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Summary of Significant Accounting Policies (Policies)

6 Months Ended

Dec. 31, 2020

The Company uses a fiscal calendar year ending on June 30. All references herein to “fiscal 2021” or “2021” represent the fiscal year ending June 30, 2021. All references herein to “fiscal 2020” or “2020” represent the fiscal year ended June 30, 2020.

Principles of Consolidation

The unaudited condensed 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 functional currency environment, all assets and liabilities are translated to United States Dollars at current month end rates of exchange and revenues 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.

Recently Issued Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326). The standard changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. It replaces the existing incurred loss impairment model with an expected loss model. It also requires credit losses related to available-for-sale debt securities to be recognized as an allowance for credit losses rather than as a reduction to the carrying value of the securities. ASU 2016-13 was effective for fiscal years beginning after December 15, 2019. The Company adopted the standard on July 1, 2020 and the impact of the adoption was not material to the Company's condensed consolidated financial statements as credit losses are not expected to be significant based on historical collection trends, the financial condition of payment partners, and external market factors.

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 was effective for fiscal years beginning after December 15, 2019, including interim periods within the fiscal year. The standard was adopted on July 1, 2020 and did not have a material impact on the Company’s financial statements upon adoption.

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 was effective for fiscal years beginning after December 15, 2019, including interim periods within the fiscal year. The standard was adopted on July 1, 2020 and did not have a material impact on the Company’s financial statements upon adoption.

Recently Issued Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, Income taxes – Simplifying the Accounting for Income Taxes (Topic 740), which reduces the complexity of accounting for income taxes including the removal of certain exceptions to the general principles of ASC 740, Income Taxes, and simplification in several other areas such as accounting for franchise tax (or similar tax) that is partially based on income. This standard is effective for fiscal years beginning after December 15, 2020, including interim periods within the fiscal year, which is the Company’s fiscal year 2022, beginning on July 1, 2021. The Company is currently evaluating the impact the new standard will have on its consolidated financial statements and related disclosures.

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 other observable inputs.

The Company’s performance obligations are satisfied at a point in time or over time as the customer receives and consumes the benefits provided. Substantially all of the Company’s product sales revenues are recognized at a point in time. Substantially all of the Company’s service, subscription, and SaaS revenues are recognized over time. For revenues recognized over time, the Company uses an input measure, days elapsed, to measure progress.

On December 31, 2020, the Company had $309.1 million of remaining performance obligations, which are primarily comprised of deferred maintenance and SaaS revenues. The Company expects to recognize approximately 40 percent of its deferred revenue as revenue in fiscal 2021, an additional 34 percent in fiscal 2022 and 26 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 condensed consolidated balance sheets. Services provided under renewable support arrangements of the Company are billed in accordance with agreed-upon contractual terms, which are either billed fully at the inception of contract or 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 condensed consolidated balance sheets on a contract-by-contract basis at the end of each reporting period.

Revenue recognized for the three months ended December 31, 2020 and 2019 that was included in the deferred revenue balance at the beginning of each period was $68.8 million and $67.2 million, respectively. Revenue recognized for the six months ended December 31, 2020 and 2019 that was included in the deferred revenue balance at the beginning of each period was $120.5 million and $90.9 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 representatives as a result of obtaining service contracts and contract renewals are recoverable and therefore the Company’s condensed consolidated balance sheets included capitalized balances in the amount of $9.2 million and $8.1 million at December 31, 2020 and June 30, 2020, 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 December 31, 2020 and 2019, was $1.2 million and $1.5 million, respectively. Amortization recognized during the six months ended December 31, 2020 and 2019, was $2.5 million and $3.0 million, respectively.

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.

Revenues by Category

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

	Three Months Ended
	December 31, 2020						December 31, 2019
	Distributor		Direct		Total		Distributor		Direct		Total
Americas:
United States	$	46,506	$	58,744	$	105,250	$	60,111	$	61,622	$	121,733
Other		8,950		3,648		12,598		8,204		5,563		13,767
Total Americas		55,456		62,392		117,848		68,315		67,185		135,500
EMEA		69,602		34,220		103,822		64,717		44,257		108,974
APAC		2,793		17,665		20,458		6,007		16,991		22,998
Total net revenues	$	127,851	$	114,277	$	242,128	$	139,039	$	128,433	$	267,472

	Six Months Ended
	December 31, 2020						December 31, 2019
	Distributor		Direct		Total		Distributor		Direct		Total
Americas:
United States	$	107,176	$	116,091	$	223,267	$	130,089	$	123,967	$	254,056
Other		17,191		7,738		24,929		12,219		10,562		22,781
Total Americas		124,367		123,829		248,196		142,308		134,529		276,837
EMEA		117,131		67,796		184,927		123,846		73,891		197,737
APAC		7,844		36,963		44,807		15,120		33,284		48,404
Total net revenues	$	249,342	$	228,588	$	477,930	$	281,274	$	241,704	$	522,978

For the three months ended December 31, 2020 the Company reflected 11% of its revenues from the Netherlands and 11% of its revenues from Germany. For the six months ended December 31, 2020 the Company reflected 10% of its revenues from the Netherlands and 10% of its revenue from Germany. No other foreign country accounted for 10% or more of revenue for the three and six months ended December 31, 2020 or 2019.

Inventories

The Company values its inventory at the 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 adjusts the carrying value of its inventory 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 previously written down or obsolete inventory subsequently sold has not had a material impact on gross margin for any of the periods presented.

Inventories consist of the following (in thousands):

	December 31, 2020		June 30, 2020
Finished goods	$	43,212	$	52,879
Raw materials		6,618		9,710
Total Inventories	$	49,830	$	62,589

Property and Equipment, Net

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

	December 31, 2020			June 30, 2020
Computers and equipment	$	75,882		$	73,244
Purchased software		38,177			34,015
Office equipment, furniture and fixtures		10,779			10,639
Leasehold improvements		53,421			52,317
Total property and equipment		178,259			170,215
Less: accumulated depreciation and amortization		(122,285	)		(111,402	)
Property and equipment, net	$	55,974		$	58,813

Deferred Revenue

Deferred revenue represents amounts for deferred maintenance, support, SaaS, and other deferred revenue including professional services and training when the revenue recognition criteria have not been met.

Guarantees and Product Warranties

The majority of the Company’s hardware products are shipped with either a one-year warranty or a limited lifetime warranty, and software products receive a 90-day warranty. 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 accrues a liability in cost of product revenues 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.

The following table summarizes the activity related to the Company’s product warranty liability during the three and six months ended December 31, 2020 and 2019 (in thousands):

	Three Months Ended						Six Months Ended
	December 31, 2020			December 31, 2019			December 31, 2020			December 31, 2019
Balance beginning of period	$	13,484		$	15,988		$	14,035		$	14,779
Warranties assumed due to acquisitions		—			—			—			570
New warranties issued		3,056			5,539			6,135			11,461
Warranty expenditures		(3,467	)		(5,318	)		(7,097	)		(10,601	)
Balance end of period	$	13,073		$	16,209		$	13,073		$	16,209

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 for intellectual property infringement and certain other losses. 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.

Concentrations

The Company may be subject to concentration of credit risk as a result of certain financial instruments consisting of accounts receivable. The Company does not invest an amount exceeding 10% of its combined cash and 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.

Earnings Per Share

Basic net loss per share is calculated by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Dilutive income per share is calculated by dividing net income by the weighted average number of shares of common stock used in the basic net loss per share calculation plus the dilutive effect of shares subject to repurchase, options and unvested RSUs.