10-Q 1 extr-10q_20180930.htm 10-Q extr-10q_20180930.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 September 30, 2018      

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 every Interactive Data File required to be submitted 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 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

 

 

 

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 October 30, 2018, was 118,337,479

 

 

 

 


 

EXTREME NETWORKS, INC.

FORM 10-Q

QUARTERLY PERIOD ENDED

September 30, 2018

 

INDEX

 

 

 

 

 

 

PAGE

PART I. CONDENSED CONSOLIDATED FINANCIAL INFORMATION

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 3

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2018 and June 30, 2018

3

 

 

 

 

Condensed Consolidated Statements of Operations for the three months ended September 30, 2018 and 2017

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive (Loss) Income for the three months ended September 30, 2018 and 2017

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2018 and 2017

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

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

26

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

 

 

 

Item 4.

Controls and Procedures

38

 

 

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

55

 

 

 

Item 3.

Defaults Upon Senior Securities

55

 

 

 

Item 4.

Mine Safety Disclosure

55

 

 

 

Item 5.

Other Information

55

 

 

 

Item 6.

Exhibits

56

 

 

Signatures

57

 

2


 

 

 

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

 

 

 

September 30,

2018

 

 

June 30,

2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

140,167

 

 

$

121,139

 

Accounts receivable, net of allowance for doubtful accounts of $1,661 at September 30, 2018 and $1,478 at June 30, 2018

 

 

164,683

 

 

 

212,423

 

Inventories

 

 

55,580

 

 

 

63,867

 

Prepaid expenses and other current assets

 

 

35,371

 

 

 

30,484

 

Total current assets

 

 

395,801

 

 

 

427,913

 

Property and equipment, net

 

 

76,224

 

 

 

78,519

 

Intangible assets, net

 

 

70,023

 

 

 

77,092

 

Goodwill

 

 

139,082

 

 

 

139,082

 

Other assets

 

 

50,754

 

 

 

47,642

 

Total assets

 

$

731,884

 

 

$

770,248

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

9,008

 

 

$

9,007

 

Accounts payable

 

 

43,873

 

 

 

75,689

 

Accrued compensation and benefits

 

 

36,387

 

 

 

50,351

 

Accrued warranty

 

 

12,601

 

 

 

12,807

 

Deferred revenue

 

 

137,991

 

 

 

130,865

 

Other accrued liabilities

 

 

82,180

 

 

 

81,153

 

Total current liabilities

 

 

322,040

 

 

 

359,872

 

Deferred revenue, less current portion

 

 

45,874

 

 

 

43,660

 

Long-term debt, less current portion

 

 

176,498

 

 

 

188,749

 

Deferred income taxes

 

 

6,234

 

 

 

6,135

 

Other long-term liabilities

 

 

64,107

 

 

 

59,100

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

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

   authorized; none issued

 

 

 

 

 

 

Common stock, $.001 par value, 750,000 shares authorized; 118,270 shares

   issued and outstanding at September 30, 2018 and 116,124 shares issued and

   outstanding at June 30, 2018

 

 

118

 

 

 

116

 

Additional paid-in-capital

 

 

956,356

 

 

 

942,397

 

Accumulated other comprehensive loss

 

 

(2,697

)

 

 

(1,703

)

Accumulated deficit

 

 

(836,646

)

 

 

(828,078

)

Total stockholders’ equity

 

 

117,131

 

 

 

112,732

 

Total liabilities and stockholders’ equity

 

$

731,884

 

 

$

770,248

 

 

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,

2018

 

 

September 30,

2017

 

Net revenues:

 

 

 

 

 

 

 

 

Product

 

$

177,720

 

 

$

164,774

 

Service

 

 

62,166

 

 

 

46,941

 

Total net revenues

 

 

239,886

 

 

 

211,715

 

Cost of revenues:

 

 

 

 

 

 

 

 

Product

 

 

83,543

 

 

 

80,045

 

Service

 

 

24,272

 

 

 

19,289

 

Total cost of revenues

 

 

107,815

 

 

 

99,334

 

Gross profit:

 

 

 

 

 

 

 

 

Product

 

 

94,177

 

 

 

84,729

 

Service

 

 

37,894

 

 

 

27,652

 

Total gross profit

 

 

132,071

 

 

 

112,381

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

51,241

 

 

 

34,285

 

Sales and marketing

 

 

67,582

 

 

 

55,561

 

General and administrative

 

 

12,771

 

 

 

12,185

 

Acquisition and integration costs

 

 

2,546

 

 

 

4,244

 

Restructuring charges, net of reversals

 

 

808

 

 

 

 

Amortization of intangibles

 

 

2,141

 

 

 

1,614

 

Total operating expenses

 

 

137,089

 

 

 

107,889

 

Operating (loss) income

 

 

(5,018

)

 

 

4,492

 

Interest income

 

 

394

 

 

 

647

 

Interest expense

 

 

(3,526

)

 

 

(2,215

)

Other (expense) income, net

 

 

487

 

 

 

3,127

 

(Loss) income before income taxes

 

 

(7,663

)

 

 

6,051

 

Provision for income taxes

 

 

1,402

 

 

 

1,675

 

Net (loss) income

 

$

(9,065

)

 

$

4,376

 

Basic and diluted net (loss) income per share:

 

 

 

 

 

 

 

 

Net (loss) income per share - basic

 

$

(0.08

)

 

$

0.04

 

Net (loss) income per share - diluted

 

$

(0.08

)

 

$

0.04

 

Shares used in per share calculation - basic

 

 

117,368

 

 

 

112,241

 

Shares used in per share calculation - diluted

 

 

117,368

 

 

 

118,431

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

4


 

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

September 30,

2018

 

 

September 30,

2017

 

Net (loss) income:

 

$

(9,065

)

 

$

4,376

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

 

 

Change in unrealized gains on available for sale securities

 

 

 

 

 

183

 

Net change in foreign currency translation adjustments

 

 

(497

)

 

 

355

 

Other comprehensive (loss) income, net of tax:

 

 

(497

)

 

 

538

 

Total comprehensive (loss) income

 

$

(9,562

)

 

$

4,914

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

5


 

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

September 30,

2018

 

 

September 30,

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(9,065

)

 

$

4,376

 

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

 

 

 

 

 

 

 

 

Depreciation

 

 

6,783

 

 

 

3,125

 

Amortization of intangible assets

 

 

7,073

 

 

 

4,309

 

Provision for doubtful accounts

 

 

515

 

 

 

489

 

Stock-based compensation

 

 

6,825

 

 

 

4,803

 

Deferred income taxes

 

 

(25

)

 

 

488

 

Unrealized/realized (gain) loss on equity investment

 

 

(154

)

 

 

(3,757

)

Non-cash interest

 

 

995

 

 

 

227

 

Other non-cash items

 

 

(172

)

 

 

701

 

Changes in operating assets and liabilities, net of acquisitions

 

 

 

 

 

 

 

 

Accounts receivable

 

 

46,661

 

 

 

(5,762

)

Inventories

 

 

8,287

 

 

 

5,915

 

Prepaid expenses and other assets

 

 

(7,814

)

 

 

(1,856

)

Accounts payable

 

 

(31,251

)

 

 

9,042

 

Accrued compensation and benefits

 

 

(13,964

)

 

 

(5,360

)

Deferred revenue

 

 

9,374

 

 

 

4,650

 

Other current and long-term liabilities

 

 

10,262

 

 

 

(2,792

)

Net cash provided by operating activities

 

 

34,330

 

 

 

18,598

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(7,417

)

 

 

(7,421

)

Business acquisitions

 

 

 

 

 

(68,047

)

Proceeds from sale of investment

 

 

727

 

 

 

4,922

 

Net cash used in investing activities

 

 

(6,690

)

 

 

(70,546

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings under Term Loan

 

 

 

 

 

80,000

 

Repayments of debt

 

 

(12,375

)

 

 

(4,093

)

Loan fees on borrowings

 

 

(273

)

 

 

(1,494

)

Proceeds from issuance of common stock, net of tax withholding

 

 

7,137

 

 

 

42

 

Capital lease financing

 

 

(91

)

 

 

 

Contingent consideration obligations

 

 

(1,577

)

 

 

 

Deferred payments on an acquisition

 

 

(1,000

)

 

 

 

Net cash (used in) provided by financing activities

 

 

(8,179

)

 

 

74,455

 

Foreign currency effect on cash

 

 

(433

)

 

 

57

 

Net increase in cash and cash equivalents

 

 

19,028

 

 

 

22,564

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

121,139

 

 

 

130,450

 

Cash and cash equivalents at end of period

 

$

140,167

 

 

$

153,014

 

 

 

 

 

 

 

 

 

 

 

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, 2018 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, 2018.

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, 2018. The results of operations for the three months ended September 30, 2018 are not necessarily indicative of the results that may be expected for fiscal 2019 or any future periods.

Fiscal Year

The Company uses a fiscal calendar year ending on June 30.  All references herein to “fiscal 2019” or “2019” represent the fiscal year ending June 30, 2019.  All references herein to “fiscal 2018” or “2018” represent the fiscal year ended June 30, 2018.

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. Actual results could differ from these estimates.

2. Business Combinations

Fiscal 2018 Acquisitions

Data Center Business

The Company completed its acquisition of the data center business (the “Data Center Business”) of Brocade Communication Systems, Inc.’s (“Brocade”) on October 27, 2017 (the “Data Center Closing Date”), pursuant to an Asset Purchase Agreement (the “Data Center Business APA”) dated as of October 3, 2017, by and between the Company and Brocade for an aggregate purchase consideration of $84.3 million. Under the terms and conditions of the Data Center Business 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 following table below summarizes the final allocation of the tangible and identifiable intangible assets acquired and liabilities assumed (in thousands):

7


 

 

Final Allocation

 

Accounts receivables

$

33,488

 

Inventories

 

19,934

 

Prepaid expenses and other current assets

 

988

 

Property and equipment

 

18,938

 

Other assets

 

4,734

 

Accounts payable and accrued expenses

 

(16,494

)

Deferred revenue

 

(33,025

)

Net tangible assets acquired

 

28,563

 

Identifiable intangible assets

 

32,800

 

Goodwill

 

22,974

 

Total intangible assets acquired

 

55,774

 

Total net assets acquired

$

84,337

 

Campus Fabric Business

The Company completed its acquisition of Avaya Inc.’s (“Avaya”) fabric-based secure networking solutions and network security solutions business (the “Campus Fabric Business”) on July 14, 2017, (the “Campus Fabric Business Closing Date”) pursuant to an Asset Purchase Agreement (the “Campus Fabric Business APA”) dated March 7, 2017.  Under the terms and conditions of the Campus Fabric Business 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 consideration of $79.4 million. 

The following table below summarizes the final allocation of the tangible and identifiable intangible assets acquired and liabilities assumed (in thousands):

 

Final Allocation

 

Accounts receivables

$

19,527

 

Inventories

 

14,165

 

Prepaid expenses and other current assets

 

240

 

Property and equipment

 

5,406

 

Other assets

 

7,009

 

Accounts payable and accrued expenses

 

(31,670

)

Deferred revenue

 

(8,994

)

Other long-term liabilities

 

(5,849

)

Net tangible assets acquired

 

(166

)

Identifiable intangible assets

 

41,300

 

In-process research and development

 

2,400

 

Goodwill

 

35,892

 

Total intangible assets acquired

 

79,592

 

Total net assets acquired

$

79,426

 

   Capital Financing Business

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 $13.7 million, lease equipment of $3.5 million and identifiable intangible assets of $0.8 million, and the fair value of the contingent consideration was $13.0 million. As the preliminary fair value of the net assets acquired exceeded the fair value of the purchase consideration, the Company recorded a bargain purchase gain of $5.0 million.

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 and Campus Fabric Business had occurred as of the beginning of fiscal 2017 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.

8


 

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 beginning of fiscal 2017, 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 historical results for Extreme for that period, which includes the results of the Campus Fabric Business subsequent to the acquisition date, with the historical results of the Data Center Business, CF Business and Campus Fabric Business, prior to the acquisition date, for the three months ended September 30, 2017.

Pro forma results of operations from the Data Center Business, CF Business and Campus Fabric Business acquisitions included in the pro forma results of operations for the three months ended September 30, 2017, have not been adjusted for the adoption of Topic 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

 

 

Net revenues

 

$

284,508

 

 

Net loss

 

$

(8,774

)

 

Net loss per share - basic

 

$

(0.08

)

 

Net loss per share - diluted

 

$

(0.08

)

 

Shares used in per share calculation - basic

 

 

112,241

 

 

Shares used in per share calculation - diluted

 

 

112,241

 

 

 

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, 2018. There have been no material changes to the Company’s significant accounting policies since the filing of the Annual Report on Form 10-K.

Recently Adopted Accounting Pronouncements

In January 2016, the Financial Accounting Standards Board (“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 guidance was adopted effective July 1, 2018 and the Company reclassified a $0.5 million unrealized gain, net of tax, related to its available-for-sale investments from accumulated other comprehensive loss to accumulated deficit as a cumulative-effect adjustment in the accompanying condensed consolidated balance sheets.  Future changes in fair value will be included in earnings in each period.

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments to provide guidance on the classification of eight cash flow issues in order to reduce diversity in practice.  The Company adopted the new guidance effective July 1, 2018. The amendments in this update have been applied on a retrospective transition method to each period presented. The adoption of this guidance did not have a material effect on the Company’s presentation of cash flows.  

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other Than Inventory, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Historical GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold outside the consolidated group.  The new guidance is effective for interim and annual reporting periods beginning after December 15, 2017. The Company adopted ASU 2016-16 effective July 1, 2018 on a modified retrospective basis. The adoption of this guidance did not have a material effect on the Company’s financial statements. 

In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, 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 Topic 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 Company adopted this guidance effective July 1, 2018, on a prospective basis.  The adoption of this guidance did not have a material effect on the Company’s financial statements.

9


 

Recently Issued Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), which aligns the requirements for capitalizing implementation costs incurred in a service contract hosting arrangement with those of developing or obtaining internal-use software. This standard is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company is currently evaluating the impact the new standard will have on its condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), which removes, modifies and adds various disclosure requirements around the topic in order to clarify and improve the cost-benefit nature of disclosures. For example, disclosures around transfers between fair value hierarchy Levels will be removed and further detail around changes in unrealized gains and losses for the period and unobservable inputs determining Level 3 fair value measurements will be added. This standard is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company is currently evaluating the impact the new standard will have on its condensed consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220), this standard that allows the reclassification from AOCI to retained earnings for stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act ("Tax Reform Act"). The amount of the reclassification is the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances related to items remaining in AOCI. This standard is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have not yet been issued. The new standard is to be applied either in the period of adoption or retrospectively to each period (or periods) in which the effects of the change in the income tax rate in the Tax Reform Act are recognized. Management is currently evaluating implementation options and impact on the Company's financial statements and related disclosures.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, 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, beginning on July 1, 2019.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), 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 arrangements must now be recognized as assets and liabilities on the balance sheet of the lessee. Under Topic 842, a right-of-use asset and lease obligation will be recorded for all leases, whether operating or financing, while the statement of operations will 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 Topic 842 must be calculated using the applicable incremental borrowing rate at the date of adoption. In addition, Topic 842 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.  The Company believes that Topic 842 will have a material impact on its financial position, as a result of recognizing right-of-use assets and lease liabilities on its consolidated balance sheets. The Company continues to evaluate the impact the new standard will have on its condensed consolidated statement of operations and statement of cash flows. This guidance will become effective for the Company beginning with its fiscal year 2020, beginning on July 1, 2019.

10


 

4.

Revenues

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.

Revenue Recognition         

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 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 condensed consolidated statements of operations for the three months ended September 30, 2018 and 2017 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, 2018, the Company had $183.9 million of remaining performance obligations, which is comprised of deferred maintenance revenue and services not yet delivered.  The Company expects to recognize approximately 65 percent of its remaining performance obligations as revenue in fiscal 2019, an additional 22 percent in fiscal 2020 and 13 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 three months ended September 30, 2018 and 2017, that was included in the deferred revenue balance at the beginning of each period was $50.6 million and $42.0 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 $4.9 million and $2.5 million at September 30, 2018 and 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 months ended September 30, 2018 and 2017, was $0.7 million and $0.4 million, respectively.  There was no impairment loss in relation to the costs capitalized.

Estimated Variable Consideration. 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. 

11


 

Revenue by Category

The following table sets forth the Company’s revenue disaggregated by sales channel and geographic region based on the customer’s ship-to locations (in thousands):

 

 

Three Months Ended

 

 

 

September 30,

2018

 

 

September 30,

2017

 

 

 

Distributor

 

Direct

 

Total

 

 

Distributor

 

Direct

 

Total

 

Americas:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

56,742

 

$

59,936

 

$

116,678

 

 

$

42,392

 

$

50,990

 

$

93,382

 

Other

 

 

4,493

 

 

5,524

 

 

10,017

 

 

 

14,336

 

 

6,395

 

 

20,731

 

Total Americas

 

 

61,235

 

 

65,460

 

 

126,695

 

 

 

56,728

 

 

57,385

 

 

114,113

 

EMEA

 

 

61,331

 

 

30,838

 

 

92,169

 

 

 

51,232

 

 

27,903

 

 

79,135

 

APAC

 

 

2,349

 

 

18,673

 

 

21,022

 

 

 

3,264

 

 

15,203

 

 

18,467

 

Total net revenues

 

$

124,915

 

$

114,971

 

$

239,886

 

 

$

111,224

 

$

100,491

 

$

211,715

 

Customer Concentrations

The Company performs ongoing credit evaluations of its customers and generally does not require collateral in exchange for credit.

The following table sets forth major customers accounting for 10% or more of the Company’s net revenues:

 

 

Three Months Ended

 

 

 

September 30,

2018

 

 

September 30,

2017

 

Tech Data Corporation

 

17%

 

 

11%

 

Westcon Group Inc.

 

13%

 

 

15%

 

Jenne Corporation

 

12%

 

 

14%

 

 

The following table sets forth major customers accounting for 10% or more of the Company’s accounts receivable balance:

 

 

September 30,

2018

 

 

June 30,

2018

 

Tech Data Corporation

 

21%

 

 

17%

 

Westcon Group Inc.

 

12%

 

 

*

 

Jenne Corporation

 

*

 

 

13%

 

 

 

 

 

 

 

 

 

 

*    Less than 10% of accounts receivable

 

 

 

 

 

 

 

 

 

5.

Balance Sheet Accounts

Cash, Cash Equivalents and Marketable Securities

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

 

 

September 30,

2018

 

 

June 30,

2018

 

Cash

 

$

140,167

 

 

$

121,139

 

Cash equivalents

 

 

 

 

 

 

Total cash and cash equivalents

 

 

140,167

 

 

 

121,139

 

Marketable securities (consisting of available-for-sale securities)

 

 

887

 

 

 

1,459

 

Total cash, cash equivalents and marketable securities

 

$

141,054

 

 

$

122,598

 

The Company considers highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Marketable equity securities are recorded in “Prepaid expense and other current assets” in the accompanying condensed consolidated balance sheets as these securities are publicly-traded with readily determinable values. Marketable equity securities are classified as available-for-sale and reported at fair value with unrealized gains and losses included in “Other (expense) income, net” in the accompanying condensed consolidated statements of operations.

12


 

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 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,

2018

 

 

June 30,

2018

 

Finished goods

 

$

42,150

 

 

$

49,393

 

Raw materials

 

 

13,430

 

 

 

14,474

 

Total Inventories

 

$

55,580

 

 

$

63,867

 

Property and Equipment, Net

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

 

 

September 30,

2018

 

 

June 30,

2018

 

Computers and equipment

 

$

63,456

 

 

$

60,677

 

Purchased software

 

 

21,558

 

 

 

21,389

 

Office equipment, furniture and fixtures

 

 

15,034

 

 

 

14,980

 

Leasehold improvements

 

 

50,959

 

 

 

50,070

 

Total property and equipment

 

 

151,007

 

 

 

147,116

 

Less: accumulated depreciation and amortization

 

 

(74,783

)

 

 

(68,597

)

Property and equipment, net

 

$

76,224

 

 

$

78,519

 

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

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Developed technology

 

3.1 years

 

$

117,000

 

 

$

63,106

 

 

$

53,894

 

Customer relationships

 

2.8 years

 

 

51,639

 

 

 

41,578

 

 

 

10,061

 

Maintenance contracts

 

0.1 years

 

 

17,000

 

 

 

16,717

 

 

 

283

 

Trade names

 

3.2 years

 

 

9,100

 

 

 

4,506

 

 

 

4,594

 

License agreements

 

7.3 years

 

 

2,232

 

 

 

1,244

 

 

 

988

 

Other intangibles

 

1.3 years

 

 

1,382

 

 

 

1,179

 

 

 

203

 

Total intangibles, net

 

 

 

$

198,353

 

 

$

128,330

 

 

$

70,023

 

 

 

 

Weighted Average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remaining Amortization

 

Gross Carrying

 

 

Accumulated

 

 

Net Carrying

 

 

 

Period

 

Amount

 

 

Amortization

 

 

Amount

 

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Developed technology

 

3.3 years

 

$

117,000

 

 

$

58,299

 

 

$

58,701

 

Customer relationships

 

3.0 years

 

 

51,639

 

 

 

40,634

 

 

 

11,005

 

Maintenance contracts

 

0.3 years

 

 

17,000

 

 

 

15,866

 

 

 

1,134

 

Trade names

 

3.4 years

 

 

9,100

 

 

 

4,141

 

 

 

4,959

 

Backlogs

 

— years

 

 

1,800

 

 

 

1,800

 

 

 

 

License agreements

 

5.8 years

 

 

2,445

 

 

 

1,390

 

 

 

1,055

 

Other intangibles

 

1.6 years

 

 

1,382

 

 

 

1,144

 

 

 

238

 

Total intangibles, net

 

 

 

$

200,366

 

 

$

123,274

 

 

$

77,092

 

 

13


 

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

 

 

Three Months Ended

 

 

 

September 30,

2018

 

 

September 30,

2017

 

Amortization in “Cost of revenues: Product”

 

$

4,932

 

 

$

2,695

 

Amortization of intangibles

 

 

2,141

 

 

 

1,614

 

Total amortization

 

$

7,073

 

 

$

4,309

 

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

Deferred Revenue

The Company offers for sale to its customers, renewable support arrangements that range from one to five years as well as professional and training services, which results in deferred revenue.

Debt

The Company’s debt is comprised of the following (in thousands):

 

 

September 30,

2018

 

 

June 30,

2018

 

Current portion of long-term debt:

 

 

 

 

 

 

 

 

Term Loan

 

$

9,500

 

 

$

9,500

 

Less: unamortized debt issuance costs

 

 

(492

)

 

 

(493

)

Current portion of long-term debt

 

$

9,008

 

 

$

9,007

 

 

 

 

 

 

 

 

 

 

Long-term debt, less current portion:

 

 

 

 

 

 

 

 

Term Loan

 

$

178,125

 

 

$

180,500

 

Revolving Facility

 

 

 

 

 

10,000

 

Less: unamortized debt issuance costs

 

 

(1,627

)

 

 

(1,751

)

Total long-term debt, less current portion

 

 

176,498

 

 

 

188,749

 

Total debt

 

$

185,506

 

 

$

197,756

 

                 

  On May 1, 2018, the Company entered into a Credit Agreement (the “Credit Agreement”), by and among the Company, as borrower, BMO Harris Bank N.A., as an issuing lender and swingline lender, Bank of Montreal, as administrative and collateral agent, and the financial institutions or entities that are a party thereto as lenders.  The Credit Agreement provides for i) $40 million five-year revolving credit facility (the “New Revolving Facility”) ii) a $190 million five-year term loan (the “New Term Loan”) and iii) an uncommitted additional incremental loan facility in the principal amount of up to $100 million (“New Incremental Facility”).  On May 1, 2018, the Company borrowed $200 million under the Credit Agreement to pay off existing debt and for general corporate purposes.

Borrowings under the Credit Agreement will bear interest, at the Company’s election, as of May 1, 2018, at a rate per annum equal to LIBOR plus 1.50% to 2.75%, or the adjusted base rate plus 0.50% to 1.75%, based on the Company’s Consolidated Leverage Ratio.  In addition, the Company is required to pay a commitment fee of between 0.25% and 0.40% quarterly (currently 0.35%) on the unused portion of the New Revolving Facility, also based on the Company’s consolidated leverage ratio.  Principal installments are payable on the New Term Loan in varying percentages quarterly starting June 30, 2018 and to the extent not previously paid, all outstanding balances are to be paid at maturity.  The Credit Agreement is secured by substantially all of the Company’s assets.

The Credit Agreement requires the Company to maintain certain minimum financial ratios at the end of each fiscal quarter. The Credit Agreement also includes covenants and restrictions that limit, among other things, the Company’s ability to incur additional indebtedness, create liens upon any of its property, merge, consolidate or sell all or substantially all of its assets. The Credit Agreement also includes customary events of default which may result in acceleration of the outstanding balance.

Financing costs incurred in connection with obtaining long-term financing are deferred and amortized over the term of the Credit Agreement.  Amortization of deferred financing costs included in “Interest expense” in the accompanying condensed consolidated statements of operations totaled $0.2 million for each of the three month periods ended September 30, 2018 and 2017.

The Company had $38.7 million of availability under the New Revolving Facility as of September 30, 2018.  The Company had $1.3 million of outstanding letters of credit as of September 30, 2018.

14


 

Guarantees and Product Warranties

Networking products may contain undetected hardware or software errors when new products or new versions or updates of existing products are released to the marketplace. The Company’s standard hardware warranty period is typically 12 months from the date of shipment to end-users and 90 days for software. For certain access products, the Company offers a limited lifetime hardware warranty commencing on the date of shipment from the Company and ending five (5) years following the Company’s announcement of the end of sale of such product. Upon shipment of products to its customers, the Company estimates expenses for the cost to repair or replace products that may be returned under warranty and accrue a liability in cost of product revenue for this amount. The determination of the Company’s warranty requirements is based on actual historical experience with the product or product family, estimates of repair and replacement costs and any product warranty problems that are identified after shipment.  The Company estimates and adjusts these accruals at each balance sheet date in accordance with changes in these factors.

Upon issuance of a standard product warranty, the Company discloses and recognizes a liability for the obligations it assumes under the product warranty. The following table summarizes the activity related to the Company’s product warranty liability during the three months ended September 30, 2018 and 2017 (in thousands):

 

 

 

Three Months Ended

 

 

 

September 30,

2018

 

 

September 30,

2017

 

Balance beginning of period

 

$

12,807

 

 

$

10,584

 

Warranties assumed due to acquisitions

 

 

 

 

 

3,156

 

New warranties issued

 

 

3,722

 

 

 

2,272

 

Warranty expenditures

 

 

(3,928

)

 

 

(2,513

)

Balance end of period

 

$

12,601

 

 

$

13,499

 

To facilitate sales of its products in the normal course of business, the Company indemnifies its resellers and end-user customers with respect to certain matters. The Company has agreed to hold the customer harmless against losses arising from a breach of intellectual property infringement or other. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim.  It is not possible to estimate the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under these agreements have not had a material impact on its operating results or financial position.

Other long-term liabilities

The following is a summary of long-term liabilities (in thousands):

 

 

September 30,

2018

 

 

June 30,

2018

 

Acquisition related deferred payments, less current portion

 

$

12,350

 

 

$

13,251

 

Contingent consideration obligations, less current portion

 

 

4,711

 

 

 

4,898

 

Other contractual obligations, less current portion

 

 

31,402

 

 

 

31,200

 

Other

 

 

15,644

 

 

 

9,751

 

Total other long-term liabilities

 

$

64,107

 

 

$

59,100

 

Advertising

All advertising costs are expensed as incurred. Advertising expenses for three months ended September 30, 2018 and 2017, were immaterial.

Concentrations

The Company may be subject to concentration of credit risk as a result of certain financial instruments consisting of accounts receivable and marketable securities. The Company does not invest an amount exceeding 10% of its combined cash or cash equivalents in the securities of any one obligor or maker, except for obligations of the United States government, obligations of United States government agencies and money market accounts.

 

15


 

6.

Fair Value Measurements

A three-tier fair value hierarchy is utilized to prioritize the inputs used in measuring fair value. The hierarchy gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels are defined as follows:

 

Level 1 Inputs - unadjusted quoted prices in active markets for identical assets or liabilities;

 

Level 2 Inputs - quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; and

 

Level 3 Inputs - unobservable inputs reflecting the Company’s own assumptions in measuring the asset or liability at fair value.

The following table presents the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis (in thousands):

 

September 30, 2018

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities

 

$

887

 

 

$

 

 

$