Extreme Networks, Inc.
EXTREME NETWORKS INC (Form: 10-Q, Received: 05/04/2017 17:29:54)

 

 

 

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 March 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 April 28, 2017, was 110,166,838

 

 

 

 


 

EXTREME NETWORKS, INC.

FORM 10-Q

QUARTERLY PERIOD ENDED  

INDEX

 

 

 

 

 

 

PAGE

PART I. CONDENSED CONSOLIDATED FINANCIAL INFORMATION

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited):

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2017 and June 30, 2016

4

 

 

 

 

Condensed Consolidated Statements of Operations for the three and nine months ended March 31, 2017 and 2016

5

 

 

 

 

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

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2017 and 2016

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

Item 2.

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

25

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

33

 

 

 

Item 4.

Controls and Procedures

34

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

36

 

 

 

Item 1A

Risk Factors

36

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

51

 

 

 

Item 3.

Defaults Upon Senior Securities

51

 

 

 

Item 4.

Mine Safety Disclosure

51

 

 

 

Item 5.

Other Information

51

 

 

 

Item 6.

Exhibits

52

 

 

Signatures

54

 

3


 

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

March 31,

2017

 

 

June 30,

2016

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

117,280

 

 

$

94,122

 

Accounts receivable, net of allowances of $2,160 at March 31, 2017 and $3,257 at June 30, 2016

 

 

101,960

 

 

 

81,419

 

Inventories

 

 

47,689

 

 

 

40,989

 

Prepaid expenses and other current assets

 

 

25,343

 

 

 

12,438

 

Total current assets

 

 

292,272

 

 

 

228,968

 

Property and equipment, net

 

 

30,409

 

 

 

29,580

 

Intangible assets, net

 

 

27,766

 

 

 

19,762

 

Goodwill

 

 

82,680

 

 

 

70,877

 

Other assets

 

 

23,454

 

 

 

25,236

 

Total assets

 

$

456,581

 

 

$

374,423

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

11,149

 

 

$

17,628

 

Accounts payable

 

 

35,629

 

 

 

30,711

 

Accrued compensation and benefits

 

 

28,170

 

 

 

27,145

 

Accrued warranty

 

 

10,030

 

 

 

9,600

 

Deferred revenue, net

 

 

78,918

 

 

 

72,934

 

Deferred distributors revenue, net of cost of sales to distributors

 

 

44,258

 

 

 

26,817

 

Other accrued liabilities

 

 

37,062

 

 

 

26,691

 

Total current liabilities

 

 

245,216

 

 

 

211,526

 

Deferred revenue, less current portion

 

 

23,856

 

 

 

21,926

 

Long-term debt, less current portion

 

 

83,775

 

 

 

37,446

 

Deferred income taxes

 

 

6,140

 

 

 

4,693

 

Other long-term liabilities

 

 

9,808

 

 

 

8,635

 

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; 109,997,087 shares

   issued and outstanding at March 31, 2017 and 104,942,665 shares issued and

   outstanding at June 30, 2016

 

 

110

 

 

 

105

 

Additional paid-in-capital

 

 

903,209

 

 

 

884,706

 

Accumulated other comprehensive loss

 

 

(3,099

)

 

 

(2,874

)

Accumulated deficit

 

 

(812,434

)

 

 

(791,740

)

Total stockholders’ equity

 

 

87,786

 

 

 

90,197

 

Total liabilities and stockholders’ equity

 

$

456,581

 

 

$

374,423

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

4


 

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 31,

2017

 

 

March 31,

2016

 

 

March 31,

2017

 

 

March 31,

2016

 

Net revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

110,789

 

 

$

92,711

 

 

$

310,709

 

 

$

289,447

 

Service

 

 

37,875

 

 

 

32,175

 

 

 

108,708

 

 

 

99,325

 

Total net revenues

 

 

148,664

 

 

 

124,886

 

 

 

419,417

 

 

 

388,772

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

52,401

 

 

 

50,240

 

 

 

155,987

 

 

 

154,277

 

Service

 

 

14,117

 

 

 

11,926

 

 

 

40,684

 

 

 

36,382

 

Total cost of revenues

 

 

66,518

 

 

 

62,166

 

 

 

196,671

 

 

 

190,659

 

Gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

58,388

 

 

 

42,471

 

 

 

154,722

 

 

 

135,170

 

Service

 

 

23,758

 

 

 

20,249

 

 

 

68,024

 

 

 

62,943

 

Total gross profit

 

 

82,146

 

 

 

62,720

 

 

 

222,746

 

 

 

198,113

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

24,691

 

 

 

18,852

 

 

 

67,003

 

 

 

59,836

 

Sales and marketing

 

 

38,759

 

 

 

38,322

 

 

 

116,824

 

 

 

111,442

 

General and administrative

 

 

9,612

 

 

 

8,957

 

 

 

27,296

 

 

 

27,896

 

Acquisition and integration costs

 

 

3,418

 

 

 

 

 

 

9,908

 

 

 

1,157

 

Restructuring and related charges, net of reversals

 

 

7,719

 

 

 

1,358

 

 

 

9,572

 

 

 

9,992

 

Amortization of intangibles

 

 

1,193

 

 

 

4,142

 

 

 

7,510

 

 

 

12,860

 

Total operating expenses

 

 

85,392

 

 

 

71,631

 

 

 

238,113

 

 

 

223,183

 

Operating loss

 

 

(3,246

)

 

 

(8,911

)

 

 

(15,367

)

 

 

(25,070

)

Interest income

 

 

236

 

 

 

28

 

 

 

374

 

 

 

84

 

Interest expense

 

 

(1,177

)

 

 

(769

)

 

 

(3,000

)

 

 

(2,404

)

Other income (loss)

 

 

(251

)

 

 

(266

)

 

 

551

 

 

 

813

 

Loss before income taxes

 

 

(4,438

)

 

 

(9,918

)

 

 

(17,442

)

 

 

(26,577

)

Provision for income taxes

 

 

1,166

 

 

 

866

 

 

 

3,252

 

 

 

2,967

 

Net loss

 

$

(5,604

)

 

$

(10,784

)

 

$

(20,694

)

 

$

(29,544

)

Basic and diluted net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share - basic

 

$

(0.05

)

 

$

(0.10

)

 

$

(0.19

)

 

$

(0.29

)

Net loss per share - diluted

 

$

(0.05

)

 

$

(0.10

)

 

$

(0.19

)

 

$

(0.29

)

Shares used in per share calculation - basic

 

 

109,213

 

 

 

104,104

 

 

 

107,531

 

 

 

102,486

 

Shares used in per share calculation - diluted

 

 

109,213

 

 

 

104,104

 

 

 

107,531

 

 

 

102,486

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

5


 

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 31,

2017

 

 

March 31,

2016

 

 

March 31,

2017

 

 

March 31,

2016

 

Net loss:

 

$

(5,604

)

 

$

(10,784

)

 

$

(20,694

)

 

$

(29,544

)

Other comprehensive gain (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in foreign currency translation adjustments

 

 

749

 

 

 

299

 

 

 

(225

)

 

 

(986

)

Other comprehensive gain (loss), net of tax:

 

 

749

 

 

 

299

 

 

 

(225

)

 

 

(986

)

Total comprehensive loss

 

$

(4,855

)

 

$

(10,485

)

 

$

(20,919

)

 

$

(30,530

)

 

See accompanying notes to condensed consolidated financial statements.

 

 

6


 

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

March 31,

2017

 

 

March 31,

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(20,694

)

 

$

(29,544

)

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

 

 

 

 

 

 

 

 

Depreciation

 

 

7,716

 

 

 

8,204

 

Amortization of intangible assets

 

 

13,781

 

 

 

24,707

 

Provision for doubtful accounts and allowance for product returns

 

 

21

 

 

 

848

 

Stock-based compensation

 

 

9,328

 

 

 

12,120

 

Non-cash restructuring and related charges

 

 

2,578

 

 

 

4,463

 

Other non-cash charges

 

 

1,964

 

 

 

529

 

Changes in operating assets and liabilities, net

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(5,926

)

 

 

26,894

 

Inventories

 

 

6,344

 

 

 

5,259

 

Prepaid expenses and other assets

 

 

8,181

 

 

 

1,896

 

Accounts payable

 

 

4,907

 

 

 

(19,520

)

Accrued compensation and benefits

 

 

(1,322

)

 

 

(2,275

)

Deferred revenue

 

 

(6,245

)

 

 

(843

)

Deferred distributor revenue, net of cost of sales to distributors

 

 

17,441

 

 

 

(14,618

)

Other current and long term liabilities

 

 

5,887

 

 

 

793

 

Net cash provided by operating activities

 

 

43,961

 

 

 

18,913

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(7,832

)

 

 

(2,797

)

Acquisition

 

 

(51,088

)

 

 

 

Deposit related to future acquisition

 

 

(10,239

)

 

 

 

Net cash used in investing activities

 

 

(69,159

)

 

 

(2,797

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings under Revolving Facility

 

 

 

 

 

15,000

 

Borrowings under Term Loan

 

 

48,250

 

 

 

 

Loan fees on  borrowings

 

 

(1,327

)

 

 

 

Repayment of debt

 

 

(7,775

)

 

 

(23,125

)

Proceeds from issuance of common stock

 

 

9,180

 

 

 

4,460

 

Net cash provided by (used in) financing activities

 

 

48,328

 

 

 

(3,665

)

Foreign currency effect on cash

 

 

28

 

 

 

(342

)

Net increase in cash and cash equivalents

 

 

23,158

 

 

 

12,109

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

94,122

 

 

 

76,225

 

Cash and cash equivalents at end of period

 

$

117,280

 

 

$

88,334

 

 

See accompanying notes to the condensed consolidated financial statements.

 

 

7


 

  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, 2016 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, 2016.

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 March 31, 2017  The results of operations for the three and nine months ended March 31, 2017 are not necessarily indicative of the results that may be expected for fiscal 2017 or any future periods.

Fiscal Year

The Company uses a fiscal calendar year ending on June 30.  All references herein to "fiscal 2017" or "2017" represent the fiscal year ending June 30, 2017.  All references herein to "fiscal 2016" or "2016" represent the fiscal year ending June 30, 2016.

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

 

On October 28, 2016 (the “Acquisition Date”), the Company completed the acquisition of Zebra Technologies Corporation’s (“Zebra”) wireless LAN assets (the “WLAN Business”).  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 cash consideration of $51.1 million.  The purchase price consideration is provisional as it is still pending finalization of post close adjustments as defined in the purchase agreement.  All accounts noted above are “preliminary” to the table below as all accounts are open.

The acquisition 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

8


 

is pending the fin alization 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 dur ing 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 rea sonable, 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 March 31, 2017 of the tangible and identifiable intangible assets acquired and liabilities assumed:

 

 

Preliminary Allocation as of December 31, 2016

 

 

Change during three months ended March 31, 2017

 

 

 

Preliminary Allocation as of March 31, 2017

 

Receivables/net

 

$

17,818

 

 

$

(3,182

)

(a)

 

$

14,636

 

Inventory

 

 

12,408

 

 

 

635

 

(b)

 

 

13,043

 

Other current assets

 

 

808

 

 

 

 

 

 

 

808

 

Property and equipment

 

 

1,780

 

 

 

1,379

 

(c)

 

 

3,159

 

Identifiable intangible assets

 

 

20,500

 

 

 

100

 

(d)

 

 

20,600

 

In-process research and development

 

 

1,600

 

 

 

 

 

 

 

1,600

 

Other assets

 

 

7,634

 

 

 

 

 

 

 

7,634

 

Goodwill

 

 

9,836

 

 

 

1,967

 

 

 

 

11,803

 

Current liabilities

 

 

(7,763

)

 

 

(273

)

(f)

 

 

(8,036

)

Deferred revenue

 

 

(13,533

)

 

 

(626

)

(g)

 

 

(14,159

)

Total purchase price allocation

 

$

51,088

 

 

$

-

 

 

 

$

51,088

 

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. Valuations of the intangible assets were valued using income approaches based on projections provided by management, 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 changes during the period in the table above is as follows: a) information on accounts receivable and related reserves of matters that existed as of the acquisition date; b) additional receipts of products; c) additional fixed assets acquired in India; d) revised net realizable value based on usefulness of asset; e) additional employee benefits assumed; f) additional maintenance contracts.

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

 

$

14,600

 

Customer relationships

 

4

 

 

3,400

 

Trademarks

 

5

 

 

2,600

 

Total identifiable intangible assets

 

 

 

$

20,600

 

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

The Company also has an indefinite lived asset of $1.6 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 WLAN Business are included in the consolidated results of operations beginning October 28, 2016.  The Company incurred $7.6 million acquisition-related expenses of which $1.1 million was incurred in the three months ended March 31, 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.

9


 

Pro forma f inancial information

The following unaudited pro forma results of operations are presented as though the acquisition of the 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 March 31, 2017, are the results for Extreme for the three months ended March 31, 2017.

The unaudited pro forma financial information for the three months ended March 31, 2016, combines the historical results for Extreme for that period, with the historical results of the WLAN Business for the same period.

The unaudited pro forma financial information for the nine months ended March 31, 2017 combines the results for Extreme for the nine months ended March 31, 2017, which include the results of the WLAN Business subsequent to the acquisition date, and the historical results of the WLAN Business for the three months ended September 30, 2016 and the month ended October 28, 2016.

The unaudited pro forma financial information for the nine months ended March 31, 2016, combines the historical results for Extreme for those periods, with the historical results of the WLAN Business for the nine months ended March 31, 2016.

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 31,

2017

 

 

March 31,

2016

 

 

March 31,

2017

 

 

March 31,

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

148,664

 

 

$

157,798

 

 

$

462,689

 

 

$

488,462

 

Net income (loss)

 

$

(2,774

)

 

$

(17,833

)

 

$

(7,560

)

 

$

(59,341

)

Net earnings (loss) per share - basic

 

$

(0.03

)

 

$

(0.17

)

 

$

(0.07

)

 

$

(0.58

)

Net earnings (loss) per share - diluted

 

$

(0.03

)

 

$

(0.17

)

 

$

(0.07

)

 

$

(0.58

)

Shares used in per share calculation - basic

 

 

109,213

 

 

 

104,104

 

 

 

107,531

 

 

 

102,486

 

Shares used in per share calculation - diluted

 

 

109,213

 

 

 

104,104

 

 

 

107,531

 

 

 

102,486

 

 

 

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, 2016. 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.

 

Business Combinations

The Company applies the acquisition method of accounting for business combinations. Under this method of accounting, all assets acquired and liabilities assumed are recorded at their respective fair values at the date of the completion of the transaction. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, intangibles and other asset lives, among other items.  Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). Market participants are assumed to be buyers and sellers in the principal (most advantageous) market for the asset or liability. Additionally, fair value measurements for an asset assume the highest and best use of that asset by market participants. As a result, the Company may have been required to value the acquired assets at fair value measures that do not reflect its intended use of those assets. Use of different

10


 

estimates and judgments could yield different results. Any excess of the purchase price over the fair value of the net assets acquired is recognized as goodwill.  Although the Company believes the assumptions and estimates it has made are reasonable and appropriate, they are based in part on historical experience and information that may be o btained from the management of the acquired company and are inherently uncertain. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.  As a result, during the measureme nt period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determinat ion of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company's consolidated statements of operations.

4.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In March 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-09, Compensation – Stock Compensation (“ASU 2016-09”) which identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows.  The Company early adopted this standard beginning with its fiscal year 2017. The impact of the adoption had the following impacts:

 

In recording share-based compensation expense, the standard allows companies to make a policy election as to whether they will include an estimate of awards expected to be forfeited or whether they will account for forfeitures as they occur. The Company has elected to not include an estimated forfeiture rate in the computation of its share-based compensation expense. This election did not have a material impact on the Company’s condensed consolidated financial statements and accordingly no adjustment was made to beginning accumulated deficit to apply the modified retrospective method.

 

The standard requires that employee taxes paid when an employer withholds shares for tax-withholding purposes be reported as financing activities in the consolidated statements of cash flows.  Previously, the Company included these cash flows in financing activities and therefore the adoption of this provision had no impact.

 

The new standard requires that the tax effects of share-based compensation be recognized in the income tax provision. Previously, these amounts were recognized in additional paid-in capital.  Given the full valuation allowance against the US deferred tax assets, there will be no impact to the effective tax rate until such time as the valuation allowance may be reversed.

 

The standard also requires previously unrecognized excess tax benefits to be recognized on a modified retrospective basis.  Unrecognized tax benefits result when a deduction for stock based compensation does not actually reduce taxes payable.  The Company has recorded $13.5 million and $0.9 million of previously unrecorded deferred tax assets for federal and state net operating losses, respectively, with a corresponding increase to the valuation allowance pursuant to the evidence discussed in Note 9.  The cumulative net impact to accumulated deficit of early adoption of this provision was therefore zero.

 

ASU 2016-09 also requires excess tax benefits to be presented as an operating activity on the statement of cash flows rather than as a financing activity on either a retrospective or prospective basis.  The Company has elected to apply this provision of the standard on a prospective basis.

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”),  which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  ASU 2015-03 requires retrospective adoption and will be effective for annual and interim periods in fiscal years beginning after December 15, 2015.  This guidance became effective for the Company beginning with its fiscal year 2017.  

In connection with the Company’s adoption of ASU 2015-03 in fiscal 2017, all debt issuance costs have been presented, with the exception of those related to the revolving credit facility, as a reduction of the carrying amount of the related debt liability.  The previously reported balances in the Company’s June 30, 2016 Form 10-K for debt issuance costs listed in “Other assets” have been reclassified to “Current portion of long-term debt” in the amount of $0.2 million and “Long-term debt, less current portion” in the amount of $0.2 million to conform to the December 31, 2016 presentation.

 

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue Recognition - Revenue from Contracts with Customers (Topic 606), which will replace substantially all current revenue recognition guidance once it becomes effective. The new standard provides accounting guidance for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers unless the contracts are in the scope of other standards. The new standard is less prescriptive and may

11


 

require software entities to use more judgment and estimates in the revenue recognition process than are required under existing revenue guidance. Since ASU 2014-09 was issued, several additional ASUs have been issued and incorporated within ASC 606 to clarify various elements of the guidance.  In August 2015, the FASB issued ASU 2015-14 which amended the effective date of this ASU to fiscal years beginning after December 15, 2017, and early adoption is permitted only for fiscal years beginning after December 15, 2016.

The new revenue standard may be applied using either of the following transition methods: (1) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (2) a modified retrospective approach with the cumulative effect of initially adopting the standard recognized at the date of adoption (which includes additional footnote disclosures).   The Company plans to adopt the standard in the first quarter of fiscal 2018 and preliminarily expects to use the full retrospective method.  However, the Company is continuing to evaluate the impact of the standard, and our adoption method is subject to change.  The Company expects that the adoption of this guidance will have a material impact on its financial statements, specifically related to the timing of revenue recognition for sales through our distributors.  The Company is continuing to assess all other potential impacts of the standard, including the pattern with which the Company recognizes revenue.

 

5.

Balance Sheet Accounts

Cash and Cash Equivalents

The following is a summary of cash and cash equivalents (in thousands):

 

 

March 31,

2017

 

 

June 30,

2016

 

Cash

 

$

112,996

 

 

$

89,847

 

Cash equivalents

 

 

4,284

 

 

 

4,275

 

 

 

 

 

 

 

 

 

 

Total cash and cash equivalents

 

$

117,280

 

 

$

94,122

 

 

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 of greater than three months, but less than one year at the balance sheet date are classified as short-term investments.

Inventory

The Company values its inventory at lower of cost or market. 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 age 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.

Inventory consists of the following (in thousands):

 

 

March 31,

2017

 

 

June 30,

2016

 

Finished goods

 

$

46,658

 

 

$

38,751

 

Raw materials

 

 

1,031

 

 

 

2,238

 

Total Inventory

 

$

47,689

 

 

$

40,989

 

 

Property and Equipment, Net

Property and equipment consist of the following (in thousands):

 

 

March 31,

2017

 

 

June 30,

2016

 

Computer equipment

 

$

36,372

 

 

$

34,657

 

Purchased software

 

 

11,099

 

 

 

5,574

 

Office equipment, furniture and fixtures

 

 

11,099

 

 

 

10,385

 

Leasehold improvements

 

 

22,505

 

 

 

19,342

 

Total property and equipment

 

 

81,075

 

 

 

69,958

 

Less: accumulated depreciation and amortization

 

 

(50,666

)

 

 

(40,378

)

Property and equipment, net

 

$

30,409

 

 

$

29,580

 

12


 

 

Intangibles

The following tables summarize the components of gross and net intangible asset balances (dollars in thousands):

 

 

 

Weighted Average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remaining Amortization

 

Gross Carrying

 

 

Accumulated

 

 

Net Carrying

 

 

 

Period

 

Amount

 

 

Amortization

 

 

Amount

 

March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Developed technology

 

5.52 years

 

$

55,600

 

 

$

42,056

 

 

$

13,544

 

Customer relationships

 

3.59 years

 

 

40,400

 

 

 

37,354

 

 

 

3,046

 

Maintenance contracts

 

1.59 years

 

 

17,000

 

 

 

11,617

 

 

 

5,383

 

Trademarks

 

4.59 years

 

 

5,100

 

 

 

2,717

 

 

 

2,383

 

License agreements

 

6.60 years

 

 

2,445

 

 

 

1,052

 

 

 

1,393

 

Other intangibles

 

2.90 years

 

 

1,382

 

 

 

965

 

 

 

417

 

Total intangibles, net with finite lives

 

 

 

 

121,927

 

 

 

95,761

 

 

 

26,166

 

In-process research and development, with indefinite life

 

 

 

 

1,600

 

 

 

-

 

 

 

1,600

 

Total intangibles, net

 

 

 

$

123,527

 

 

$

95,761

 

 

$

27,766

 

 

 

 

Weighted Average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remaining Amortization

 

Gross   Carrying

 

 

Accumulated

 

 

Net Carrying

 

 

 

Period

 

Amount

 

 

Amortization

 

 

Amount

 

June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Developed technology

 

0.30 years

 

$

48,000

 

 

$

43,028

 

 

$

4,972

 

Customer relationships

 

0.30 years

 

 

37,000

 

 

 

32,889

 

 

 

4,111

 

Maintenance contracts

 

2.30 years

 

 

17,000

 

 

 

9,067

 

 

 

7,933

 

Trademarks

 

0.30 years

 

 

2,500

 

 

 

2,222

 

 

 

278

 

License agreements

 

9.70 years

 

 

3,413

 

 

 

1,473

 

 

 

1,940

 

Other intangibles

 

3.70 years

 

 

1,428

 

 

 

900

 

 

 

528

 

Total intangibles, net

 

 

 

$

109,341

 

 

$

89,579

 

 

$

19,762

 

 

 

The amortization expense of intangibles for the periods presented is summarized below (in thousands):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 31,

2017

 

 

March 31,

2016

 

 

March 31,

2017

 

 

March 31,

2016

 

Amortization in "Cost of revenues: Product"

 

$

995

 

 

$

3,417

 

 

$

6,271

 

 

$

11,847

 

Amortization of intangibles

 

 

1,193

 

 

 

4,142

 

 

 

7,510

 

 

 

12,860

 

Total amortization

 

$

2,188

 

 

$

7,559

 

 

$

13,781

 

 

$

24,707

 

 

The amortization expense that is recognized in “Cost of revenues: Product” is comprised of amortization for developed technology, license agreements and other intangibles.

Goodwill

The following table summarizes goodwill for the periods presented (in thousands):

 

 

March 31,

2017

 

Balance as of June 30, 2016

 

$

70,877