The following discussion should be read in conjunction with the consolidated
financial statements and related notes which appear elsewhere in this Annual
Report. This discussion contains forward-looking statements that involve risks
and uncertainties. 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 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 commenced operations in 1993 and have been profitable every year since
inception. 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. We must also continue to expand our
software and customer service and support offerings, particularly as we
increasingly focus on larger enterprise customers. Additionally, we must focus
on development of our sales partners and distribution channels to further expand
our market share. We measure our financial success based on various indicators,
including growth in net sales, gross profit margin and operating margin. Among
the key non-financial indicators of our success is our ability to rapidly
introduce new products and deliver the latest application-optimized server and
storage solutions. In this regard, we work closely with microprocessor and other
key component vendors to take advantage of new technologies as they are
introduced. Historically, our ability to introduce new products rapidly has
allowed us to benefit from technology transitions such as the introduction of
new microprocessors and storage technologies, and as a result, we monitor the
introduction cycles of NVIDIA Corporation, Intel Corporation, Advanced Micro
Devices, Inc., Samsung Electronics Company Limited, Micron Technology, Inc. and
others closely and carefully. 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. In an effort to contain
COVID-19 or slow its spread, governments around the world have enacted various
measures, including orders that govern the operations of businesses. We are an
essential critical infrastructure (information technology) business under the
relevant federal, state and county regulations. Our first priority is the safety
of our workforce and we have therefore implemented numerous health precautions
and work practices to be in compliance with the law and to operate in a safe
manner.

We have continued to see ongoing demand for our IT solutions and do not have
significant direct exposure to industries which have been impacted the greatest.
The COVID-19 pandemic has created additional demand for many server applications
that support the global movement towards a digital economy. These applications
include greater use of online transactions for everyday purchases by consumers
of food, clothing, entertainment from gaming and video streaming, as well as
tele-health, social networking, messaging, email, autonomous driving solutions
and video conferencing companies.

We have actively managed our supply chain for potential shortage risk by
building inventories of critical components required such as CPUs, memory, SSDs
and GPUs to support our ability to fulfill customer orders. Our architecture,
which is based on a "Building Block Solutions" design approach, has also
assisted us during the COVID-19 pandemic, to qualify different components for
compatibility with our systems to help us overcome some shortages.

Logistics has continued to be a challenge during the COVID-19 pandemic as the
global transportation industry, and particularly ocean transportation, has been
constrained by shortages of containers, labor, truckers and crowded ports. As a
result, shipping by air, has been used more frequently despite that it is more
expensive and there are fewer flights during the COVID-19 pandemic than there
were previously. We have experienced increased costs in freight. In addition, we
also experienced increased direct labor costs as we incentivized our employees
to continue to work and assist us in serving our customers, many of whom are in
critical industries. We expect both of these trends to continue until the
COVID-19 pandemic and other macroeconomic factors exacerbated by the COVID-19
pandemic end.
                           SMCI | 2022 Form 10-K | 37
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We monitor the credit profile and payment history of our customers to evaluate
risk in specific industries or geographic areas where cash flow may be
disrupted. While we believe that we are adequately capitalized, we actively
manage our liquidity needs. In June 2021, we negotiated an extension of our
credit facility with Bank of America to extend the maturity date to June 2026
and, in March 2022, further negotiated an increase in the size of our credit
facility with Bank of America from $200 million to $350 million. In July 2021,
we replaced our prior credit facility and term loan facility with CTBC Bank,
with a new facility for omnibus credit lines. In September 2021, we replaced our
prior credit facility with E.SUN Bank, with new credit facility and term
facility. In September 2021 and April 2022, we entered into a term loan facility
and credit line, respectively, with Mega Bank which will be used to support our
manufacturing activities (including the purchase of materials and components)
and provide medium-term working capital. In October 2021, we entered into a
credit facility with Chang Hwa Bank and in January 2022 we entered into a loan
agreement with HSBC Bank, each of which will be used to support the growth of
our Taiwan business. In May 2022, we also entered into a line of credit with
Cathay Bank to be used for general corporate purposes to support our growth. In
August 2022, we entered into a new general credit agreement with E.Sun Bank
which replaced the prior E.Sun Bank credit facility which will also support the
growth of our Taiwan business. Refer to Part II, Item 8, Note 9, "Short-term and
Long-term Debt" in our notes to consolidated financial statements in this Annual
Report on Form 10-K for further information on our outstanding debt

Our management team is focused on guiding our company through the ongoing
challenges presented by the COVID-19 pandemic, including the emergence of any
new variants. There are positive signs with the expiration of various COVID-19
mandates, vaccine availability and the rollout of boosters; however, with the
possibility of the emergence of other new virus strains and ongoing adverse
impacts of the COVID-19 pandemic on economic recovery, we are unable to predict
the ultimate extent to which the global COVID-19 pandemic may further impact our
business operations, financial performance and results of operations.

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. In fiscal year 2022, we generated
net cash of $35.1 million and $522.9 million in cash provided by financing
activities primarily due to the proceeds from borrowings and invested
$45.2 million in purchases of property and equipment. We used $440.8 million in
operating activities primarily related to the increase in inventories and
accounts receivables.

                           SMCI | 2022 Form 10-K | 38
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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. The preparation of these consolidated financial statements requires us
to make estimates and judgments that affect the reported amount of assets,
liabilities, net sales and expenses. We evaluate our estimates on an on-going
basis and base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making the judgments we make about the
carrying values of assets and liabilities that are not readily apparent from
other sources. Because these estimates can vary depending on the situation,
actual results may differ from the estimates. Making estimates and judgments
about future events is inherently unpredictable and is subject to significant
uncertainties, some of which are beyond our control. 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.

A summary of significant accounting policies is included in Part II, Item 8,
Note 1, "Organization and Summary of Significant Accounting Policies" in our
notes to the consolidated financial statements in this Annual Report. Management
believes the following are the most critical accounting policies and reflect the
significant estimates and assumptions used in the preparation of the
consolidated financial statements.

Revenue Recognition



The most critical accounting policy estimate and judgments required in applying
ASC 606, Revenue Recognition of Contracts from Customers, and our revenue
recognition policy relate to the determination of the transaction price,
distinct performance obligations and the evaluation of the standalone selling
price (the "SSP") for each performance obligation.

We generate revenues from the sale of server and storage systems, subsystems,
accessories, services, server software management solutions, and support
services. Many of our customer contracts include multiple performance
obligations. Judgment is required in determining whether each performance
obligation within a customer contract is distinct. This assessment involves
subjective determinations and requires management to make judgments about the
individual promised goods or services and whether such goods or services are
separable from the other aspects of the contractual relationship.

As part of determining the transaction price in contracts with customers, we may
be required to estimate variable consideration when determining the amount of
revenue to recognize. We estimate reserves for future sales returns based on a
review of our history of actual returns. Based upon historical experience, a
refund liability is recorded at the time of sale for estimated product returns
and an asset is recognized for the amount expected to be recorded in inventory
upon product return, less the expected recovery costs. We also estimate the
costs of customer and distributor programs and incentive offerings such as price
protection, rebates, as well as the estimated costs of cooperative marketing
arrangements where the fair value of the benefit derived from the costs cannot
be reasonably estimated. 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. We recognize the amount of transaction price allocated to each
performance obligation within a customer contract as revenue at the time the
respective performance obligation is satisfied by transferring control of the
promised good or service to a customer. Determining the relative SSP for
contracts that contain multiple performance obligations requires significant
judgement. We determine standalone selling prices based on the price at which
the performance obligation is sold separately. If the standalone selling price
is not observable through past transactions, we apply judgment to estimate the
SSP. For substantially all performance obligations, we are able to establish the
SSP based on the observable prices of products or services sold separately in
comparable circumstances to similar customers. We typically establish an SSP
range for our products and services, which is reassessed on a periodic basis or
when facts and circumstances change. SSP for our products and services can
evolve over time due to changes in our pricing practices, internally approved
pricing guidelines with respect to geographies, customer type, internal costs,
and gross margin objectives for the related performance obligations which can
also be influenced by intense competition, changes in demand for our products
and services, economic and other factors.

These estimates and judgements have not fluctuated significantly for the fiscal year ended June 30, 2022 compared to prior fiscal years.


                           SMCI | 2022 Form 10-K | 39
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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. Inventories consist of purchased
parts and raw materials (principally electronic components), work in process
(principally products being assembled) and finished goods. We evaluate inventory
on a quarterly basis for lower of cost or net realizable value and excess and
obsolescence and, as necessary, write down the valuation of inventories based
upon our inventory aging, forecasted usage and sales, anticipated selling price,
product obsolescence and other factors. Once inventory is written down, its new
value is maintained until it is sold or scrapped.

We receive various rebate incentives from certain suppliers based on our
contractual arrangements, including volume-based rebates. The rebates earned are
recognized as a reduction of cost of inventories and reduce the cost of sales in
the period when the related inventory is sold. We determine the volume-based
rebates to be recognized in the cost of sales on a first-in, first-out basis.

Income Taxes



As part of the process of preparing our consolidated financial statements, we
are required to estimate our taxes in each of the jurisdictions in which we
operate. We estimate actual current tax exposure together with assessing
temporary differences resulting from differing treatment of items, such as
accruals and allowances not currently deductible for tax purposes. These
differences result in deferred tax assets, which are included in our
consolidated balance sheets. In general, deferred tax assets represent future
tax benefits to be received when certain expenses previously recognized in our
consolidated statements of income become deductible expenses under applicable
income tax laws, or when loss or credit carryforwards are utilized. In assessing
the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. We continue to assess the need for a valuation
allowance on the deferred tax assets by evaluating both positive and negative
evidence that may exist. Any adjustment to the valuation allowance on deferred
tax assets would be recorded in the consolidated statements of income for the
period that the adjustment is determined to be required.

We recognize tax liabilities for uncertain income tax positions on the income
tax return based on the two-step process. The first step is to determine whether
it is more likely than not that each income tax position would be sustained upon
audit. The second step is to estimate and measure the tax benefit as the amount
that has a greater than 50% likelihood of being realized upon ultimate
settlement with the tax authority. Estimating these amounts requires us to
determine the probability of various possible outcomes. We evaluate these
uncertain tax positions on a quarterly basis. This evaluation is based on the
consideration of several factors, including changes in facts or circumstances,
changes in applicable tax law, settlement of issues under audit and new
exposures. If we later determine that our exposure is lower or that the
liability is not sufficient to cover our revised expectations, we adjust the
liability and reflect a related charge in our tax provision during the period in
which we make such a determination.

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. Stock option and RSU awards
are recognized to expense on a straight-line basis over the requisite service
period. PRSU awards are recognized to expense using an accelerated method only
when it is probable that a performance condition is met during the vesting
period. If it is not probable, no expense is recognized and the previously
recognized expense is reversed. We base initial accrual of compensation expense
on the estimated number of PRSUs that are expected to vest over the requisite
service period. That estimate is revised if subsequent information indicates
that the actual number of PRSUs is likely to differ from previous estimates. The
cumulative effect on current and prior periods of a change in the estimated
number of PRSUs expected to vest is recognized in stock-based compensation
expense in the period of the change. Previously recognized compensation expense
is not reversed if vested stock options, RSUs or PRSUs for which the requisite
service has been rendered and the performance condition has been met expire
unexercised or are not settled.

                           SMCI | 2022 Form 10-K | 40
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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. 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 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. If factors change and
different assumptions are used, our stock-based compensation expense could be
materially different in the future.

Variable Interest Entities



We determine at the inception of each arrangement whether an entity in which we
hold an investment or in which we have other variable interests is considered a
variable interest entity ("VIE"). We consolidate VIEs when we are the primary
beneficiary. The primary beneficiary of a VIE is the party that meets both of
the following criteria: (1) has the power to make decisions that most
significantly affect the economic performance of the VIE and (2) has the
obligation to absorb losses or the right to receive benefits that in either case
could potentially be significant to the VIE. Periodically, we assess whether any
changes in the interest or relationship with the entity affect the determination
of whether the entity is still a VIE and, if so, whether we are the primary
beneficiary. If we are not the primary beneficiary in a VIE, we account for the
investment or other variable interest in accordance with applicable GAAP.

We have concluded that Ablecom and its affiliate, Compuware, are VIEs; however,
we are not the primary beneficiary as we do not have the power to direct the
activities that are most significant to the entities and therefore, we do not
consolidate these entities. In performing this analysis, we considered our
explicit arrangements with Ablecom and Compuware, including all contractual
arrangements with these entities. Also, as a result of the substantial related
party relationships between us and these two companies, we considered whether
any implicit arrangements exist that would cause us to protect these related
parties' interests from suffering losses. We determined that no material
implicit arrangements exist with Ablecom, Compuware, or their shareholders.

Our ability to assess correctly our influence or control over an entity at
inception of our involvement or on a continuous basis when determining the
primary beneficiary of a VIE affects the presentation of these entities in our
consolidated financial statements. Subsequent evaluations of the primary
beneficiary of a VIE may require the use of different assumptions that could
lead to identification of a different primary beneficiary, resulting in a
different consolidation conclusion than what was determined at inception of the
arrangement.

                           SMCI | 2022 Form 10-K | 41
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Results of Operations

The following table presents certain items of our consolidated statements of operations expressed as a percentage of revenue.


                                                                            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. The main factors
that impact net sales of our server and storage systems are the number of
compute nodes sold and the average selling prices per node. The main factors
that impact net sales of our subsystems and accessories are units shipped and
the average selling price per unit. The prices for our server and storage
systems range widely depending upon the configuration, including the number of
compute nodes in a server system as well as the level of integration of key
components such as SSDs and memory. The prices for our subsystems and
accessories can also vary widely based on whether a customer is purchasing power
supplies, server boards, chassis or other accessories.

A compute node is an independent hardware configuration within a server system
capable of having its own CPU, memory and storage and that is capable of running
its own instance of a non-virtualized operating system. The number of compute
nodes sold, which can vary by product, is an important metric we use to track
our business. Measuring volume using compute nodes enables more consistent
measurement across different server form factors and across different vendors.
As with most electronics-based product life cycles, average selling prices
typically are highest at the time of introduction of new products that utilize
the latest technology and tend to decrease over time as such products mature in
the market and are replaced by next generation products. Additionally, in order
to remain competitive throughout all industry cycles, we actively change our
selling price per unit in response to changes in costs for key components such
as CPU/GPU, memory and storage.

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

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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
year-over-year increase in net sales of server and storage systems was primarily
due to an increase of average selling prices per compute node by approximately
32% as well as an increase of approximately 23% in the number of units of
compute nodes sold. The year-over-year decrease in net sales of subsystems and
accessories was primarily due to our emphasis on selling full systems and
servers. Our services and software revenue, included in server and storage
systems revenue, increased by $2.5 million year-over-year.

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. The
year-over-year increase in net sales of server and storage systems was primarily
due to an increase of average selling prices per compute node by approximately
17%, offset by a decrease of approximately 9% in the number of units of compute
nodes sold. We typically adjust our selling prices as component costs rise and
fall. The increase in average selling prices was primarily due to significant
inventory component price increases resulting from component shortages during
fiscal year 2021. The year-over-year increase in net sales of subsystems and
accessories was primarily due to an increase of approximately 5% in the volume
of subsystems and accessories sold, mainly due to increased demand and an
approximately 2% increase in average selling prices due primarily to the
increase in costs of the components. Our services and software revenue, included
in server and storage systems revenue, increased by $0.2 million year-over-year.

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. Asia experienced the highest
percentage growth among all regions. China, Japan and Korea exceeded the overall
regional average of growth, which was the primary driver of the increases in net
sales in Asia. Russia experienced a year over year decrease due to the conflict
in that region, which decrease had an immaterial impact on our overall
performance.

Fiscal Year 2021 Compared with Fiscal Year 2020



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

                           SMCI | 2022 Form 10-K | 43
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Cost of Sales and Gross Margin



Cost of sales primarily consists of the costs to manufacture our products,
including the costs of materials, contract manufacturing, shipping, personnel
expenses, including salaries, benefits, stock-based compensation and incentive
bonuses, equipment and facility expenses, warranty costs and inventory excess
and obsolescence provisions. The primary factors that impact our cost of sales
are the mix of products sold and cost of materials, which include purchased
parts and material costs, shipping costs, salary and benefits and overhead costs
related to production. Cost of sales as a percentage of net sales may increase
over time if decreases in average selling prices are not offset by corresponding
decreases in our costs. Our cost of sales as a percentage of net sales is also
impacted by the extent to which we are able to efficiently utilize our expanding
manufacturing capacity. Because we generally do not have long-term fixed supply
agreements, our cost of sales is subject to change based on the cost of
materials and market conditions. As a result, our cost of sales as a percentage
of net sales in any period can increase due to significant component price
increases resulting from component shortages.

We use several suppliers and contract manufacturers to design and manufacture
subsystems in accordance with our specifications, with most final assembly and
testing predominantly performed at our manufacturing facilities in the same
region where our products are sold. We work with Ablecom, one of our key
contract manufacturers and also a related party to optimize modular designs for
our chassis and certain of other components. We also outsource to Compuware,
also a related party, a portion of our design activities and a significant part
of our manufacturing of components, particularly power supplies. 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. 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.

The year-over-year increase in the gross margin percentage was primarily due to
sales prices increases, product and customer mix and higher capitalization of
manufacturing overhead due to higher inventory levels, offset by higher costs
from freight, overhead, other cost of sales, excess and obsolete inventory
charges, and lower recovery of costs from prior periods. Since the start of the
COVID-19 pandemic, we have experienced an increase in costs of sales, logistics
costs as well as direct labor costs as we incentivize our employees. This
increase in costs negatively impacts our gross margin, and we expect these
higher costs to continue for the duration of the COVID-19 pandemic.

Fiscal Year 2021 Compared with Fiscal Year 2020



The year-over-year increase in cost of sales was primarily attributable to an
increase of $244.1 million in costs of materials and contract manufacturing
expenses primarily related to the increase in net sales volume and an increase
of $8.9 million in the cost of freight. This was offset by a decrease of
$29.5 million in overhead costs attributable primarily to a recovery of costs
paid in prior periods, a decrease of $12.4 million in the provision of excess
inventory and obsolescence and a decrease of $2.6 million in personnel expenses
due to a decrease in special performance bonuses in the fiscal year 2021.
Warranty and repairs costs also decreased by $3.4 million in the fiscal year
2021 as compared to the fiscal year 2020.

                           SMCI | 2022 Form 10-K | 44
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The period-over-period decrease in the gross margin percentage was primarily due
to sales prices increasing at a slower rate than the increase in the costs of
components and due to the decrease in services and software revenue which have
higher margins than product sales. Since the start of the COVID-19 pandemic, we
have experienced an increase in both logistics costs as well as direct labor
costs as we incentivize our employees to continue to work and assist us in
serving our customers. This increase in costs negatively impacts our gross
margins, and we expect these higher costs to continue for the duration of the
COVID-19 pandemic.

Operating Expenses

Research and development expenses consist of personnel expenses, including
salaries, benefits, stock-based compensation and incentive bonuses, and related
expenses for our research and development personnel, as well as product
development costs such as materials and supplies, consulting services,
third-party testing services and equipment and facility expenses related to our
research and development activities. 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. These amounts offset a portion of the related research and
development expenses and have the effect of reducing our reported research and
development expenses.

Sales and marketing expenses consist primarily of personnel expenses, including
salaries, benefits, stock-based compensation and incentive bonuses, and related
expenses for our sales and marketing personnel, cost for tradeshows, independent
sales representative fees and marketing programs. From time to time, we receive
marketing development funding from certain suppliers. Under these arrangements,
we are reimbursed for certain marketing costs that we incur as part of the joint
promotion of our products and those of our suppliers. These amounts offset a
portion of the related expenses and have the effect of reducing our reported
sales and marketing expenses. The timing, magnitude and estimated usage of these
programs can result in significant variations in reported sales and marketing
expenses from period to period. Spending on cooperative marketing, reimbursed by
our suppliers, typically increases in connection with new product releases by
our suppliers.

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.

Operating 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.

The year-over-year increase in sales and marketing expenses was primarily due to
a $9.6 million increase in personnel expenses due to salary increases and a
higher headcount, offset by a $5.7 million increase in marketing development
funds received and a $0.5 million increase in advertising and other expenses.

                           SMCI | 2022 Form 10-K | 45
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The year-over-year increase in general and administrative expenses was primarily
due to a $4.1 million increase in legal and litigation settlement expenses and
$6.6 million increase in personnel and other expenses due to salary increases
and a higher headcount offset by decrease of $1.5 million in professional fees
driven by lower expenses incurred to remediate the causes that led to the delay
in filing our periodic reports with the SEC and the associated restatement of
our previously issued financial statements and a $7.3 million decrease in
expense from special performance awards.

Fiscal Year 2021 Compared with Fiscal Year 2020



The year-over-year increase in research and development expenses was primarily
due to an increase of $11.6 million in costs mainly related to materials,
supplies and equipment used in product development. During fiscal year 2020, we
recorded a $9.5 million net settlement fee as a reduction in the research and
development expenses related to the reimbursement of previously incurred
materials, supplies and equipment costs for one canceled joint product
development agreement. Personnel expenses increased $1.7 million as a result of
an increase in the number of research and development employees. These increases
were partially offset by an increase of $8.8 million in research and development
credits from certain suppliers and customers towards our development efforts and
a $1.5 million decrease mainly due to decrease in travel expenses as a result of
change in our operations in response to the COVID-19 pandemic.

The year-over-year increase in sales and marketing expenses was primarily due to
an increase of $1.2 million in advertising expenses, a $1.0 million increase in
other sales and marketing expenses, offset by a $1.7 million decrease in trade
shows and business travel as a result in a change in our operations in response
to the COVID-19 pandemic.

The year-over-year decrease in general and administrative expenses was due to a
decrease of $41.8 million in professional fees incurred to investigate, assess
and remediate the causes that led to the delay in filing our periodic reports
with the SEC and the associated restatement of certain of our previously issued
financial statements, a decrease of $3.4 million in other expenses related to
the COVID-19 pandemic and a $1.1 million decrease in supplies costs. These
decreases were partially offset by a $12.9 million increase in personnel
expenses due to increased full time personnel and bonuses.

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

Interest and Income (Expense), Net

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 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.

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.

                           SMCI | 2022 Form 10-K | 46
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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. Our effective tax rate differs from the statutory
rate primarily due to research and development tax credits, certain
non-deductible expenses, tax benefits from foreign derived intangible income and
stock-based compensation. 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.

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. 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. R&D credit reduced the effective tax
rate by 3.5% and foreign derived income reduced the effective tax rate by 1.4%.

Fiscal Year 2021 Compared with Fiscal Year 2020

The year-over-year increase in the effective tax rate was primarily due to a release of reserve from uncertain tax positions in the prior year.

Share of Income from Equity Investee, Net of Taxes

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

Share of income from equity investee, net of taxes for fiscal years 2022, 2021 and 2020 are as follows (dollars in millions):



                                      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.

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.


                           SMCI | 2022 Form 10-K | 47
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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. 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. Repatriations generally will not be taxable from a U.S. federal
tax perspective but may be subject to state income or foreign withholding tax.
Where local restrictions prevent an efficient intercompany transfer of funds,
our intent is to keep cash balances outside of the U.S. and to meet liquidity
needs through operating cash flows, external borrowings, or both. We do not
expect restrictions or potential taxes incurred on repatriation of amounts held
outside of the U.S. to have a material effect on our overall liquidity,
financial condition or results of operations.

We believe that our current cash, cash equivalents, borrowing capacity available
from our credit facilities and internally generated cash flows will be
sufficient to support our operating businesses and maturing debt and interest
payments for the twelve months following the issuance of these consolidated
financial statements. In August 2022, we entered into a new general credit
agreement with E.Sun Bank. This New E.SUN Bank Credit Facility permits
borrowings of up to (i) NTD 1.8 billion ($61.0 million U.S. dollar equivalent)
and (ii) US$30.0 million in loans that will support the growth of our Taiwan
business.

On January 29, 2021, a duly authorized subcommittee of the Board of Directors
approved the Prior Repurchase Program, which permitted us to repurchase up to an
aggregate of $200.0 million of our common stock at market prices. The program
was effective until the earlier of July 31, 2022 or the date when the maximum
amount of common stock is repurchased. We had $150.0 million of remaining
availability under the Prior Repurchase Program as of June 30, 2022.
Subsequently, on August 3, 2022, after the expiration of the Prior Repurchase
Program, a duly authorized subcommittee of our Board approved a new share
repurchase program to repurchase shares of common stock for up to $200 million
at prevailing prices in the open market. The share repurchase program is
effective until January 31, 2024 or until the maximum amount of common stock is
repurchased, whichever occurs first.

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



                                                            Years Ended June 30,                     2022 over          2021 over
                                                   2022              2021             2020              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. The decrease was primarily due to an
increase in net cash required for net working capital of $739.6 million to meet
customer demand, support expected business growth and mitigate supply chain risk
as a result of the COVID-19 pandemic environment and a $16.2 million decrease in
unrealized gain and loss. These decreases are partially offset by increases in
provision for excess and obsolete inventories of $8.3 million, depreciation and
amortization expense of $4.3 million, stock-based compensation expense of
$4.3 million and net income of $173.3 million. Since the beginning of the
COVID-19 pandemic and the accompanying supply chain disruptions our management
decided to increase our holdings of all components of our inventory (finished
goods, work in process and purchased parts and raw materials). This decision
reflected our belief that we had opportunities to increase our net sales if we
could mitigate the risk of being unable to satisfy customer demand because of
these supply chain disruptions, including longer lead times. We expect
disruption of the supply chain and longer lead times to continue for the
foreseeable future and therefore expect to continue to carry larger amounts of
inventory than we would if the supply chain were functioning more normally and
predictably.

                           SMCI | 2022 Form 10-K | 48
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Net cash provided by operating activities increased by $153.3 million for fiscal
year 2021 as compared to fiscal year 2020. While net income increased by $27.6
million in fiscal year 2021 as compared to fiscal year 2020, the increase in
cash flows from operating activities was due primarily to a decrease of cash
used for net working capital requirements of $120.3 million. Non-cash charges
related to stock-based compensation expense increased by $8.4 million,
collection of bad debt previously reserved decreased by $2.3 million, income
from equity investee decreased by $2.2 million and $5.4 million decrease in the
non-cash charges related to the change in our deferred income tax assets. These
increases in the cash flow from operating activities were partially offset by
the decrease of $11.6 million in previously reserved excess and obsolete
inventory.

Investing Activities



Net cash used in investing activities was $46.3 million, $58.0 million and $43.6
million for fiscal years 2022, 2021 and 2020, respectively, as we invested in
our Green Computing Park in San Jose to expand our capacity and office space we
purchased and expanded our Bade Facility in Taiwan and made purchases of
property, plant and equipment.

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 $68.2 million for fiscal year 2021 as compared to fiscal year 2020
primarily due to an increase of $130.0 million in repurchase of our common
stock, partially offset by an increase of $61.9 million in proceeds from
borrowings net of repayment.

Other Factors Affecting Liquidity and Capital Resources

Refer to Part II, Item 8, Note 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.

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. As a result, our future growth within the
existing business or new opportunities and markets may dictate the need for
additional facilities and capital expenditures to support that growth. 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. Our future capital requirements will
depend on many factors including our growth rate, the timing and extent of
spending to support development efforts, the expansion of sales and marketing
activities, the introduction of new and enhanced software and services
offerings, the investments in our office facilities and our systems
infrastructure, the continuing market acceptance of our offerings and our
planned investments, particularly in our product development efforts,
applications or technologies.

Contractual Obligations



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. 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.

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

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