Restatement of Previously Issued Consolidated Financial Statements

In August 2017, prior to the issuance of the Company’s consolidated financial statements for the fiscal year ended June 30, 2017, the audit committee (the “Audit Committee”) of the Company’s Board of Directors (the “Board”) commenced an investigation (the “Investigation”) into certain accounting and internal control matters at the Company, principally focused on certain revenue recognition matters. The Investigation was conducted with the assistance of outside counsel, which retained forensic accountants to assist them in their work. Following the conclusion of the Investigation, the Audit Committee directed its outside counsel and its forensic accountants to conduct additional procedures on an expanded scope of revenue recognition matters. Concurrent with these additional procedures, new members of the Company’s management, under the direction of the Audit Committee, performed a thorough analysis of the Company’s historical financial statements, accounting policies and financial reporting, as well as the Company’s disclosure controls and procedures and its internal control over financial reporting. During the course of the Investigation, the further procedures by outside counsel and the management analysis (collectively, the “Investigation, Procedures and Analysis”), the Audit Committee and management determined certain employees had violated the Company’s Code of Business Conduct and Ethics and discovered accounting and financial reporting errors and certain irregularities. On November 14, 2018, the Board, upon the recommendation, and with the concurrence of the Audit Committee and new members of management, concluded that certain previously filed consolidated financial statements and related financial information should no longer be relied upon.

As a result, within these consolidated financial statements, the Company has included the restated consolidated financial statements as of and for the years ended June 30, 2016 and June 30, 2015, which is referred to as the "Restatement". The Restatement corrects errors and certain irregularities which are discussed in detail within this footnote.

The errors and certain irregularities primarily related to the timing of recognition of (i) revenue, (ii) expenses related to certain inventory used for engineering and marketing purposes and (iii) expenses related to defective products under warranty not returned by customers. Additionally, errors were identified whereby the Company had derecognized inventory while control over such inventory was retained because the Company was obligated to buy it back.

Restatement

The following is a discussion of the restatement adjustments that were made to the Company’s previously issued consolidated financial statements.

(a) Product revenue

During the fiscal years ended June 30, 2016 and 2015, product revenue was recognized prematurely. As a result of the information gathered in the Investigation, Procedures and Analysis, it was determined that there was an aggressive focus on quarterly revenue without sufficient focus on compliance by an appropriate number of competent resources, and all relevant information was not communicated among the Company’s internal functions as well as the management to both the Audit Committee and the independent auditors that resulted in the inappropriate recording of revenue with insufficient documentation or rigorous assessment of revenue transactions. The Company found instances where (i) title and risk of loss had not transferred to the customer, (ii) persuasive evidence of an arrangement with the customer consistent with the Company’s customary business practices was not present, (iii) the distributor’s price was not fixed or determinable, or (iv) collectibility was not reasonably assured, all of which resulted in premature recognition of revenue.

Also, during the fiscal years ended June 30, 2016 and 2015, revenue was misstated as it was determined from the information gathered in the Investigation, Procedures and Analysis there was a misapplication of accounting principles related to the classification of consideration paid to customers under the Company’s cooperative marketing arrangements for which the Company did not receive an identifiable benefit.

To correct the errors and certain irregularities related to premature revenue recognition, the related revenue and cost of sales were reversed in the period in which the accounting errors took place and have been recognized in subsequent periods when all of the revenue recognition criteria were met. The correction of these errors resulted in net sales for 2016 being increased by $8.8 million, and net sales for 2015 being decreased by $21.5 million, and cost of sales for 2016 increased by $11.1 million, and for 2015 decreased by $21.7 million from amounts previously reported. Additionally, certain related adjustments to reverse accounts receivable, net, of $60.6 million and to recognize inventories of $48.7 million were made to amounts previously reported as of June 30, 2016. Additionally, certain related adjustments to accounts payable and accrued liabilities, which also impacted cost of sales and sales and marketing expense, were made to the consolidated financial statements in which the accounting errors and certain irregularities occurred.

The Company corrected errors related to consideration paid to customers under the Company’s cooperative marketing arrangements for which the Company did not receive an identifiable benefit, as well as the value of free samples provided to customers. These transactions were incorrectly recorded as sales and marketing expense and have now been corrected and recorded as a reduction of revenue. The correction of these errors resulted in net sales and sales and marketing expense for 2016 and 2015 being reduced by $3.6 million and $2.5 million, respectively, from amounts previously reported.

(b) Services revenue

During the fiscal years ended June 30, 2016 and 2015, services revenue was misstated as it was determined that as a result of the information gathered in the Investigation, Procedures and Analysis there were errors related to inaccurate allocation of contract consideration for multiple element arrangements resulting from (a) lack of proper identification or accounting for contractual service obligations, (b) incorrect allocation of discounts to service related deliverables, and (c) lack of a robust process resulting in inaccurate determination of BESP. Additionally, there were misalignments of the revenue recognition period and the contractual requisite service period. Consequently, certain contracts for extended warranties on products or on-site services in multiple element arrangements were incorrectly recorded as revenue at the time of sale of the product instead of being deferred and amortized over the contractual warranty or service period. The Company had previously identified a portion of these errors in the amount of $9.0 million related to extended warranty in a prior period and had adjusted the consolidated financial statements for the fiscal year ended June 30, 2016 for their cumulative effect with an out-of-period correction to revenues.

To correct these errors, the Company reversed the revenue and the out-of-period correction to revenues in the period in which the accounting errors or out-of-period adjustment took place, quantified an amount for these services by determining a best estimated selling price for these services based on a percentage of the separately priced product deliverables in the arrangement, and deferred and amortized the quantified amount of revenue over the contractual warranty or service period. Additionally, certain related adjustments to deferred revenues, which are included in accrued liabilities and other long-term liabilities, were made to the consolidated balance sheet at the end of the period in which the errors occurred. The correction of these errors resulted in net sales for 2016 being increased by $3.9 million and net sales for 2015 being reduced by $11.3 million, accrued liabilities being increased by $9.3 million and other long-term liabilities being increased by $4.6 million as of June 30, 2016 from amounts previously reported.

As of June 30, 2016 and 2015, inventories were overstated due to misapplication of accounting principles, whereby materials issued from inventory to research and development projects and marketing with no alternative use were included as inventory and expensed upon completion of a project rather than being expensed upon consumption.

Also as of June 30, 2016 and 2015, inventories were understated due to misapplication of accounting principles, whereby (i) inventory of materials transferred to certain contract manufacturers was improperly derecognized upon transfer that the Company retained control over the materials because it was obligated to buy them back; and (ii) in-transit inventory was not being recorded in the appropriate period due to improper cut-off procedures.

To correct the errors related to inventory overstatement, the Company has recorded the materials as a research and development expense, or a marketing expense, in the period that inventory was consumed. The correction of the overstatement errors resulted in a $2.1 million decrease in inventories as of June 30, 2016 from amounts previously reported.

To correct the errors related to inventory understatement, the Company has adjusted the carrying value of inventory in the periods in which the errors took place. The correction of these understatement errors resulted in a $20.8 million increase in inventories, as well as $16.1 million increase in accrued liabilities as of June 30, 2016 from amounts previously reported. Additionally, certain related adjustments to cost of sales, inventories, accounts payable and accrued liabilities were made to the consolidated financial statements in the period in which the errors occurred.

(d) Other

The Company corrected the following errors impacting the consolidated financial statements:


•	The Company did not correctly record receivables from suppliers as prepaid expenses and other current assets. The correction of this error resulted in a $56.3 million decrease in accounts receivable, net, a $63.6 million increase in prepaid expenses and other current assets, and an increase to accounts payable of $7.3 million as of June 30, 2016 from amounts previously reported.


•	The Company did not record the payments for certain payroll tax related liabilities, as well as did not accrue certain withholding tax liabilities, in the appropriate periods. The correction of the error resulted in a $2.1 million decrease in cash and cash equivalents, and a corresponding decrease in accrued liabilities as of June 30, 2016 from amounts previously reported.

The Company corrected other immaterial misstatements relating to (i) sales taxes, (ii) stock-based compensation expense, (iii) accounts receivable and related allowances, (iv) other assets, (v) accounts payable, and (vi) prepaid expenses and other current assets.

Additionally, the Company changed the presentation of foreign exchange gains and losses of $1.5 million and $0.7 million for 2016 and 2015, respectively, from general and administrative expenses, as previously reported, to other income (expense), net in the consolidated statement of operations.

(e) Income taxes

The Company has recorded tax adjustments to reflect the impacts of the Restatement and other income tax related error corrections.

Impact on Consolidated Statements of Operations

The effect of the Restatement described above on the accompanying consolidated statements of operations for the fiscal years ended June 30, 2016 and 2015 is as follows (in thousands, except per share amounts):



	For the Year Ended June 30, 2016
	As Previously Reported			Product Revenue			Services Revenue		Inventories			Other			Income Taxes			As Restated
Net sales (1)	$	2,215,573		$	5,582		$	3,867	$	—		$	—		$	—		$	2,225,022
Cost of sales (1)	1,884,048			11,410			—		(926		)	(11		)	—			1,894,521
Gross profit	331,525			(5,828		)	3,867		926			11			—			330,501
Operating expenses:
Research and development	123,994			—			—		(367		)	596			—			124,223
Sales and marketing	62,841			(4,255		)	—		(364		)	116			—			58,338
General and administrative	37,840			—			—		—			2,609			—			40,449
Total operating expenses	224,675			(4,255		)	—		(731		)	3,321			—			223,010
Income from operations	106,850			(1,573		)	3,867		1,657			(3,310		)	—			107,491
Other income (expense), net	171			—			—		—			1,336			—			1,507
Interest expense	(1,594		)	—			—		—			—			—			(1,594		)
Income before income tax provision	105,427			(1,573		)	3,867		1,657			(1,974		)	—			107,404
Income tax provision	33,406			—			—		—			—			1,917			35,323
Net income	$	72,021		$	(1,573	)	$	3,867	$	1,657		$	(1,974	)	$	(1,917	)	$	72,081
Net income per common share:
Basic	$	1.50																$	1.50
Diluted	$	1.39																$	1.39
Weighted-average shares used in calculation of net income per common share:
Basic	47,917																	47,917
Diluted	51,836																	51,836

__________________________

(1) Transactions with related parties are included in the line items above as follows:



	Year Ended June 30,
	2016				2016
	As Previously Reported		Adjustments		As Restated
Net sales	$	19,453	$	9,657	$	29,110
Cost of sales*	241,836		802		242,638

* Represents purchases from related parties.



	For the Year Ended June 30, 2015
	As Previously Reported			Product Revenue			Services Revenue			Inventories			Other			Income Taxes			As Restated
Net sales (1)	$	1,991,155		$	(25,542	)	$	(11,260	)	$	—		$	—		$	—		$	1,954,353
Cost of sales (1)	1,670,924			(23,229		)	—			(13		)	87			—			1,647,769
Gross profit	320,231			(2,313		)	(11,260		)	13			(87		)	—			306,584
Operating expenses:
Research and development	100,257			—			—			501			644			—			101,402
Sales and marketing	48,851			(1,814		)	—			386			73			—			47,496
General and administrative	24,377			—			—			—			663			—			25,040
Total operating expenses	173,485			(1,814		)	—			887			1,380			—			173,938
Income from operations	146,746			(499		)	(11,260		)	(874		)	(1,467		)	—			132,646
Other income (expense), net	115			—			—			—			841			—			956
Interest expense	(965		)	—			—			—			—			—			(965		)
Income before income tax provision	145,896			(499		)	(11,260		)	(874		)	(626		)	—			132,637
Income tax provision	44,033			—			—			—			—			(3,951		)	40,082
Net income	$	101,863		$	(499	)	$	(11,260	)	$	(874	)	$	(626	)	$	3,951		$	92,555
Net income per common share:
Basic	$	2.19																	$	1.99
Diluted	$	2.03																	$	1.85
Weighted-average shares used in calculation of net income per common share:
Basic	46,434																		46,434
Diluted	50,094																		50,094

__________________________

(1) Transactions with related parties are included in the line items above as follows:



	Year Ended June 30,
	2015					2015
	As Previously Reported		Adjustments			As Restated
Net sales	$	58,013	$	(10,329	)	$	47,684
Cost of sales*	227,562		99			227,661

* Represents purchases from related parties.

Impact on Consolidated Balance Sheet

The effect of the Restatement described above on the accompanying consolidated balance sheet as of June 30, 2016 is as follows (in thousands):



	As of June 30, 2016
	As Previously Reported			Product Revenue			Services Revenue			Inventories			Other			Income Taxes			As Restated
ASSETS
Current assets:
Cash and cash equivalents	$	180,964		$	—		$	—		$	—		$	(2,144	)	$	—		$	178,820
Accounts receivable, net (1)*	288,941			(60,590		)	—			—			(53,418		)	—			174,933
Inventories	448,980			48,714			—			18,205			908			—			516,807
Prepaid income taxes	5,682			—			—			—			—			(1,341		)	4,341
Prepaid expenses and other current assets (1)	13,435			—			—			—			65,992			—			79,427
Total current assets	938,002			(11,876		)	—			18,205			11,338			(1,341		)	954,328
Long-term investments	2,643			—			—			—			—			—			2,643
Property, plant, and equipment, net	187,949			—			—			—			—			—			187,949
Deferred income taxes, net	28,460			—			—			—			—			5,218			33,678
Other assets	8,546			—			—			—			4,339			—			12,885
Total assets	$	1,165,600		$	(11,876	)	$	—		$	18,205		$	15,677		$	3,877		$	1,191,483
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable (1)	$	249,239		$	5		$	—		$	2,981		$	15,166		$	—		$	267,391
Accrued liabilities (1)	55,618			(128		)	9,313			16,251			2,542			—			83,596
Income taxes payable	5,172			—			—			—			—			(118		)	5,054
Short-term debt and current portion of long-term debt	53,589			—			—			—			—			—			53,589
Total current liabilities	363,618			(123		)	9,313			19,232			17,708			(118		)	409,630
Long-term debt	40,000			—			—			—			—			—			40,000
Other long-term liabilities	40,603			—			4,597			—			—			—			45,200
Total liabilities	444,221			(123		)	13,910			19,232			17,708			(118		)	494,830
Stockholders' equity:							—
Common stock and additional paid-in capital	277,339			—			—			—			2,067			59			279,465
Treasury stock	(2,030		)	—			—			—			—			—			(2,030		)
Accumulated other comprehensive loss	(85		)	—			—			—			—			—			(85		)
Retained earnings	445,971			(11,753		)	(13,910		)	(1,027		)	(4,098		)	3,936			419,119
Total Super Micro Computer, Inc. stockholders' equity	721,195			(11,753		)	(13,910		)	(1,027		)	(2,031		)	3,995			696,469
Noncontrolling interest	184			—			—			—			—			—			184
Total stockholders’ equity	721,379			(11,753		)	(13,910		)	(1,027		)	(2,031		)	3,995			696,653
Total liabilities and stockholders' equity	$	1,165,600		$	(11,876	)	$	—		$	18,205		$	15,677		$	3,877		$	1,191,483

__________________________

* Previously reported allowances for accounts receivable as of June 30, 2016 were $2,721, now corrected and restated to $2,413.

(1) Transactions with related parties are included in the line items above as follows:



	As of June 30, 2016
	As Reported		Adjustments			As Restated
Accounts receivable, net	$	4,678	$	(4,629	)	$	49
Prepaid expenses and other current assets	—		9,622			9,622
Accounts payable	39,152		5,789			44,941
Accrued liabilities	—		5,354			5,354

Cumulative Effect of Prior Period Adjustments

The following table presents the impact of the Restatement on the beginning stockholders’ equity as of June 30, 2014 (in thousands):



	Common Stock and Additional Paid-in Capital		Treasury Stock			Accumulated Other Comprehensive Loss			Retained Earnings			Total Super Micro Computer Stockholders’ Equity			Non-controlling interest		Total Stockholders’ Equity
Balance, June 30, 2014 (As previously reported)	$	199,062	$	(2,030	)	$	(63	)	$	272,087		$	469,056		$	175	$	469,231
Adjustments:
Product revenue recognition	—		—			—			(9,681		)	(9,681		)	—		(9,681		)
Service revenue	—		—			—			(6,518		)	(6,518		)	—		(6,518		)
Inventory	—		—			—			(1,809		)	(1,809		)	—		(1,809		)
Other	531		—			—			(1,498		)	(967		)	—		(967		)
Restatement tax impacts	—		—			—			1,902			1,902			—		1,902
Cumulative restatement adjustments	531		—			—			(17,604		)	(17,073		)	—		(17,073		)
Balance, June 30, 2014 (As Restated)	$	199,593	$	(2,030	)	$	(63	)	$	254,483		$	451,983		$	175	$	452,158

Other changes to the consolidated statements of stockholders’ equity for the years ended June 30, 2016 and 2015 as a result of the Restatement are due to the changes in net income and changes to additional paid in capital related to the impact of the correction of errors to stock-based compensation expense.

Impact on Consolidated Statements of Comprehensive Loss

The only change to the consolidated statements of comprehensive loss for the years ended June 30, 2016 and 2015 as a result of the Restatement is due to the changes in net income.

Impact on Consolidated Statements of Cash Flows

The effect of the Restatement described above on the accompanying consolidated statements of cash flows for the years ended June 30, 2016 and 2015 is as follows (in thousands):



	Year Ended June 30, 2016
	As Previously Reported			Restatement Adjustments			As Restated
OPERATING ACTIVITIES:
Net income	$	72,021		$	60		$	72,081
Reconciliation of net income to net cash provided by operating activities:
Depreciation and amortization	13,282			—			13,282
Stock-based compensation expense	16,131			799			16,930
Excess tax benefits from stock-based compensation	(2,855		)	43			(2,812		)
Allowance for doubtful accounts	1,278			(62		)	1,216
Provision for excess and obsolete inventories	9,313			71			9,384
Foreign currency exchange gain	(1,233		)	(106		)	(1,339		)
Deferred income taxes, net	(6,133		)	921			(5,212		)
Changes in operating assets and liabilities:
Accounts receivable, net (1)	32,375			21,200			53,575
Inventories	5,200			2,509			7,709
Prepaid expenses and other assets (1)	(8,210		)	(15,329		)	(23,539		)
Accounts payable (1)	(54,301		)	(11,534		)	(65,835		)
Income taxes payable	(3,260		)	2,874			(386		)
Accrued liabilities (1)	9,027			3,884			12,911
Other long-term liabilities	24,874			(4,852		)	20,022
Net cash provided by operating activities	107,509			478			107,987
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (1)	(34,108		)	—			(34,108		)
Change in restricted cash	(1,020		)	—			(1,020		)
Net cash used in investing activities	(35,128		)	—			(35,128		)
FINANCING ACTIVITIES:
Proceeds from debt, net of issuance costs	34,200			—			34,200
Repayment of debt	(34,100		)	—			(34,100		)
Proceeds from exercise of stock options	12,186			—			12,186
Excess tax benefits from stock-based compensation	2,855			(43		)	2,812
Payments of obligations under capital leases	(189		)	—			(189		)
Payments under receivable financing arrangements	(21		)	—			(21		)
Payment of withholding tax on vesting of restricted stock units	(1,786		)	—			(1,786		)
Net cash provided by financing activities	13,145			(43		)	13,102
Effect of exchange rate fluctuations on cash	(4		)	(57		)	(61		)
Net increase in cash and cash equivalents	85,522			378			85,900
Cash and cash equivalents at beginning of year	95,442			(2,522		)	92,920
Cash and cash equivalents at end of year	$	180,964		$	(2,144	)	$	178,820
Supplemental disclosure of cash flow information:
Cash paid for interest	$	1,632		$	—		$	1,632
Cash paid for taxes, net of refunds	$	36,951		$	—		$	36,951
Non-cash investing and financing activities:
Equipment purchased under capital leases	$	299		$	—		$	299
Unpaid property, plant and equipment purchases (1)	$	10,888		$	(39	)	$	10,849

__________________________

(1) Transactions with related parties are included in the line items above as follows:



	Years Ended June 30,
	2016						2016
	As Reported			Adjustments			As Restated
OPERATING ACTIVITIES:
Changes in operating assets and liabilities:
Accounts receivable, net	$	8,508		$	(8,428	)	$	80
Prepaid expenses and other assets	—			652			652
Accounts payable	(19,863		)	(2,024		)	(21,887		)
Accrued liabilities	—			(340		)	(340		)
INVESTING ACTIVITIES:
Purchases of property, plant and equipment	—			(4,641		)	(4,641		)
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Unpaid property, plant and equipment purchases	—			2,246			2,246



	Year Ended June 30, 2015
	As Previously Reported			Restatement Adjustments			As Restated
OPERATING ACTIVITIES:
Net income	$	101,863		$	(9,308	)	$	92,555
Reconciliation of net income to net cash used in operating activities:
Depreciation and amortization	8,133			(39		)	8,094
Stock-based compensation expense	13,699			737			14,436
Excess tax benefits from stock-based compensation	(8,089		)	43			(8,046		)
Allowance for doubtful accounts	326			(246		)	80
Provision for excess and obsolete inventories	5,928			2			5,930
Foreign currency exchange gain	(675		)	(155		)	(830		)
Deferred income taxes, net	632			(4,208		)	(3,576		)
Changes in operating assets and liabilities:
Accounts receivable, net (1)	(110,182		)	31,996			(78,186		)
Inventories	(153,584		)	(23,973		)	(177,557		)
Prepaid expenses and other assets (1)	(2,741		)	(8,585		)	(11,326		)
Accounts payable (1)	75,520			6,181			81,701
Income taxes payable	11,951			(2,972		)	8,979
Accrued liabilities (1)	9,551			4,342			13,893
Other long-term liabilities	3,032			4,696			7,728
Net cash used in operating activities	(44,636		)	(1,489		)	(46,125		)
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (1)	(35,100		)	—			(35,100		)
Change in restricted cash	(416		)	—			(416		)
Investment in a privately held company	(661		)	—			(661		)
Net cash used in investing activities	(36,177		)	—			(36,177		)
FINANCING ACTIVITIES:
Proceeds from debt, net of issuance costs	84,900			—			84,900
Repayments of debt	(36,000		)	—			(36,000		)
Proceeds from exercise of stock options	23,338			—			23,338
Excess tax benefits from stock-based compensation	8,089			(43		)	8,046
Payment of obligations under capital leases	(134		)	—			(134		)
Advances under receivable financing arrangements	33			—			33
Payment of withholding tax on vesting of restricted stock units	(175		)	—			(175		)
Net cash provided by financing activities	80,051			(43		)	80,008
Effect of exchange rate fluctuations on cash	(668		)	400			(268		)
Net decrease in cash and cash equivalents	(1,430		)	(1,132		)	(2,562		)
Cash and cash equivalents at beginning of year	96,872			(1,390		)	95,482
Cash and cash equivalents at end of year	$	95,442		$	(2,522	)	$	92,920
Supplemental disclosure of cash flow information:
Cash paid for interest	$	933		$	—		$	933
Cash paid for taxes, net of refunds	$	30,671		$	—		$	30,671
Non-cash investing and financing activities:
Equipment purchased under capital leases	$	442		$	—		$	442
Unpaid property, plant and equipment purchases (1)	$	6,826		$	236		$	7,062

__________________________

(1) Transactions with related parties are included in the line items above as follows:



	Years Ended June 30,
	2015						2015
	As Reported			Adjustments			As Restated
OPERATING ACTIVITIES:
Changes in operating assets and liabilities:
Accounts receivable, net	$	(12,565	)	$	13,057		$	492
Prepaid expenses and other assets	—			(10,274		)	(10,274		)
Accounts payable	10,046			12,142			22,188
Accrued liabilities	—			1,364			1,364
INVESTING ACTIVITIES:
Purchases of property, plant and equipment	—			(4,070		)	(4,070		)
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Unpaid property, plant and equipment purchases	—			724			724