| Restatement of Previously Issued Consolidated Financial Statements | 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. (c) Inventory 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 |
