these privacy-related and data protection measures could be significant. Global privacy legislation, enforcement, and policy activity for privacy and data protection are rapidly expanding and creating a complex regulatory compliance environment. Costs to comply with and implement these privacy-related and data protection measures could be significant.
Costs to comply with and implement these privacy-related and data protection measures could be significant. SMCI | 2023 Form 10-K | 25 Global privacy legislation, enforcement, and policy activity for privacy and data protection are rapidly expanding and creating a complex regulatory compliance environment. Costs to comply with and implement these privacy-related and data protection measures could be significant.
Risk Factor Summary 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. • Our revenue and margins for a particular period are difficult to predict, and a shortfall in revenue or decline in margins may harm our operating results. • As we increasingly target larger customers and larger sales opportunities, our customer base may become more concentrated, our cost of sales may increase, our margins may be lower, our borrowings may be higher with effects on our cash flow, we are exposed to inventory risks, and our sales may be less predictable. • If we fail to meet any publicly announced financial guidance or other expectations about our business, it could cause our stock to decline in value. • Increases in average selling prices for our Total IT Solutions have historically significantly contributed to increases in net sales in some of the periods covered.
Risk Factor Summary Operational and Execution Risks • Adverse economic conditions may harm our business. • 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. • Our quarterly operating results have fluctuated and will likely fluctuate in the future. • Our revenue and margins for a particular period are difficult to predict, and a shortfall in revenue or decline in margins may harm our operating results. • As we increasingly target larger customers and larger sales opportunities, our customer base may become more concentrated, our cost of sales may increase, our margins may be lower, our borrowings may be higher with effects on our cash flow, we are exposed to inventory risks, and our sales may be less predictable. • If we fail to meet any publicly announced financial guidance or other expectations about our business, it could cause our stock to decline in value. • 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.
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.
SMCI | 2023 Form 10-K | 14 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.
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.
SMCI | 2023 Form 10-K | 26 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.
SMCI | 2022 Form 10-K | 29 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.
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.
We outsource to Compuware a portion of our design activities and a significant part of our manufacturing of subassemblies, particularly power supplies. Our purchases of products from Ablecom and Compuware represented 8.2%, 7.8% and 10.1% of our cost of sales for fiscal years 2022, 2021 and 2020, respectively.
We outsource to Compuware a portion of our design activities and a significant part of our manufacturing of subassemblies, particularly power supplies. Our purchases of products from Ablecom and Compuware represented 6.6%, 8.3% and 7.8% of our cost of sales for fiscal years 2023, 2022 and 2021, respectively.
If we fail to predict or respond to emerging technological trends & our customers’ changing needs, our operating results and market share may suffer. • The market in which we participate is highly competitive. • Industry consolidation may lead to increased competition and may harm our operating results. • We must work closely with our suppliers to make timely new product introductions. • Our suppliers’ failure to improve the functionality and performance of materials and key components for our products may impair or delay our ability to deliver innovative products to our customers. • We rely on a limited number of suppliers for certain components used to manufacture our products. • We rely on indirect sales channels and any disruption in these channels could adversely affect our sales. • Our failure to deliver high quality server and storage solutions could damage our reputation and diminish demand for our products. • Our results of operations may be subject to fluctuations based upon our investment in corporate ventures.
SMCI | 2023 Form 10-K | 9 • The market in which we participate is highly competitive. • Industry consolidation may lead to increased competition and may harm our operating results. • We must work closely with our suppliers to make timely new product introductions. • Our suppliers’ failure to improve the functionality and performance of materials and key components for our products may impair or delay our ability to deliver innovative products to our customers. • We rely on a limited number of suppliers for certain components used to manufacture our products. • We rely on indirect sales channels and any disruption in these channels could adversely affect our sales. • Our failure to deliver high quality server and storage solutions could damage our reputation and diminish demand for our products. • Our results of operations may be subject to fluctuations based upon our investment in corporate ventures.
We plan our operating expense levels based primarily on forecasted revenue levels. These expenses and the impact of long-term commitments are relatively fixed in the short term. A shortfall in revenue could lead to operating results being below expectations because we may not be able to quickly reduce these fixed expenses in response to short-term business changes.
These expenses and the impact of long-term commitments are relatively fixed in the short term. A shortfall in revenue could lead to operating results being below expectations because we may not be able to quickly reduce these fixed expenses in response to short-term business changes.
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.
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.
SMCI | 2022 Form 10-K | 21 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.
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.
Our most significant business offices, research and development, and manufacturing locations, are in the San Jose, California area and in Taiwan. Each region is subject to climate change events and known for earthquakes.
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.
Risks Related to Owning our Common Stock • 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. • The concentration of our capital stock ownership with insiders likely limits your ability to influence corporate matters. • We do not expect to pay any cash dividends for the foreseeable future.
Risks Related to Owning our Common Stock • The trading price of our common stock is likely to be volatile. • 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. • We do not expect to pay any cash dividends for the foreseeable future.
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. Our business depends on the overall demand for accelerated compute platforms.
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.
Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends in the foreseeable future should not purchase our common stock. General Risks Our products may not be viewed as supporting climate change mitigation in the IT sector.
Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.
If our new hires perform poorly, or if we are unsuccessful in hiring, training, managing and integrating these new employees, or if we are not successful in retaining our employees, our business may be harmed.
We must continue to hire, train and manage new employees as needed. If our new hires perform poorly, or if we are unsuccessful in hiring, training, managing and integrating these new employees, or if we are not successful in retaining our employees, our business may be harmed.
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.
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, particularly for GPUs during periods of growth of new emerging markets (such as for AI).
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.
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.
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; • Announcements of technological innovations, new products or product enhancements, strategic alliances or significant agreements by us or by our competitors; • Changes in recommendations by any securities analysts that elect to follow our common stock; • The financial projections we may provide to the public, any changes in these projections or our failure to meet these projections; SMCI | 2022 Form 10-K | 31 • False or misleading press releases or articles regarding our company or our products; • The loss of a key customer; • The loss of key personnel; • Technological advancements rendering our products less valuable; • Lawsuits filed against us, including those described in Part I, Item 3, “Legal Proceedings”; • Changes in operating performance and stock market valuations of other companies that sell similar products; • Price and volume fluctuations in the overall stock market; • Market conditions in our industry, the industries of our customers and the economy as a whole; and • Other events or factors, including those resulting from war, incidents of terrorism, political instability or responses to these events.
Factors, in addition to those outlined elsewhere in this filing, that may affect the trading price of our common stock include: • 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; • Changes in recommendations by any securities analysts that elect to follow our common stock; • The financial projections we may provide to the public, any changes in these projections or our failure to meet these projections; • False or misleading press releases or articles regarding our company or our products; • The loss of a key customer; • The loss of key personnel; • Technological advancements rendering our products less valuable; • Lawsuits filed against us; • Changes in operating performance and stock market valuations of other companies that sell similar products; • Price and volume fluctuations in the overall stock market; • Market conditions in our industry, the industries of our customers and the economy as a whole; and • Other events or factors, including those resulting from war, incidents of terrorism, political instability, pandemics or responses to these events.
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.
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.
If our suppliers’ components do not function properly, we may incur additional costs and our relationships with our customers may be adversely affected. SMCI | 2022 Form 10-K | 24 We rely on a limited number of suppliers for certain components used to manufacture our products.
If our suppliers’ components do not function properly, we may incur additional costs and our relationships with our customers may be adversely affected. 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.
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.
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. We receive significant tax benefits from sales to our non-U.S. customers.
Foreign Corrupt Practices Act, other applicable anti-corruption and anti-bribery laws, and applicable trade control laws could subject us to penalties and other adverse consequences. We manufacture and sell our products in several countries outside of the United States, both to direct and OEM customers as well as through our indirect sales channel. Our operations are subject to the U.S.
We manufacture and sell our products in several countries outside of the United States, both to direct and OEM customers as well as through our indirect sales channel. Our operations are subject to the U.S. Foreign Corrupt Practices Act (the “FCPA”) as well as the anti-corruption and anti-bribery laws in the countries where we do business.
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.
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. We are also pursuing an expansion of our manufacturing operations into Malaysia.
If we are unable to successfully ramp up our international manufacturing capacity, including the associated increased logistics and warehousing, we may incur unanticipated costs, difficulties in making timely delivery of products or suffer other business disruptions which could adversely impact our results of operations. We may not be able to successfully manage our business for growth and expansion.
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.
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.
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.
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.
If our customers do not purchase our products, our business will be harmed. SMCI | 2023 Form 10-K | 21 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.
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. • Our future effective income tax rates could be affected by changes in the relative mix of our operations and income among different geographic regions and by changes in domestic and foreign income tax laws. • Backlog does not provide a substantial portion of our net sales in any quarter.
Financial Risks • Our R&D expenditures, as a percentage of our net sales, are considerably higher than many of our competitors. • Our future effective income tax rates could be affected by changes in the relative mix of our operations and income among different geographic regions and by changes in domestic and foreign income tax laws. • Backlog does not provide a substantial portion of our net sales in any quarter.
If we are not able to predict market trends accurately, we may not benefit from such research and development activities, and our results of operations may suffer. Managing our business for long-term growth also requires us to successfully manage our employee headcount. We must continue to hire, train and manage new employees as needed.
If 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. SMCI | 2023 Form 10-K | 20 Managing our business for long-term growth also requires us to successfully manage our employee headcount.
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. If our customers do not purchase our products, our business will be harmed.
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.
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 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, which has the power to implement and enforce the CCPA and CPRA through administrative actions, including administrative fines.
The COVID-19 pandemic and other macroeconomic factors exacerbated by the COVID-19 pandemic has resulted in widely reported shortages of semiconductors. From time to time, we have been forced to delay the introduction of certain of our products or the fulfillment of customer orders as a result of shortages of materials and key components, which can adversely impact our revenue.
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.
Occasionally, our design or manufacturing processes may fail to deliver products of the quality that our customers require. For example, in the past certain vendors have provided us with defective components that failed under certain applications. As a result, our products needed to be repaired and we incurred costs in connection with the recall and diverted resources from other projects.
For example, in the past certain vendors have provided us with defective components that failed under certain applications. As a result, our products needed to be repaired and we incurred costs in connection with the recall and diverted resources from other projects. New flaws or limitations in our server and storage solutions may be detected in the future.
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.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeItem 2. Properties As of June 30, 2022, we owned approximately 2,273,000 square feet and leased approximately 690,000 square feet of office and manufacturing space. Our long-lived assets located outside of the United States represented 36.8%, 34.4% and 23.5% of total value of long-lived assets in fiscal years 2022, 2021 and 2020, respectively.
Biggest changeItem 2. Properties SMCI | 2023 Form 10-K | 32 As of June 30, 2023, we owned approximately 2,273,000 square feet and leased approximately 720,000 square feet of office and manufacturing space. Our long-lived assets located outside of the United States represented 36.8%, 36.8% and 34.4% of total value of long-lived assets in fiscal years 2023, 2022 and 2021, respectively.
See Part II, Item 8, Note 17, “Segment Reporting” to the consolidated financial statements in this Annual Report for a summary of long-lived assets by geographic region. Our principal executive offices, research and development center and production operations are located in San Jose, California where we own approximately 1,307,000 square feet of office and manufacturing space.
See Part II, Item 8, Note 14, “Segment Reporting” to the consolidated financial statements in this Annual Report for a summary of long-lived assets by geographic region. Our principal executive offices, research and development center and production operations are located in San Jose, California where we own approximately 1,307,000 square feet of office and manufacturing space.
Our European headquarters for manufacturing and service operations is located in Den Bosch, the Netherlands where we own approximately 12,000 square feet of office and we lease approximately 203,000 square feet of office and manufacturing space under five leases, which expire in July 2025 and June 2026.
Our European headquarters for manufacturing and service operations is located in Den Bosch, the Netherlands where we own approximately 12,000 square feet of office and we lease approximately 203,000 square feet of office and manufacturing space under five leases, which expire in June 2026.
We lease approximately 5,000 square feet of office space in Jersey City, New Jersey under a lease that expires in May 2027, lease approximately 46,000 square feet of office space in San Jose, California under a lease that expires in January 2028, lease approximately 246,000 square feet of warehouse space in Fremont, California under a lease that expires in July 2025, and lease approximately 28,000 square feet of warehouse space in Milpitas, California under a lease that expires in March 2027.
We lease approximately 5,000 square feet of office space in Jersey City, New Jersey under a lease that expires in July 2025, lease approximately 46,000 square feet of office space in San Jose, California under a lease that expires in January 2028, lease approximately 246,000 square feet of warehouse space in Fremont, California under a lease that expires in July 2025, lease approximately 28,000 square feet of warehouse space in Milpitas, California under a lease that expires in March 2027.
In fiscal year 2022, we continued to engage several contractors for the development and construction of improvements on the property. We financed this development through our operating cash flows and borrowings from banks. See Part II, Item 8, Note 9, “Short-term and Long-term Debt” to the consolidated financial statements in this Annual Report for a discussion of our company's debt.
In fiscal year 2023, we continued to engage several contractors for the development and construction of improvements on the property. We financed this development through our operating cash flows and borrowings from banks. See Part II, Item 8, Note 7, “Short-term and Long-term Debt” to the consolidated financial statements in this Annual Report for a discussion of our company's debt.
In Asia, our manufacturing facilities are located in Taoyuan County, Taiwan where we own approximately 954,000 square feet of office and manufacturing space on 6.77 acres of land. These manufacturing facilities are pledged as security under the existing term loans with $45.8 million remaining outstanding as of June 30, 2022.
In Asia, our manufacturing facilities are located in Taoyuan County, Taiwan where we own approximately 954,000 square feet of office and manufacturing space on 6.77 acres of land. These manufacturing facilities are pledged as security under the existing term loans with $38.2 million remaining outstanding as of June 30, 2023.
Our research and development center, service operations, and warehouse space in Asia are located in an approximately 110,000 square feet facility in Taipei, Taiwan under thirteen leases that expire at various dates ranging from November 2022 through July 2025 and an approximately 38,000 square feet facility in Taoyuan, Taiwan under two leases that expire in December 2022.
Our research and development center, service operations, and warehouse space in Asia are located in an approximately 118,000 square feet facility in Taipei and Hsinchu, Taiwan under fourteen leases that expire at various dates ranging from January 2024 through February 2026 and an approximately 42,000 square feet facility in Taoyuan, Taiwan under three leases that expire in December 2023.
Added
Subsequent to June 30, 2023, we entered into a five year lease for an additional approximate 124,000 square feet of warehouse space in San Jose, California.
Added
D uring the second quarter of fiscal year 2023, we entered into a letter of understanding to acquire land in Malaysia to be used 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 acquisition.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeItem 3. Legal Proceedings The information required by this item is incorporated herein by reference to the information set forth under the caption “Litigation and Claims” in Part II, Item 8, Note 15 “Commitments and Contingencies” of our notes to the consolidated financial statements included in this Annual Report.
Biggest changeItem 3. Legal Proceedings The information required by this item is incorporated herein by reference to the information set forth under the caption “Litigation and Claims” in Part II, Item 8, Note 12 “Commitments and Contingencies” of our notes to the consolidated financial statements included in this Annual Report.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeIssuer Purchases of Equity Securities During the three months ended June 30, 2022, we did not repurchase shares of our common stock. On January 29, 2021, a duly authorized subcommittee of the Board approved a share repurchase program (the "Prior Repurchase Program") to repurchase up to $200 million of our common stock at prevailing prices in the open market.
Biggest changeIssuer Purchases of Equity Securities During the three months ended June 30, 2023, we did not repurchase any shares of our common stock: Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs (1) Month 1 (April 1, 2023 to April 30, 2023) — $ — — $50.0 Million Month 2 (May 1, 2023 to May 31, 2023) — $ — — $50.0 Million Month 3 (June 1, 2023 to June 30, 2023) — $ — — $50.0 Million Total — $ — — (1) On August 3, 2022, after the expiration of a 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.
Holders As of July 31, 2022, there were 20 registered stockholders of record of our common stock. Because most of our shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial stockholders represented by these holders of record.
Holders As of July 31, 2023, there were 20 registered stockholders of record of our common stock. Because most of our shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial stockholders represented by these holders of record.
The graph reflects an investment of $100 (with reinvestment of all dividends, if any) in our common stock, the Nasdaq Computer Index and the Nasdaq Composite Index on June 30, 2017, and our relative performance tracked through June 30, 2022.
The graph reflects an investment of $100 (with reinvestment of all dividends, if any) in our common stock, the Nasdaq Computer Index and the Nasdaq Composite Index on June 30, 2018, and our relative performance tracked through June 30, 2023.
The share repurchase program is effective until January 31, 2024 or until the maximum amount of common stock is repurchased, whichever occurs first. SMCI | 2022 Form 10-K | 35
The share repurchase program is effective until January 31, 2024 or until the maximum amount of common stock is repurchased, whichever occurs first. As of June 30, 2023, $50 million remained available under the program. SMCI | 2023 Form 10-K | 35
Removed
SMCI | 2022 Form 10-K | 34 6/30/2017 6/30/2018 6/30/2019 6/30/2020 6/30/2021 6/30/2022 Super Micro Computer, Inc. 100.00 95.94 78.50 115.17 142.72 163.69 Nasdaq Composite Index 100.00 122.31 130.39 163.81 236.20 179.61 Nasdaq Computer Index 100.00 129.47 140.11 200.72 301.78 246.13 Recent Sales of Unregistered Securities None.
Added
SMCI | 2023 Form 10-K | 34 6/30/2018 6/30/2019 6/30/2020 6/30/2021 6/30/2022 6/30/2023 Super Micro Computer, Inc. 100.00 81.82 120.04 148.75 170.61 1,053.91 Nasdaq Composite Index 100.00 106.60 133.93 193.12 146.85 183.59 Nasdaq Computer Index 100.00 108.22 155.03 233.08 190.10 260.87 Recent Sales of Unregistered Securities None.
Removed
Prior to the expiration of such repurchase program on July 31, 2022, an aggregate of $50 million had been purchased thereunder.
Removed
Subsequently, on August 3, 2022, after the expiration of the Prior Repurchase Program, a duly authorized subcommittee of the 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.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeOperating expenses for fiscal years 2022, 2021 and 2020 are as follows (dollars in millions): Years Ended June 30, 2022 over 2021 Change 2021 over 2020 Change 2022 2021 2020 $ % $ % Research and development $ 272.3 $ 224.4 $ 221.5 $ 47.9 21.3 % $ 2.9 1.3 % Percentage of total net sales 5.2 % 6.3 % 6.6 % Sales and marketing 90.1 85.7 85.1 4.4 5.1 % 0.6 0.7 % Percentage of total net sales 1.7 % 2.4 % 2.5 % General and administrative 102.4 100.5 133.9 1.9 1.9 % (33.4) (24.9) % Percentage of total net sales 2.0 % 2.8 % 4.0 % Total operating expenses $ 464.8 $ 410.6 $ 440.5 54.2 13.2 % (29.9) (6.8) % Fiscal Year 2022 Compared with Fiscal Year 2021 The year-over-year increase in research and development expenses was primarily due to a $40.8 million increase in personnel expenses due to salary increases and a higher headcount, $3.7 million lower research and development credits from certain suppliers and customers towards our development efforts and a $3.4 million increase in product development costs.
Biggest changeOperating expenses 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 $ % $ % Research and development $ 307.3 $ 272.3 $ 224.4 $ 35.0 12.9 % $ 47.9 21.3 % Percentage of total net sales 4.3 % 5.2 % 6.3 % Sales and marketing 115.0 90.1 85.7 24.9 27.6 % 4.4 5.1 % Percentage of total net sales 1.6 % 1.7 % 2.4 % General and administrative 99.6 102.4 100.5 (2.8) (2.7) % 1.9 1.9 % Percentage of total net sales 1.4 % 2.0 % 2.8 % Total operating expenses $ 521.9 $ 464.8 $ 410.6 57.1 12.3 % 54.2 13.2 % 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.
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.
Interest and Income (Expense), Net Other income (expense), net consists primarily of interest earned on our investment and cash balances and foreign exchange gains and losses. Interest expense represents interest expense on our term loans and lines of credit.
Interest and Other 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.
Financing Activities Net cash used in financing activities increased by $567.3 million for fiscal year 2022 as compared to fiscal year 2021 primarily due to an increase of $446.2 million in proceeds from borrowings net of repayment, offset by a $130.0 million decrease in stock repurchases.
Net cash used in financing activities increased by $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.
Historically, our ability to introduce new products rapidly has allowed us to benefit from technology transitions such as the introduction of new microprocessors and storage technologies, and as a result, we monitor the introduction cycles of NVIDIA Corporation, Intel Corporation, Advanced Micro Devices, Inc., Samsung Electronics Company Limited, Micron Technology, Inc. and others closely and carefully.
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.
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.
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.
All research and development costs are expensed as incurred. We occasionally receive non-recurring engineering funding from certain suppliers and customers for joint development. Under these arrangements, we are reimbursed for certain research and development costs that we incur as part of the joint development efforts with our suppliers and customers.
All research and development costs are expensed as incurred. 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.
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 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 evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and our expected return on investment. We intend to continue to focus our capital expenditures in fiscal year 2023 to support the growth of our operations.
We evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and our expected return on investment. We intend to continue to focus our capital expenditures in fiscal year 2024 to support the growth of our operations.
Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report, particularly under the heading "Risk Factors." Overview We are a 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 actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report, particularly under the heading "Risk Factors." Overview We are a 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, AI, 5G and edge computing.
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 (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.
Other Factors Affecting Liquidity and Capital Resources 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.
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.
Since the start of the COVID-19 pandemic, we have experienced an increase in costs of sales, logistics costs as well as direct labor costs as we incentivize our employees. This increase in costs negatively impacts our gross margin, and we expect these higher costs to continue for the duration of the COVID-19 pandemic.
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.
A reconciliation of the federal statutory income tax rate to our effective tax rate is set forth in Part II, Item 8, Note 14, “Income Taxes” to the consolidated financial statements in this Annual Report.
A reconciliation of the federal statutory income tax rate to our effective tax rate is set forth in Part II, Item 8, Note 11, “Income Taxes” to the consolidated financial statements in this Annual Report.
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.
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.
Fiscal Year 2021 Compared with Fiscal Year 2020 During fiscal year 2021 we experienced increased revenue from server and storage systems, particularly from our large enterprise and datacenter customers.
Fiscal Year 2022 Compared with Fiscal Year 2021 During fiscal year 2022 we experienced increased revenue from server and storage systems, particularly from our large enterprise and datacenter customers.
Recent Accounting Pronouncements For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see Part II, Item 8, Note 1, “Organization and Summary of Significant Accounting Policies” to the consolidated financial statements in this Annual Report. SMCI | 2022 Form 10-K | 49
Recent Accounting Pronouncements For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see Part II, Item 8, Note 1, “Organization and Summary of Significant Accounting Policies” to the consolidated financial statements in this Annual Report. SMCI | 2023 Form 10-K | 48
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.
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.
SMCI | 2022 Form 10-K | 47 Liquidity and Capital Resources We have financed our growth primarily with funds generated from operations, in addition to utilizing borrowing facilities, particularly in relation to an increase in the need for working capital due to longer supply chain manufacturing and delivery times as well as the financing of real property acquisitions and funds received from the exercise of employee stock options.
Liquidity and Capital Resources We have financed our growth primarily with funds generated from operations, in addition to utilizing borrowing facilities, particularly in relation to an increase in the need for working capital due to longer supply chain manufacturing and delivery times as well as the financing of real property acquisitions and funds received from the exercise of employee stock options.
For fiscal years 2022, 2021 and 2020, our net income was $285.2 million, $111.9 million and $84.3 million, respectively. In order to increase our sales and profits, we believe that we must continue to develop flexible and application optimized server and storage solutions and be among the first to market with new features and products.
For fiscal years 2023, 2022 and 2021, our net income was $640.0 million, $285.2 million and $111.9 million, respectively. In order to increase our sales and profits, we believe that we must continue to develop flexible and application optimized server and storage solutions and be among the first to market with new features and products.
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.
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.
Stock-Based Compensation We measure and recognize compensation expense for all share-based awards made to employees and non-employees, including stock options, restricted stock units ("RSUs") and performance-based restricted stock units (“PRSUs”). We recognize the grant date fair value of all share-based awards over the requisite service period and account for forfeitures as they occur.
SMCI | 2023 Form 10-K | 39 Stock-Based Compensation We measure and recognize compensation expense for all share-based awards made to employees and non-employees, including stock options, restricted stock units ("RSUs") and performance-based restricted stock units (“PRSUs”). We recognize the grant date fair value of all share-based awards over the requisite service period and account for forfeitures as they occur.
Cost of sales as a percentage of net sales may increase over time if decreases in average selling prices are not offset by corresponding decreases in our costs. Our cost of sales as a percentage of net sales is also impacted by the extent to which we are able to efficiently utilize our expanding manufacturing capacity.
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.
Any provision is recorded as a reduction of revenue at the time of sale based on an evaluation of the contract terms and historical experience. We allocate the transaction price for each customer contract to each performance obligation based on the relative SSP for each performance obligation within each contract.
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.
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.
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.
Years Ended June 30, 2022 2021 2020 Net sales 100.0 % 100.0 % 100.0 % Cost of sales 84.6 % 85.0 % 84.2 % Gross profit 15.4 % 15.0 % 15.8 % Operating expenses: Research and development 5.2 % 6.3 % 6.6 % Sales and marketing 1.7 % 2.4 % 2.5 % General and administrative 2.0 % 2.8 % 4.1 % Total operating expenses 8.9 % 11.5 % 13.2 % Income from operations 6.5 % 3.5 % 2.6 % Other (expense) income, net 0.2 % (0.1) % — % Interest expense (0.1) % (0.1) % (0.1) % Income before income tax provision 6.6 % 3.3 % 2.5 % Income tax provision (1.0) % (0.2) % (0.1) % Share of income from equity investee, net of taxes — % — % 0.1 % Net income 5.6 % 3.1 % 2.5 % Net Sales Net sales consist of sales of our server and storage solutions, including systems and related services and subsystems and accessories.
Years Ended June 30, 2023 2022 2021 Net sales 100.0 % 100.0 % 100.0 % Cost of sales 82.0 % 84.6 % 85.0 % Gross profit 18.0 % 15.4 % 15.0 % Operating expenses: Research and development 4.3 % 5.2 % 6.3 % Sales and marketing 1.6 % 1.7 % 2.4 % General and administrative 1.4 % 2.0 % 2.8 % Total operating expenses 7.3 % 8.9 % 11.5 % Income from operations 10.7 % 6.5 % 3.5 % Other income (expense), net 0.1 % 0.2 % (0.1) % Interest expense (0.1) % (0.1) % (0.1) % Income before income tax provision 10.7 % 6.6 % 3.3 % Income tax provision (1.6) % (1.0) % (0.2) % 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 Net sales consist of sales of our server and storage solutions, including systems and related services and subsystems and accessories.
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.
SMCI | 2022 Form 10-K | 38 Critical Accounting Policies and Estimates General Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States.
Critical Accounting Policies and Estimates General Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States.
Our cash and cash equivalents were $267.4 million and $232.3 million as of June 30, 2022 and 2021, respectively. Our cash in foreign locations was $169.5 million and $152.6 million as of June 30, 2022 and 2021, respectively. Amounts held outside of the U.S. are generally utilized to support non-U.S. liquidity needs.
Our cash and cash equivalents were $440.5 million and $267.4 million as of June 30, 2023 and 2022, respectively. Our cash in foreign locations was $192.3 million and $169.5 million as of June 30, 2023 and 2022, respectively. Amounts held outside of the U.S. are generally utilized to support non-U.S. liquidity needs.
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.
Investing Activities 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.
Our purchases of products from Ablecom and Compuware combined represented 8.3%, 7.8% and 10.1% of our cost of sales for fiscal years 2022, 2021 and 2020, respectively.
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.
SMCI | 2022 Form 10-K | 46 Provision for Income Taxes Our income tax provision is based on our taxable income generated in the jurisdictions in which we operate, which primarily include the United States, Taiwan, and the Netherlands.
Provision for Income Taxes Our income tax provision is based on our taxable income generated in the jurisdictions in which we operate, which primarily include the United States, Taiwan, and the Netherlands.
Interest and other income (expense), net for fiscal years 2022, 2021 and 2020 are as follows (dollars in millions): Years Ended June 30, 2022 over 2021 Change 2021 over 2020 Change 2022 2021 2020 $ % $ % Other income (expense), net $ 8.1 $ (2.8) $ 1.4 $ 10.9 (389.3) % $ (4.2) (300.0) % Interest expense (6.4) (2.5) (2.2) (3.9) 156.0 % (0.3) 13.6 % Interest and other income (expense), net $ 1.7 $ (5.3) $ (0.8) $ 7.0 (132.1) % $ (4.5) 562.5 % Fiscal Year 2022 Compared with Fiscal Year 2021 The change of $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.
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): Years Ended June 30, 2023 over 2022 Change 2022 over 2021 Change 2023 2022 2021 $ % $ % Other income (expense), net $ 3.6 $ 8.1 $ (2.8) $ (4.5) (55.6) % $ 10.9 (389.3) % Interest expense (10.5) (6.4) (2.5) (4.1) 64.1 % (3.9) 156.0 % Interest and other income (expense), net $ (6.9) $ 1.7 $ (5.3) $ (8.6) (505.9) % $ 7.0 (132.1) % Fiscal Year 2023 Compared with Fiscal Year 2022 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.
Contractual Obligations Our estimated future obligations as of June 30, 2022, include both current and long term obligations. For our long-term debt as noted in Part II, Item 8, Note 9, “Short-term and Long-term Debt”, we have a current obligation of $449.1 million and a long-term obligation of $147.6 million.
Contractual Obligations Our estimated future obligations as of June 30, 2023, include both current and long term obligations. For our long-term debt as noted in Part II, Item 8, Note 7, “Short-term and Long-term Debt”, we have a current obligation of $170.1 million and a long-term obligation of $120.2 million.
The following table presents net sales by product type for fiscal years 2022, 2021 and 2020 (dollars in millions): Years Ended June 30, 2022 over 2021 Change 2021 over 2020 Change 2022 2021 2020 $ % $ % Server and storage systems $ 4,463.8 $ 2,790.3 $ 2,620.8 $ 1,673.5 60.0 % $ 169.5 6.5 % Percentage of total net sales 85.9 % 78.4 % 78.5 % Subsystems and accessories 732.3 767.1 718.5 (34.8) (4.5) % 48.6 6.8 % Percentage of total net sales 14.1 % 21.6 % 21.5 % Total net sales $ 5,196.1 $ 3,557.4 $ 3,339.3 $ 1,638.7 46.1 % $ 218.1 6.5 % SMCI | 2022 Form 10-K | 42 Fiscal Year 2022 Compared with Fiscal Year 2021 During fiscal year 2022 we experienced increased revenue from server and storage systems, particularly from our large enterprise and datacenter customers.
The following table presents net sales by product type for fiscal years 2023, 2022 and 2021 (dollars in millions): Years Ended June 30, 2023 over 2022 Change 2022 over 2021 Change 2023 2022 2021 $ % $ % Server and storage systems $ 6,569.8 $ 4,463.8 $ 2,790.3 $ 2,106.0 47.2 % $ 1,673.5 60.0 % Percentage of total net sales 92.2 % 85.9 % 78.4 % Subsystems and accessories 553.7 732.3 767.1 (178.6) (24.4) % (34.8) (4.5) % Percentage of total net sales 7.8 % 14.1 % 21.6 % Total net sales $ 7,123.5 $ 5,196.1 $ 3,557.4 $ 1,927.4 37.1 % $ 1,638.7 46.1 % 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.
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.
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 and investments in our office facilities and our IT system infrastructure.
Under our operating leases as noted in Part II, Item 8, Note 11, "Leases", we have a current obligation of $7.7 million and a long-term obligation of $17.4 million. As noted in Part II, Item 8, Note 15, "Commitments and Contingencies", we have current obligations related to noncancelable purchase commitments of $562.9 million.
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 12, "Commitments and Contingencies", we have current obligations related to noncancelable purchase commitments of $2.3 billion.
SMCI | 2022 Form 10-K | 41 Results of Operations The following table presents certain items of our consolidated statements of operations expressed as a percentage of revenue.
Results of Operations The following table presents certain items of our consolidated statements of operations expressed as a percentage of revenue.
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.
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 as well as economies of scale gained from higher production volume in our facilities.
Share of income from equity investee, net of taxes for fiscal years 2022, 2021 and 2020 are as follows (dollars in millions): Years Ended June 30, 2022 over 2021 Change 2021 over 2020 Change 2022 2021 2020 $ % $ % Share of income from equity investee, net of taxes $ 1.2 $ 0.2 $ 2.4 $ 1.0 500.0 % $ (2.2) 91.7 % Percentage of total net sales — % — % — % Fiscal Year 2022 Compared with Fiscal Year 2021 The 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.
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 (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 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.
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.
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.
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.
Previously recognized compensation expense is not reversed if vested stock options, RSUs or PRSUs for which the requisite service has been rendered and the performance condition has been met expire unexercised or are not settled. The fair value of RSUs and PRSUs is based on the closing market price of our common stock on the date of grant.
Our key cash flow metrics were as follows (dollars in millions): Years Ended June 30, 2022 over 2021 2021 over 2020 2022 2021 2020 Net cash (used in) provided by operating activities $ (440.8) $ 123.0 $ (30.3) $ (563.8) $ 153.3 Net cash used in investing activities $ (46.3) $ (58.0) $ (43.6) $ 11.7 $ (14.4) Net cash provided by (used in) financing activities $ 522.9 $ (44.4) $ 23.8 $ 567.3 $ (68.2) Net increase (decrease) in cash, cash equivalents and restricted cash $ 35.1 $ 21.1 $ (49.8) $ 14.0 $ 70.9 Operating Activities Net cash provided by operating activities decreased by $563.8 million for fiscal year 2022 as compared to fiscal year 2021.
SMCI | 2023 Form 10-K | 46 Our key cash flow metrics were as follows (dollars in millions): Years Ended June 30, 2023 over 2022 2022 over 2021 2023 2022 2021 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 (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.
We had $150.0 million of remaining availability under the Prior Repurchase Program as of June 30, 2022.
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.
Fiscal Year 2021 Compared with Fiscal Year 2020 The year-over-year decrease of $2.2 million in share of income from equity investee, net of taxes was primarily due to lower net income recognized by the Corporate Venture in the fiscal year 2021 as compared to 2020.
Fiscal Year 2022 Compared with Fiscal Year 2021 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 following table presents percentages of net sales by geographic region for fiscal years 2022, 2021 and 2020 (dollars in millions): Years Ended June 30, 2022 over 2021 Change 2021 over 2020 Change 2022 2021 2020 $ % $ % United States $ 3,035.5 $ 2,107.9 $ 1,957.3 $ 927.6 44.0 % $ 150.6 7.7 % Percentage of total net sales 58.4 % 59.3 % 58.6 % Asia 1,139.9 699.7 650.7 440.2 62.9 % 49.0 7.5 % Percentage of total net sales 21.9 % 19.7 % 19.5 % Europe 825.2 614.8 598.6 210.4 34.2 % 16.2 2.7 % Percentage of total net sales 15.9 % 17.3 % 17.9 % Others 195.5 135.0 132.7 60.5 44.8 % 2.3 1.7 % Percentage of total net sales 3.7 % 3.7 % 4.0 % Total net sales $ 5,196.1 $ 3,557.4 $ 3,339.3 $ 1,638.7 46.1 % $ 218.1 6.5 % 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.
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): Years Ended June 30, 2023 over 2022 Change 2022 over 2021 Change 2023 2022 2021 $ % $ % United States $ 4,834.1 $ 3,035.5 $ 2,107.9 $ 1,798.6 59.3 % $ 927.6 44.0 % Percentage of total net sales 67.9 % 58.4 % 59.3 % Asia 1,050.8 1,139.9 699.7 (89.1) (7.8) % 440.2 62.9 % Percentage of total net sales 14.7 % 21.9 % 19.7 % Europe 1,003.1 825.2 614.8 177.9 21.6 % 210.4 34.2 % Percentage of total net sales 14.1 % 15.9 % 17.3 % Others 235.5 195.5 135.0 40.0 20.5 % 60.5 44.8 % Percentage of total net sales 3.3 % 3.7 % 3.7 % Total net sales $ 7,123.5 $ 5,196.1 $ 3,557.4 $ 1,927.4 37.1 % $ 1,638.7 46.1 % 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.
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.
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.
Total effective tax rate increased by 9.5% from 5.8% for the fiscal year ended June 30, 2021 to 15.7% for the fiscal year ended June 30, 2022. This increase was driven by a 15.4% increase in the overall effective tax rate.
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. Total effective tax rate increased by 9.5% from 5.8% for the fiscal year ended June 30, 2021 to 15.7% for the fiscal year ended June 30, 2022.
This model requires us to make estimates and assumptions with respect to the expected term of the option and the expected volatility of the price of our common stock. The expected term represents the period that our stock-based awards are expected to be outstanding and was determined based on our historical experience.
The expected term represents the period that our stock-based awards are expected to be outstanding and was determined based on our historical experience. The expected volatility is based on the historical volatility of our common stock. The assumptions used to determine the fair value of the option awards represent management’s best estimates.
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.
SMCI | 2023 Form 10-K | 47 Capital Expenditure Requirements 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.
Provision for income taxes and effective tax rates for fiscal years 2022, 2021 and 2020 are as follows (dollars in millions): Years Ended June 30, 2022 over 2021 Change 2021 over 2020 Change 2022 2021 2020 $ % $ % Income tax provision $ 52.9 $ 6.9 $ 2.9 $ 46.0 666.7 % $ 4.0 137.9 % Percentage of total net sales 1.0 % 0.2 % 0.1 % Effective tax rate 15.7 % 5.8 % 3.4 % Fiscal Year 2022 Compared with Fiscal Year 2021 The year-over-year increase in the effective tax rate was primarily due to a significant increase in revenue and income before tax.
Provision for income taxes and effective tax rates 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 $ % $ % Income tax provision $ 110.7 $ 52.9 $ 6.9 $ 57.8 109.3 % $ 46.0 666.7 % Percentage of total net sales 1.6 % 1.0 % 0.2 % Effective tax rate 14.7 % 15.7 % 5.8 % 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.
Financial Highlights The following is a summary of financial highlights of fiscal years 2022 and 2021: • Net sales increased by 46.1% in fiscal year 2022 as compared to fiscal year 2021. • Gross margin increased to 15.4% in fiscal year 2022 from 15.0% in fiscal year 2021, primarily due to product and customer mix and was offset by increased logistic costs. • Operating expenses increased by 13.2% in fiscal year 2022 as compared to fiscal year 2021, primarily due to the increase in personnel expenses as a result of salary increases and a higher headcount. • Net income increased to $285.2 million in fiscal year 2022 as compared to $111.9 million in fiscal year 2021, which was primarily due to the higher net sales and lower operating expenses as a percentage of revenues in fiscal year 2022 as compared to fiscal year 2021. • Our cash and cash equivalents were $267.4 million and $232.3 million at the end of fiscal years 2022 and 2021, respectively.
Financial Highlights The following is a summary of financial highlights of fiscal years 2023 and 2022: • Net sales increased by 37.1% in fiscal year 2023 as compared to fiscal year 2022. • 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.
For further details on our dealings with related parties, see Part II, Item 8, Note 12, “Related Party Transactions.” Cost of sales and gross margin for fiscal years 2022, 2021 and 2020, are as follows (dollars in millions): Years Ended June 30, 2022 over 2021 Change 2021 over 2020 Change 2022 2021 2020 $ % $ % Cost of sales $ 4,396.1 $ 3,022.9 $ 2,813.1 $ 1,373.2 45.4 % $ 209.8 7.5 % Gross profit 800.0 534.5 526.2 265.5 49.7 % 8.3 1.6 % Gross margin 15.4 % 15.0 % 15.8 % 0.4 % (0.8) % 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.
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): Years Ended June 30, 2023 over 2022 Change 2022 over 2021 Change 2023 2022 2021 $ % $ % Cost of sales $ 5,840.5 $ 4,396.1 $ 3,022.9 $ 1,444.4 32.9 % $ 1,373.2 45.4 % Gross profit 1,283.0 800.0 534.5 483.0 60.4 % 265.5 49.7 % Gross margin 18.0 % 15.4 % 15.0 % 2.6 % 0.4 % 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.
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.
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.
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.
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 expected volatility is based on the historical volatility of our common stock. The assumptions used to determine the fair value of the option awards represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. Our use of the Black-Scholes option-pricing model requires the input of highly subjective assumptions.
These estimates involve inherent uncertainties and the application of management’s judgment. Our use of the Black-Scholes option-pricing model requires the input of highly subjective assumptions. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future.
This also impacts our research and development expenditures as we continue to invest more in our current and future product development efforts. COVID-19 Pandemic Impact COVID-19 and its variants have continued to create volatility, uncertainty and economic disruption for many businesses worldwide.
This also impacts our research and development expenditures as we continue to invest more in our current and future product development efforts. COVID-19 Pandemic Impact Our business and financial outlook have experienced, and may continue to face, challenges due to adverse macroeconomic conditions and uncertainties.
Net realizable value is the estimated selling price of our products in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Inventories consist of purchased parts and raw materials (principally electronic components), work in process (principally products being assembled) and finished goods.
Inventories Inventories are stated at lower of cost, using weighted average cost method, or net realizable value. Net realizable value is the estimated selling price of our products in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.
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.
This increase was driven by a 15.4% increase in the overall effective tax rate. R&D credit reduced the effective tax rate by 3.5% and foreign derived income reduced the effective tax rate by 1.4%.
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.
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.
Our services and software revenue, included in server and storage systems revenue, increased by $0.2 million year-over-year.
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 $28.0 million year-over-year.
Fiscal Year 2021 Compared with Fiscal Year 2020 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.
Fiscal Year 2022 Compared with Fiscal Year 2021 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.
The share repurchase program is effective until January 31, 2024 or until the maximum amount of common stock is repurchased, whichever occurs first.
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 | 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. We estimate the fair value of stock options granted using a Black-Scholes option pricing model.
We estimate the fair value of stock options granted using a Black-Scholes option pricing model. This model requires us to make estimates and assumptions with respect to the expected term of the option and the expected volatility of the price of our common stock.
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.
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.
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.
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 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 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.
Removed
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.
Added
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.
Removed
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.
Added
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.
Removed
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.
Added
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.
Removed
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.
Added
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.
Removed
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.
Added
Inventories consist of purchased parts and raw materials (principally electronic components), work in process (principally products being assembled) and finished goods.
Removed
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.
Added
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.
Removed
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.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

3 edited+0 added−0 removed6 unchanged
Biggest changeForeign exchange gain (loss) for fiscal years 2022, 2021 and 2020 was $7.7 million, $(3.2) million and $(1.4) million, respectively. SMCI | 2022 Form 10-K | 50
Biggest changeRealized and unrealized foreign exchange gain (loss) for fiscal years 2023, 2022 and 2021 was $0.2 million, $7.7 million and $(3.2) million, respectively. SMCI | 2023 Form 10-K | 49
As of June 30, 2022, our investments were in money market funds, certificates of deposits and auction rate securities. We are exposed to changes in interest rates as a result of our borrowings under our term loan and revolving lines of credit.
As of June 30, 2023, our investments were in money market funds, certificates of deposits and auction rate securities. We are exposed to changes in interest rates as a result of our borrowings under our term loan and revolving lines of credit.
The interest rates for the term loans and the revolving lines of credit ranged from 0.83% to 4.0% at June 30, 2022. Based on the outstanding principal indebtedness of $596.8 million under our credit facilities as of June 30, 2022, we believe that a 10% change in interest rates would not have a significant impact on our results of operations.
The interest rates for the term loans and the revolving lines of credit ranged from 1.20% to 7.08% at June 30, 2023. Based on the outstanding principal indebtedness of $290.3 million under our credit facilities as of June 30, 2023, we believe that a 10% change in interest rates would not have a significant impact on our results of operations.

Other SMCI 10-K year-over-year comparisons