EXTR-123114 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
___________________________
Form 10-Q
___________________________
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2014
OR
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o | 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)
___________________________
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| | |
DELAWARE | | 77-0430270 |
[State or other jurisdiction of incorporation or organization] | | [I.R.S Employer Identification No.] |
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145 Rio Robles, San Jose, California | | 95134 |
[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 x No o
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 x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | | o | | Accelerated filer | | x |
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Non-accelerated filer | | o (Do not check if a smaller reporting company) | | Smaller reporting company | | o |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares of the Registrant’s Common Stock, $.001 par value, outstanding at January 20, 2015 was 99,325,978.
EXTREME NETWORKS, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED December 31, 2014
INDEX
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Item 1. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 1. | | |
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Item 1A | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 5. | | |
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Item 6. | | |
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EXTREME NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
|
| | | | | | | |
| December 31, 2014 | | June 30, 2014 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 88,972 |
| | $ | 73,190 |
|
Short-term investments | 20,321 |
| | 32,692 |
|
Accounts receivable, net of allowances of $6,138 at December 31, 2014 and $3,618 at June 30, 2014 | 93,519 |
| | 124,664 |
|
Inventories | 54,431 |
| | 57,109 |
|
Deferred income taxes | 911 |
| | 1,058 |
|
Prepaid expenses and other current assets | 11,929 |
| | 14,143 |
|
Total current assets | 270,083 |
| | 302,856 |
|
Property and equipment, net | 43,568 |
| | 46,554 |
|
Intangible assets, net | 69,880 |
| | 87,459 |
|
Goodwill | 70,877 |
| | 70,877 |
|
Other assets | 20,903 |
| | 18,686 |
|
Total assets | $ | 475,311 |
| | $ | 526,432 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Current portion of long-term debt | $ | 8,125 |
| | $ | 29,688 |
|
Accounts payable | 45,503 |
| | 37,308 |
|
Accrued compensation and benefits | 22,476 |
| | 26,677 |
|
Restructuring liabilities | 75 |
| | 322 |
|
Accrued warranty | 7,845 |
| | 7,551 |
|
Deferred revenue, net | 74,353 |
| | 74,735 |
|
Deferred distributors revenue, net of cost of sales to distributors | 31,172 |
| | 31,992 |
|
Other accrued liabilities | 36,030 |
| | 38,035 |
|
Total current liabilities | 225,579 |
| | 246,308 |
|
Deferred revenue, less current portion | 23,940 |
| | 22,942 |
|
Long-term debt, less current portion | 81,000 |
| | 91,875 |
|
Other long-term liabilities | 10,676 |
| | 8,595 |
|
Commitments and contingencies (Note 8) |
|
| |
|
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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; 99,325,978 shares issued and outstanding at December 31, 2014 and 96,980,214 shares issued and outstanding at June 30, 2014 | 99 |
| | 97 |
|
Additional paid-in-capital | 856,549 |
| | 845,267 |
|
Accumulated other comprehensive loss | (1,884 | ) | | (439 | ) |
Accumulated deficit | (720,648 | ) | | (688,213 | ) |
Total stockholders’ equity | 134,116 |
| | 156,712 |
|
Total liabilities and stockholders’ equity | $ | 475,311 |
| | $ | 526,432 |
|
See accompanying notes to condensed consolidated financial statements.
EXTREME NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| December 31, 2014 | | December 31, 2013 | | December 31, 2014 | | December 31, 2013 |
Net revenues: | | | | | | | |
Product | $ | 112,501 |
| | $ | 119,065 |
| | $ | 215,173 |
| | $ | 180,109 |
|
Service | 34,707 |
| | 27,518 |
| | 68,309 |
| | 42,389 |
|
Total net revenues | 147,208 |
| | 146,583 |
| | 283,482 |
| | 222,498 |
|
Cost of revenues: | | | | | | | |
Product | 60,496 |
| | 66,893 |
| | 114,521 |
| | 94,409 |
|
Service | 11,550 |
| | 9,845 |
| | 23,272 |
| | 14,538 |
|
Total cost of revenues | 72,046 |
| | 76,738 |
| | 137,793 |
| | 108,947 |
|
Gross profit: | | | | | | | |
Product | 52,005 |
| | 52,172 |
| | 100,652 |
| | 85,700 |
|
Service | 23,157 |
| | 17,673 |
| | 45,037 |
| | 27,851 |
|
Total gross profit | 75,162 |
| | 69,845 |
| | 145,689 |
| | 113,551 |
|
Operating expenses: | | | | | | | |
Research and development | 24,000 |
| | 18,896 |
| | 47,347 |
| | 28,832 |
|
Sales and marketing | 43,971 |
| | 40,636 |
| | 88,750 |
| | 63,330 |
|
General and administrative | 10,306 |
| | 11,189 |
| | 21,380 |
| | 18,125 |
|
Acquisition and integration costs | 3,500 |
| | 8,688 |
| | 7,558 |
| | 12,382 |
|
Restructuring charge, net of reversals | — |
| | 430 |
| | — |
| | 505 |
|
Amortization of intangibles | 4,467 |
| | 3,778 |
| | 8,934 |
| | 3,778 |
|
Total operating expenses | 86,244 |
| | 83,617 |
| | 173,969 |
| | 126,952 |
|
Operating loss | (11,082 | ) | | (13,772 | ) | | (28,280 | ) | | (13,401 | ) |
Interest income | 196 |
| | 172 |
| | 342 |
| | 447 |
|
Interest expense | (825 | ) | | (524 | ) | | (1,661 | ) | | (524 | ) |
Other expense, net | (64 | ) | | (937 | ) | | (498 | ) | | (1,192 | ) |
Loss before income taxes | (11,775 | ) | | (15,061 | ) | | (30,097 | ) | | (14,670 | ) |
Provision for income taxes | 1,330 |
| | 925 |
| | 2,338 |
| | 1,352 |
|
Net loss | $ | (13,105 | ) | | $ | (15,986 | ) | | $ | (32,435 | ) | | $ | (16,022 | ) |
Basic and diluted net loss per share: | | | | | | | |
Net loss per share – basic | $ | (0.13 | ) | | $ | (0.17 | ) | | $ | (0.33 | ) | | $ | (0.17 | ) |
Net loss per share – diluted | $ | (0.13 | ) | | $ | (0.17 | ) | | $ | (0.33 | ) | | $ | (0.17 | ) |
Shares used in per share calculation – basic | 98,677 |
| | 95,216 |
| | 97,996 |
| | 94,639 |
|
Shares used in per share calculation – diluted | 98,677 |
| | 95,216 |
| | 97,996 |
| | 94,639 |
|
See accompanying notes to condensed consolidated financial statements.
EXTREME NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| December 31, 2014 | | December 31, 2013 | | December 31, 2014 | | December 31, 2013 |
Net loss: | $ | (13,105 | ) | | $ | (15,986 | ) | | $ | (32,435 | ) | | $ | (16,022 | ) |
Other comprehensive income, net of tax: | | | | | | | |
Available for sale securities: | | | | | | | |
Change in unrealized (losses) gains on available for sale securities, net of taxes | 32 |
| | (52 | ) | | (25 | ) | | 233 |
|
Reclassification of adjustment for realized net gains on available for sale securities included in net loss | — |
| | — |
| | — |
| | 148 |
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Net change in unrealized (losses) gains on available for sale securities, net of taxes | 32 |
| | (52 | ) | | (25 | ) | | 381 |
|
Net change in foreign currency translation adjustments | (654 | ) | | 952 |
| | (1,420 | ) | | 1,053 |
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Other comprehensive (loss) income | (622 | ) | | 900 |
| | (1,445 | ) | | 1,434 |
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Total comprehensive loss | $ | (13,727 | ) | | $ | (15,086 | ) | | $ | (33,880 | ) | | $ | (14,588 | ) |
See accompanying notes to condensed consolidated financial statements.
EXTREME NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
| | | | | | | |
| Six Months Ended |
| December 31, 2014 | | December 31, 2013 |
Cash flows from operating activities: | | | |
Net loss | $ | (32,435 | ) | | $ | (16,022 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | |
Depreciation | 6,406 |
| | 4,143 |
|
Amortization of intangible assets | 17,997 |
| | 6,997 |
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Provision for doubtful accounts and allowance for sales returns | 2,520 |
| | 375 |
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Stock-based compensation | 9,563 |
| | 5,033 |
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Other non-cash charges | 512 |
| | 1,409 |
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Changes in operating assets and liabilities, net | | | |
Accounts receivable | 28,624 |
| | (21,370 | ) |
Inventories | 2,679 |
| | (13,105 | ) |
Prepaid expenses and other assets | (8 | ) | | 2,473 |
|
Accounts payable | 8,196 |
| | 12,881 |
|
Accrued compensation and benefits | (4,202 | ) | | (639 | ) |
Restructuring liabilities | (247 | ) | | (756 | ) |
Deferred revenue | 608 |
| | 9,716 |
|
Deferred distributor revenue, net of cost of sales to distributors | (811 | ) | | 4,795 |
|
Other current and long term liabilities | 2,051 |
| | (799 | ) |
Net cash provided by (used in) operating activities | 41,453 |
| | (4,869 | ) |
Cash flows from investing activities: | | | |
Capital expenditures | (3,962 | ) | | (12,562 | ) |
Acquisition, net of cash acquired | — |
| | (180,000 | ) |
Purchases of investments | — |
| | (9,045 | ) |
Proceeds from maturities of investments and marketable securities | 3,000 |
| | 20,062 |
|
Proceeds from sales of investments and marketable securities | 9,051 |
| | 54,578 |
|
Purchases of intangible assets | (419 | ) | | — |
|
Net cash provided by (used in) investing activities | 7,670 |
| | (126,967 | ) |
Cash flows from financing activities: | | | |
Borrowings under Revolving Facility | 24,000 |
| | 35,000 |
|
Issuance of Term Loan | — |
| | 65,000 |
|
Repayment of debt | (56,438 | ) | | (813 | ) |
Proceeds from issuance of common stock | 1,722 |
| | 4,803 |
|
Net cash (used in) provided by financing activities | (30,716 | ) | | 103,990 |
|
| | | |
Foreign currency effect on cash | (2,625 | ) | | 347 |
|
| | | |
Net increase (decrease) in cash and cash equivalents | 15,782 |
| | (27,499 | ) |
| | | |
Cash and cash equivalents at beginning of period | 73,190 |
| | 95,803 |
|
Cash and cash equivalents at end of period | $ | 88,972 |
| | $ | 68,304 |
|
See accompanying notes to the condensed consolidated financial statements.
EXTREME NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited condensed consolidated financial statements of Extreme Networks, Inc. (referred to as the “Company” or “Extreme Networks”) 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, 2014 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, 2014.
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 Networks at December 31, 2014. The results of operations for the three and six months ended December 31, 2014 are not necessarily indicative of the results that may be expected for fiscal 2015 or any future periods.
2. 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, 2014. There have been no material changes to the Company's significant accounting policies since the filing of the Annual report on Form 10-K.
3. Recently Issued Accounting Pronouncements
In May 2014, the FASB, jointly with the International Accounting Standards Board, issued Accounting Standard Update No. 2014-09 (Topic 606) - Revenue from Contracts with Customers ("ASU 2014-09"). This ASU's core principle is that a reporting entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying this new guidance to contracts within its scope, an entity will: (1) identify the contract(s) with a customer, (2) identify the performance obligation in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. Additionally, this new guidance will require significantly expanded disclosures about revenue recognition. ASU 2014-09 is effective for annual reporting periods (including interim reporting periods within those annual periods) beginning after December 15, 2016. Early application is not permitted. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt this ASU. The Company is currently evaluating the potential effect on its consolidated financial statements from adoption of this standard.
4. Business combinations
On October 31, 2013 (the “Acquisition Date”), the Company completed the acquisition of Enterasys Networks, Inc. ("Enterasys"), a privately held provider of wired and wireless network infrastructure and security solutions, for $180.0 million, net of cash acquired. The Company also assumed outstanding options and restricted stock units of Enterasys at the Acquisition Date, all of which were unvested.
The acquisition was accounted for using the acquisition method of accounting. The preliminary and final purchase price allocation as of the date of the acquisition is set forth in the table below and reflects various fair value estimates.
EXTREME NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes the final allocation as of September 30, 2014 of the tangible and identifiable intangible assets acquired and liabilities assumed as compared to the allocation as of December 31, 2013, the quarter in which the transaction was completed (in thousands):
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| | | | | | | | | | | | |
| | Preliminary Allocation as of December 31, 2013 (Initial allocation) | | Change during the measurement period | | Final Allocation as of September 30, 2014 |
Cash | | $ | 4,969 |
| | $ | 2,428 |
| a | $ | 7,397 |
|
Receivables | | 25,699 |
| | (2,428 | ) | a | 23,271 |
|
Inventory | | 33,662 |
| | — |
| | 33,662 |
|
Other current assets | | 8,888 |
| | (1,514 | ) | b | 7,374 |
|
Property and equipment | | 23,122 |
| | (1,829 | ) | c | 21,293 |
|
Identifiable intangible assets | | 108,900 |
| | — |
| d | 108,900 |
|
In-process research and development | | 3,000 |
| | — |
| | 3,000 |
|
Deferred tax assets | | 9 |
| | — |
| | 9 |
|
Other assets | | 7,343 |
| | — |
| | 7,343 |
|
Goodwill | | 57,922 |
| | 12,955 |
| | 70,877 |
|
Current liabilities | | (75,394 | ) | | (6,141 | ) | c,e,f | (81,535 | ) |
Other long-term liabilities | | (13,151 | ) | | (1,043 | ) | c | (14,194 | ) |
Total purchase price allocation | | $ | 184,969 |
| | $ | 2,428 |
| | $ | 187,397 |
|
Less: Cash acquired from acquisition | | (4,969 | ) | | (2,428 | ) | a | (7,397 | ) |
Total purchase price consideration, net of cash acquired | | $ | 180,000 |
| | $ | — |
| | $ | 180,000 |
|
| |
a. | The Company finalized the working capital adjustment during the nine months ended September 30, 2014, which led to a decrease of $2.4 million in receivables and a corresponding increase in cash. As a result of this adjustment, the total cash acquired from the acquisition also increased by the same amount. The net effect of this adjustment is an increase in goodwill of $2.4 million. |
| |
b. | The Company obtained new information regarding the existence of prepaids as of the acquisition date which led to a decrease in the fair value of current assets of $1.5 million, and a corresponding increase in goodwill. The change in the amortization of prepaids due to the change in fair value of current assets was immaterial. |
| |
c. | The Company updated its preliminary estimate of the fair value of property and equipment which led to a decrease of $3.0 million in property and equipment with a corresponding increase in goodwill. The Company also updated the fair values of the asset retirement obligations and the related asset retirement assets which led to an increase in the fair value of property and equipment of $1.2 million and a corresponding increase in current liabilities and other long-term liabilities of $0.2 million and $1.0 million, respectively. The decrease in depreciation expense due to the change in fair value of property and equipment was immaterial. |
| |
d. | During the nine months ended September 30, 2014, there were no changes to the fair value of the identifiable intangible assets acquired. However, the Company revised the estimated useful life of Order backlog from 1.5 years to 1 year. |
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e. | The Company obtained new information regarding accruals for litigation and statutory tax assessment as of the acquisition date which led to an increase in the fair value of current liabilities of $5.4 million and a corresponding increase in goodwill. |
| |
f. | The Company obtained new information regarding the existence of accrued liabilities as of the acquisition date which led to a net increase in the fair value of accrued liabilities by $0.5 million with a corresponding increase in goodwill. |
EXTREME NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
5. Balance Sheet Accounts
Cash, Cash Equivalents, Short-Term Investments
Summary of Cash and Available-for-Sale Securities (in thousands)
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| | | | | | | |
| December 31, 2014 | | June 30, 2014 |
Cash | $ | 88,021 |
| | $ | 72,623 |
|
| | | |
Cash equivalents | $ | 951 |
| | $ | 567 |
|
Short-term investments | 20,321 |
| | 32,692 |
|
Total available-for-sale | $ | 21,272 |
| | $ | 33,259 |
|
| | | |
Total cash, cash equivalents and available for sale securities | $ | 109,293 |
| | $ | 105,882 |
|
Available-for-Sale Securities
The following is a summary of available-for-sale securities (in thousands):
|
| | | | | | | | | | | | | | | |
| Amortized Cost | | Fair Value | | Unrealized Holding Gains | | Unrealized Holding Losses |
December 31, 2014 | | | | | | | |
Money market funds | $ | 951 |
| | $ | 951 |
| | $ | — |
| | $ | — |
|
U.S. corporate debt securities | 20,317 |
| | 20,321 |
| | 4 |
| | — |
|
| $ | 21,268 |
| | $ | 21,272 |
| | $ | 4 |
| | $ | — |
|
Classified as: | | | | | | | |
Cash equivalents | $ | 951 |
| | $ | 951 |
| | $ | — |
| | $ | — |
|
Short-term investments | 20,317 |
| | 20,321 |
| | 4 |
| | — |
|
| $ | 21,268 |
| | $ | 21,272 |
| | $ | 4 |
| | $ | — |
|
June 30, 2014 | | | | | | | |
Money market funds | $ | 567 |
| | $ | 567 |
| | $ | — |
| | $ | — |
|
U.S. corporate debt securities | 32,578 |
| | 32,692 |
| | 114 |
| | — |
|
| $ | 33,145 |
| | $ | 33,259 |
| | $ | 114 |
| | $ | — |
|
Classified as: | | | | | | | |
Cash equivalents | $ | 567 |
| | $ | 567 |
| | $ | — |
| | $ | — |
|
Short-term investments | 32,578 |
| | 32,692 |
| | 114 |
| | — |
|
| $ | 33,145 |
| | $ | 33,259 |
| | $ | 114 |
| | $ | — |
|
The amortized cost and estimated fair value of available-for-sale investments in debt securities at December 31, 2014, by contractual maturity, were as follows (in thousands):
|
| | | | | | | |
| Amortized Cost | | Fair Value |
Due in 1 year or less | $ | 20,317 |
| | $ | 20,321 |
|
Total investments in available for sale debt securities | $ | 20,317 |
| | $ | 20,321 |
|
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.
The Company accumulates unrealized gains and losses on the Company's available-for-sale debt securities, net of tax, in accumulated other comprehensive income (loss) in the stockholders' equity section of its balance sheets. If the fair value of an available-for-sale debt instrument is less than its amortized cost basis, an other-than-temporary impairment is triggered in
EXTREME NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
circumstances where (1) the Company intends to sell the instrument, (2) it is more likely than not that the Company will be required to sell the instrument before recovery of its amortized cost basis, or (3) the Company does not expect to recover the entire amortized cost basis of the instrument (that is, a credit loss exists).
The Company determines the basis of the cost of a security sold or the amount reclassified out of accumulated other comprehensive income (loss) into earnings using the specific identification method. The Company recorded an other-than temporary impairment loss of $148,000 during the six months ended December 31, 2013.
Deferred Revenue, Net
Deferred revenue, net represents amounts for (i) deferred services revenue (support arrangements, professional services and training), and (ii) deferred product revenue net of the related cost of revenue when the revenue recognition criteria have not been met. The following table summarizes deferred revenue, net (in thousands):
|
| | | | | | | |
| December 31, 2014 | | June 30, 2014 |
Deferred services | $ | 91,373 |
| | $ | 89,657 |
|
Deferred product and other revenue | 6,920 |
| | 8,020 |
|
Total deferred revenue | 98,293 |
| | 97,677 |
|
Less: current portion | 74,353 |
| | 74,735 |
|
Non-current deferred revenue, net | $ | 23,940 |
| | $ | 22,942 |
|
The Company offers for sale to its customers, renewable support arrangements that range from one to five years. Deferred support revenue is included within deferred revenue, net within the services category above. The change in the Company’s deferred support revenue balance in relation to these arrangements was as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| December 31, 2014 | | December 31, 2013 | | December 31, 2014 | | December 31, 2013 |
Balance beginning of period | $ | 87,012 |
| | $ | 37,091 |
| | $ | 89,657 |
| | $ | 38,003 |
|
Assumed from acquisition | — |
| | 35,879 |
| | — |
| | 35,879 |
|
New support arrangements | 35,517 |
| | 33,146 |
| | 64,056 |
| | 46,489 |
|
Recognition of support revenue | (31,156 | ) | | (24,631 | ) | | (62,340 | ) | | (38,886 | ) |
Balance end of period | 91,373 |
| | 81,485 |
| | 91,373 |
| | 81,485 |
|
Less: current portion | 67,433 |
| | 63,150 |
| | 67,433 |
| | 63,150 |
|
Non-current deferred revenue | $ | 23,940 |
| | $ | 18,335 |
| | $ | 23,940 |
| | $ | 18,335 |
|
Deferred Distributors Revenue, Net of Cost of Sales to Distributors
The Company records revenue from its distributors on a sell-through basis, recording deferred revenue and deferred cost of sales associated with all sales transactions to its distributors in “Deferred distributors revenue, net of cost of sales to distributors” in the liability section of its condensed consolidated balance sheet. The amount shown as “Deferred distributors revenue, net of cost of sales to distributors” represents the deferred gross profit on sales to distributors based on contractual pricing.
The following table summarizes deferred distributors revenue, net of cost of sales to distributors (in thousands):
|
| | | | | | | |
| December 31, 2014 | | June 30, 2014 |
Deferred distributors revenue | $ | 40,901 |
| | $ | 40,715 |
|
Deferred cost of sales to distributors | (9,729 | ) | | (8,723 | ) |
Deferred distributors revenue, net of cost of sales to distributors | $ | 31,172 |
| | $ | 31,992 |
|
EXTREME NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Debt
The Company's debt is comprised of the following:
|
| | | | | | | | |
| | December 31, 2014 | | June 30, 2014 |
Current portion of long-term debt: | | | | |
Term Loan | | $ | 8,125 |
| | $ | 5,688 |
|
Revolving Facility | | — |
| | 24,000 |
|
Current portion of long-term debt | | $ | 8,125 |
| | $ | 29,688 |
|
| | | | |
Long-term debt, less current portion: | | | | |
Term Loan | | $ | 52,000 |
| | $ | 56,875 |
|
Revolving Facility | | 29,000 |
| | 35,000 |
|
Total long-term debt, less current portion | | 81,000 |
| | 91,875 |
|
Total debt | | $ | 89,125 |
| | $ | 121,563 |
|
On October 31, 2013, the Company entered into a Credit Agreement (the “Credit Agreement”) which provides for a five-year revolving credit facility for up to $60 million (the “Revolving Facility”) and a $65 million five-year term loan (the “Term Loan”) and together with the Revolving Facility (the “Senior Secured Credit Facilities”). During the three months ended December 31, 2014, the Company amended the Credit Agreement and among other things modified certain financial covenants governing quick and leverage ratios. The proceeds from the Term Loan were used to pay a portion of the purchase price in the acquisition of all of the issued and outstanding capital stock of Enterasys. The Company also drew $35 million of the Revolving Facility to pay a portion of the purchase price of Enterasys and subsequently drew $24 million in the first quarter of fiscal 2015 to fund working capital requirements. Such additional draw of $24 million and an additional $6 million of the Revolving Facility were repaid during second fiscal quarter of 2015.
The Credit Agreement contains, among others, certain financial covenants that require the Company to maintain defined minimum financial ratios which may limit the Company’s availability to borrowings under the Revolving Facility. As of December 31, 2014, the Company had $17.4 million of availability under the Revolving Facility.
The Company had $1.0 million of outstanding letters of credit as of December 31, 2014.
Guarantees and Product Warranties
Upon issuance of a standard product warranty, the Company discloses and recognizes a liability for the obligation it assumes under the warranty. 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 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. The following table summarizes the activity related to the Company’s product warranty liability during the three and six months ended December 31, 2014 and 2013:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| December 31, 2014 | | December 31, 2013 | | December 31, 2014 | | December 31, 2013 |
Balance beginning of period | $ | 7,889 |
| | $ | 3,440 |
| | $ | 7,551 |
| | $ | 3,296 |
|
Assumed from acquisition | — |
| | 3,732 |
| | — |
| | 3,732 |
|
New warranties issued | 1,683 |
| | 1,654 |
| | 3,948 |
| | 2,958 |
|
Warranty expenditures | (1,727 | ) | | (1,347 | ) | | (3,654 | ) | | (2,507 | ) |
Balance end of period | $ | 7,845 |
| | $ | 7,479 |
| | $ | 7,845 |
| | $ | 7,479 |
|
The Company has agreed to hold the customer harmless against losses arising from a breach of intellectual property infringement or other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is not estimable. We have not recorded a liability related to these indemnification
EXTREME NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
and guarantee provisions and our guarantee and indemnification arrangements have not had any significant impact on our consolidated financial statements to date.
Concentrations
The Company may be subject to concentration of credit risk as a result of certain financial instruments consisting principally of marketable investments and accounts receivable. The Company has placed its investments with high-credit quality issuers. The Company does not invest an amount exceeding 10% of its combined cash, cash equivalents, short-term investments and marketable securities 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.
The following table sets forth major customers accounting for 10% or more of our net revenue:
|
| | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | December 31, 2014 | | December 31, 2013 | | December 31, 2014 | | December 31, 2013 |
Techdata | | 15% | | * | | 15% | | * |
Westcon Group Inc. | | 13% | | 10% | | 13% | | 12% |
| | | | | | | | |
| | | | | | | | |
* Less than 10% of net revenue | | | | | | | | |
6. Fair Value Measurements
The following table presents the Company’s fair value hierarchy for its financial assets measured at fair value on a recurring basis:
|
| | | | | | | | | | | | | | | |
December 31, 2014 | Level 1 | | Level 2 | | Level 3 | | Total |
| (In thousands) |
Assets | | | | | | | |
Investments: | | | | | | | |
Money market funds | $ | 951 |
| | $ | — |
| | $ | — |
| | $ | 951 |
|
Corporate notes/bonds | — |
| | 20,321 |
| | — |
| | 20,321 |
|
Foreign currency forward contracts | — |
| | 1 |
| | — |
| | 1 |
|
Total | $ | 951 |
| | $ | 20,322 |
| | $ | — |
| | $ | 21,273 |
|
|
| | | | | | | | | | | | | | | |
June 30, 2014 | Level 1 | | Level 2 | | Level 3 | | Total |
| (In thousands) |
Assets | | | | | | | |
Investments: | | | | | | | |
Money market funds | $ | 567 |
| | $ | — |
| | $ | — |
| | $ | 567 |
|
Corporate notes/bonds | — |
| | 32,692 |
| | — |
| | 32,692 |
|
Foreign currency forward contracts | — |
| | 21 |
| | — |
| | 21 |
|
Total | $ | 567 |
| | $ | 32,713 |
| | $ | — |
| | $ | 33,280 |
|
Level 2 investment valuations are based on inputs such as quoted market prices of similar instruments, dealer quotations or valuations provided by alternative pricing sources supported by observable inputs. These generally include U.S. government and sovereign obligations, most government agency securities, investment-grade corporate bonds, and state, municipal and provincial obligations. There were no transfers of assets or liabilities between Level 1 and Level 2 during the three and six months ended December 31, 2014. There were no liabilities as of December 31, 2014 that were being measured using fair value on a recurring basis.
EXTREME NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
7. Share-based Compensation
As of December 31, 2014, the Company had 19,315,115 shares available for issuance, of which 12,000,000 shares are available under the 2014 Employee Stock Purchase Plan, which was approved by the shareholders on November 12, 2014, 466,187 shares are available under the 1999 Employee Stock Purchase Plan and 6,848,968 shares are available under the 2013 Stock Plan.
Share-based compensation expense recognized in the condensed consolidated financial statements by line item caption is as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| December 31, 2014 | | December 31, 2013 | | December 31, 2014 | | December 31, 2013 |
Cost of product revenue | $ | 275 |
| | $ | 198 |
| | $ | 558 |
| | $ | 300 |
|
Cost of service revenue | 272 |
| | — |
| | 563 |
| | 40 |
|
Research and development | 1,544 |
| | 898 |
| | 3,188 |
| | 1,141 |
|
Sales and marketing | 1,566 |
| | 1,279 |
| | 3,123 |
| | 1,850 |
|
General and administrative | 1,092 |
| | 1,083 |
| | 2,131 |
| | 1,702 |
|
Total share-based compensation expense | $ | 4,749 |
| | $ | 3,458 |
| | $ | 9,563 |
| | $ | 5,033 |
|
During the three and six months ended December 31, 2014 and 2013, the Company did not capitalize any stock-based compensation expense in inventory, as the amounts were immaterial.
Stock Awards
Stock awards may be granted under the 2013 Plan on terms approved by the Board of Directors. Stock awards generally provide for the issuance of restricted stock which vests over a fixed period.
The following table summarizes stock award activity for the six months ended December 31, 2014:
|
| | | | | | | | | | |
| Number of Shares (000’s) | | Weighted- Average Grant- Date Fair Value | | Aggregate Fair Market Value ($000's) |
Non-vested stock outstanding at June 30, 2014 | 6,000 |
| | $ | 4.98 |
| | |
Granted | 828 |
| | $ | 3.83 |
| | |
Vested | (1,805 | ) | | $ | 5.25 |
| | $ | 6,689 |
|
Cancelled | (358 | ) | | $ | 4.28 |
| | |
Non-vested stock outstanding at December 31, 2014 | 4,665 |
| | $ | 4.72 |
| | |
The following table summarizes stock option activity under all plans for the six months ended December 31, 2014:
|
| | | | | | | | | | | | | |
| Number of Shares (000’s) | | Weighted- Average Exercise Price Per Share | | Weighted- Average Remaining Contractual Term (years) | | Aggregate Intrinsic Value (000’s) |
Options outstanding at June 30, 2014 | 11,732 |
| | $ | 4.26 |
| | 5.13 |
| | 6,846 |
|
Granted | 1,063 |
| | $ | 4.21 |
| | | | |
Exercised | (381 | ) | | $ | 3.29 |
| | | | $ | 329 |
|
Cancelled | (1,074 | ) | | $ | 5.14 |
| | | | |
Options outstanding at December 31, 2014 | 11,340 |
| | $ | 4.20 |
| | 4.96 |
| | $ | 1,618 |
|
Exercisable at December 31, 2014 | 5,373 |
| | $ | 3.86 |
| | 3.99 |
| | $ | 1,225 |
|
Vested and expected to vest at December 31, 2014 | 10,396 |
| | $ | 4.17 |
| | 4.87 |
| | $ | 1,573 |
|
The weighted-average grant-date per share fair value of options granted during the three months ended December 31, 2014 and 2013 was $1.66 and $2.35, respectively. The weighted-average estimated per share fair value of shares purchased under the
EXTREME NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Company’s 1999 Employee Stock Purchase Plan (“ESPP”) during the three months ended December 31, 2014 and 2013 was $1.17 and $1.35, respectively.
The weighted-average grant-date per share fair value of options granted during the six months ended December 31, 2014 and 2013 was $1.96 and $2.33, respectively. The weighted-average estimated per share fair value of shares purchased under the Company’s ESPP during the six months ended December 31, 2014 and 2013 was $1.33 and $1.21, respectively.
The Company uses the Monte-Carlo simulation model to determine the fair value and the derived service period of performance-based option awards, with market conditions, on the date of the grant.
Excluding the options assumed as part of the Enterasys acquisition, the fair value of each option award and share purchase option under the Company's ESPP is estimated on the date of grant using the Black-Scholes-Merton option valuation model with the weighted average assumptions noted in the following table.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Stock Option Plan | | Employee Stock Purchase Plan | | Stock Option Plan | | Employee Stock Purchase Plan |
| Three Months Ended | | Three Months Ended | | Six Months Ended | | Six Months Ended |
| December 31, 2014 | | December 31, 2013 | | December 31, 2014 | | December 31, 2013 | | December 31, 2014 | | December 31, 2013 | | December 31, 2014 | | December 31, 2013 |
Expected life | 4.8 years |
| | 4.0 years |
| | 0.25 years |
| | 0.25 years |
| | 4.7 years |
| | 4.0 years |
| | 0.25 years |
| | 0.25 years |
|
Risk-free interest rate | 1.67 | % | | 1.14 | % | | 0.03 | % | | 0.11 | % | | 1.61 | % | | 1.20 | % | | 0.02 | % | | 0.10 | % |
Volatility | 54 | % | | 55 | % | | 63 | % | | 47 | % | | 54 | % | | 56 | % | | 57 | % | | 41 | % |
Dividend yield | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % |
8. Commitments and Contingencies
Purchase Commitments
The Company currently has arrangements with contract manufacturers and suppliers for the manufacture of its products. The arrangements allow them to procure long lead-time component inventory based upon a rolling production forecast provided by the Company. The Company is obligated to the purchase of long lead-time component inventory that its contract manufacturer procures in accordance with the forecast, unless the Company gives notice of order cancellation outside of applicable component lead-times. As of December 31, 2014, the Company had non-cancelable commitments to purchase $102.4 million of such inventory.
Legal Proceedings
The Company may from time to time be party to litigation arising in the course of its business, including, without limitation, allegations relating to commercial transactions, business relationships or intellectual property rights. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources. Litigation in general and intellectual property and securities litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of legal proceedings are difficult to predict.
In accordance with applicable accounting guidance, the Company records accruals for certain of its outstanding legal proceedings, investigations or claims when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated. The Company evaluates, at least on a quarterly basis, developments in legal proceedings, investigations or claims that could affect the amount of any accrual, as well as any developments that would result in a loss contingency to become both probable and reasonably estimable. When a loss contingency is not both probable and reasonably estimable, the Company does not record a loss accrual. However, if the loss (or an additional loss in excess of any prior accrual) is at least a reasonable possibility and material, then the Company would disclose an estimate of the possible loss or range of loss, if such estimate can be made, or disclose that an estimate cannot be made. The assessment whether a loss is probable or a reasonable possibility, and whether the loss or a range of loss is estimable, involves a series of complex judgments about future events. Even if a loss is reasonably possible, the Company may not be able to estimate a range of possible loss, particularly where (i) the damages sought are substantial or indeterminate, (ii) the proceedings are in the early stages, or (iii) the matters involve novel or unsettled legal theories or a large number of parties. In such cases, there is considerable uncertainty regarding the ultimate resolution of such matters, including the amount of any possible loss, fine or penalty. Accordingly, for current proceedings, except as noted below, the Company is currently unable to estimate any reasonably possible loss or range of possible loss. However, an adverse resolution of one or more of such matters could have a material adverse effect on the Company's results of operations in a particular quarter or fiscal year.
EXTREME NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Intellectual Property Litigation
Selene Communication Technologies, LLC.
On April 7, 2014, Selene Communication Technologies, LLC (“Selene”), filed a complaint in the US District Court for the District of Delaware against Extreme and Enterasys asserting a cause of action for infringement of United States Patent No. 7,143,444 (the “444 Patent”). Selene has also recently sued a number of other technology companies including Cisco for infringement of the 444 Patent. Selene, a non-practicing entity, seeks injunctive relief as well as monetary damages, costs, expenses and attorney fees, although the complaint seeks no quantified amount.
The Company is a member of RPX Corporation’s (“RPX”) network of clients, who procure patent risk management services from RPX. On September 30, 2014, RPX signed an agreement on behalf of its members (including Extreme) with Selene to resolve the litigation cases against its members by Selene and to obtain a license for all RPX members to the 444 Patent and its foreign counterparts. As a result, a Release Agreement was finalized on November 19, 2014 and the litigation was dismissed in US District court for the District of Delaware on November 20, 2014.
Commonwealth of Kentucky
On or about February 3, 2014, a class action lawsuit was filed in the Commonwealth of Kentucky against Enterasys Networks, Inc. and two other defendants. The complaint alleges that Enterasys and its subcontractor, TJL Information Technologies, Inc., d.b.a. Unbridled Information Technologies (“Subcontractor”), violated Kentucky’s wage and hour laws and failed to pay the prevailing wage in violation of the Kentucky State Prevailing Wage Act (the “Act”) on various public works projects for a number of Kentucky government agencies since January 2010. Plaintiffs also allege common law actions for quantum merit and unjust enrichment and they seek monetary damages, costs, expenses and attorney fees, although there was no quantified amount identified. One of the defendants, Integrated Facility Systems, LLC (“IFS”), has also filed a cross-claim against Enterasys. The Company denies the claims and filed answers to both the complaint and cross-claim on April 16, 2014. In addition, the Company filed a cross-claim for indemnity against IFS.
Plaintiffs filed a first amended complaint on September 26, 2014, in which they named Commonwealth of Kentucky’s Office of Technology under the State’s Finance and Administration Cabinet (“COT”) as a defendant. The Company filed an answer to the Plaintiffs’ first amended complaint on October 10, 2014. COT then filed a motion to dismiss COT as a defendant in this lawsuit and the court granted COT’s motion. Although this litigation is in the discovery stage, Plaintiffs have filed a motion for Summary Judgment/Adjudication, which will be heard on February 26, 2015, on the issue of whether the work performed by the defendants constitutes “construction” under the Act. The Company will vigorously oppose this motion. This litigation is in the early stages of discovery.
ICMS Tax Assessment Matters
The State of Sao Paolo (Brazil) denied Enterasys Networks do Brazil Ltda. the use of certain credits derived from the State of Espirito Santo under the terms of the FUNDAP scheme for the tax years of 2002 through 2009. Enterasys’ application to resolve the ICMS Tax Assessments at the administrative level of the Sao Paolo Tax Department under the amnesty relief program (Reference No 3.056.963-1) was denied in March, 2014 by the Sao Paolo Tax Administration. The value of the ICMS tax credits that were disallowed by the Sao Paolo Tax Administration is approximately BR 3,443,914 (or approximately US$1.5 million), plus interest and penalties (that are currently estimated to be approximately US$9 million). On January 10, 2014, Enterasys filed a lawsuit to overturn or reduce the assessment, which lawsuit remains on-going. As part of this lawsuit, Enterasys made a request for a stay of execution, so that no tax foreclosure can be filed until a final ruling is made and no guarantee needs to be presented. On or about October 6, 2014, the preliminary injunction was granted with regard to the stay of execution; however, the court ruled that a cash deposit of the full amount at issue is to be made by Enterasys. Enterasys then prepared a motion aimed at the partial reconsideration of such decision concerning the need for a deposit, which was denied on October 10, 2014. The Company appealed this ruling on October 30, 2014 and is currently awaiting a decision from the Court of Appeals.
Given the preliminary nature of the lawsuit, it is premature to assess the likelihood of a particular final outcome. Based on the currently available information, the Company believes the ultimate outcome of this audit will not have material adverse effect on the Company's financial position or overall trends in results of operations. The range of the potential total tax liability related to these matters is estimated to be from $0 million to $9 million, of which the Company believes $4.3 million is the best estimate within the range and has recorded an accrual as of the acquisition date of Enterasys as such matter relates to the period before the acquisition.
EXTREME NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
9. Income Taxes
For the three and six months ended December 31, 2014, the Company recorded an income tax provision of $1.3 million and $2.3 million, respectively. For the three and six months ended December 31, 2013, the Company recorded an income tax provision of $0.9 million and $1.4 million, respectively.
The income tax provisions for the three and six months ended December 31, 2014 and 2013 consisted primarily of taxes on the income of our foreign subsidiaries as well as tax expense associated with the establishment of a U.S. deferred tax liability for amortizable goodwill resulting from the acquisition of Enterasys Networks, Inc. The income tax provisions for both fiscal years were calculated based on the actual results of operations for the three and six months ended December 31, 2014 and 2013, and therefore may not reflect the annual effective tax rate.
The Company has provided a full valuation allowance against all of its U.S. federal and state deferred tax assets as well as substantially all of the acquired Enterasys foreign entities’ deferred tax assets. No valuation allowance has been established against the non-U.S. deferred tax assets of the legacy Extreme Networks, Inc. foreign subsidiaries. A valuation allowance is determined by assessing both negative and positive evidence to determine whether it is “more likely than not” that the deferred tax assets are recoverable; such assessment is required on a jurisdiction by jurisdiction basis. The Company's inconsistent earnings in recent periods, coupled with the Company's inability to forecast greater than one quarter in advance and the cyclical nature of its business represent sufficient negative evidence to require a full valuation allowance against its U.S. federal and state net deferred tax assets as well as the above mentioned foreign jurisdictions. This valuation allowance will be evaluated periodically and can be reversed partially or in whole if business results and the economic environment have sufficiently improved to support realization of some or all of the Company's deferred tax assets.
The acquisition of Enterasys included a U.S. parent company as well as its wholly-owned domestic and foreign subsidiaries. The Company has elected to treat this stock acquisition as an asset purchase by filing the required election forms under IRC Sec 338(h)(10). The Company has estimated the value of the intangible assets from this transaction and is amortizing the amount over 15 years for tax purposes. During the three and six months ended December 31, 2014, the Company deducted $1.1 million and $2.2 million, respectively of tax amortization expense related to capitalized goodwill. As of December 31, 2014, the Company recorded a deferred tax liability of $1.9 million related to this amortization which is not considered a future source of taxable income in evaluating the need for a valuation allowance against our deferred tax assets.
The Company had $11.5 million of unrecognized tax benefits as of December 31, 2014. The future impact of the unrecognized tax benefit of $11.5 million, if recognized, would result in adjustments to deferred tax assets and corresponding adjustments to the valuation allowance. The Company does not anticipate any events to occur during the next twelve months that would reduce the unrealized tax benefit as currently stated in the Company’s balance sheet.
Estimated interest and penalties related to the underpayment of income taxes are classified as a component of tax expense in the Condensed Consolidated Statements of Operations and were immaterial for the three and six months ended December 31, 2014 and 2013. Accrued interest and penalties were $42,000 as of December 31, 2013 and have been fully reversed as of December 31, 2014.
In general, the Company's U.S. federal income tax returns are subject to examination by tax authorities for fiscal years 2001 forward due to net operating losses and the Company's state income tax returns are subject to examination for fiscal years 2003 forward due to net operating losses.
10. Net Loss Per Share
Basic earnings per share is calculated by dividing net earnings by the weighted average number of common shares outstanding during the period. Dilutive earnings per share is calculated by dividing net earnings by the weighted average number of common shares used in the basic earnings per share calculation plus the dilutive effect of shares subject to repurchase, options, warrants and unvested restricted stock.
The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| December 31, 2014 | | December 31, 2013 | | December 31, 2014 | | December 31, 2013 |
Net loss | $ | (13,105 | ) | | $ | (15,986 | ) | | $ | (32,435 | ) | | $ | (16,022 | ) |
Weighted-average shares used in per share calculation – basic and diluted | 98,677 |
| | 95,216 |
| | 97,996 |
| | 94,639 |
|
Net loss per share – basic and diluted | $ | (0.13 | ) | | $ | (0.17 | ) | | $ | (0.33 | ) | | $ | (0.17 | ) |
EXTREME NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following securities were excluded from the computation of diluted net loss per share of common stock for the periods presented as their effect would have been anti-dilutive (in thousands):
|
| | | | | | |
| | December 31, 2014 | | December 31, 2013 |
Options to purchase common stock | | 9,203 |
| | 5,833 |
|
Restricted stock units | | 1,369 |
| | 1,101 |
|
Employee Stock Purchase Plan shares | | 563 |
| | 154 |
|
11. Foreign Exchange Forward Contracts
The Company uses derivative financial instruments to manage exposures to foreign currency. The Company’s objective for holding derivatives is to use the most effective methods to minimize the impact of these exposures. The Company does not enter into derivatives for speculative or trading purposes. The Company records all derivatives on the balance sheet as "Other assets" at fair value. Changes in the fair value of derivatives are recognized in earnings as Other Income (Expense). The Company from time to time enters into foreign exchange forward contracts to mitigate the effect of gains and losses generated by the foreign currency forecasted transactions related to certain operating expenses and re-measurement of certain assets and liabilities denominated in foreign currencies. These derivatives do not qualify as hedges. At December 31, 2014, these forward foreign currency contracts had a notional principal amount of $2.3 million and an immaterial unrealized loss on foreign exchange contracts. These contracts have maturities of less than 60 days. Changes in the fair value of these foreign exchange forward contracts are offset largely by re-measurement of the underlying assets and liabilities.
Foreign currency transaction gains and losses from operations was a gain of less than $0.1 million and $1.0 million loss for the three months ended December 31, 2014 and December 31, 2013, respectively. Foreign currency transaction gains and losses from operations were a $0.3 million loss and $1.1 million loss for the six months ended December 31, 2014 and December 31, 2013, respectively.
12. Disclosure about Segments of an Enterprise and Geographic Areas
The Company operates in one segment, the development and marketing of network infrastructure equipment. The Company conducts business globally and is managed geographically. Revenue is attributed to a geographical area based on the location of its customers. The Company operates in three geographical areas: Americas, which includes the United States, Canada, Mexico, Central America and South America; EMEA, which includes Europe, Russia, Middle East and Africa; and APAC which includes Asia Pacific, South Asia, India, Australia and Japan.
The Company attributes revenues to geographic regions primarily based on the customer's ship-to location. Information regarding geographic areas is as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
Net Revenues: | December 31, 2014 | | December 31, 2013 | | December 31, 2014 | | December 31, 2013 |
Americas: | | | | | | | |
United States | $ | 58,160 |
| | $ | 56,292 |
| | $ | 116,648 |
| | $ | 81,681 |
|
Other | 12,576 |
| | 13,913 |
| | 19,917 |
| | 20,214 |
|
Total Americas | 70,736 |
| | 70,205 |
| | 136,565 |
| | 101,895 |
|
EMEA | 62,574 |
| | 61,292 |
| | 116,509 |
| | 92,133 |
|
APAC | 13,898 |
| | 15,086 |
| | 30,408 |
| | 28,470 |
|
Total net revenues | $ | 147,208 |
| | $ | 146,583 |
| | $ | 283,482 |
| | $ | 222,498 |
|
|
| | | | | | | | |
Long Lived Assets: | | December 31, 2014 | | June 30, 2014 |
Americas | | $ | 93,778 |
| | $ | 104,387 |
|
EMEA | | 37,021 |
| | 45,191 |
|
APAC | | 3,552 |
| | 3,121 |
|
Total long lived assets | | $ | 134,351 |
| | $ | 152,699 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This quarterly report on Form 10-Q, including the following sections, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including in particular, our expectations regarding market demands, customer requirements and the general economic environment, future results of operations, and other statements that include words such as “may” “expect” or “believe” . These forward-looking statements involve risks and uncertainties. We caution investors that actual results may differ materially from those projected in the forward-looking statements as a result of certain risk factors identified in the section entitled “Risk Factors” in this Report, our Quarterly Report on Form 10-Q for the second quarter of fiscal 2015, our Annual Report on Form 10-K for the fiscal year ended June 30, 2014, and other filings we have made with the Securities and Exchange Commission. These risk factors, include, but are not limited to: fluctuations in demand for our products and services; a highly competitive business environment for network switching equipment; our effectiveness in controlling expenses; the possibility that we might experience delays in the development or introduction of new technology and products; customer response to our new technology and products; the timing of any recovery in the global economy; risks related to pending or future litigation; a dependency on third parties for certain components and for the manufacturing of our products; and our ability to receive the anticipated benefits of the acquisition of Enterasys.
Business Overview
We are a leading provider of network infrastructure equipment and services for enterprises, data centers, and service providers. We were incorporated in California in May 1996 and reincorporated in Delaware in March 1999. The shares of Extreme Networks, Inc. (EXTR) began trading on NASDAQ in April 1999. Our corporate headquarters are located in San Jose, California. We develop and sell network infrastructure equipment to our enterprise, data center and telecommunications service provider customers.
On October 31, 2013 (the “Acquisition Date”), we completed the acquisition of Enterasys Networks, Inc. (“Enterasys”), a privately held provider of wired and wireless network infrastructure and security solutions, for $180.0 million, net of cash acquired, whereby Enterasys became our wholly-owned subsidiary. The combined entity immediately became a networking industry leader with more than 12,000 customers. As a combined Company, we believe we will set the standard for the networking industry with a strategic focus on three principles:
Highly scaled and differentiated products and solutions: Our combined product portfolio spans data center networking, switching and routing, Software-Defined Networking (SDN), wired and wireless LAN access, network management with analytics and integrated security features. This broader solutions portfolio can be leveraged to better serve existing and new customers. We will continue to enhance and support the product roadmaps of both companies going forward to protect the investments of customers and avoid any disruption to their businesses. We intend to increase research and development to accelerate our vision for high-performance, modular, open networking.
Leading customer service and support: We are working to augment our current outsourced support model by integrating Enterasys' in-sourced expertise, building on Enterasys' award-winning heritage and strong commitment to exceptional customer experience. The Company's expanded global network of channel partners and distributors will benefit from expanded services and support capabilities.
Strong Channels and Strategic Partners: Our focus is to leverage the capabilities of the combined Company and expand existing partnerships with Ericsson and the developing partnership with Lenovo as well as continue to add new strategic partnerships in the future. Additionally, we will increase our focus on partnering with distributors and channel partners globally. The goal is to develop and enhance relationships that grow revenue and profits for the Company and our alliance and channel partners. At the same time, we are investing in infrastructure to make doing business with the Company easier and more efficient.
We conduct our sales and marketing activities on a worldwide basis through a distribution channel utilizing distributors, resellers and our field sales organization. We primarily sell our products through an ecosystem of channel partners who combine our Ethernet, wireless and software analytics products with their offerings to create compelling information technology solutions for end-user customers. We utilize our field sales organization to support our channel partners and to sell direct to end-user customers, including some large global accounts. Our customers include businesses, hospitals, hotels, universities, sports venues, telecommunications companies and government agencies around the world.
We outsource the majority of our manufacturing and supply chain management operations as part of our strategy to maintain global manufacturing capabilities and to reduce our costs. We conduct quality assurance, manufacturing engineering, document control and test development at engineering facilities in San Jose, California, RTP, North Carolina, Salem, New Hampshire, Toronto, Canada and Chennai, India. This approach enables us to reduce fixed costs and to flexibly respond to changes in market demand.
The market for network infrastructure equipment is highly competitive and dominated by a few large companies. The current economic climate has further driven consolidation of vendors within the Ethernet networking market and with vendors from adjacent markets, including storage, security, wireless and voice applications. We believe that the underpinning technology for all of these adjacent markets is Ethernet. As a result, we believe that, as an independent Ethernet switch vendor, we must provide products that, when combined with the products of our large strategic partners, create compelling solutions for end user customers. Our approach is to focus on the intelligence and automation layer that spans our hardware and software products that facilitates end-to-end solutions, as opposed to positioning Extreme Networks as a low-cost-vendor with point products.
We believe that continued success in our marketplace is dependent upon a variety of factors that includes, but is not limited to, our ability to design, develop and distribute new and enhanced products employing leading-edge technology.
Results of Operations
During the second quarter of fiscal 2015, we achieved the following results:
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• | Net revenues of $147.2 million compared to net revenues of $146.6 million in the second quarter of fiscal 2014. |
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• | Product revenues of $112.5 million compared to product revenues of $119.1 million in the second quarter of fiscal 2014. |
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• | Service revenues of $34.7 million compared to service revenues of $27.5 million in the second quarter of fiscal 2014. |
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• | Total gross margin of 51% of net revenues compared to total gross margin of 48% of net revenues in the second quarter of fiscal 2014. |
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• | Operating loss of $11.1 million compared to operating loss of $13.8 million in the second quarter of fiscal 2014. |
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• | Net loss of $13.1 million compared to net loss of $16.0 million in the second quarter of fiscal 2014. |
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• | Cash flow provided by operating activities of $41.5 million in the three months ended December 31, 2014 compared to cash flow used in operating activities of $4.9 million in the three months ended December 31, 2013. |
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• | Cash and cash equivalents, short-term investments and marketable securities increased by $3.4 million to $109.3 million as of December 31, 2014 from $105.9 million as of June 30, 2014, primarily due to increased proceeds from cash provided by operations offset by repayment of debt. |
We operate in three regions: Americas, which includes the United States, Canada, Mexico, Central America and South America; EMEA, which includes Europe, Russia, Middle East, and Africa; and APAC which includes Asia Pacific, South Asia, India, and Australia.
The following table presents the total net revenue geographically for the three and six months ended December 31, 2014 and December 31, 2013 (dollars in thousands):
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
Net Revenues | December 31, 2014 | | December 31, 2013 | | $ Change | | % Change | | December 31, 2014 | | December 31, 2013 | | $ Change | | % Change |
Americas: | | | | | | | | | | | | | | | |
United States | $ | 58,160 |
| | $ | 56,292 |
| | $ | 1,868 |
| | 3.3 | % | | $ | 116,648 |
| | $ | 81,681 |
| | $ | 34,967 |
| | 42.8 | % |
Other | 12,576 |
| | 13,913 |
| | (1,337 | ) | | (9.6 | )% | | 19,917 |
| | 20,214 |
| | (297 | ) | | (1.5 | )% |
Total Americas | 70,736 |
| | 70,205 |
| | 531 |
| | 0.8 | % | | 136,565 |
| | 101,895 |
| | 34,670 |
| | 34.0 | % |
Percentage of net revenue | 48.0 | % | | 47.9 | % | | | | | | 48.2 | % | | 45.8 | % | |
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EMEA | 62,574 |
| | 61,292 |
| | 1,282 |
| | 2.1 | % | | 116,509 |
| | 92,133 |
| | 24,376 |
| | 26.5 | % |
Percentage of net revenue | 42.5 | % | | 41.8 | % | | | | | | 41.1 | % | | 41.4 | % | |
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APAC | 13,898 |
| | 15,086 |
| | (1,188 | ) | | (7.9 | )% | | 30,408 |
| | 28,470 |
| | 1,938 |
| | 6.8 | % |
Percentage of net revenue | 9.4 | % | | 10.3 | % | | | | | | 10.7 | % | | 12.8 | % | |
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Total net revenues | $ | 147,208 |
| | $ | 146,583 |
| | $ | 625 |
| | 0.4 | % | | $ | 283,482 |
| | $ | 222,498 |
| | $ | 60,984 |
| | 27.4 | % |
Net Revenues
The following table presents net product and service revenue for the three and six months ended December 31, 2014 and December 31, 2013 (dollars in thousands):
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| December 31, 2014 | | December 31, 2013 | | $ Change | | % Change | | December 31, 2014 | | December 31, 2013 | | $ Change | | % Change |
Net Revenues: | | | | | | | | | | | | | | | |
Product | $ | 112,501 |
| | $ | 119,065 |
| | $ | (6,564 | ) | | (5.5 | )% | | $ | 215,173 |
| | $ | 180,109 |
| | $ | 35,064 |
| | 19.5 | % |
Percentage of net revenue | 76.4 | % | | 81.2 | % | | | | | | 75.9 | % | | 80.9 | % | | | | |
Service | 34,707 |
| | 27,518 |
| | 7,189 |
| | 26.1 | % | | 68,309 |
| | 42,389 |
| | 25,920 |
| | 61.1 | % |
Percentage of net revenue | 23.6 | % | | 18.8 | % | | | | | | 24.1 | % | | 19.1 | % | | | | |
Total net revenues | $ | 147,208 |
| | $ | 146,583 |
| | $ | 625 |
| | 0.4 | % | | $ | 283,482 |
| | $ | 222,498 |
| | $ | 60,984 |
| | 27.4 | % |
Product revenue decreased $6.6 million or 5.5% in the second quarter of fiscal 2015 compared to the corresponding period of fiscal 2014. In the second quarter of fiscal 2015, the Company experienced a decrease in shipments due to product constraints, timing of orders and increased price competition. Product revenue increased $35.1 million or 19.5% in the six months ended December 31, 2014 compared to the corresponding period of fiscal 2014 due to increased product shipments and customers as a result of our acquisition of Enterasys on October 31, 2013.
Service revenue increased $7.2 million or 26.1% in the second quarter of fiscal 2015 and $25.9 million or 61.1% for the six months ended December 31, 2014 compared to the corresponding periods of fiscal 2014 due to an increase in service maintenance contracts and professional service and training revenues due to our acquisition of Enterasys on October 31, 2013. In addition, purchase accounting charges against service revenue decreased $1.0 million in the second quarter of fiscal 2015 as compared to fiscal 2014.
Gross Profit
The following table presents the product and service revenue gross profit and the respective gross profit percentages for the three and six months ended December 31, 2014 and 2013 (dollars in thousands):
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| December 31, 2014 | | December 31, 2013 | | $ Change | | % Change | | December 31, 2014 | | December 31, 2013 | | $ Change | | % Change |
Gross profit: | | | | | | | | | | | | | | | |
Product | $ | 52,005 |
| | $ | 52,172 |
| | $ | (167 | ) | | (0.3 | )% | | $ | 100,652 |
| | $ | 85,700 |
| | $ | 14,952 |
| | 17.4 | % |
Percentage of product revenue | 46.2 | % | | 43.8 | % | | | | | | 46.8 | % | | 47.6 | % | | | | |
Service | 23,157 |
| | 17,673 |
| | 5,484 |
| | 31.0 | % | | 45,037 |
| | 27,851 |
| | 17,186 |
| | 61.7 | % |
Percentage of service revenue | 66.7 | % | | 64.2 | % | | | | | | 65.9 | % | | 65.7 | % | | | | |
Total gross profit | $ | 75,162 |
| | $ | 69,845 |
| | $ | 5,317 |
| | 7.6 | % | | $ | 145,689 |
| | $ | 113,551 |
| | $ | 32,138 |
| | 28.3 | % |
Percentage of net revenue | 51.1 | % | | 47.7 | % | | | | | | 51.4 | % | | 51.0 | % | | | | |
Cost of product revenue includes costs of materials, amounts paid to third-party contract manufacturers, costs related to warranty obligations, charges for excess and obsolete inventory, amortization expense for developed technology, royalties under technology license agreements, and internal costs associated with manufacturing overhead, including management, manufacturing engineering, quality assurance, development of test plans, and document control. We outsource substantially all of our manufacturing and supply chain management operations, and we conduct quality assurance, manufacturing engineering, document control and distribution in San Jose, California; Salem, New Hampshire; China, and Taiwan.
Product gross profit remained flat in the second quarter of fiscal 2015 as compared to the corresponding period in 2014. Gross profit was impacted during the second quarter of fiscal 2015 by a decrease in product revenue of $6.6 million and higher material costs in addition to increases in the amortization of the developed technology intangibles related to the acquisition of Enterasys on October 31, 2013 of $1.5 million, excess and obsolete inventory charges of $1.0 million and higher distribution expenses as compared to the corresponding period of fiscal 2014. Gross profit for the second quarter of fiscal 2014 was negatively impacted by $9.2 million related to the sale of inventory which had been adjusted to fair value upon the Enterasys acquisition due to purchase accounting.
Product gross profit increased to $100.7 million in the six months ended December 31, 2014 from $85.7 million in the corresponding period for 2014. Product gross profit for the six months ended December 31, 2014 was favorably impacted by an increase in product revenue of $35.2 million, offset by higher material costs and increases in excess and obsolete inventory charges of $2.5 million, amortization of the developed technology intangibles from the acquisition of Enterasys of $5.6 million and warranty reserves of $0.5 million. Gross profit for the second quarter of fiscal 2014 was negatively impacted by $9.2 million related to the sale of inventory which had been adjusted to fair value upon the Enterasys acquisition due to purchase accounting.
Our cost of service revenue consists primarily of personnel, overhead, repair and freight costs and the cost of spares used in providing support under customer service contracts. Service gross profit increased to $23.2 million in the second quarter of fiscal 2015 from $17.7 million in the second quarter of fiscal 2014. The increase in service gross profit was primarily due to higher revenue from an increased customer base as a result of our acquisition of Enterasys offset by higher service labor costs of approximately 110 employees.
Service gross profit for the six months ended December 31, 2014 increased to $45.0 million in the second quarter of fiscal 2015 from $27.9 million in the corresponding period for 2014 primarily due to increase in service revenue of $25.9 million offset by increased personnel, overhead and travel costs for approximately 110 employees as a result of the acquisition of Enterasys on October 31, 2013.
Operating Expenses
The following table presents operating expenses and operating income (dollars in thousands):
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| Three Months Ended | | Six Months Ended |
| December 31, 2014 | | December 31, 2013 | | $ Change | | % Change | | December 31, 2014 | | December 31, 2013 | | $ Change | | % Change |
Research and development | $ | 24,000 |
| | $ | 18,896 |
| | $ | 5,104 |
| | 27.0 | % | | $ | 47,347 |
| | $ | 28,832 |
| | $ | 18,515 |
| | 64.2 | % |
Sales and marketing | 43,971 |
| | 40,636 |
| | 3,335 |
| | 8.2 | % | | 88,750 |
| | 63,330 |
| | 25,420 |
| | 40.1 | % |
General and administrative | 10,306 |
| | 11,189 |
| | (883 | ) | | (7.9 | )% | | 21,380 |
| | 18,125 |
| | 3,255 |
| | 18.0 | % |
Acquisition and integration costs | 3,500 |
| | 8,688 |
| | (5,188 | ) | | (59.7 | )% | | 7,558 |
| | 12,382 |
| | (4,824 | ) | | (39.0 | )% |
Restructuring charge, net of reversals | — |
| | 430 |
| | (430 | ) | | (100.0 | )% | | — |
| | 505 |
| | (505 | ) | | (100.0 | )% |
Amortization of intangibles | 4,467 |
| | 3,778 |
| | 689 |
| | 18.2 | % | | 8,934 |
| | 3,778 |
| | 5,156 |
| | 136.5 | % |
Total operating expenses | $ | 86,244 |
| | $ | 83,617 |
| | $ | 2,627 |
| | 3.1 | % | | $ | 173,969 |
| | $ | 126,952 |
| | $ | 47,017 |
| | 37.0 | % |
Operating loss | $ | (11,082 | ) | | $ | (13,772 | ) | | $ | 2,690 |
| | 19.5 | % | | $ | (28,280 | ) | | $ | (13,401 | ) | | $ | (14,879 | ) | | (111.0 | )% |
Research and Development Expenses
Research and development expenses consist primarily of salaries and related personnel expenses, consultant fees and prototype expenses related to the design, development, and testing of our products.
Research and development expenses increased by $5.1 million, or 27.0% and increased by $18.5 million or 64.2% for the three and six months ended December 31, 2014 as compared to the corresponding periods of fiscal 2014. The increases in research and development expenses were due to increased personnel costs of approximately 300 employees and higher occupancy costs of additional facilities, primarily in Salem New Hampshire and Toronto Canada, as a result of our acquisition of Enterasys on October 31, 2013.
Sales and Marketing Expenses
Sales and marketing expenses consist of salaries, commissions and related expenses for personnel engaged in marketing and sales functions, as well as trade shows and promotional expenses.
Sales and marketing expenses increased by $3.3 million, or 8.2% and increased by $25.4 million or 40.1% for the three and six months ended December 31, 2014 as compared to the corresponding periods of fiscal 2014. The increases in sales and marketing expenses were primarily due to additional headcount of approximately 330 employees and facilities expense as well as additional spending on sales and marketing programs as a result of our acquisition of Enterasys on October 31, 2013.
General and Administrative Expenses
General and administrative expenses decreased by $0.9 million, or 7.9% for the three months ended December 31, 2014 and increased by $3.3 million or 18.0% for the six months ended December 31, 2014 as compared to the corresponding periods of fiscal 2014. The decrease in general and administrative expenses was primarily due to lower bonus accruals and lower travel costs offset by additional month of personnel costs and higher recruiting costs related to our acquisition of Enterasys on October 31, 2013. The increase in general and administrative expenses during the six months ending December 31, 2014, compared to the corresponding period of fiscal 2014, was primarily due to higher personnel and travel costs due to an increase in headcount of approximately 100 employees, and higher occupancy costs due to additional facilities in Salem, New Hampshire and Shannon, Ireland as a result of our acquisition of Enterasys on October 31, 2013 and an increase in bad debt expense.
Acquisition and Integration Costs
Acquisition and Integration costs include those costs that the company has incurred only as result of the acquisition of Enterasys and related subsequent integration of the two companies. The Company expects to continue to incur principally integration costs for the remainder of fiscal 2015.
We incurred $3.5 million and $7.6 million of integration costs during the three and six months ended December 31, 2014, primarily for IT, warehouse, and sales integration and severance costs. The Company expects to incur integration costs through fiscal 2015. The Company incurred $8.7 million and $12.4 million of acquisition and integration costs during the three and six months ended December 31, 2013.
Amortization of Intangibles
During the three and six months ended December 31, 2014, we recorded $4.5 million and $8.9 million of amortization expense and during the three and six months ended December 31, 2013, we recorded $3.8 million of amortization expense, primarily for certain intangible assets related to the acquisition of Enterasys on October 31, 2013.
Interest Expense
During the three and six months ended December 31, 2014 we recorded $0.8 million and $1.7 million in interest expense related to the Credit Facility that the Company entered into on October 31, 2013.
Other Expense, Net
Other expense, net decreased by $0.9 million in the second quarter of fiscal 2015 compared to the corresponding period of fiscal 2014. The increase in other expense, net was primarily due to losses from the revaluation of certain assets and liabilities denominated in foreign currencies into U.S. Dollars.
Provision for Income Taxes
For the three and six months ended December 31, 2014, we recorded an income tax provision of $1.3 million and $2.3 million, respectively. For the three and six months ended December 31, 2013, we recorded an income tax provision of $0.9 million and $1.4 million, respectively.
The income tax provisions for the three and six months ended December 31, 2014 and 2013 consisted primarily of taxes on the income of our foreign subsidiaries as well as tax expense associated with the establishment of a U.S. deferred tax liability for amortizable goodwill resulting from the acquisition of Enterasys.
Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements and the related notes included elsewhere in this report are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. On an ongoing basis, we evaluate our estimates and assumptions. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.
As discussed in Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended June 30, 2014, we consider the following accounting policies to be the most critical in understanding the judgments that are involved in preparing our consolidated financial statements:
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• | Deferred Tax Valuation Allowance |
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• | Accounting for Uncertainty in Income Taxes |
There have been no changes to our critical accounting policies since the filing of our last Annual Report on Form 10-K.
New Accounting Pronouncements
See Note 3 of the accompanying condensed consolidated financial statements for a full description of new accounting pronouncements, including the respective expected dates of adoption and effects on results of operations and financial condition.
Liquidity and Capital Resources
The following summarizes information regarding our cash, investments, and working capital (in thousands):
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| | | | | | | |
| December 31, 2014 | | June 30, 2014 |
Cash and cash equivalent | $ | 88,972 |
| | $ | 73,190 |
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Short-term investments | 20,321 |
| | 32,692 |
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Total cash and investments | $ | 109,293 |
| | $ | 105,882 |
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Working capital | $ | 44,504 |
| | $ | 56,548 |
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As of December 31, 2014, our principal sources of liquidity consisted of cash, cash equivalents and investments of $109.3 million, net accounts receivable of $93.5 million and $1.0 million of letters of credit and borrowings from the Revolving Facility under which the Company had $17.4 million of availability at December 31, 2014. Our principal uses of cash will include purchase of finished goods inventory from our contract manufacturers, payroll and other operating expenses related to the development, marketing of our products, purchases of property and equipment, repayments of debt and related interest. We believe that our $109.3 million of cash and cash equivalents and investments at December 31, 2014 along with the availability of borrowings from the Revolving Facility will be sufficient to fund our principal uses of cash for at least the next 12 months.
Our Credit Agreement contains financial covenants that require us to maintain a minimum Consolidated Fixed Charge Coverage Ratio and Consolidated Quick Ratio and a maximum a Consolidated Leverage Ratio and several other covenants and restrictions that limit our ability to incur additional indebtedness, create liens upon any of our property, merge, consolidate or sell all or substantially all of our assets, etc. During the three months ended December 31, 2014, the Company amended the Credit Agreement and among other things modified certain financial covenants governing quick and leverage ratios.
The Credit Agreement also includes customary events of default, including failure to pay principal, interest or fees when due, failure to comply with covenants, if any representation or warranty made by us is false or misleading in any material respect, certain insolvency or receivership events affecting Extreme and its subsidiaries, the occurrence of certain material judgments, the occurrence of certain ERISA events, the invalidity of the loan documents or a change in control of our Company. The amounts outstanding under the Credit Agreement may be accelerated upon certain events of default. We believe we are in compliance and expect to remain in compliance with our Credit Agreement covenants and they are not expected to impact our liquidity or capital resources.
Key Components of Cash Flows and Liquidity
A summary of the sources and uses of cash and cash equivalents is as follows (in thousands):
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| | | | | | | |
| Six Months Ended |
| December 31, 2014 | | December 31, 2013 |
Net cash provided by (used in) operating activities | $ | 41,453 |
| | $ | (4,869 | ) |
Net cash provided by (used in) investing activities | 7,670 |
| | (126,967 | ) |
Net cash (used in) provided by financing activities | (30,716 | ) | | 103,990 |
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Foreign currency effect on cash | (2,625 | ) | | 347 |
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Net increase (decrease) in cash and cash equivalents | $ | 15,782 |
| | $ | (27,499 | ) |
Net Cash Provided by (Used In) Operating Activities
Cash flows provided by operations was $41.5 million in the six months ending December 31, 2014. Current period's net loss was primarily offset by non-cash expenses such as amortization of intangibles, stock-based compensation expense and depreciation. Accounts receivables decreased primarily due to higher collections. Inventories decreased primarily due to the timing of inventory receipts to bring the inventory levels in line with the near term demand. Accounts payable increased due to timing of payments. Such increases in cash inflows offset by decreases in accrued compensation due to lower commissions and bonus accruals.
Cash flows used in operations was $4.9 million in the six months ending December 31, 2013. The net loss for the period was primarily offset by non-cash expenses such as amortization of intangibles, stock-based compensation expense and depreciation. Accounts receivables, inventory and accounts payables primarily increased due to increased activity post acquisition.
Net Cash Provided by (Used In) Investing Activities
Cash flow provided by investing activities in the six months ending December 31, 2014 was $7.7 million, primarily comprised of $4.0 million used to purchase property and equipment offset by proceeds of $3.0 million from the maturities and $9.1 million from the sale of investments.
Cash flow used in investing activities in the six months ending December 31, 2013 was $127.0 million, comprised of $180.0 million net cash used in the acquisition of Enterasys, purchases of investments of $9.0 million, $12.6 million used to purchase property and equipment offset by proceeds of $20.1 million from the maturities of investments and proceeds of $54.6 million from the sale of investments.
Net Cash (Used In) Provided by Financing Activities
Cash flow used in financing activities in the six months ending December 31, 2014 was $30.7 million, comprised of $56.4 million of cash used for repayment of debt offset by a draw on the Revolving Facility of $24 million during the six months ended December 31, 2014 for wo