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Summary of Significant Accounting Policies (Policies)

6 Months Ended

Dec. 31, 2021

The Company uses a fiscal calendar year ending on June 30. All references herein to “fiscal 2022” or “2022” represent the fiscal year ending June 30, 2022. All references herein to “fiscal 2021” or “2021” represent the fiscal year ended June 30, 2021.

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 and Adopted Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board (“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 Accounting Standards Codification (“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. The standard was adopted on July 1, 2021 and did not have a material impact on the Company’s financial statements upon adoption.

Recently Issued and Adopted Accounting Pronouncements

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers, as if it had originated the contracts. Under the current business combinations guidance, such assets and liabilities are recognized by the acquirer at fair value on the acquisition date. ASU 2021-08 is effective for annual periods beginning after December 15, 2022 and interim periods within those annual periods, with early adoption permitted, including adoption in an interim period. The Company has elected to early adopt the standard in the quarter ended December 31, 2021 and retrospectively applied the standard to the acquisition that happened in the current fiscal year beginning July 1, 2021. The application of the guidance increased the deferred revenue balance acquired through the acquisition of Ipanema by $7.1 million as of the acquisition date.

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, 2021, the Company had $373.2 million of remaining performance obligations, which are primarily comprised of deferred maintenance and SaaS revenues. The Company expects to recognize approximately 38% of its deferred revenue as revenue in fiscal 2022, an additional 34% in fiscal 2023 and 28% 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, 2021 and 2020 that was included in the deferred revenue balance at the beginning of each period was $81.9 million and $68.8 million, respectively. Revenue recognized for the six months ended December 31, 2021 and 2020 that was included in the deferred revenue balance at the beginning of each period was $132.5 million and $120.5 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 $14.2 million and $13.1 million at December 31, 2021 and June 30, 2021, 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, 2021 and 2020, was $1.8 million and $1.2 million, respectively. Amortization recognized during the six months ended December 31, 2021 and 2020, was $3.6 million and $2.5 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 Company operates in three geographic 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, China, South Asia and Japan. The following table sets forth the Company’s revenues disaggregated by sales channel and geographic region based on the billing addresses of its customers (in thousands):

	Three Months Ended
	December 31, 2021						December 31, 2020
	Distributor		Direct		Total		Distributor		Direct		Total
Americas:
United States	$	68,565	$	68,585	$	137,150	$	46,506	$	58,744	$	105,250
Other		3,865		4,955		8,820		8,950		3,648		12,598
Total Americas		72,430		73,540		145,970		55,456		62,392		117,848
EMEA		68,934		42,128		111,062		69,602		34,220		103,822
APAC		5,034		18,867		23,901		2,793		17,665		20,458
Total net revenues	$	146,398	$	134,535	$	280,933	$	127,851	$	114,277	$	242,128

	Six Months Ended
	December 31, 2021						December 31, 2020
	Distributor		Direct		Total		Distributor		Direct		Total
Americas:
United States	$	124,633	$	135,916	$	260,549	$	107,176	$	116,091	$	223,267
Other		11,664		8,322		19,986		17,191		7,738		24,929
Total Americas		136,297		144,238		280,535		124,367		123,829		248,196
EMEA		146,832		77,859		224,691		117,131		67,796		184,927
APAC		9,369		34,022		43,391		7,844		36,963		44,807
Total net revenues	$	292,498	$	256,119	$	548,617	$	249,342	$	228,588	$	477,930

For the six months ended December 31, 2021, the Company generated 10% of its revenues from the Netherlands. For the three months ended December 31, 2020, the Company generated 11% of its revenues from the Netherlands and 11% of its revenues from Germany. For the six months ended December 31, 2020, the Company generated 10% of its revenues from the Netherlands and 10% of its revenues from Germany. No other foreign country accounted for 10% or more of revenue for the three and six months ended December 31, 2021 or 2020.

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, 2021		June 30, 2021
Finished goods	$	30,342	$	27,901
Raw materials		6,838		4,984
Total inventories	$	37,180	$	32,885

Property and Equipment, Net

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

	December 31, 2021			June 30, 2021
Computers and equipment	$	76,308		$	75,866
Purchased software		44,305			40,037
Office equipment, furniture and fixtures		10,242			10,201
Leasehold improvements		52,984			53,329
Total property and equipment		183,839			179,433
Less: accumulated depreciation and amortization		(131,722	)		(124,429	)
Property and equipment, net	$	52,117		$	55,004

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, 2021 and 2020 (in thousands):

	Three Months Ended						Six Months Ended
	December 31, 2021			December 31, 2020			December 31, 2021			December 31, 2020
Balance beginning of period	$	10,780		$	13,484		$	11,623		$	14,035
Warranties assumed due to acquisition		—			—			41			—
New warranties issued		3,822			3,056			6,532			6,135
Warranty expenditures		(3,465	)		(3,467	)		(7,059	)		(7,097	)
Balance end of period	$	11,137		$	13,073		$	11,137		$	13,073

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 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 income (loss) per share is calculated by dividing net income (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 income (loss) per share calculation plus the dilutive effect of shares subject to repurchase, options and unvested RSUs.