extr-10q_20171231.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

Form 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2017      

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 000-25711

 

EXTREME NETWORKS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

 

DELAWARE

 

77-0430270

[State or other jurisdiction

of incorporation or organization]

 

[I.R.S Employer

Identification No.]

 

 

6480 Via Del Oro,

San Jose, California

 

95119

[Address of principal executive office]

 

[Zip Code]

Registrant’s telephone number, including area code: (408) 579-2800

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” and “an emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

 

Smaller reporting company

 

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The number of shares of the Registrant’s Common Stock, $.001 par value, outstanding at February 2, 2018, was 115,267,499

 

 

 

 


 

EXTREME NETWORKS, INC.

FORM 10-Q

QUARTERLY PERIOD ENDED 2018

INDEX

 

 

 

 

 

 

PAGE

PART I. CONDENSED CONSOLIDATED FINANCIAL INFORMATION

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited):

 

 

 

 

 

Condensed Consolidated Balance Sheets as of December 31, 2017 and June 30, 2017

3

 

 

 

 

Condensed Consolidated Statements of Operations for the three and six months ended December 31, 2017 and 2016

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended December 31, 2017 and 2016

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2017 and 2016

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

33

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

44

 

 

 

Item 4.

Controls and Procedures

45

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

46

 

 

 

Item 1A

Risk Factors

46

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

60

 

 

 

Item 3.

Defaults Upon Senior Securities

60

 

 

 

Item 4.

Mine Safety Disclosure

61

 

 

 

Item 5.

Other Information

61

 

 

 

Item 6.

Exhibits

62

 

 

Signatures

63

 

2


 

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

December 31,

2017

 

 

June 30,

2017

 

 

 

 

 

 

 

(As adjusted)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

127,108

 

 

$

130,450

 

Accounts receivable, net of allowance for doubtful accounts of $1,382 at December 31, 2017 and $1,190 at June 30, 2017

 

 

154,906

 

 

 

93,115

 

Inventories

 

 

83,377

 

 

 

47,410

 

Prepaid expenses and other current assets

 

 

24,772

 

 

 

27,867

 

Total current assets

 

 

390,163

 

 

 

298,842

 

Property and equipment, net

 

 

68,565

 

 

 

30,240

 

Intangible assets, net

 

 

92,925

 

 

 

25,337

 

Goodwill

 

 

130,988

 

 

 

80,216

 

Other assets

 

 

44,267

 

 

 

25,065

 

Total assets

 

$

726,908

 

 

$

459,700

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

22,426

 

 

$

12,280

 

Accounts payable

 

 

73,553

 

 

 

31,587

 

Accrued compensation and benefits

 

 

49,104

 

 

 

42,662

 

Accrued warranty

 

 

13,010

 

 

 

10,584

 

Deferred revenue

 

 

113,664

 

 

 

79,048

 

Other accrued liabilities

 

 

74,517

 

 

 

37,044

 

Total current liabilities

 

 

346,274

 

 

 

213,205

 

Deferred revenue, less current portion

 

 

38,693

 

 

 

25,293

 

Long-term debt, less current portion

 

 

160,712

 

 

 

80,422

 

Deferred income taxes

 

 

5,163

 

 

 

6,576

 

Other long-term liabilities

 

 

64,347

 

 

 

8,526

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Convertible preferred stock, $.001 par value, issuable in series, 2,000,000 shares

   authorized; none issued

 

 

 

 

 

 

Common stock, $.001 par value, 750,000,000 shares authorized; 113,931,341 shares

   issued and outstanding at December 31, 2017 and 110,924,508 shares issued and

   outstanding at June 30, 2017

 

 

114

 

 

 

111

 

Additional paid-in-capital

 

 

921,716

 

 

 

909,155

 

Accumulated other comprehensive loss

 

 

(1,278

)

 

 

(2,302

)

Accumulated deficit

 

 

(808,833

)

 

 

(781,286

)

Total stockholders’ equity

 

 

111,719

 

 

 

125,678

 

Total liabilities and stockholders’ equity

 

$

726,908

 

 

$

459,700

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

3


 

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

2017

 

 

December 31,

2016

 

 

December 31,

2017

 

 

December 31,

2016

 

 

 

 

 

 

 

(As adjusted)

 

 

 

 

 

 

(As adjusted)

 

Net revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

174,850

 

 

$

118,055

 

 

$

339,624

 

 

$

208,148

 

Service

 

 

56,273

 

 

 

38,322

 

 

 

103,214

 

 

 

70,833

 

Total net revenues

 

 

231,123

 

 

 

156,377

 

 

 

442,838

 

 

 

278,981

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

78,472

 

 

 

62,627

 

 

 

158,517

 

 

 

106,876

 

Service

 

 

23,665

 

 

 

14,098

 

 

 

42,954

 

 

 

26,567

 

Total cost of revenues

 

 

102,137

 

 

 

76,725

 

 

 

201,471

 

 

 

133,443

 

Gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

96,378

 

 

 

55,428

 

 

 

181,107

 

 

 

101,272

 

Service

 

 

32,608

 

 

 

24,224

 

 

 

60,260

 

 

 

44,266

 

Total gross profit

 

 

128,986

 

 

 

79,652

 

 

 

241,367

 

 

 

145,538

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

45,907

 

 

 

24,013

 

 

 

80,192

 

 

 

42,312

 

Sales and marketing

 

 

65,659

 

 

 

41,025

 

 

 

121,220

 

 

 

77,884

 

General and administrative

 

 

11,669

 

 

 

9,397

 

 

 

23,854

 

 

 

17,684

 

Acquisition and integration costs, net of bargain purchase gain

 

 

34,115

 

 

 

4,169

 

 

 

38,359

 

 

 

6,490

 

Restructuring and related charges, net of reversals

 

 

 

 

 

1,853

 

 

 

 

 

 

1,853

 

Amortization of intangibles

 

 

2,746

 

 

 

2,175

 

 

 

4,360

 

 

 

6,317

 

Total operating expenses

 

 

160,096

 

 

 

82,632

 

 

 

267,985

 

 

 

152,540

 

Operating loss

 

 

(31,110

)

 

 

(2,980

)

 

 

(26,618

)

 

 

(7,002

)

Interest income

 

 

717

 

 

 

81

 

 

 

1,364

 

 

 

138

 

Interest expense

 

 

(2,504

)

 

 

(1,176

)

 

 

(4,719

)

 

 

(1,823

)

Other income (expense), net

 

 

(643

)

 

 

1,025

 

 

 

2,484

 

 

 

802

 

Loss before income taxes

 

 

(33,540

)

 

 

(3,050

)

 

 

(27,489

)

 

 

(7,885

)

Provision (benefit) for income taxes

 

 

(1,617

)

 

 

1,179

 

 

 

58

 

 

 

2,086

 

Net loss

 

$

(31,923

)

 

$

(4,229

)

 

$

(27,547

)

 

$

(9,971

)

Basic and diluted net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share - basic

 

$

(0.28

)

 

$

(0.04

)

 

$

(0.24

)

 

$

(0.09

)

Net loss per share - diluted

 

$

(0.28

)

 

$

(0.04

)

 

$

(0.24

)

 

$

(0.09

)

Shares used in per share calculation - basic

 

 

113,621

 

 

 

107,425

 

 

 

112,931

 

 

 

106,690

 

Shares used in per share calculation - diluted

 

 

113,621

 

 

 

107,425

 

 

 

112,931

 

 

 

106,690

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

4


 

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

2017

 

 

December 31,

2016

 

 

December 31,

2017

 

 

December 31,

2016

 

 

 

 

 

 

 

(As adjusted)

 

 

 

 

 

 

(As adjusted)

 

Net loss:

 

$

(31,923

)

 

$

(4,229

)

 

$

(27,547

)

 

$

(9,971

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gains on available for sale securities

 

 

54

 

 

 

 

 

 

237

 

 

 

 

Net change in foreign currency translation adjustments

 

 

432

 

 

 

(421

)

 

 

787

 

 

 

(974

)

Other comprehensive income (loss), net of tax:

 

 

486

 

 

 

(421

)

 

 

1,024

 

 

 

(974

)

Total comprehensive loss

 

$

(31,437

)

 

$

(4,650

)

 

$

(26,523

)

 

$

(10,945

)

 

See accompanying notes to condensed consolidated financial statements.

 

 

5


 

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

December 31,

2017

 

 

December 31,

2016

 

 

 

 

 

 

 

(As adjusted)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(27,547

)

 

$

(9,971

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

8,093

 

 

 

4,832

 

Amortization of intangible assets

 

 

11,023

 

 

 

11,593

 

Provision for doubtful accounts

 

 

1,180

 

 

 

154

 

Stock-based compensation

 

 

11,828

 

 

 

6,856

 

Deferred income taxes

 

 

(2,135

)

 

 

923

 

Non-cash restructuring and related charges

 

 

 

 

 

1,718

 

Realized gain on sale of non-marketable equity investment

 

 

(3,757

)

 

 

 

Realized gain on bargain purchase

 

 

(4,920

)

 

 

 

Other non-cash items

 

 

1,818

 

 

 

(243

)

Changes in operating assets and liabilities, net of assets acquired and liabilities assumed

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(11,188

)

 

 

(7,756

)

Inventories

 

 

(449

)

 

 

4,313

 

Prepaid expenses and other assets

 

 

1,188

 

 

 

6,823

 

Accounts payable

 

 

17,547

 

 

 

(4,444

)

Accrued compensation and benefits

 

 

3,734

 

 

 

(916

)

Deferred revenue

 

 

4,446

 

 

 

(2,469

)

Other current and long-term liabilities

 

 

3,387

 

 

 

7,875

 

Net cash provided by operating activities

 

 

14,248

 

 

 

19,288

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(13,309

)

 

 

(4,662

)

Acquisitions

 

 

(97,581

)

 

 

(51,088

)

Proceeds from sale of non-marketable equity investment

 

 

4,922

 

 

 

 

Net cash used in investing activities

 

 

(105,968

)

 

 

(55,750

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings under Term Loan

 

 

100,000

 

 

 

48,250

 

Repayments of debt

 

 

(8,686

)

 

 

(5,513

)

Loan fees on borrowings

 

 

(1,494

)

 

 

(1,327

)

Proceeds from issuance of common stock, net of tax withholding

 

 

(1,536

)

 

 

4,831

 

Net cash provided by financing activities

 

 

88,284

 

 

 

46,241

 

Foreign currency effect on cash

 

 

94

 

 

 

(115

)

Net (decrease) increase in cash and cash equivalents

 

 

(3,342

)

 

 

9,664

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

130,450

 

 

 

94,122

 

Cash and cash equivalents at end of period

 

$

127,108

 

 

$

103,786

 

 

See accompanying notes to the condensed consolidated financial statements.

 

6


 

 EXTREME NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.

Description of Business and Basis of Presentation

Extreme Networks, Inc., together with its subsidiaries (collectively referred to as “Extreme” or the “Company”) is a leader in providing software-driven networking solutions for enterprise customers.  The Company conducts its sales and marketing activities on a worldwide basis through distributors, resellers and the Company’s field sales organization. Extreme was incorporated in California in 1996 and reincorporated in Delaware in 1999.

The unaudited condensed consolidated financial statements of Extreme included herein have been prepared under the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted under such rules and regulations.  The condensed consolidated balance sheet at June 30, 2017 was derived from audited financial statements as of that date but does not include all disclosures required by generally accepted accounting principles for complete financial statements. These interim financial statements and notes should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017.

The unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations and cash flows for the interim periods presented and the financial condition of Extreme at December 31, 2017. The results of operations for the three and six months ended December 31, 2017 are not necessarily indicative of the results that may be expected for fiscal 2018 or any future periods.

Effective July 1, 2017, the Company adopted the requirements of Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. All amounts and disclosures set forth in this Form 10-Q have been updated to comply with the new standards, as indicated by the “as adjusted” footnote.

Fiscal Year

The Company uses a fiscal calendar year ending on June 30.  All references herein to “fiscal 2018” or “2018” represent the fiscal year ending June 30, 2018.  All references herein to “fiscal 2017” or “2017” represent the fiscal year ending June 30, 2017.

Principles of Consolidation

The consolidated financial statements include the accounts of Extreme and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated.

The Company predominantly uses the United States Dollar as its functional currency.  The functional currency for certain of its foreign subsidiaries is the local currency.  For those subsidiaries that operate in a local currency functional environment, all assets and liabilities are translated to United States Dollars at current month end rates of exchange; and revenue and expenses are translated using the monthly average rate.

Accounting Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Estimates are used for, but are not limited to, the accounting for the allowances for doubtful accounts and sales returns, determining the fair value of acquired assets and assumed liabilities, estimated selling prices, inventory valuation and purchase commitments, depreciation and amortization, impairment of long-lived assets including goodwill, warranty accruals, restructuring liabilities, measurement of share-based compensation costs and income taxes. Actual results could differ from these estimates.

Reclassification

Certain amounts from prior years have been reclassified to conform to the current year’s presentation in the accompanying condensed consolidated statements of cash flow. The reclassification had no impact on previously reported net loss or accumulated deficit.

7


 

2. Business Combinations

 

The Company completed three acquisitions during the six months ended December 31, 2017. The acquisitions have been accounted for using the acquisition method of accounting.  The purchase price has been allocated on a preliminary basis to tangible and identifiable intangible assets acquired and liabilities assumed. The fair value of working capital related items, such as other current assets and accrued liabilities, approximated their book values at the date of acquisition.  Inventories were valued at fair value using the net realizable value approach.  The fair value of property and equipment was determined using a cost approach.  The fair value of the acquired deferred revenue was estimated using the cost build-up approach. The cost build-up approach determines fair value using estimates of the costs required to provide the contracted deliverables plus an assumed profit.  The total costs including the assumed profit were adjusted to present value using a discount rate considered appropriate. The resulting fair value approximates the amount that the Company would be required to pay to a third party to assume the obligation.  Valuations of the intangible assets were valued using income approaches based on management projections, which we consider to be Level 3 inputs. The Company also continues to analyze the tax implications of the acquisition of the intangible assets which may ultimately impact the overall level of goodwill associated with the acquisition.

The final purchase price allocation is pending the finalization of valuations, which may result in an adjustment to the preliminary purchase price allocation. Also, additional information which existed as of the acquisition dates, but was unknown to the Company at that time, may become known to the Company during the remainder of the measurement period (up to one year from the acquisition dates), and may result in a change in the purchase price allocation.  While management believes that its preliminary estimates and assumptions underlying the valuations are reasonable, different estimates and assumptions could result in different valuations assigned to the individual assets acquired and liabilities assumed, and the resulting amount of goodwill. Results of operations of the acquired entities are included in the Company’s operations beginning with the closing date of each acquisition.

Fiscal 2018 Acquisitions

Data Center Business

On October 27, 2017 (the “Brocade Closing”), the Company completed its acquisition of the data center business (the “Data Center Business”) of Brocade Communication Systems, Inc.’s (“Brocade”), pursuant to an Asset Purchase Agreement (the “Brocade APA”) dated as of October 3, 2017, by and between the Company and Brocade. Under the terms and conditions of the Brocade APA, the Company acquired customers, employees, technology and other assets of the Data Center Business as well as assumed certain contracts and other liabilities of the Data Center Business.

The fair value of consideration transferred on the Brocade Closing date includes:

 

upfront cash closing payment equal to $23.0 million,

 

deferred payments of $1.0 million per quarter for the next twenty full fiscal quarters of the Company following the acquisition date discounted to their present value,

 

contingent consideration in the form of quarterly earnout payments equal to 50% of the profits of the Data Center Business for the five-year period commencing at the end of the first full fiscal quarter of the Company following the acquisition of the Data Center Business discounted to their present value,

 

an amount payable due to the excess working capital acquired over the target working capital agreed upon in the Brocade APA, and,

 

portion of the fair value of replacement stock awards granted to employees assumed from Brocade for which their services were provided prior to the Brocade Closing date.

The components of aggregate estimated purchase consideration are as follows (in thousands):

Estimated purchase consideration

October 27,

2017

 

Cash paid to sellers at closing

$

23,000

 

Deferred payments

 

18,430

 

Contingent consideration

 

34,100

 

Working capital adjustment

 

6,534

 

Replacement of stock-based awards

 

2,273

 

Aggregate estimated purchase consideration

$

84,337

 

The following table below summarizes the preliminary allocation as of October 27, 2017 of the tangible and identifiable intangible assets acquired and liabilities assumed:

8


 

 

Preliminary Allocation as of

October 27, 2017

 

Accounts receivables

$

33,488

 

Inventories

 

19,973

 

Prepaid expenses and other current assets

 

988

 

Property and equipment

 

29,160

 

Other assets

 

4,734

 

Accounts payable and accrued expenses

 

(15,850

)

Deferred revenue

 

(33,519

)

Net tangible assets acquired

 

38,974

 

Identifiable intangible assets

 

28,600

 

Goodwill

 

16,763

 

Total intangible assets acquired

 

45,363

 

Total net assets acquired

$

84,337

 

The following table presents details of the identifiable intangible assets acquired as part of the acquisition (in thousands, except years):

Intangible Assets

 

Estimated Useful Life

(in years)

 

 

Amount

 

Developed technology

 

2 - 5

 

 

$

21,800

 

Customer relationships

 

 

5

 

 

 

5,400

 

Trade names

 

 

4

 

 

 

1,400

 

Total identifiable intangible assets

 

 

 

 

 

$

28,600

 

The amortization for the developed technology is recorded in “Cost of revenues” for product and the amortization for the remaining intangibles is recorded in “Amortization of intangibles” in the accompanying condensed consolidated statements of operations.  The goodwill recognized is attributable primarily to expected synergies and the assembled workforce of the Data Center Business.  The Company anticipates both the goodwill and intangible assets to be fully deductible for income tax purposes.

The results of operations of the Data Center Business are included with those of the Company beginning October 28, 2017.  The associated expenses of the Data Center Business have been incorporated with the results of operations of the Company as a product line and, therefore, stand-alone operating results are not available.  In the three and six months ended December 31, 2017 the Company incurred $32.5 million and $33.8 million, respectively, of acquisition and integration related expenses associated with the acquisition of the Data Center Business, including a $25.0 consent fee paid to terminate a previous asset purchase agreement entered into by the Company to purchase the Data Center Business from Broadcom Corporation, in anticipation of Broadcom’s proposed acquisition of Brocade. The fee was paid to allow the Company to buy the Data Center Business directly from Brocade. Such acquisition-related costs are included in “Acquisition and integration costs, net of bargain purchase gain” in the accompanying condensed consolidated statements of operations. The costs, which the Company expensed as incurred, consist primarily of professional fees to financial and legal advisors and IT consultants and companies.

Campus Fabric Business

On July 14, 2017, (the “Avaya Closing Date”) the Company completed its acquisition of Avaya Inc.’s. (“Avaya”) fabric-based secure networking solutions and network security solutions business (the “Campus Fabric Business”) that had been announced on March 7, 2017.  Upon the terms and subject to the conditions of the Asset Purchase Agreement (the “Avaya APA”), the Company acquired the customers, employees, technology and other assets of the Campus Fabric Business, as well as assumed certain contracts and other liabilities of the Campus Fabric Business, for total provisional consideration of $79.8 million, calculated as $100.0 million, less adjustments set forth in the Avaya APA related to net working capital, deferred revenue, certain assumed lease obligations and certain assumed pension obligations for transferring employees of the Campus Fabric Business.  Pursuant to certain ancillary agreements, Avaya will also provide the Company with transition services for a period of time following the Avaya Closing Date. As a condition of the Avaya APA, the Company had made deposits of $10.2 million in the third quarter of fiscal 2017, which were applied to the purchase price upon the Avaya Closing Date. 

9


 

The following table below summarizes the preliminary allocation as of December 31, 2017 of the tangible and identifiable intangible assets acquired and liabilities assumed:

 

Preliminary Allocation as of

September 30, 2017

 

 

Change during three months ended December 31, 2017

 

 

Preliminary Allocation as of

December 31, 2017

 

Accounts receivables

$

18,112

 

 

$

183

 

(a)

$

18,295

 

Inventories

 

16,605

 

 

 

(1,060

)

(b)(c)

 

15,545

 

Prepaid expenses and other current assets

 

673

 

 

 

 

 

 

673

 

Property and equipment

 

3,768

 

 

 

 

 

 

3,768

 

Other assets

 

2,568

 

 

 

2,743

 

(c)

 

5,311

 

Accounts payable and accrued expenses

 

(29,716

)

 

 

(2,203

)

(d)(f)

 

(31,919

)

Deferred revenue

 

(10,214

)

 

 

163

 

(d)(e)

 

(10,051

)

Other long-term liabilities

 

(6,608

)

 

 

1,403

 

(f)

 

(5,205

)

Net tangible assets acquired

 

(4,812

)

 

 

1,229

 

 

 

(3,583

)

Identifiable intangible assets

 

44,000

 

 

 

2,900

 

(g)

 

46,900

 

In-process research and development

 

2,300

 

 

 

200

 

(g)

 

2,500

 

Goodwill

 

38,338

 

 

 

(4,329

)

 

 

34,009

 

Total intangible assets acquired

 

84,638

 

 

 

(1,229

)

 

 

83,409

 

Total net assets acquired

$

79,826

 

 

$

 

 

$

79,826

 

The changes during the period in the table above include: a) additional information on accounts receivable as of the acquisition date, b) additional receipts of product, c) a reclassification from inventories to other assets related to service parts, d) a reclassification from deferred revenue to accounts payable, e) an adjustment of the fair value of deferred maintenance revenue, f) a reclassification from long-term liabilities to short-term related to liabilities assumed, g) revised net realizable value based on usefulness of identifiable intangible assets and in-process research and development acquired.

The following table presents details of the identifiable intangible assets acquired as part of the acquisition (in thousands, except years):

 

Intangible Assets

 

Estimated Useful Life

(in years)

 

 

Amount

 

Developed technology

 

 

6

 

 

$

37,400

 

Customer relationships

 

 

4

 

 

 

5,100

 

Trademarks

 

 

5

 

 

 

2,600

 

Backlog

 

 

1

 

 

 

1,800

 

Total identifiable intangible assets

 

 

 

 

 

$

46,900

 

The amortization for the developed technology is recorded in “Cost of revenues” for product and the amortization for the remaining intangibles is recorded in “Amortization of intangibles” in the accompanying condensed consolidated statement of operations.  The goodwill recognized is attributable primarily to expected synergies and the assembled workforce of the Campus Fabric Business.  The Company anticipates both the goodwill and intangible assets to be fully deductible for income tax purposes. 

The Company also acquired an indefinite lived asset of $2.5 million which represents the fair value of in-process research and development activities.  Once the related research and development efforts are completed, the Company will determine whether the asset will continue to be an indefinite lived asset or become a finite lived asset and apply the appropriate accounting accordingly.

The results of operations of the Campus Fabric Business are included in the accompanying condensed consolidated results of operations beginning July 14, 2017.  The associated expenses of the Campus Fabric Business have been incorporated with the results of operations of the Company as a product line and, therefore, stand-alone operating results are not available. In the three and six months ended December 31, 2017, the Company incurred $6.6 million and $9.5 million, respectively, of acquisition and integration related expenses associated with the acquisition of the Campus Fabric Business.  Such acquisition-related costs are included in “Acquisition and integration costs, net of bargain purchase gain” in the accompanying condensed consolidated statements of operations.  The costs, which the Company expensed as incurred, consist primarily of professional fees to financial and legal advisors and IT consultants and companies.

Capital Financing Business

10


 

On December 1, 2017, Company completed its acquisition of a capital financing business (the “CF Business”), pursuant to a Bill of Sale and Assignment and Assumption Agreement (the “Assumption Agreement”) between the Company and Broadcom.  Under the terms and conditions of the Assumption Agreement, the Company acquired customers, employees, contracts and lease equipment of the CF Business equal to the earn out payments to Broadcom of 90% of acquired financing receivables to be collected commencing at the closing date.

Net assets acquired included financing receivables of $13.8 million, lease equipment of $3.5 million and identifiable intangible assets of $0.6 million, and the fair value of the contingent consideration was $12.9 million. As the preliminary fair value of the net assets acquired exceeded the fair value of the purchase consideration, the Company recorded a gain from the bargain purchase of $4.9 million in “Acquisition and integration costs, net of bargain purchase gain” in the accompanying condensed consolidated statements of operations for the second quarter of fiscal 2018.  Acquisition and integration related expenses associated with the acquisition of the CF Business were immaterial.

Fiscal 2017 Acquisition

On October 28, 2016, the Company completed the acquisition of the wireless local area network business (“WLAN Business”) from Zebra Technologies Corporation.  Under the terms of the WLAN Asset Purchase Agreement, the Company acquired customers, employees, technology and other assets as well as assumed certain contracts and other liabilities of the WLAN Business, for a net cash consideration to $49.5 million.  The following table below summarizes the final allocation of the tangible and identifiable intangible assets acquired and liabilities assumed:

 

Final Allocation as of

October 28, 2016

 

Accounts receivables, net

$

14,636

 

Inventories

 

13,593

 

Other current assets

 

808

 

Property and equipment

 

3,159

 

Other assets

 

7,634

 

Deferred revenue

 

(14,159

)

Other liabilities

 

(7,201

)

Total tangible assets acquired and liabilities assumed

 

18,470

 

Identifiable intangible assets

 

20,300

 

In-process research and development

 

1,400

 

Goodwill

 

9,339

 

Total intangible assets acquired

 

31,039

 

Total net assets acquired

$

49,509

 

Pro forma financial information

The following unaudited pro forma results of operations are presented as though the acquisitions of the Data Center Business, CF Business, Campus Fabric Business and WLAN Businesses had occurred as of the beginning of the earliest period presented after giving effect to purchase accounting adjustments relating to inventories, deferred revenue, depreciation and amortization on acquired property and equipment and intangibles, acquisition costs, interest income and expense and related tax effects.

The pro forma results of operations are not necessarily indicative of the combined results that would have occurred had the acquisition been consummated as of the earliest period presented, nor are they necessarily indicative of future operating results. The unaudited pro forma results do not include the impact of synergies, nor any potential impacts on current or future market conditions which could alter the unaudited pro forma results.

The unaudited pro forma financial information for the three and six months ended December 31, 2017, combines the results for Extreme for the three and six months ended December 31, 2017, which include the results of the Data Center Business, CF Business and Campus Fabric Business subsequent to the acquisition date and their historical results up to the acquisition date.

The unaudited pro forma financial information for the three and six months ended December 31, 2016, combines the historical results for Extreme for those periods, as adjusted for the adoption of ASC 606, with the historical results of the Data Center Business, CF Business and Campus Fabric Business for the three and six months ended December 31, 2016, as well as the historical results of the WLAN Business up to the acquisition date.

Pro forma results of operations from the Data Center Business, CF Business, Campus Fabric Business and WLAN Business acquisitions included in the pro forma results of operations for the three and six months ended December 31, 2016 or 2017 have not

11


 

been adjusted for the adoption of ASC 606 because the Company determined that it is impractical to estimate the impact of the adoption.

The following table summarizes the unaudited pro forma financial information (in thousands, except per share amounts):

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

2017

 

 

December 31,

2016

 

 

December 31,

2017

 

 

December 31,

2016

 

 

 

 

 

 

 

(As adjusted)

 

 

 

 

 

 

(As adjusted)

 

Net revenues

 

$

252,532

 

 

$

311,503

 

 

$

537,040

 

 

$

644,435

 

Net income (loss)

 

$

1,152

 

 

$

(62,134

)

 

$

(7,622

)

 

$

(95,972

)

Net income (loss) per share - basic

 

$

0.01

 

 

$

(0.58

)

 

$

(0.07

)

 

$

(0.90

)

Net income (loss) per share - diluted

 

$

0.01

 

 

$

(0.58

)

 

$

(0.07

)

 

$

(0.90

)

Shares used in per share calculation - basic

 

 

113,621

 

 

 

107,425

 

 

 

112,931

 

 

 

106,690

 

Shares used in per share calculation - diluted

 

 

119,656

 

 

 

107,425

 

 

 

112,931

 

 

 

106,690

 

 

3.

Summary of Significant Accounting Policies

For a description of significant accounting policies, see Note 3, Summary of Significant Accounting Policies, to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017. Except for the following policies, there have been no material changes to the Company’s significant accounting policies since the filing of the Annual Report on Form 10-K.

Revenue Recognition

The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which the Company adopted on July 1, 2017, using the retrospective method.  The Company derives the majority of its revenue from sales of its networking equipment, with the remaining revenue generated from service fees relating to maintenance contracts, professional services, and training for its products. The Company sells its products and maintenance contracts direct to customers and to partners in two distribution channels, or tiers. The first tier consists of a limited number of independent distributors that stock its products and sell primarily to resellers.  The second tier of the distribution channel consists of a non-stocking distributors and value-added resellers that sell directly to end-users.  Products and services may be sold separately or in bundled packages.  

The Company considers customer purchase orders, which in some cases are governed by master sales agreements, to be the contracts with a customer.  For each contract, the Company considers the promise to transfer products and services, each of which are distinct, to be the identified performance obligations. In determining the transaction price the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which the Company expects to be entitled.

For all of the Company’s sales and distribution channels, revenue is recognized when control of the product is transferred to the customer (i.e., when the Company’s performance obligation is satisfied), which typically occurs at shipment for product sales. Revenue from maintenance contracts is recognized over time as the Company’s performance obligations are satisfied. This is typically the contractual service period, which ranges from one to three years.  For product sales to value-added resellers of the Company, non-stocking distributors and end-user customers, the Company generally does not grant return privileges, except for defective products during the warranty period, nor does the Company grant pricing credits.  Sales incentives and other programs that the Company may make available to these customers are considered to be a form of variable consideration and the Company maintains estimated accruals and allowances using the expected value method. There were no material changes in the current period to the estimated transaction price for performance obligations which were satisfied or partially satisfied during previous periods.    

Sales to stocking distributors are made under terms allowing certain price adjustments and limited rights of return (known as “stock rotation”) of the Company’s products held in their inventory. Revenue from sales to distributors is recognized upon the transfer of control to the distributor.  Frequently, distributors need to sell at a price lower than the contractual distribution price in order to win business, and submit rebate requests for Company pre-approval prior to selling the product through at the discounted price.  At the time the distributor invoices its customer or soon thereafter, the distributor submits a rebate claim to the Company to adjust the distributor’s cost from the contractual price to the pre-approved lower price. After the Company verifies that the claim was pre-approved, a credit memo is issued to the distributor for the rebate claim. In determining the transaction price, the Company considers these rebate adjustments to be variable consideration. Such price adjustments are estimated using the expected value method based on an analysis of actual claims, at the distributor level over a trailing twelve-month period of time considered adequate to account for current pricing and business trends. Stock rotation rights grant the distributor the ability to return certain specified amounts of inventory. Stock rotation adjustments are an additional form of variable consideration and are also estimated using the expected value

12


 

method based on historical return rates. There were no material changes in the current period to the estimated variable consideration for performance obligations which were satisfied or partially satisfied during previous periods. 

Performance Obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.  Certain of the Company’s contracts have multiple performance obligations, as the promise to transfer individual goods or services is separately identifiable from other promises in the contracts and, therefore, is distinct.  For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation based on its relative standalone selling price.  The stand-alone selling prices are determined based on the prices at which the Company separately sells these products.  For items that are not sold separately, the Company estimates the stand-alone selling prices using the best estimated selling price approach.  

The Company’s performance obligations are satisfied at a point in time or over time as work progresses.  Substantially all of the Company’s product sales revenues as reflected on the consolidated statements of operations for the three-month and six-month periods ended December 31, 2017, and 2016 are recognized at a point in time. Substantially all of the Company’s service revenue is recognized over time.  For revenue recognized over time, the Company uses an input measure, days elapsed, to measure progress.  

On December 31, 2017, the Company had $152.4 million of remaining performance obligations, which is comprised of deferred maintenance revenue and services not yet delivered.  The Company expects to recognize approximately 54 percent of its remaining performance obligations as revenue in fiscal 2018, an additional 31 percent by fiscal 2019 and 15 percent of the balance thereafter.

Contract Balances. The timing of revenue recognition, billings and cash collections results in billed accounts receivable and deferred revenue in the consolidated balance sheet. Services provided under renewable support arrangements of the Company are billed in accordance with agreed-upon contractual terms, which are typically at periodic intervals (e.g., quarterly or annually).  The Company sometimes receives payments from its customers in advance of services being provided, resulting in deferred revenues.  These liabilities are reported on the consolidated balance sheet on a contract-by-contract basis at the end of each reporting period.

Revenue recognized for the six-month periods ended December 31, 2017 and 2016, that was included in the deferred revenue balance at the beginning of each period was $53.1 million and $49.7 million respectively. Revenue recognized for the three-month periods ended December 31, 2017 and 2016, that was included in the deferred revenue balance at the beginning of each period was $36.9 million and $33.5 million, respectively.

Contract Costs.  The Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less.  Management expects that commission fees paid to sales representative as a result of obtaining service contracts and contract renewals are recoverable and therefore the Company capitalized them as contract costs in the amount of $3.0 million and $2.5 million at December 31, 2017 and June 30, 2017, respectively.  Capitalized commission fees are amortized on a straight-line basis over the average period of service contracts of approximately three years, and are included in “Sales and marketing” in the accompanying condensed consolidated statements of operations.  Amortization recognized during the three-month period ended December 31, 2017 and 2016, was $0.5 million and $0.4 million, respectively.  Amortization recognized during the six-month period ended December 31, 2017 and 2016, was $0.9 million and $0.7 million, respectively.  There was no impairment loss in relation to the costs capitalized.

Revenue by Category: The following table sets forth the Company’s revenue disaggregated by sales channel and geographic region based on the billing addresses of its customers (in thousands, unaudited):

 

 

Three Months Ended

 

 

 

December 31,

2017

 

 

December 31,

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

(As adjusted)

 

 

 

Distributor

 

Direct

 

Total

 

 

Distributor

 

Direct

 

Total

 

Americas:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

56,269

 

$

54,559

 

$

110,828

 

 

$

39,063

 

$

38,396

 

$

77,459

 

Other

 

 

1,155

 

 

5,698

 

 

6,853

 

 

 

2,827

 

 

3,243

 

 

6,070

 

Total Americas

 

 

57,424

 

 

60,257

 

 

117,681

 

 

 

41,890

 

 

41,639

 

 

83,529

 

EMEA:

 

 

55,956

 

 

33,624

 

 

89,580

 

 

 

36,070

 

 

24,361

 

 

60,431

 

APAC:

 

 

5,131

 

 

18,731

 

 

23,862

 

 

 

1,613

 

 

10,804

 

 

12,417

 

Total net revenues

 

$

118,511

 

$

112,612

 

$

231,123

 

 

$

79,573

 

$

76,804

 

$

156,377

 

 

13


 

 

 

Six Months Ended

 

 

 

December 31,

2017

 

 

December 31,

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

(As adjusted)

 

 

 

Distributor

 

Direct

 

Total

 

 

Distributor

 

Direct

 

Total

 

Americas:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

98,661

 

$

105,549

 

$

204,210

 

 

$

66,054

 

$

65,225

 

$

131,279

 

Other

 

 

15,491

 

 

12,093

 

 

27,584

 

 

 

4,220

 

 

12,871

 

 

17,091

 

Total Americas

 

 

114,152

 

 

117,642

 

 

231,794

 

 

 

70,274

 

 

78,096

 

 

148,370

 

EMEA:

 

 

107,188

 

 

61,527

 

 

168,715

 

 

 

67,369

 

 

40,890

 

 

108,259

 

APAC: