Extreme Networks, Inc.
EXTREME NETWORKS INC (Form: 10-Q, Received: 11/09/2017 17:04:02)

 

 

 

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 September 30, 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 November 3, 2017, was 113,420,099

 

 

 

 


 

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 September 30, 2017 and June 30, 2017

3

 

 

 

 

Condensed Consolidated Statements of Operations for the three months ended September 30, 2017 and 2016

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended September 30, 2017 and 2016

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 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

29

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

38

 

 

 

Item 4.

Controls and Procedures

39

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

40

 

 

 

Item 1A

Risk Factors

40

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

54

 

 

 

Item 3.

Defaults Upon Senior Securities

54

 

 

 

Item 4.

Mine Safety Disclosure

55

 

 

 

Item 5.

Other Information

55

 

 

 

Item 6.

Exhibits

55

 

 

Signatures

56

 

2


 

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

September 30,

2017

 

 

June 30,

2017

 

 

 

 

 

 

 

(As adjusted)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

153,014

 

 

$

130,450

 

Accounts receivable, net of allowance for doubtful accounts of $1,685 at September 30, 2017

   and $1,190 at June 30, 2017

 

 

116,500

 

 

 

93,115

 

Inventories

 

 

58,100

 

 

 

47,410

 

Prepaid expenses and other current assets

 

 

18,237

 

 

 

27,867

 

Total current assets

 

 

345,851

 

 

 

298,842

 

Property and equipment, net

 

 

38,627

 

 

 

30,240

 

Intangible assets, net

 

 

67,328

 

 

 

25,337

 

Goodwill

 

 

118,554

 

 

 

80,216

 

Other assets

 

 

27,524

 

 

 

25,065

 

Total assets

 

$

597,884

 

 

$

459,700

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

17,863

 

 

$

12,280

 

Accounts payable

 

 

50,567

 

 

 

31,587

 

Accrued compensation and benefits

 

 

38,810

 

 

 

42,662

 

Accrued warranty

 

 

13,499

 

 

 

10,584

 

Deferred revenue

 

 

90,705

 

 

 

79,048

 

Other accrued liabilities

 

 

52,335

 

 

 

37,044

 

Total current liabilities

 

 

263,779

 

 

 

213,205

 

Deferred revenue, less current portion

 

 

28,500

 

 

 

25,293

 

Long-term debt, less current portion

 

 

149,729

 

 

 

80,422

 

Deferred income taxes

 

 

7,204

 

 

 

6,576

 

Other long-term liabilities

 

 

13,235

 

 

 

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; 113,304,977 shares

   issued and outstanding at September 30, 2017 and 110,924,508 shares issued and

   outstanding at June 30, 2017

 

 

113

 

 

 

111

 

Additional paid-in-capital

 

 

913,998

 

 

 

909,155

 

Accumulated other comprehensive loss

 

 

(1,764

)

 

 

(2,302

)

Accumulated deficit

 

 

(776,910

)

 

 

(781,286

)

Total stockholders’ equity

 

 

135,437

 

 

 

125,678

 

Total liabilities and stockholders’ equity

 

$

597,884

 

 

$

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

 

 

 

September 30,

2017

 

 

September 30,

2016

 

 

 

 

 

 

 

(As adjusted)

 

Net revenues:

 

 

 

 

 

 

 

 

Product

 

$

164,774

 

 

$

90,093

 

Service

 

 

46,941

 

 

 

32,511

 

Total net revenues

 

 

211,715

 

 

 

122,604

 

Cost of revenues:

 

 

 

 

 

 

 

 

Product

 

 

80,045

 

 

 

44,249

 

Service

 

 

19,289

 

 

 

12,469

 

Total cost of revenues

 

 

99,334

 

 

 

56,718

 

Gross profit:

 

 

 

 

 

 

 

 

Product

 

 

84,729

 

 

 

45,844

 

Service

 

 

27,652

 

 

 

20,042

 

Total gross profit

 

 

112,381

 

 

 

65,886

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

34,285

 

 

 

18,299

 

Sales and marketing

 

 

55,561

 

 

 

36,859

 

General and administrative

 

 

12,185

 

 

 

8,287

 

Acquisition and integration costs

 

 

4,244

 

 

 

2,321

 

Amortization of intangibles

 

 

1,614

 

 

 

4,142

 

Total operating expenses

 

 

107,889

 

 

 

69,908

 

Operating income (loss)

 

 

4,492

 

 

 

(4,022

)

Interest income

 

 

647

 

 

 

57

 

Interest expense

 

 

(2,215

)

 

 

(647

)

Other income (expense), net

 

 

3,127

 

 

 

(223

)

Income (loss) before income taxes

 

 

6,051

 

 

 

(4,835

)

Provision for income taxes

 

 

1,675

 

 

 

907

 

Net income (loss)

 

$

4,376

 

 

$

(5,742

)

Basic and diluted net income (loss) per share:

 

 

 

 

 

 

 

 

Net income (loss) per share - basic

 

$

0.04

 

 

$

(0.05

)

Net income (loss) per share - diluted

 

$

0.04

 

 

$

(0.05

)

Shares used in per share calculation - basic

 

 

112,241

 

 

 

105,955

 

Shares used in per share calculation - diluted

 

 

118,431

 

 

 

105,955

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

4


 

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

September 30,

2017

 

 

September 30,

2016

 

 

 

 

 

 

 

(As adjusted)

 

Net income (loss):

 

$

4,376

 

 

$

(5,742

)

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

 

 

Change in unrealized gains on available for sale securities, net of taxes

 

 

183

 

 

 

 

Net change in foreign currency translation adjustments

 

 

355

 

 

 

126

 

Other comprehensive income, net of tax:

 

 

538

 

 

 

126

 

Total comprehensive income (loss)

 

$

4,914

 

 

$

(5,616

)

 

See accompanying notes to condensed consolidated financial statements.

 

 

5


 

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

September 30,

2017

 

 

September 30,

2016

 

 

 

 

 

 

 

(As adjusted)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

4,376

 

 

$

(5,742

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

3,125

 

 

 

2,437

 

Amortization of intangible assets

 

 

4,309

 

 

 

7,640

 

Provision for doubtful accounts

 

 

489

 

 

 

223

 

Stock-based compensation

 

 

4,803

 

 

 

3,475

 

Realized gain on sale of non-marketable equity investment

 

 

(3,757

)

 

 

 

Other non-cash charges

 

 

1,416

 

 

 

695

 

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

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(5,762

)

 

 

16,606

 

Inventories

 

 

5,915

 

 

 

(3,312

)

Prepaid expenses and other assets

 

 

(1,856

)

 

 

1,465

 

Accounts payable

 

 

9,042

 

 

 

(3,154

)

Accrued compensation and benefits

 

 

(5,360

)

 

 

(7,318

)

Deferred revenue

 

 

4,650

 

 

 

(2,622

)

Other current and long term liabilities

 

 

(2,792

)

 

 

(819

)

Net cash provided by operating activities

 

 

18,598

 

 

 

9,574

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(7,421

)

 

 

(1,635

)

Acquisitions

 

 

(68,047

)

 

 

 

Proceeds from sale of non-marketable equity investment

 

 

4,922

 

 

 

 

Net cash used in investing activities

 

 

(70,546

)

 

 

(1,635

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings under Term Loan

 

 

80,000

 

 

 

 

Repayments of debt

 

 

(4,093

)

 

 

(3,250

)

Loan fees on borrowings

 

 

(1,494

)

 

 

 

Proceeds from issuance of common stock, net of tax

 

 

42

 

 

 

3,416

 

Net cash provided by financing activities

 

 

74,455

 

 

 

166

 

Foreign currency effect on cash

 

 

57

 

 

 

38

 

Net increase in cash and cash equivalents

 

 

22,564

 

 

 

8,143

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

130,450

 

 

 

94,122

 

Cash and cash equivalents at end of period

 

$

153,014

 

 

$

102,265

 

 

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 September 30, 2017. The results of operations for the three months ended September 30, 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.

 

2. Business Combinations

 

2018 Acquisition

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 (“Avaya Networking”) that had been announced on March 7, 2017.  Upon the terms and subject to the conditions of the asset purchase agreement (the “Avaya Purchase Agreement”), the Company

7


 

acquired the customers, employees, technology and other assets of Avaya Networking, as well as assume certain contracts and other liabilities of Avaya Networking, for total provisional consideration  of $79.8 million, calculated as $100.0 million, less adjustments set forth in the Avaya Purchase Agreement related to net working capital, deferred revenue,   certain assumed lease obligations and certain ass umed pension obligations for transferring employees of Avaya Networking.  Pursuant to certain ancillary agreements, Avaya will also provide the Company with access to specified technology related to Avaya Networking, as well as   transition services for a pe riod of time following the Avaya Closing Date of the transaction. As a condition of the Avaya Purchase Agreement, 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 Cl osing Date. 

The transaction has been accounted for using the acquisition method of accounting.  The provisional purchase price has been allocated on a preliminary basis to tangible and intangible assets acquired and liabilities assumed.  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 date, 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 date), 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.

The following table below summarizes the preliminary allocation as of September 30, 2017 of the tangible and identifiable intangible assets acquired and liabilities assumed:

 

 

Preliminary Allocation as of

July 14, 2017

 

Accounts receivables, net

$

18,112

 

Inventory

 

16,605

 

Other current assets

 

673

 

Property and equipment

 

3,768

 

Other long-term assets

 

2,568

 

Accounts payable and accrued expenses

 

(29,716

)

Deferred revenue

 

(10,214

)

Other liabilities

 

(6,608

)

Net tangible assets acquired

 

(4,812

)

Identifiable intangible assets

 

44,000

 

In-process research and development

 

2,300

 

Goodwill

 

38,338

 

Total intangible assets acquired

 

84,638

 

Total net assets acquired

$

79,826

 

The estimated purchase price has been allocated based on the preliminary estimates of the fair value of assets acquired and liabilities assumed as of the acquisition date.  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 a third party to assume the obligation. Valuations of the intangible assets were valued using income approaches based on projections provided by management, which the Company considers 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.

8


 

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

 

Intangible Assets

 

Estimated Useful Life

(in years)

 

 

Amount

 

Developed technology

 

 

6

 

 

$

34,800

 

Customer relationships

 

 

4

 

 

 

5,300

 

Trademarks

 

 

5

 

 

 

2,400

 

Backlog

 

 

1

 

 

 

1,500

 

Total identifiable intangible assets

 

 

 

 

 

$

44,000

 

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” on the condensed consolidated statement of operations.  The goodwill recognized is attributable primarily to expected synergies and the assembled workforce of the Avaya Networking.  The Company anticipates both the goodwill and intangible assets to be fully deductible for tax purposes. 

The Company also acquired an indefinite lived asset of $2.3 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 Avaya Networking are included in the condensed consolidated results of operations beginning July 14, 2017.   The associated expenses of the Avaya Networking 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. The Company incurred $5.1 million of acquisition-related expenses of which $2.9 million was incurred in the three months ended September 30, 2017.  Such acquisition-related costs are included in “Acquisition and integration costs” on the condensed consolidated statement 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.

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 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 acquisition has been accounted for using the acquisition method of accounting.  The purchase price allocation as of the acquisition date is set forth in the table below and reflects fair values. The fair values were determined through established and generally accepted valuation techniques, including work performed by third-party valuation specialists.  All valuations were considered finalized as of June 30, 2017.

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

 

Inventory

 

13,593

 

Other current assets

 

808

 

Property and equipment

 

3,159

 

Other long-term 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

 

9


 

The purchase price has been allocated based on the fair value of assets acquired and liabilities assumed as of the acquisition date.  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 fa ir 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 wou ld be required to pay a third party to assume the obligation.  Valuations of the intangible assets were valued using income approaches based on projections provided by management, which we consider to be Level 3 inputs.

Pro forma financial information

The following unaudited pro forma results of operations are presented as though the acquisition of Avaya Networking and WLAN Business 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 months ended September 30, 2017, combines the results for Extreme for the three months ended September 30, 2017, which include the results of Avaya Networking subsequent to the acquisition date, and the historical results of Avaya Networking for the month of July 2017 up to the acquisition date of July 14, 2017. Pro forma results of operations from Avaya Networking acquisition for the quarter ended September 30, 2017 prior to the acquisition date have not been adjusted for the adoption of ASC 606 because the Company determined that it was impractical to estimate the impact of the adoption.

The unaudited pro forma financial information for the three months ended September 30, 2016, combines the historical results for Extreme for those periods, as adjusted for the adoption of ASC 606, with the historical results of Avaya Networking and WLAN Business for the three months ended September 30, 2016. Pro forma results of operations from Avaya Networking and WLAN Business acquisitions for the quarter ended September 30, 2016 have not 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

 

 

 

September 30,

2017

 

 

September 30,

2016

 

 

 

 

 

 

 

(As adjusted)

 

Net revenues

 

$

222,382

 

 

$

238,858

 

Net income (loss)

 

$

16,776

 

 

$

(8,936

)

Net income (loss) per share - basic

 

$

0.15

 

 

$

(0.08

)

Net income (loss) per share - diluted

 

$

0.14

 

 

$

(0.08

)

Shares used in per share calculation - basic

 

 

112,241

 

 

 

105,955

 

Shares used in per share calculation - diluted

 

 

118,431

 

 

 

105,955

 

 

 

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 policy, there have been no material changes to the Company’s significant accounting policies since the filing of the Annual Report on Form 10-K.

10


 

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 range 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 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 periods ended September 30, 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 September 30, 2017, the Company had $119.2 million of remaining performance obligations, which is comprised of deferred maintenance revenue and services not yet delivered.  The Company expects to recognize approximately 70 percent of its remaining performance obligations as revenue in fiscal 2018, an additional 18 percent by fiscal 2019 and the balance thereafter.

Contract Balances. The timing of revenue recognition, billings and cash collections results in billed accounts receivable and deferred revenue on the consolidated balance sheet. Services provided under renewable support arrangements of the Company are

11


 

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.  Thes e 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 three month periods ended September 30, 2017 and 2016, that was included in the deferred revenue balance at the beginning of each year was $42.1 million and $37.2 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.  These costs are included in selling and marketing expenses.  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 $2.5 million and $2.3 million at September 30, 2017 and 2016, 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 expenses.  Amortization recognized during the three-month period ended September 30, 2017 and September 30, 2016, was $0.4 million and $0.3 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 our customers (in thousands, unaudited):

 

 

 

Three Months Ended

 

 

 

September 30,

2017

 

 

September 30,

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

(As adjusted)

 

 

 

Distributor

 

Direct

 

Total

 

 

Distributor

 

Direct

 

Total

 

Americas:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

42,392

 

$

50,990

 

$

93,382

 

 

$

26,991

 

$

26,829

 

$

53,820

 

Other

 

 

14,336

 

 

6,395

 

 

20,731

 

 

 

1,393

 

 

9,628

 

 

11,021

 

Total Americas

 

 

56,728

 

 

57,385

 

 

114,113

 

 

 

28,384

 

 

36,457

 

 

64,841

 

EMEA:

 

 

51,232

 

 

27,903

 

 

79,135

 

 

 

31,299

 

 

16,529

 

 

47,828

 

APAC:

 

 

3,264

 

 

15,203

 

 

18,467

 

 

 

1,452

 

 

8,483

 

 

9,935

 

Total net revenues

 

$

111,224

 

$

100,491

 

$

211,715

 

 

$

61,135

 

$

61,469

 

$

122,604

 

 

4.

Recent Accounting Pronouncements

Recently Issued Accounting Pronouncements

In August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2017-12, Derivatives and Hedging (Topic 815) – Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”), which is intended to allow companies to better align risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results by expanding and refining hedge accounting for both nonfinancial and financial risk components and aligning the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The guidance is effective for fiscal years beginning after December 15, 2018. The Company is evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption. This guidance is effective for the Company beginning with its fiscal year 2020.

In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718) - Scope of Modification Accounting (“ASU 2017-09”) which amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The guidance is effective prospectively for fiscal years beginning after December 15, 2017, and interim periods within that reporting period. Early adoption is permitted, including adoption in any interim period. The Company does not expect the adoption of this guidance to have a material effect on our financial statements. This guidance will be effective for the Company beginning with its fiscal year 2019.

In January 2016, the FASB issued ASU No. 2016-01,  Recognition and Measurement of Financial Assets and Financial Liabilities , which provides guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities.  The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements and footnote disclosures. This guidance will become effective for the Company beginning with its fiscal year 2019.

12


 

In Feb ruary 2016, the FASB issued ASU No. 2016-02 (Topic 842),  Leases  (“ASU 2016-02”) which requires the identification of arrangements that should be accounted for as leases by lessees. In general, for lease arrangements exceeding a twelve month term, these arr angements must now be recognized as assets and liabilities on the balance sheet of the lessee. Under ASU 2016-02, a right-of-use asset and lease obligation will be recorded for all leases, whether operating or financing, while the statement of operations w ill reflect lease expense for operating leases and amortization/interest expense for financing leases. The balance sheet amount recorded for existing leases at the date of adoption of ASU 2016-02 must be calculated using the applicable incremental borrowin g rate at the date of adoption. In addition, ASU 2016-02 requires the use of the modified retrospective method, which will require adjustment to all comparative periods presented in the consolidated financial statements. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements and footnote disclosures. This guidance will become effective for the Company beginning with its fiscal year 2020.

Recently Adopted Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), to clarify the principles of recognizing revenue and create common revenue recognition guidance between U.S. GAAP and International Financial Reporting Standards. Under ASU 2014-09, revenue is recognized when a customer obtains control of promised goods or services and is recognized at an amount that reflects the consideration expected to be received in exchange for such goods or services.  In addition, ASU 2014-09 requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

The Company adopted Topic 606 on July 1, 2017, using the full retrospective method. This adoption primarily affected the Company’s accounting for distributor and resellers revenues from a primarily “sell-through” model, where revenue is recognized upon the sale from the distribution channel to the end customer, to the “sell-in” method where revenue is recognized upon transfer of control to its customers, including distributors. Under the sell-in method, the Company is required to make estimates at the time of shipment to its distributors of variable consideration as well as estimated returns under stock rotation rights granted to the distributors.  Additionally, the Company capitalizes contract acquisition costs such as commissions paid for maintenance services contracts in excess of one year.  Following the adoption of ASU 2014-09, the revenue recognition for the Company’s other sales arrangements remained materially consistent with our historical practice.

Upon adoption of Topic 606, we applied the standard’s practical expedients that allows a) an entity to use the transaction price at the date the contract was completed rather than estimating variable consideration amounts in the comparative reporting periods, b) that permits the omission of prior-period information about our performance obligations, and c) that allows the Company to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price to the satisfied and unsatisfied performance obligations.   

See the tables at the end of this note for the effects of the adoption of ASU 2014-09 on our condensed consolidated financial statements as of June 30, 2017, and for the three months ended September 30, 2016.  See Note 3. “Summary of Significant Accounting Policies” to our condensed consolidated financial statements for further discussion of the effects of the adoption of ASU 2014-09 on our significant accounting policies.

 

13


 

Adjustments to Previously Reported Financial Statements from the Adoption of Accounting Pronouncements

The following table presents the effect of the adoption of ASU 2014-09 on our condensed consolidated balance sheet (unaudited) as of June 30, 2017, (in thousands):

 

 

As of June 30, 2017

 

 

As Reported

 

 

Adjustment

 

 

As Adjusted

 

Accounts receivable, net

$

120,770

 

 

$

(27,655

)

 

$

93,115

 

Inventories

 

45,880

 

 

 

1,530

 

 

 

47,410

 

   Total current assets

 

324,967

 

 

 

(26,125

)

 

 

298,842

 

Other assets

 

22,586

 

 

 

2,479

 

 

 

25,065

 

   Total assets

 

483,346

 

 

 

(23,646

)

 

 

459,700

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued warranty

 

10,007

 

 

 

577

 

 

 

10,584

 

Other accrued liabilities

 

36,713

 

 

 

331

 

 

 

37,044

 

Deferred distributors revenue, net of cost of sales to distributors

 

43,525

 

 

 

(43,525

)

 

 

 

   Total current liabilities

 

255,822

 

 

 

(42,617

)

 

 

213,205

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

(800,257

)

 

 

18,971

 

 

 

(781,286

)

Total stockholders’ equity

 

106,707

 

 

 

18,971

 

 

 

125,678

 

Total liabilities and stockholders’ equity

$

483,346

 

 

$

(23,646

)

 

$

459,700

 

 

The following table presents the effect of the adoption of ASU 2014-09 on our condensed consolidated statements of operations (unaudited) for the three months ended September 30, 2016 (in thousands, except per share amounts):

 

 

Three months ended September 30, 2016

 

 

As Reported

 

 

Adjustment

 

 

As Adjusted

 

Net revenues

 

 

 

 

 

 

 

 

 

 

 

   Product

$

90,131

 

 

$

(38

)

 

$

90,093

 

   Service

 

32,511

 

 

 

 

 

 

32,511

 

        Total net revenues

 

122,642

 

 

 

(38

)

 

 

122,604

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

 

 

 

 

 

 

 

 

 

   Product

 

44,927

 

 

 

(678

)

 

 

44,249

 

   Service

 

12,469

 

 

 

 

 

 

12,469

 

        Total cost of revenues

 

57,396

 

 

 

(678

)

 

 

56,718

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

 

 

 

 

 

 

 

 

 

   Product

 

45,204

 

 

 

640

 

 

 

45,844

 

   Service

 

20,042

 

 

 

 

 

 

20,042

 

        Total Gross profit

 

65,246

 

 

 

640

 

 

 

65,886

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing expenses

 

36,956

 

 

 

(97

)

 

 

36,859

 

Operating loss

 

(4,759

)

 

 

737

 

 

 

(4,022

)

Net loss before tax

 

(5,572

)

 

 

737

 

 

 

(4,835

)

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(6,479

)

 

$

737

 

 

$

(5,742

)

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share

 

 

 

 

 

 

 

 

 

 

 

Net loss per share - basic

$

(0.06

)

 

 

 

 

 

$

(0.05

)

Net loss per share - diluted

$

(0.06

)

 

 

 

 

 

$

(0.05

)

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in per share calculation - basic

 

105,955

 

 

 

 

 

 

 

105,955

 

Shares used in per share calculation - diluted

 

105,955

 

 

 

 

 

 

 

105,955

 

 

14


 

The following table presents the effect of the adoption of ASU 2014-09 on our condensed consolidated statement of cash flows (unaudited) for the three months ended September 30, 2016 (in thousands):

 

 

Three months ended September 30, 2016

 

 

As Reported

 

 

Adjustment

 

 

As Adjusted

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(6,479

)

 

$

737

 

 

$

(5,742

)

Changes in operating assets and liabilities, net

 

 

 

 

 

 

 

 

 

 

 

      Accounts receivable

 

12,950

 

 

 

3,656

 

 

 

16,606

 

      Inventories

 

(2,405

)

 

 

(907

)

 

 

(3,312

)

      Prepaid and other assets

 

1,562

 

 

 

(97

)

 

 

1,465

 

      Deferred distributors revenue, net of cost of sales to distributors

 

3,412

 

 

 

(3,412

)

 

 

 

      Other current and long term liabilities

 

(842

)

 

 

23

 

 

 

(819

)

Net cash provided by operating activities

 

9,574

 

 

 

 

 

 

9,574

 

Cash flows from investing activities

 

(1,635

)

 

 

 

 

 

(1,635

)

Cash flows from financing activities

 

166

 

 

 

 

 

 

166

 

Foreign currency effect on cash

 

38

 

 

 

 

 

 

38

 

Net increase in cash and cash equivalents

$

8,143

 

 

$

 

 

$

8,143

 

 

 

5.

Balance Sheet Accounts

Cash, Cash Equivalents and Short-term Investments

The following is a summary of cash, cash equivalents and short-term investments (in thousands):

 

 

 

September 30,

2017

 

 

June 30,

2017

 

Cash

 

$

148,514

 

 

$

126,159

 

Cash equivalents (consisting of available-sale-securities)

 

 

4,500

 

 

 

4,291

 

Total cash and cash equivalents

 

 

153,014

 

 

 

130,450

 

Short-term investments

 

 

1,050

 

 

 

 

Total cash, cash equivalents and short-term investments

 

$

154,064

 

 

$

130,450

 

 

The Company considers highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Investments with original maturities greater than three months, but less than one year at the balance sheet date are classified as short-term investments. Short-term investments are recorded in “Prepaid expenses and other current assets” in the accompanying condensed consolidated balance sheets.

Inventories

The Company values its inventory at lower of cost or net realizable value. Cost is computed using standard cost, which approximates actual cost, on a first-in, first-out basis. The Company has established inventory allowances primarily determined by the demand of inventory or when conditions exist that suggest that inventory may be in excess of anticipated demand or is obsolete based upon assumptions about future demand. At the point of the loss recognition, a new, lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. Any written down or obsolete inventory subsequently sold has not had a material impact on gross margin for any of the periods disclosed.

Inventories consist of the following (in thousands):

 

 

 

September 30,

2017

 

 

June 30,

2017