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262Tejo

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-Q

(Mark One)

☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

OR

☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-25711

EXTREME NETWORKS, INC.

(Exact name of registrant as specified in its charter)

delaware |  | 77-0430270 |  |
[State or other jurisdiction of incorporation or organization] |  | [I.R.S Employer Identification No.]
6480 Via Del Oro, San Jose, California |  | 95119 |
[Address of principal executive office] |  | [Zip Code]

Registrant’s telephone number, including area code: (408) 579-2800

Securities registered pursuant to Section 12(b) of the Act:

Title of each class |  | Trading Symbol(s) |  | Name of each exchange on which registered
Common Stock |  | EXTR |  | NASDAQ Global Select Market |  |

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “an emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer |  | ☒ |  | Accelerated filer |  | ☐ |
Non-accelerated filer |  | ☐ |  | Smaller reporting company |  | ☐ |
|  |  |  | Emerging growth company |  | ☐

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐

As of October 23, 2020, the registrant had 123,013,137 shares of common stock, $0.001 par value per share, outstanding.

EXTREME NETWORKS, INC.

FORM 10-Q

QUARTERLY PERIOD ENDED

September 30, 2020

INDEX

|  | PAGE
PART I. CONDENSED CONSOLIDATED FINANCIAL INFORMATION |
Item 1. | Condensed Consolidated Financial Statements (Unaudited) |
| Condensed Consolidated Balance Sheets as of September 30, 2020 and June 30, 2020 | 3
| Condensed Consolidated Statements of Operations for the three months ended September 30, 2020 and 2019 | 4
| Condensed Consolidated Statements of Comprehensive Loss for the three months ended September 30, 2020 and 2019 | 5
| Condensed Consolidated Statements of Stockholders' Equity for the three months ended September 30, 2020 and 2019 | 6
| Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2020 and 2019 | 7
| Notes to Condensed Consolidated Financial Statements | 8
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 26
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 37
Item 4. | Controls and Procedures | 38
PART II. OTHER INFORMATION |
Item 1. | Legal Proceedings | 39
Item 1A | Risk Factors | 39
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 39
Item 3. | Defaults Upon Senior Securities | 39
Item 4. | Mine Safety Disclosure | 39
Item 5. | Other Information | 39
Item 6. | Exhibits | 40
Signatures | 41

2

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

|  | September 30, 2020 |  |  | June 30, 2020 |
ASSETS |  |  |  |  |  |  |  |
Current assets: |  |  |  |  |  |  |  |
Cash |  | $ | 193,116 |  |  | $ | 193,872 |
Accounts receivable, net of allowance for doubtful accounts of $1,193 and $1,212, respectively |  |  | 123,637 |  |  |  | 122,727 |
Inventories |  |  | 55,830 |  |  |  | 62,589 |
Prepaid expenses and other current assets |  |  | 34,097 |  |  |  | 35,019 |
Total current assets |  |  | 406,680 |  |  |  | 414,207 |
Property and equipment, net |  |  | 55,995 |  |  |  | 58,813 |
Operating lease right-of-use assets, net |  |  | 48,460 |  |  |  | 51,274 |
Intangible assets, net |  |  | 59,903 |  |  |  | 68,394 |
Goodwill |  |  | 331,159 |  |  |  | 331,159 |
Other assets |  |  | 57,297 |  |  |  | 55,241 |
Total assets |  | $ | 959,494 |  |  | $ | 979,088 |
LIABILITIES AND STOCKHOLDERS’ EQUITY |  |  |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |  |  |
Current portion of long-term debt, net of unamortized debt issuance costs of $2,485 and $2,484, respectively |  | $ | 51,515 |  |  | $ | 16,516 |
Accounts payable |  |  | 59,440 |  |  |  | 48,439 |
Accrued compensation and benefits |  |  | 45,529 |  |  |  | 50,884 |
Accrued warranty |  |  | 13,484 |  |  |  | 14,035 |
Current portion of operating lease liabilities |  |  | 19,560 |  |  |  | 19,196 |
Current portion of deferred revenue |  |  | 192,330 |  |  |  | 190,226 |
Other accrued liabilities |  |  | 53,753 |  |  |  | 58,525 |
Total current liabilities |  |  | 435,611 |  |  |  | 397,821 |
Deferred revenue, less current portion |  |  | 105,463 |  |  |  | 100,961 |
Long-term debt, less current portion, net of unamortized debt issuance costs of $6,539 and $7,165, respectively |  |  | 335,461 |  |  |  | 394,585 |
Operating lease liabilities, less current portion |  |  | 46,414 |  |  |  | 50,238 |
Deferred income taxes |  |  | 2,446 |  |  |  | 2,334 |
Other long-term liabilities |  |  | 24,188 |  |  |  | 27,751 |
Commitments and contingencies (Note 9) |  |  |  |  |  |  |  |
Stockholders’ equity: |  |  |  |  |  |  |  |
Convertible preferred stock, $0.001 par value, issuable in series, 2,000 shares authorized; none issued |  |  | — |  |  |  | — |
Common stock, $0.001 par value, 750,000 shares authorized; 129,532 and 127,114 shares issued, respectively; 122,935 and 120,517 shares outstanding, respectively |  |  | 130 |  |  |  | 127 |
Additional paid-in-capital |  |  | 1,046,921 |  |  |  | 1,035,041 |
Accumulated other comprehensive loss |  |  | (4,936 | ) |  |  | (6,378 | )
Accumulated deficit |  |  | (989,091 | ) |  |  | (980,279 | )
Treasury stock at cost: 6,597 and 6,597 shares, respectively |  |  | (43,113 | ) |  |  | (43,113 | )
Total stockholders’ equity |  |  | 9,911 |  |  |  | 5,398 |
Total liabilities and stockholders’ equity |  | $ | 959,494 |  |  | $ | 979,088 |

See accompanying notes to condensed consolidated financial statements.

3

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

|  | Three Months Ended |
|  | September 30, 2020 |  |  | September 30, 2019 |
Net revenues: |  |  |  |  |  |  |  |
Product |  | $ | 161,396 |  |  | $ | 185,134 |
Service and subscription |  |  | 74,406 |  |  |  | 70,372 |
Total net revenues |  |  | 235,802 |  |  |  | 255,506 |
Cost of revenues: |  |  |  |  |  |  |  |
Product |  |  | 73,395 |  |  |  | 91,391 |
Service and subscription |  |  | 27,389 |  |  |  | 26,872 |
Total cost of revenues |  |  | 100,784 |  |  |  | 118,263 |
Gross profit: |  |  |  |  |  |  |  |
Product |  |  | 88,001 |  |  |  | 93,743 |
Service and subscription |  |  | 47,017 |  |  |  | 43,500 |
Total gross profit |  |  | 135,018 |  |  |  | 137,243 |
Operating expenses: |  |  |  |  |  |  |  |
Research and development |  |  | 49,524 |  |  |  | 59,116 |
Sales and marketing |  |  | 64,325 |  |  |  | 71,357 |
General and administrative |  |  | 16,461 |  |  |  | 14,982 |
Acquisition and integration costs |  |  | 1,975 |  |  |  | 15,925 |
Restructuring and related charges, net of reversals |  |  | 1,001 |  |  |  | 6,137 |
Amortization of intangibles |  |  | 1,792 |  |  |  | 1,930 |
Total operating expenses |  |  | 135,078 |  |  |  | 169,447 |
Operating loss |  |  | (60 | ) |  |  | (32,204 | )
Interest income |  |  | 118 |  |  |  | 667 |
Interest expense |  |  | (6,663 | ) |  |  | (5,164 | )
Other (expense) income, net |  |  | (887 | ) |  |  | 558 |
Loss before income taxes |  |  | (7,492 | ) |  |  | (36,143 | )
Provision for income taxes |  |  | 1,320 |  |  |  | 1,595 |
Net loss |  | $ | (8,812 | ) |  | $ | (37,738 | )
Basic and diluted net loss per share: |  |  |  |  |  |  |  |
Net loss per share - basic and diluted |  | $ | (0.07 | ) |  | $ | (0.31 | )
Shares used in per share calculation - basic and diluted |  |  | 121,705 |  |  |  | 120,226 |

See accompanying notes to condensed consolidated financial statements.

4

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

|  | Three Months Ended |
|  | September 30, 2020 |  |  | September 30, 2019 |
Net loss |  | $ | (8,812 | ) |  | $ | (37,738 | )
Other comprehensive income (loss), net of tax: |  |  |  |  |  |  |  |
Interest rate swap derivatives designated as hedging instruments: |  |  |  |  |  |  |  |
Unrealized losses on derivative instruments |  |  | (173 | ) |  |  | — |
Reclassification adjustment for gains on derivative instruments |  |  | 160 |  |  |  | — |
Net decrease from derivatives designated as hedging instruments. |  |  | (13 | ) |  |  | — |
Change in unrealized losses on available for sale securities |  |  | — |  |  |  | (7 | )
Net change in foreign currency translation adjustments |  |  | 1,455 |  |  |  | (891 | )
Other comprehensive income (loss), net of tax: |  |  | 1,442 |  |  |  | (898 | )
Total comprehensive loss |  | $ | (7,370 | ) |  | $ | (38,636 | )

See accompanying notes to condensed consolidated financial statements.

5

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands) (Unaudited)

| Common Stock |  |  | Additional Paid- |  |  | Accumulated Other |  |  | Treasury Stock |  |  | Accumulated |  |  | Total Stockholders' |
| Shares |  |  | Amount |  |  | In-Capital |  |  | Comprehensive Loss |  |  | Shares |  |  | Amount |  |  | Deficit |  |  | Equity |
Balance at June 30, 2019 |  | 121,538 |  |  | $ | 122 |  |  | $ | 986,772 |  |  | $ | (2,473 | ) |  |  | (2,366 | ) |  | $ | (15,000 | ) |  | $ | (853,434 | ) |  | $ | 115,987 |
Net loss |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (37,738 | ) |  |  | (37,738 | )
Other comprehensive loss |  | — |  |  |  | — |  |  |  | — |  |  |  | (898 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (898 | )
Issuance of common stock from equity incentive plans, net of tax |  | 2,326 |  |  |  | 2 |  |  |  | 4,132 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 4,134 |
Stock awards granted in connection with acquisition |  | — |  |  |  | — |  |  |  | 3,530 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 3,530 |
Share-based compensation |  | — |  |  |  | — |  |  |  | 8,834 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 8,834 |
Balance at September 30, 2019 |  | 123,864 |  |  | $ | 124 |  |  | $ | 1,003,268 |  |  | $ | (3,371 | ) |  |  | (2,366 | ) |  | $ | (15,000 | ) |  | $ | (891,172 | ) |  | $ | 93,849 |
Balance at June 30, 2020 |  | 127,114 |  |  | $ | 127 |  |  | $ | 1,035,041 |  |  | $ | (6,378 | ) |  |  | (6,597 | ) |  | $ | (43,113 | ) |  | $ | (980,279 | ) |  | $ | 5,398 |
Net loss |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (8,812 | ) |  |  | (8,812 | )
Other comprehensive income |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,442 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,442 |
Issuance of common stock from equity incentive plans, net of tax |  | 2,418 |  |  |  | 3 |  |  |  | 3,578 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 3,581 |
Share-based compensation |  | — |  |  |  | — |  |  |  | 8,302 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 8,302 |
Balance at September 30, 2020 |  | 129,532 |  |  | $ | 130 |  |  | $ | 1,046,921 |  |  | $ | (4,936 | ) |  |  | (6,597 | ) |  | $ | (43,113 | ) |  | $ | (989,091 | ) |  | $ | 9,911 |

See accompanying notes to condensed consolidated financial statements.

6

EXTREME NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

|  | Three Months Ended |
|  | September 30, 2020 |  |  | September 30, 2019 |
Cash flows from operating activities: |  |  |  |  |  |  |  |
Net loss |  | $ | (8,812 | ) |  | $ | (37,738 | )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |  |  |  |  |  |  |
Depreciation |  |  | 6,727 |  |  |  | 7,101 |
Amortization of intangible assets |  |  | 8,491 |  |  |  | 8,425 |
Reduction in carrying amount of right-of-use asset |  |  | 4,038 |  |  |  | 4,317 |
Provision for doubtful accounts |  |  | — |  |  |  | 401 |
Share-based compensation |  |  | 8,302 |  |  |  | 8,834 |
Deferred income taxes |  |  | 312 |  |  |  | 357 |
Non-cash restructuring and impairment charges |  |  | — |  |  |  | 3,839 |
Non-cash interest expense |  |  | 1,103 |  |  |  | 904 |
Other |  |  | 1,380 |  |  |  | (78 | )
Changes in operating assets and liabilities, net of acquisitions |  |  |  |  |  |  |  |
Accounts receivable |  |  | (910 | ) |  |  | 33,490 |
Inventories |  |  | 6,628 |  |  |  | (2,108 | )
Prepaid expenses and other assets |  |  | (1,521 | ) |  |  | (486 | )
Accounts payable |  |  | 10,628 |  |  |  | (11,198 | )
Accrued compensation and benefits |  |  | (5,482 | ) |  |  | (10,277 | )
Operating lease liabilities |  |  | (4,812 | ) |  |  | (4,631 | )
Deferred revenue |  |  | 6,607 |  |  |  | 2,001 |
Other current and long-term liabilities |  |  | (7,934 | ) |  |  | (3,355 | )
Net cash provided by (used in) operating activities |  |  | 24,745 |  |  |  | (202 | )
Cash flows from investing activities: |  |  |  |  |  |  |  |
Capital expenditures |  |  | (3,023 | ) |  |  | (5,239 | )
Business acquisitions, net of cash acquired |  |  | — |  |  |  | (219,458 | )
Maturities and sales of investments |  |  | — |  |  |  | 15,503 |
Net cash used in investing activities |  |  | (3,023 | ) |  |  | (209,194 | )
Cash flows from financing activities: |  |  |  |  |  |  |  |
Borrowings under Term Loan |  |  | — |  |  |  | 199,500 |
Payments on debt obligations |  |  | (24,750 | ) |  |  | (20,099 | )
Loan fees on borrowings |  |  | — |  |  |  | (10,515 | )
Proceeds from issuance of common stock, net of tax withholding |  |  | 3,581 |  |  |  | 4,136 |
Payment of contingent consideration obligations |  |  | (603 | ) |  |  | (635 | )
Deferred payments on an acquisition |  |  | (1,000 | ) |  |  | (1,000 | )
Net cash (used in) provided by financing activities |  |  | (22,772 | ) |  |  | 171,387 |
Foreign currency effect on cash |  |  | 294 |  |  |  | (229 | )
Net decrease in cash |  |  | (756 | ) |  |  | (38,238 | )
Cash at beginning of period |  |  | 193,872 |  |  |  | 169,607 |
Cash and cash equivalents at end of period |  | $ | 193,116 |  |  | $ | 131,369 |

See accompanying notes to the condensed consolidated financial statements.

7

EXTR EME NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. | Description of Business and Basis of Presentation

Extreme Networks, Inc., together with its subsidiaries (collectively referred to as “Extreme” or the “Company”), is a leader in providing software-driven networking solutions for enterprise customers. The Company conducts its sales and marketing activities on a worldwide basis through distributors, resellers and the Company’s field sales organization. Extreme was incorporated in California in 1996 and reincorporated in Delaware in 1999.

The unaudited condensed consolidated financial statements of Extreme included herein have been prepared under the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted under such rules and regulations. The condensed consolidated balance sheet at June 30, 2020 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, 2020.

The unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations and cash flows for the interim periods presented and the financial condition of Extreme at September 30, 2020. The results of operations for the three months ended September 30, 2020 are not necessarily indicative of the results that may be expected for fiscal 2021 or any future periods.

Fiscal Year

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.

2. | Summary of Significant Accounting Policies

For a description of significant accounting policies, see Note 2, 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, 2020. There have been no material changes to the Company’s significant accounting policies since the filing of the Annual Report on Form 10-K.

Recently Adopted Accounting Pronouncements

In 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.

8

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 wa s 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.

3. | Revenues |

The Company accounts for revenues in accordance with ASU 2014-09, Revenue from Contracts from Customers (Topic 606), which the Company adopted on July 1, 2017. The Company derives the majority of its revenues from sales of its networking equipment, with the remaining revenues generated from sales of services and subscriptions, which primarily includes maintenance contracts and software subscriptions delivered as software as a service (“SaaS”) and additional revenues from professional services, and training for its products. The Company sells its products and maintenance contracts direct to customers and to partners in two distribution channels, or tiers. The first tier consists of a limited number of independent distributors that stock its products and sell primarily to resellers. The second tier of the distribution channel consists of non-stocking distributors and value-added resellers that sell directly to end-users. Products and services may be sold separately or in bundled packages.

Revenue Recognition

Performance Obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Certain of the Company’s contracts have multiple performance obligations, as the promise to transfer individual goods or services is separately identifiable from other promises in the contracts and, therefore, is distinct. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation based on its relative standalone selling price. The stand-alone selling prices are determined based on the prices at which the Company separately sells these products. For items that are not sold separately, the Company estimates the stand-alone selling prices using the best estimated selling price approach.

The Company’s performance obligations are satisfied at a point in time or over time as 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 September 30, 2020, the Company had $297.8 million of remaining performance obligations, which are primarily comprised of deferred maintenance and SaaS revenues. The Company expects to recognize approximately 54 percent of its deferred revenue as revenue in fiscal 2021, an additional 25 percent in fiscal 2022 and 21 percent of the balance thereafter.

9

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 September 30, 2020 and 2019 that was included in the deferred revenue balance at the beginning of each period was $66.9 million and $53.8 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 $8.7 million and $8.1 million at September 30, 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 September 30, 2020 and 2019, was $1.2 million and $1.4 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 |
|  | September 30, 2020 |  |  | September 30, 2019 |
|  | Distributor |  | Direct |  | Total |  |  | Distributor |  | Direct |  | Total |
Americas: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
United States |  | $ | 60,670 |  | $ | 57,347 |  | $ | 118,017 |  |  | $ | 69,978 |  | $ | 62,345 |  | $ | 132,323 |
Other |  |  | 8,241 |  |  | 4,090 |  |  | 12,331 |  |  |  | 4,015 |  |  | 4,999 |  |  | 9,014 |
Total Americas |  |  | 68,911 |  |  | 61,437 |  |  | 130,348 |  |  |  | 73,993 |  |  | 67,344 |  |  | 141,337 |
EMEA |  |  | 47,529 |  |  | 33,576 |  |  | 81,105 |  |  |  | 59,129 |  |  | 29,634 |  |  | 88,763 |
APAC |  |  | 5,051 |  |  | 19,298 |  |  | 24,349 |  |  |  | 9,113 |  |  | 16,293 |  |  | 25,406 |
Total net revenues |  | $ | 121,491 |  | $ | 114,311 |  | $ | 235,802 |  |  | $ | 142,235 |  | $ | 113,271 |  | $ | 255,506 |

Customer Concentrations

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

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

|  | Three Months Ended |
|  | September 30, 2020 |  |  | September 30, 2019 |
Tech Data Corporation |  | 27% |  |  | 16% |
Jenne Corporation |  | 15% |  |  | 14% |
Westcon Group Inc. |  | 13% |  |  | 10% |

10

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

|  | September 30, 2020 |  |  | June 30, 2020 |
Tech Data Corporation |  |  | 33 | % |  |  | 23 | %
Jenne Corporation |  |  | 22 | % |  |  | 25 | %
Westcon Group Inc. |  |  | 12 | % |  | * |
* Less than 10% of accounts receivable. |  |  |  |  |  |  |  |

4. | Business Combination

Fiscal 2020 Acquisition

Aerohive Acquisition

On August 9, 2019 (the “Acquisition Date”), the Company consummated its acquisition (the “Acquisition”) of all of the outstanding common stock of Aerohive Networks, Inc. (“Aerohive”) pursuant to that certain Agreement and Plan of Merger entered into as of June 26, 2019. Under the terms of the Acquisition, the net consideration paid by Extreme to Aerohive stockholders was $267.1 million.

The Acquisition was accounted for using the acquisition method of accounting whereby the acquired assets and liabilities of Aerohive have been recorded at their respective fair values and added to those of the Company including an amount for goodwill calculated as the difference between the acquisition consideration and the fair value of the identifiable net assets. Of the total purchase consideration, $192.6 million was allocated to goodwill, $52.5 million to identifiable intangible assets and the remainder to net tangible assets assumed. All valuations were finalized as of June 30, 2020.

The following unaudited pro forma results of operations are presented as though the Acquisition had occurred as of July 1, 2018, the beginning of fiscal 2019, after giving effect to purchase accounting adjustments relating to inventories, deferred revenue, depreciation and amortization of intangibles, acquisition and integration costs, interest income and expense and related tax effects.

The pro forma results of operations are not necessarily indicative of the combined results that would have occurred had the acquisition been consummated as of the beginning of fiscal 2019, nor are they necessarily indicative of future operating results. The unaudited pro forma results do not include the impact of synergies, nor any potential impacts on current or future market conditions which could alter the unaudited pro forma results.

The unaudited pro forma financial information for the three months ended September 30, 2019 combines the historical results for Extreme for such periods, which include the results of Aerohive subsequent to the Acquisition Date, and Aerohive’s historical results up to the Acquisition Date.

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

|  | Three Months Ended |
|  | September 30, 2019 |
Net revenues |  | $ | 267,678 |
Net loss |  | $ | (24,084 | )
Net loss per share - basic and diluted |  | $ | (0.20 | )
Shares used in per share calculation - basic and diluted |  |  | 120,226 |

11

5. | Balance Sheet Accounts

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):

|  | September 30, 2020 |  |  | June 30, 2020 |
Finished goods |  | $ | 48,468 |  |  | $ | 52,879 |
Raw materials |  |  | 7,362 |  |  |  | 9,710 |
Total Inventories |  | $ | 55,830 |  |  | $ | 62,589 |

Property and Equipment, Net

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

|  | September 30, 2020 |  |  | June 30, 2020 |
Computers and equipment |  | $ | 74,275 |  |  | $ | 73,244 |
Purchased software |  |  | 35,942 |  |  |  | 34,015 |
Office equipment, furniture and fixtures |  |  | 10,679 |  |  |  | 10,639 |
Leasehold improvements |  |  | 52,678 |  |  |  | 52,317 |
Total property and equipment |  |  | 173,574 |  |  |  | 170,215 |
Less: accumulated depreciation and amortization |  |  | (117,579 | ) |  |  | (111,402 | )
Property and equipment, net |  | $ | 55,995 |  |  | $ | 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 months ended September 30, 2020 and 2019 (in thousands):

|  | Three Months Ended |  |
|  | September 30, 2020 |  |  | September 30, 2019 |  |
Balance beginning of period |  | $ | 14,035 |  |  | $ | 14,779 |  |
Warranties assumed due to acquisitions |  |  | — |  |  |  | 570 |  |
New warranties issued |  |  | 3,079 |  |  |  | 5,922 |  |
Warranty expenditures |  |  | (3,630 | ) |  |  | (5,283 | ) |
Balance end of period |  | $ | 13,484 |  |  | $ | 15,988 |  |

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T o 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.

Other Long-term Liabilities

Other long-term liabilities consist of the following (in thousands):

|  | September 30, 2020 |  |  | June 30, 2020 |
Acquisition-related deferred payments, less current portion |  | $ | 4,891 |  |  | $ | 5,847 |
Other contractual obligations, less current portion |  |  | 14,715 |  |  |  | 16,722 |
Other |  |  | 4,582 |  |  |  | 5,182 |
Total other long-term liabilities |  | $ | 24,188 |  |  | $ | 27,751 |

Concentrations

The Company may be subject to concentration of credit risk as a result of certain financial instruments consisting of accounts receivable and short-term investments. 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.

6. | Fair Value Measurements

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

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

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

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

The following table presents the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis at September 30, 2020 and June 30, 2020 (in thousands).

September 30, 2020 |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency derivatives |  | $ | — |  |  | $ | 27 |  |  | $ | — |  |  | $ | 27 |
Total assets measured at fair value |  | $ | — |  |  | $ | 27 |  |  | $ | — |  |  | $ | 27 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | — |  |  | $ | 1,782 |  |  | $ | — |  |  | $ | 1,782 |
Acquisition-related contingent consideration obligations |  |  | — |  |  |  | — |  |  |  | 1,576 |  |  |  | 1,576 |
Total liabilities measured at fair value |  | $ | — |  |  | $ | 1,782 |  |  | $ | 1,576 |  |  | $ | 3,358 |

June 30, 2020 |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency derivatives |  | $ | — |  |  | $ | 8 |  |  | $ | — |  |  | $ | 8 |
Interest rate swaps |  |  | — |  |  |  | 1,769 |  |  |  | — |  |  |  | 1,769 |
Acquisition-related contingent consideration obligations |  |  | — |  |  |  | — |  |  |  | 2,167 |  |  |  | 2,167 |
Total liabilities measured at fair value |  | $ | — |  |  | $ | 1,777 |  |  | $ | 2,167 |  |  | $ | 3,944 |

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Level 1 Assets and Liabilities:

The Company’s financial instruments consist of cash, accounts receivable, accounts payable, and accrued liabilities. The Company states accounts receivable, accounts payable and accrued liabilities at their carrying value, which approximates fair value due to the short time to the expected receipt or payment.

Level 2 Assets and Liabilities:

The fair value of derivative instruments under the Company’s foreign exchange forward contracts and interest rate swaps are estimated based on valuations provided by alternative pricing sources supported by observable inputs which is considered Level 2.

As of September 30, 2020 and June 30, 2020, the Company had foreign exchange forward contracts with notional principal amount of $7.5 million and $4.0 million, respectively. For the three months ended September 30, 2020, there were gains of less than $0.1 million. There were no foreign exchange forward contracts or related gains or losses for the three months ended September 30, 2019. These contracts have maturities of less than 30 days. Changes in the fair value of these foreign exchange forward contracts are included in other income or expense. See Note 13, Derivatives and Hedging, for additional information.

The fair values of the interest rate swaps are based upon inputs corroborated by observable market data which is considered Level 2. As of September 30, 2020 and as of June 30, 2020, the Company had entered into multiple interest rate swap contracts with the total notional amount of $200.0 million. Changes in fair value of these contracts are recorded as a component of accumulated other comprehensive loss. As of September 30, 2020 and as of June 30, 2020, these contracts had an unrealized loss of $1.8 million. See Note 13, Derivatives and Hedging, for additional information.

The fair value of the borrowings under the 2019 Credit Agreement (as defined below) is estimated based on valuations provided by alternative pricing sources supported by observable inputs which is considered Level 2. Since the interest rate is variable in the 2019 Credit Agreement, the fair value approximates the face amount of the Company’s indebtedness of $396.0 million and $420.8 million as of September 30, 2020, and June 30, 2020, respectively.

Level 3 Assets and Liabilities:

Certain of the Company’s assets, including intangible assets and goodwill are measured at fair value on a non-recurring basis if impairment is indicated.

At September 30, 2020 and June 30, 2020, the Company reflected one liability measured at fair value of $1.6 million and $2.2 million, respectively, for contingent consideration related to a certain acquisition completed in fiscal 2018. The fair value measurement of the contingent consideration obligation is determined using Level 3 inputs. These fair value measurements represent Level 3 measurements as they are based on significant inputs not observable in the market. Changes in the value of the contingent consideration obligations is recorded in general and administrative expenses in the accompanying condensed consolidated statements of operations.

The change in the acquisition-related contingent consideration obligations is as follows (in thousands):

|  | Three Months Ended |  |  | Three Months Ended |
|  | September 30, 2020 |  |  | September 30, 2019 |
Beginning balance |  |  | 2,167 |  |  |  | 6,298 |
Payments |  |  | (603 | ) |  |  | (635 | )
Accretion on discount |  |  | 12 |  |  |  | 30 |
Ending balance |  | $ | 1,576 |  |  | $ | 5,693 |

There were no transfers of assets or liabilities between Level 1, Level 2 and Level 3 during the three months ended September 30, 2020 and 2019. There were no impairments recorded for the three months ended September 30, 2020 and 2019.

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.

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7. | Intangible Assets

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

|  | Weighted Average |  |  |  |  |  |  |  |  |  |  |  |
|  | Remaining Amortization |  | Gross Carrying |  |  | Accumulated |  |  | Net Carrying |
|  | Period |  | Amount |  |  | Amortization |  |  | Amount |
September 30, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |
Developed technology |  | 2.2 years |  | $ | 156,100 |  |  | $ | 110,420 |  |  | $ | 45,680 |
Customer relationships |  | 4.8 years |  |  | 63,039 |  |  |  | 50,914 |  |  |  | 12,125 |
Backlog |  | — years |  |  | 400 |  |  |  | 400 |  |  |  | — |
Trade names |  | 1.2 years |  |  | 10,700 |  |  |  | 9,047 |  |  |  | 1,653 |
License agreements |  | 6.2 years |  |  | 2,445 |  |  |  | 2,000 |  |  |  | 445 |
Other intangibles |  | — years |  |  | 1,382 |  |  |  | 1,382 |  |  |  | — |
Total intangibles, net |  |  |  | $ | 234,066 |  |  | $ | 174,163 |  |  | $ | 59,903 |

|  | Weighted Average |  |  |  |  |  |  |  |  |  |  |  |
|  | Remaining Amortization |  | Gross Carrying |  |  | Accumulated |  |  | Net Carrying |
|  | Period |  | Amount |  |  | Amortization |  |  | Amount |
June 30, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |
Developed technology |  | 2.4 years |  | $ | 156,100 |  |  | $ | 103,806 |  |  | $ | 52,294 |
Customer relationships |  | 4.8 years |  |  | 63,039 |  |  |  | 49,598 |  |  |  | 13,441 |
Backlog |  | — years |  |  | 400 |  |  |  | 400 |  |  |  | — |
Trade names |  | 1.4 years |  |  | 10,700 |  |  |  | 8,554 |  |  |  | 2,146 |
License agreements |  | 5.8 years |  |  | 2,445 |  |  |  | 1,932 |  |  |  | 513 |
Other intangibles |  | — years |  |  | 1,382 |  |  |  | 1,382 |  |  |  | — |
Total intangibles, net |  |  |  | $ | 234,066 |  |  | $ | 165,672 |  |  | $ | 68,394 |

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

|  | Three Months Ended |  |
|  | September 30, 2020 |  |  | September 30, 2019 |  |
Amortization in “Cost of revenues: Product and Service and subscription” |  | $ | 6,699 |  |  | $ | 6,495 |  |
Amortization of intangibles in "Operations" |  |  | 1,792 |  |  |  | 1,930 |  |
Total amortization expense |  | $ | 8,491 |  |  | $ | 8,425 |  |

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

8. | Debt

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

|  | September 30, 2020 |  |  | June 30, 2020 |
Current portion of long-term debt: |  |  |  |  |  |  |  |
Term Loan |  | $ | 19,000 |  |  | $ | 19,000 |
Revolving Facility |  | $ | 35,000 |  |  | $ | — |
Less: unamortized debt issuance costs |  |  | (2,485 | ) |  |  | (2,484 | )
Current portion of long-term debt |  | $ | 51,515 |  |  | $ | 16,516 |
Long-term debt, less current portion: |  |  |  |  |  |  |  |
Term Loan |  | $ | 342,000 |  |  | $ | 346,750 |
Revolving Facility |  |  | — |  |  |  | 55,000 |
Less: unamortized debt issuance costs |  |  | (6,539 | ) |  |  | (7,165 | )
Total long-term debt, less current portion |  |  | 335,461 |  |  |  | 394,585 |
Total debt |  | $ | 386,976 |  |  | $ | 411,101 |

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In connection with the Acquisition discussed in Note 4, on August 9, 2019, the Company entered into an Amended and Restated Credit Agreement (the “2019 Credit Agreement”), by and among the Company, as borrower, several banks and other fin ancial institutions as Lenders, BMO Harris Bank N.A., as an issuing lender and swingline lender, Silicon Valley Bank, as an Issuing Lender, and Bank of Montreal, as administrative agent and collateral agent for the Lenders.

The 2019 Credit Agreement provides for a five-year first lien term loan facility in an aggregate principal amount of $380 million and a five-year revolving loan facility in an aggregate principal amount of $75 million (the “2019 Revolving Facility”). In addition, the Company may request incremental term loans and/or incremental revolving loan commitments in an aggregate amount not to exceed the sum of $100 million plus an unlimited amount that is subject to pro forma compliance with certain financial tests. On August 9, 2019, the Company used the additional proceeds from the term loan to partially fund the Acquisition and for working capital and general corporate purposes.

At the Company’s election, the initial term loan under the 2019 Credit Agreement may be made as either base rate loans or Eurodollar loans. The applicable margin for base rate loans ranges from 0.25% to 2.50% per annum and the applicable margin for Eurodollar loans ranges from 1.25% to 3.50%, in each case based on Extreme’s consolidated leverage ratio. All Eurodollar loans are subject to a Base Rate of 0.00%. In addition, the Company is required to pay a commitment fee of between 0.25% and 0.40% quarterly (currently 0.40%) on the unused portion of the 2019 Revolving Facility, also based on the Company’s consolidated leverage ratio. Principal installments are payable on the new term loan in varying percentages quarterly starting December 31, 2019 and to the extent not previously paid, all outstanding balances are to be paid at maturity. The 2019 Credit Agreement is secured by substantially all of the Company’s assets.

The 2019 Credit Agreement requires the Company to maintain certain minimum financial ratios at the end of each fiscal quarter. The 2019 Credit Agreement also includes covenants and restrictions that limit, among other things, the Company’s ability to incur additional indebtedness, create liens upon any of its property, merge, consolidate or sell all or substantially all of its assets. The 2019 Credit Agreement also includes customary events of default which may result in acceleration of the payment of the outstanding balance.

On April 8, 2020, the Company entered into the first amendment to the 2019 Credit Agreement (the “First Amendment”) to waive certain terms and financial covenants of the 2019 Credit Agreement through July 31, 2020. On May 8, 2020, the Company entered into the second amendment to the 2019 Credit Agreement (the “Second Amendment”) which supersedes the First Amendment and provides certain revised terms and financial covenants through March 31, 2021. Subsequent to March 31, 2021, the original terms and financial covenants under the 2019 Credit Agreement will resume in effect. The Second Amendment requires the Company to maintain certain minimum cash requirements and certain financial metrics at the end of each fiscal quarter through March 31, 2021. Under the terms of the Second Amendment, the Company is not permitted to exceed $55.0 million in its outstanding balance under the 2019 Revolving Facility, the applicable margin for Eurodollar rate will be 4.5%, and the Company is restricted from pursuing certain activities such as incurring additional debt, stock repurchases, making acquisitions or declaring a dividend, until the Company is in compliance with the original covenants of the 2019 Credit Agreement.

Financing costs incurred in connection with obtaining long-term financing are deferred and amortized over the term of the related indebtedness or credit agreement. During the year ended June 30, 2020, the Company incurred $10.5 million of deferred financing costs in conjunction with the 2019 Credit Agreement and $1.5 million of deferred financing costs from the amendments, and continues to amortize $1.6 million of debt issuance costs as of August 9, 2019 that were associated with the previous facility. The interest rate as of September 30, 2020 was 4.85%.

Amortization of deferred financing costs included in “Interest expense” in the accompanying condensed consolidated statements of operations totaled $0.8 million and $0.5 million for the three months ended September 30, 2020 and 2019.

During the three months ended September 30, 2020, the Company repaid $20.0 million against its 2019 Revolving Facility’s outstanding balance of $55.0 million. Although not required under the terms of the 2019 Credit Agreement and amendments, the Company intends to repay the balance of $35.0 million in full under the 2019 Revolving Facility within the next 12 months should market conditions improve, and has classified the remaining balance as a current liability as of September 30, 2020 in the accompanying condensed consolidated balance sheets. The Company has $20.0 million of availability under the 2019 Revolving Facility as of September 30, 2020. In October 2020, the Company repaid another $20.0 million against its 2019 Revolving Credit Facility and has a remaining outstanding balance of $15.0 million.

The Company had $7.7 million of outstanding letters of credit as of September 30, 2020.

9. | Commitments and Contingencies

Purchase Commitments

The Company currently has arrangements with contract manufacturers and suppliers for the manufacture of its products. Those arrangements allow the contract manufactures to procure long lead-time component inventory based upon a rolling production forecast provided by the Company. The Company is obligated to purchase long lead-time component inventory that its contract manufacturer

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procures in accordance with the forecast, unless the Company gives notice of order cancellation outside of applicable component lead-times. As of September 30, 2020, the Company had commitments to purchase $33.9 million of inventory and other services.

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 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.

All currency conversions in this Legal Proceedings section are as of September 30, 2020.

XR Communications, LLC d/b/a Vivato Technologies v. Extreme Networks, Inc. Patent Infringement Suit

On April 19, 2017, XR Communications, LLC (“XR”) (d/b/a Vivato Technologies) filed a patent infringement lawsuit against the Company in the Central District of California. The operative Second Amended Complaint asserts infringement of U.S. Patent Nos. 7,062,296, 7,729,728, and 6,611,231 based on the Company’s manufacture, use, sale, offer for sale, and/or importation into the United States of certain access points and routers supporting multi-user, multiple-input, multiple-output technology. XR seeks unspecified damages, on-going royalties, pre- and post-judgment interest, and attorneys’ fees. In 2018, the Court stayed the case pending a resolution by the Patent Trial and Appeal Board (“PTAB”) of inter partes review (“IPR”) petitions filed by several defendants in other XR-related patent lawsuits challenging the validity of the asserted patents. The PTAB previously invalidated all asserted claims of the ’296 patent and ’728 patent and has found the challenged claims of the ’231 patent not invalid in view of the prior art asserted in the IPR instituted against that patent. The matter has been stayed and a status conference is now set for November 23, 2020. The Company believes the claims are without merit and intends to defend them vigorously.

Orckit IP, LLC v. Extreme Networks, Inc., Extreme Networks Ireland Ltd., and Extreme Networks GmbH

On February 1, 2018, Orckit IP, LLC (“Orckit”) filed a patent infringement lawsuit against the Company and its Irish and German subsidiaries in the District Court in Dusseldorf, Germany. The lawsuit alleges direct and indirect infringement of the German portion of European Patent EP 1 958 364 B1 (“EP ’364”) based on the offer, distribution, use, possession and/or importation into Germany of certain network switches that equipped with the ExtremeXOS operating system. Orckit is seeking injunctive relief, accounting, and an unspecified declaration of liability for damages and costs of the lawsuit. On May 3, 2018, Extreme Networks GmbH filed a separate nullity action in the Federal Patent Court in Munich, seeking to invalidate the asserted patents. After a hearing on January 28, 2020, the Court rendered a decision in the infringement case in favor of the Company. The matter is proceeding through the appeal process, pursuant to the appeal filed by Orckit on March 13, 2020.

On April 23, 2019, Orckit filed an extension of the patent infringement complaint against the Company and its Irish and German subsidiaries in the District Court in Dusseldorf, Germany. With this extension, Orckit alleges infringement of the German portion of European Patent EP 3 068 077 B1 (“EP ‘077”) based on the offer, distribution, use, possession and/or importation into Germany of certain network switches that we no longer sell in Germany. Orckit is seeking injunctive relief, accounting and sales information, and a declaration of liability for damages as well as costs of the lawsuit. The Company filed a nullity action with the German Federal Patent Court, seeking to invalidate the asserted patent. Orckit has filed its substantive reasons for opposing the Company’s nullity action on June 11, 2020. A hearing was held on September 29, 2020, and the Court issued an infringement decision and injunction against the Company. The Company is evaluating its options for further proceedings.

The Company believes that all claims in both cases filed by Orckit are without merit and intends to defend them vigorously.

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Shenzhen Dunjun Technology Ltd. v. Aerohive Networks (Hangzhou) Ltd.; Aerohive Networks, Inc.; and Yunqing Information Technology (Shenzhen) Ltd.

On June 20, 2019, Shenzhen Dunjun Technology Ltd. filed a patent infringement lawsuit against Aerohive Networks, Inc. (“Aerohive”), a Chinese subsidiary of the Company, and Yunqing Information Technology (Shenzhen) Ltd. in the Shenzhen Intermediate People’s Court in China. The lawsuit alleges infringement of a Chinese patent and seeks damages of RMB 10.0 million (USD $1.5 million). A first hearing in the trial was held on July 30, 2020, and the Court held a second hearing for September 4, 2020. The Court then ordered the parties to retain a third-party appraisal center to analyze and report to the Court on various technical aspects of the case. The Company believes that the claims are without merit and intends to defend them vigorously.

Proven Networks, LLC v. Extreme Networks, Inc.

On March 24, 2020, Proven Networks, LLC (“Proven”) filed a patent infringement lawsuit against the Company in the Northern District of California. The lawsuit alleged direct and indirect infringement of three U.S. patents based on the Company’s manufacture, use, sale, offer for sale, and/or importation into the United States of Extreme Analytics Extreme XOS, and certain network devices equipped with the Extreme XOS operating system. Proven sought injunctive relief, unspecified damages, pre- and post-judgment interest, and attorneys’ fees. The parties have reached a settlement in this case that was not material and the case was subsequently dismissed.

DataCloud Technologies, LLC. v. Extreme Networks, Inc.

On June 5, 2020, DataCloud Technologies, LLC (“DataCloud”) filed a patent infringement lawsuit against the Company in the District of Delaware. The lawsuit alleges direct infringement of four U.S. patents based on Company’s shipping, distributing, making, using, importing, offering for sale, and/or selling of Extreme SLX Insight Architecture, Extreme Management Center, ExtremeSwitching switches, and ExtremeCloud Subscription Service. DataCloud seeks injunctive relief, monetary damages, interest, and attorneys’ fees. Given the uncertainty of litigation and the preliminary stage of the case, Extreme cannot estimate at this time the possible loss or range of loss that may result from this action.

American Patents LLC v. Extreme Networks, Inc.

On August 14, 2020, American Patents LLC filed a patent infringement lawsuit against the Company in the Western District of Texas. The complaint alleges direct and indirect infringement of certain U.S. patents and seeks injunctive relief, unspecified damages, on-going royalties, pre- and post-judgment interest, and attorneys’ fees. The parties have reached settlement terms for a non-material amount and are finalizing a settlement agreement.

SNMP Research, Inc. and SNMP Research International, Inc. v. Broadcom Inc., Brocade Communications Systems LLC, and Extreme Networks, Inc.

On October 26, 2020, SNMP Research, Inc. and SNMP Research International, Inc. (collectively, “SNMP”) filed a lawsuit against the Company in the Eastern District of Tennessee for copyright infringement, alleging that the Company was not properly licensed to use their software. SNMP is seeking actual damages and profits attributed to the infringement, as well as equitable relief. Given the uncertainty of litigation and the preliminary stage of the case, Extreme cannot estimate at this time the possible loss or range of loss that may result from this action.

Indemnification Obligations

Subject to certain limitations, the Company may be obligated to indemnify its current and former directors, officers and employees. These obligations arise under the terms of its certificate of incorporation, its bylaws, applicable contracts, and applicable law. The obligation to indemnify, where applicable, generally means that the Company is required to pay or reimburse, and in certain circumstances the Company has paid or reimbursed, the individuals' reasonable legal expenses and possibly damages and other liabilities incurred in connection with certain legal matters. The Company also procures Directors and Officers liability insurance to help cover its defense and/or indemnification costs, although its ability to recover such costs through insurance is uncertain. While it is not possible to estimate the maximum potential amount that could be owed under these governing documents and agreements due to the Company’s limited history with prior indemnification claims, indemnification (including defense) costs could, in the future, have a material adverse effect on the Company’s consolidated financial position, results of operations and cash flows.

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10. | Stockholders’ Equity

Stockholders’ Rights Agreement

On April 26, 2012, the Company entered into an Amended and Restated Rights Agreement between the Company and Computershare Shareholder Services LLC as the rights agent (as amended, the “Restated Rights Plan”). The Restated Rights Plan governs the terms of each right (“Right”) that has been issued with respect to each share of common stock of Extreme Networks. Each Right initially represents the right to purchase one one-thousandth of a share of the Company’s Preferred Stock.

The Company’s Board of Directors (the “Board”) adopted the Restated Rights Plan to preserve the value of deferred tax assets, including net operating loss carry forwards of the Company, with respect to its ability to fully use its tax benefits to offset future income which may be limited if the Company experiences an “ownership change” for purposes of Section 382 of the Internal Revenue Code of 1986 as a result of ordinary buying and selling of shares of its common stock. Following its review of the terms of the plan, the Board decided it was necessary and in the best interests of the Company and its stockholders to enter into the Restated Rights Plan. Each year since 2013 the Board and stockholders have approved an amendment providing for a one-year extension of the term of the Restated Rights Plan. The Board unanimously approved an amendment to the Restated Rights Plan on May 8, 2020, to extend the Restated Rights Plan through May 31, 2021, subject to ratification by a majority of the stockholders of the Company at the next annual meeting of stockholders.

Equity Incentive Plan

The Board unanimously approved an amendment to the Extreme Networks, Inc. Amended and Restated 2013 Equity Incentive Plan (the “2013 Plan”) to increase the maximum number of available shares by 7.0 million shares. The amendment was approved by the stockholders at the Company’s annual meeting of stockholders held on November 7, 2019.

Employee Stock Purchase Plan

The Board unanimously approved an amendment to the 2014 Employee Stock Purchase Plan (the “ESPP”) to increase the maximum number of shares that will be available for sale thereunder by 7.5 million shares. The amendment was approved by the stockholders of the Company at the annual meeting of stockholders held on November 8, 2018.

Common Stock Repurchases

On November 2, 2018, the Company announced the Board had authorized management to repurchase up to $60.0 million of the Company’s common stock over a two-year period from the date of authorization. Purchases may be made from time to time through any means including, but not limited to, open market purchases and privately negotiated transactions. A maximum of $30.0 million of the Company’s common stock may be repurchased in any calendar year. In February 2020, the Board increased the authorization to repurchase by $40.0 million to $100.0 million and extended the period for repurchase for three years from February 5, 2020.

There were no shares repurchased during the three months ended September 30, 2020 and 2019.

11. | Employee Benefit Plans

Shares Reserved for Issuance

The Company had the following reserved shares of common stock for future issuance as of the dates noted (in thousands):

|  | September 30, 2020 |  |  | June 30, 2020 |
2013 Equity Incentive Plan shares available for grant |  |  | 6,431 |  |  |  | 13,118 |
Employee stock options and awards outstanding |  |  | 13,549 |  |  |  | 10,396 |
2014 Employee Stock Purchase Plan |  |  | 5,913 |  |  |  | 7,364 |
Total shares reserved for issuance |  |  | 25,893 |  |  |  | 30,878 |

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Share-based Compensation Expense

Share-based compensation expense recognized in the condensed consolidated financial statements by line item caption is as follows (in thousands):

|  | Three Months Ended |
|  | September 30, 2020 |  |  | September 30, 2019 |
Cost of product revenues |  | $ | 258 |  |  | $ | 250 |
Cost of service and subscription revenues |  |  | 372 |  |  |  | 347 |
Research and development |  |  | 2,272 |  |  |  | 2,435 |
Sales and marketing |  |  | 2,647 |  |  |  | 3,719 |
General and administrative |  |  | 2,753 |  |  |  | 2,083 |
Total share-based compensation expense |  | $ | 8,302 |  |  | $ | 8,834 |

Stock Options

The following table summarizes stock option activity for the three months ended September 30, 2020 (in thousands, except per share and contractual term):

|  | Number of Shares |  |  | Weighted-Average Exercise Price Per Share |  |  | Weighted-Average Remaining Contractual Term (years) |  |  | Aggregate Intrinsic Value |
Options outstanding at June 30, 2020 |  |  | 2,922 |  |  | $ | 4.95 |  |  |  | 3.09 |  |  | $ | 1,688 |
Granted |  |  | — |  |  |  | — |  |  |  |  |  |  |  |  |
Exercised |  |  | (15 | ) |  |  | 4.18 |  |  |  |  |  |  |  |  |
Cancelled |  |  | (81 | ) |  |  | 5.29 |  |  |  |  |  |  |  |  |
Options outstanding at September 30, 2020 |  |  | 2,826 |  |  | $ | 4.95 |  |  |  | 2.94 |  |  | $ | 1,384 |
Vested and expected to vest at September 30, 2020 |  |  | 2,826 |  |  | $ | 4.95 |  |  |  | 2.94 |  |  | $ | 1,384 |
Exercisable at September 30, 2020 |  |  | 1,745 |  |  | $ | 3.97 |  |  |  | 1.44 |  |  | $ | 1,384 |

The fair value of each stock option grant under the 2013 Plan is estimated on the date of grant using the Black-Scholes-Merton option valuation model. The expected term of options granted is derived from historical data on employee exercise and post-vesting employment termination behavior. The risk-free rate is based upon the estimated life of the option and the U.S. Treasury yield curve in effect at the time of grant. Expected volatility is based on the historical volatility on the Company’s stock. There were no stock options granted during the three months ended September 30, 2020. The average fair value of the stock options granted during the three months ended September 30, 2019 was $3.52.

Stock Awards

Stock awards may be granted under the 2013 Plan on terms approved by the Compensation Committee of the Board. Stock awards generally provide for the issuance of restricted stock units (“RSUs”) including performance or market-condition RSUs which vest over a fixed period of time or based upon the satisfaction of certain performance criteria or market conditions. The Company recognizes compensation expense on the awards over the vesting period based on the awards’ grant date fair value as of the date of grant. The Company does not estimate forfeitures, but accounts for them as incurred.

The following table summarizes stock award activity for the three months ended September 30, 2020 (in thousands, except grant date fair value):

|  | Number of Shares |  |  | Weighted- Average Grant Date Fair Value |  |  | Aggregate Fair Market Value |
Non-vested stock awards outstanding at June 30, 2020 |  |  | 7,474 |  |  | $ | 6.83 |  |  |  |  |
Granted |  |  | 5,306 |  |  |  | 4.71 |  |  |  |  |
Released |  |  | (1,453 | ) |  |  | 7.35 |  |  |  |  |
Cancelled |  |  | (604 | ) |  |  | 9.61 |  |  |  |  |
Non-vested stock awards outstanding at September 30, 2020 |  |  | 10,723 |  |  | $ | 5.55 |  |  | $ | 43,108 |
Vested and expected to vest at September 30, 2020 |  |  | 10,409 |  |  | $ | 5.52 |  |  | $ | 41,843 |

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The RSU's granted under the 2013 plan vest over a period of time, generally one-to-three years, and are subject to participant's continued service to the Company. The stock awards granted during the three months ended September 30, 2020 included 1,350,000 RSUs including the market condition awards discussed below to named executive officers.

Fiscal 2021 Awards

On July 27, 2020, the Compensation Committee of the Board granted 475,000 RSUs with vesting based on market conditions (“MSU”) to certain of the Company’s executive officers. These MSUs will vest based on the Company’s total shareholder return (“TSR”) relative to the TSR of the Russell 2000 Index (“Index”). The MSU award represents the right to receive a target number of shares of common stock up to 150% of the original grant. The MSUs vest based on the Company’s TSR relative to the TSR of the Index over performance periods from August 15, 2020 through August 15, 2023, subject to the grantees’ continued service through the certification of performance.

Level | Relative TSR | Shares Vested |
Below Threshold | TSR is less than the Index by more than 37.5 percentage points | 0% |
Threshold | TSR is less than the Index by 37.5 percentage points | 25% |
Target | TSR equals the Index | 100% |
Maximum | TSR is greater than the Index by 25 percentage points or more | 150% |

Total shareholder return is calculated based on the average closing price for the 30-trading days prior to the beginning and end of the performance periods. Performance is measured based on three periods, with the ability for up to one-third of target shares to vest after years 1 and 2 and the ability for up to the maximum of the full award to vest based on the full 3-year TSR less any shares vested based on 1 and 2 year periods. Linear interpolation is used to determine the number of shares vested for achievement between target levels.

The grant date fair value of each MSU was determined using the Monte-Carlo simulation model. The weighted-average grant-date fair value of these MSU was $5.32. The assumptions used in the Monte-Carlo simulation included the expected volatility of 69%, risk-free rate of 0.18%, no expected dividend yield, expected term of 3 years and possible future stock prices over the performance period based on the historical stock and market prices. The Company recognizes the expense related to these MSUs on a graded-vesting method over the estimated term.

Fiscal 2018 and 2019 Awards

During fiscal 2019 and 2018, the Company approved the grant of 0.6 million shares underlying stock awards each year in the form of restricted stock units with certain performance conditions (“PSUs”) to named executive officers and other vice president level employees. These PSUs would vest once the Company’s U.S. GAAP earnings aggregates at least $0.09 per share over two consecutive quarters (the “Performance Thresholds”). Upon satisfying the Performance Thresholds, the PSUs will vest with respect to the same number of RSUs that have vested which were granted on the same date and thereafter will vest on the same schedule as the RSUs, subject to continued service to the Company. If the Performance Thresholds are not met by the third anniversary of the grant date for each award, that award is canceled. The PSUs issued in fiscal 2018 expired and were cancelled during the three months ended September 30, 2020 without the achievement of the Performance Thresholds. During the three months ended September 30, 2020 and 2019 the Performance Thresholds for outstanding performance PSUs issued in fiscal 2019 were not achieved, and as such, no compensation expense was recorded in either reporting period.

Employee Stock Purchase Plan

The fair value of each share purchase option under the 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. The expected term of the ESPP represents the term of the offering period of each option. The risk-free rate is based upon the estimated life and on the U.S. Treasury yield curve in effect at the time of grant. Expected volatility is based on the historical volatility on the Company’s stock.

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There were 1.5 million and 1.2 million shares issued under the ESPP during the three months ended September 30, 2020 and 2019, respectively. The following assumptions were used to determine the grant-date fair values of the ESPP shares during the following periods:

|  | Employee Stock Purchase Plan |
|  | Three Months Ended |
|  | September 30, 2020 |  |  | September 30, 2019 |
Expected life |  | 0.5 years |  |  | 0.5 years |
Risk-free interest rate |  |  | 0.12 | % |  |  | 1.85 | %
Volatility |  |  | 119 | % |  |  | 43 | %
Dividend yield |  |  | — | % |  |  | — | %

The weighted-average grant-date fair value of shares issued under the ESPP during the three months ended September 30, 2020 and 2019 was $2.23 and $2.02, respectively.

1 2. | Information about Segments and Geographic Areas

The Company operates in one segment, the development and marketing of network infrastructure equipment and related software. The Company conducts business globally and is managed geographically. Revenues are attributed to a geographical area based on the ship-to 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’s chief operating decision maker, who is its CEO, reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance.

See Note 3, Revenues, for the Company’s revenues by geographic regions and channel based on the customer’s ship-to location.

The Company’s long-lived assets are attributed to the geographic regions as follows (in thousands):

Long-lived Assets |  | September 30, 2020 |  |  | June 30, 2020 |
Americas |  | $ | 168,844 |  |  | $ | 177,443 |
EMEA |  |  | 36,270 |  |  |  | 39,477 |
APAC |  |  | 16,541 |  |  |  | 16,802 |
Total long-lived assets |  | $ | 221,655 |  |  | $ | 233,722 |

1 3. | Derivatives and Hedging

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 fair value of the Company’s derivatives in a gain position are recorded in “Prepaid expenses and other current assets” and derivatives in a loss position are recorded in “Other accrued liabilities” in the accompanying condensed consolidated balance sheets. Changes in the fair value of derivatives are recorded in “Other income (expense), net” in the accompanying condensed consolidated statements of operations. The Company enters into foreign exchange forward contracts to mitigate the effect of gains and losses generated by foreign currency 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. Gains and losses recorded in the condensed consolidated statement of operations from these transactions during the three months ended September 30, 2020 were less than $0.1 million. There were no related gains and losses for the three months ended September 30, 2019 as the Company did not have any foreign exchange forward contracts at September 30, 2019.

As of September 30, 2020, foreign exchange forward contracts had a notional principal amount of $7.5 million. These contracts have maturities of less than 30 days. Changes in the fair value of these foreign exchange forward contracts are offset largely by remeasurement of the underlying assets and liabilities.

The Company recognized total foreign currency losses of $1.2 million and gains $0.6 million for the three months ended September 30, 2020 and 2019, respectively related to the change in fair value of foreign currency denominated assets and liabilities.

Interest Rate Swaps

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The Company is exposed to interest rate risk on its debt. The Company enters into interest rate swap contracts to effectively manage the impact of fluctuations of interest rate changes on its outstanding debt which has floating interest rate. The Company does not enter into derivative contracts for trading or speculative purposes.

At the inception date of the derivative contract, the Company performs an assessment of these contracts and has designated these contracts as cash flow hedges. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreement without exchange of the underlying notional amount. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, by performing qualitative and quantitative assessment, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flow of hedged items. Changes in the fair value of a derivative that is qualified, designated and highly effective as a cash flow hedge are recorded in other comprehensive income (loss). When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively. In accordance with ASC 815 “Derivatives and Hedging,” the Company may prospectively discontinue the hedge accounting for an existing hedge if the applicable criteria are no longer met, the derivative instrument expires, is sold, terminated or exercised or if the Company removes the designation of the respective cash flow hedge. In those circumstances, the net gain or loss remains in accumulated other comprehensive income (loss) and is reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings, unless the forecasted transaction is no longer probable in which case the net gain or loss is reclassified into earnings immediately.

During fiscal 2020, the Company entered into multiple interest rate swap contracts, designated as cash flow hedges, to hedge the variability of cash flows in interest payments associated with the Company’s various tranches of floating-rate debt. As of September 30, 2020, the total notional amount of these interest rate swaps was $200.0 million and had maturity dates through April 2023. As of September 30, 2020, these contracts had an unrealized loss of $1.8 million which is recorded in “Accumulated other comprehensive loss” with the associated liability in “Other accrued liabilities” in the condensed consolidated balance sheets and other financial statements. Cash flows associated with periodic settlements of interest rate swaps are classified as operating activities in the condensed consolidated statement of cash flows. The Company did not have any interest rate swaps as of or for the three months ended September 30, 2019. Realized gains and losses are recognized as they accrue in interest expense. Amounts reported in accumulated other comprehensive loss related to these cash flow hedges are reclassified to interest expense over the life of the swap contracts. The Company estimates that $0.9 million will be reclassified to interest expense over the next twelve months. The classification and fair value of these cash flow hedges are discussed in Note 6, Fair Value Measurements.

14. | Restructuring Charges, Net of Reversals, Impairment, and Related Charges.

The Company recorded $1.0 million of restructuring charges, net of reversals and impairments during the three months ended September 30, 2020 which included severance and benefits charges of $0.7 million and facility related charges of $0.3 million. Severance and benefit restructuring charges consisted primarily of additional employee severance and benefit expenses incurred under the reduction-in-force action initiated in the third quarter of fiscal 2020 (the “2020 Plan”) to reduce operating costs and enhance financial flexibility as a result of disruptions caused by the COVID-19 global pandemic. The Company incurred $8.8 million of charges under the 2020 Plan through September 30, 2020. With the reduction and realignment of the headcount under the 2020 Plan, the Company is relocating certain of its lab test equipment to third-party consulting companies. The Company expects to incur equipment related relocation expenses of approximately $1.0 million related to these activities and expects to substantially complete these activities by the end of fiscal 2021. The facility restructuring charges included additional facilities expenses related to previously impaired facilities.

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The Company recorded $6.1 million of restructuring charges, net of reversals and impairment during the three months ended September 30, 2019, including charges of $3.9 million for right-of-use assets related to facilities which the Company has exited during the period and employee severance and benefit expenses of $2.2 million incurred under the Company’s restructuring plans initiated in prior years which were complete as of the end of fiscal 2020.

Restructuring liabilities related to severance and benefits obligations are recorded in “Other accrued liabilities” in the accompanying condensed consolidated balance sheets. The following table summarizes the activity related to the severance and benefits related equipment restructuring liabilities during the three months ended September 30, 2020 and 2019 (in thousands):

|  | Three Months Ended |
|  | September 30, 2020 |  |  | September 30, 2019 |
|  | Severance Benefits |  |  | Severance Benefits |
Balance as of June 30, 2020 |  | $ | 2,219 |  |  | $ | 3,559 |
Period charges |  |  | 772 |  |  |  | 2,595 |
Period reversals |  |  | (50 | ) |  |  | (409 | )
Period payments |  |  | (2,639 | ) |  |  | (3,608 | )
Balance as of September 30, 2020 |  | $ | 302 |  |  | $ | 2,137 |

15. | Income Taxes

For the three months ended September 30, 2020 and 2019, the Company recorded an income tax provision of $1.3 million and $1.6 million, respectively.

The income tax provisions for the three months ended September 30, 2020 and 2019, consisted of (1) taxes on the income of the Company’s foreign subsidiaries, (2) foreign withholding taxes, (3) 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 wireless local area network (“WLAN”) business from Zebra Technologies Corporation, the Campus Fabric Business from Avaya and the Data Center Business from Brocade, and (4) state taxes in jurisdictions where the Company has no remaining state net operating losses (“NOLs”). The interim income tax provisions for the three months ended September 30, 2020 and 2019 were calculated using the discrete effective tax rate method as allowed by Accounting Standards Codification (“ASC”) 740-270-30-18, “Income Taxes – Interim Reporting.” The discrete method is applied when the application of the estimated annual effective tax rate is impractical because it is not possible to reliably estimate the annual effective tax rate. The discrete method treats the year to date period as if it was the annual period and determines the income tax expense or benefit on that basis. The Company believes that, at this time, the use of this discrete method is more appropriate than the annual effective tax rate method as (i) the estimated annual effective tax rate method is not reliable due to the high degree of uncertainty in estimating annual pretax earnings and (ii) the Company’s ongoing assessment that the recoverability of certain U.S. and Irish deferred tax assets is not more likely than not.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law in the United States. The CARES Act, among other things, includes modifications to net operating loss carryforward provisions and the net interest expense deduction, and deferment of employer social security tax payments. The Company has evaluated the provisions of the CARES Act and how certain elections may impact its financial position and results of operations, and has determined the enactment of the CARES Act did not have a material impact to the Company’s income tax provision for the three months ended September 30, 2020, or to the Company’s net deferred tax assets as of September 30, 2020.

The Company has provided a full valuation allowance against all of its U.S. federal and state deferred tax assets as well as a portion of the deferred tax assets in Ireland. A valuation allowance is determined by assessing both negative and positive evidence to determine whether it is “more likely than not” that deferred tax assets are recoverable; such assessment is required on a jurisdiction by jurisdiction basis. The Company's inconsistent earnings in recent periods, including a cumulative loss over the last three years, coupled with its difficulty in forecasting future revenue trends and the cyclical nature of its business represent sufficient negative evidence to require full valuation allowances against its U.S. federal and state net deferred tax assets as well as a portion of the deferred tax assets in Ireland. These valuation allowances 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.

On August 9, 2019, the Company completed its acquisition of Aerohive. This acquisition was treated as a non-taxable stock acquisition and, therefore, Extreme Networks will have carryover tax basis in the assets and liabilities acquired. During the fourth quarter of fiscal 2020 following the acquisition of Aerohive, the Company realigned the Aerohive related non U.S. intellectual property (“IP”) rights to correspond with the Company’s global operating model. This transaction resulted in recognition of a $75 million U.S. tax gain

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which was fully consumed by existing NOLs and the intangibles transferred are being amortized over 10 years for Irish statutory purposes.

The Company had $23.8 million of unrecognized tax benefits as of September 30, 2020. If fully recognized in the future, $0.5 million would impact the effective tax rate and $23.3 million, would result in adjustments to deferred tax assets and corresponding adjustments to the valuation allowance with no impact to the effective tax rate. 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.

The Company’s policy is to accrue interest and penalties related to the underpayment of income taxes as a component of tax expense in the accompanying condensed consolidated statements of operations.

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 2000 forward due to net operating losses. The Company is not currently under audit in any material jurisdictions.

16. | Net Loss 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 loss per share is calculated by dividing net loss by the weighted average number of shares of common stock used in the basic loss per share calculation plus the dilutive effect of shares subject to repurchase, options and unvested RSUs.

The following table presents the calculation of net loss per share of basic and diluted (in thousands, except per share data):

|  | Three Months Ended |  |
|  | September 30, 2020 |  |  | September 30, 2019 |  |
Net loss |  | $ | (8,812 | ) |  | $ | (37,738 | ) |
Weighted-average shares used in per share calculation - basic and diluted |  |  | 121,705 |  |  |  | 120,226 |  |
Net loss per share - basic and diluted |  | $ | (0.07 | ) |  | $ | (0.31 | ) |

The following securities were excluded from the computation of net loss per diluted share of common stock for the periods presented as their effect would have been anti-dilutive (in thousands):

|  | Three Months Ended |
|  | September 30, 2020 |  |  | September 30, 2019 |
Options to purchase common stock |  |  | 2,864 |  |  |  | 2,898 |
Restricted stock units |  |  | 8,877 |  |  |  | 9,305 |
Employee Stock Purchase Plan shares |  |  | 750 |  |  |  | 750 |
Total shares excluded |  |  | 12,491 |  |  |  | 12,953 |

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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,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” and similar expressions. 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 Quarterly Report on Form 10-Q for the first quarter ended September 30, 2020, our Annual Report on Form 10-K for the fiscal year ended June 30, 2020, 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; fluctuations in the global economy, including political, social, economic, currency and regulatory factors (such as the outbreak of COVID-19); 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 acquired businesses.

Business Overview

The following discussion is based upon our unaudited condensed consolidated financial statements included elsewhere in this Report. In the course of operating our business, we routinely make decisions as to the timing of the payment of invoices, the collection of receivables, the manufacturing and shipment of products, the fulfillment of orders, the purchase of supplies, and the building of inventory and service parts, among other matters. Each of these decisions has some impact on the financial results for any given period. In making these decisions, we consider various factors including contractual obligations, customer satisfaction, competition, internal and external financial targets and expectations, and financial planning objectives. For further information about our critical accounting policies and estimates, see the “Critical Accounting Policies and Estimates” section included in this “Management's Discussion and Analysis of Financial Condition and Results of Operations.”

Extreme Networks, Inc., together with its subsidiaries (collectively referred to as “Extreme” and as “we”, “us” and “our”), is a leader in providing cloud-driven networking solutions for enterprise, data center, and service provider customers. Providing a combined end-to-end solution from the Internet of Things (“IoT”) edge to the cloud, Extreme designs, develops, and manufactures wired and wireless network infrastructure equipment as well as designs and develops a leading cloud networking platform and application portfolio using cloud management, machine learning, and artificial intelligence to deliver network policy, analytics, security, and access controls. Extreme cloud-driven technologies provide flexibility and scalability in deployment, management, and licensing of networks globally, and the global cloud footprint provides service to over 50,000 customers and over 10 million daily users. Our corporate headquarters are located in San Jose, California. We were incorporated in California in May 1996 and reincorporated in Delaware in March 1999. We derive substantially all of our revenues from the sale of our networking equipment, software, and related maintenance contracts.

Extreme delivers cloud-driven solutions from the IoT edge to the cloud that are agile, adaptive, and secure to enable autonomous enterprises of the future. We recognize that every customer environment is unique with its own requirements, which may be industry-specific or site driven. Extreme gives customers and partners the power to mix and match a broad array of software, hardware, and services (including third-party applications) to create a custom network that can be managed and automated from end-to-end and enabled with intelligence and assurance from the cloud. With this strategic asset in place, organizations have the foundation needed to drive both digital transformation and the outcomes impacting each one of us.

We believe our 100% in-sourced services and support are number one in the industry, and even as we increase the breadth of our portfolio and scale our organization, we remain nimble and responsive to ensure customer and partner success. We are relentless in our commitment to our over 50,000 customers around the world, including some of the world's leading names in business, hospitality, retail, transportation and logistics, education, government, healthcare, and manufacturing, and provide the building blocks that drive competitive advantage, accelerate innovation, and improve the human experience.

Enterprise network administrators need to respond to the rapid digital transformational trends of cloud, mobility, big data, social business, and the ever-present need for network security. In January 2020, an outbreak of a new strain of coronavirus, COVID-19, was identified in Wuhan, China. Through the first calendar quarter of 2020, the disease became widespread around the world, and on March 11, 2020, the World Health Organization declared the outbreak a pandemic. Particularly in 2020, COVID-19 has accelerated digital transformation efforts for organizations everywhere, driving rapid adoption of new cloud technologies to support remote working and online learning. For organizations bringing employees back to work and students back into schools, technology drivers such as IoT, robotics automation, occupancy management, and contact tracing applications have a profound effect across the entire enterprise network by placing unprecedented demands on network administrators to enhance management capabilities, scalability, programmability, agility, security, and analytics of the enterprise networks they manage.

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Improving the network experience for enterprises that increasingly require greater simplification at the edge or the access layer of the network remains a key focus for Extreme. In fiscal 2020, we augmented our cloud and infrastructure offerings by closing the acquisition of Aerohive Networks, which allowed us to focus our product and go-to-market strategy on delivering ease and simplicity in deployment, management, licensing, and operation of networking, with a particular emphasis on Wi-Fi, security, and analytics. Cloud-Driven Networking positions us to deliver effortless experiences to organizations of various sizes by combining our software-driven applications with machine learning and artificial intelligence to assist in collecting data to build, secure, and maintain agile and distributed environments. In addition, we are the only major vendor who can provide these enterprise-class capabilities in public cloud, private cloud, and on-premises deployment options with a single, unified license and end-to-end portfolio.

We have chosen to focus on enterprise cloud networking based on compelling benefits we believe we can offer our customers. Legacy approaches to network management have relied on complex enterprise applications that customers must install, integrate, maintain, and administer. New releases were infrequent, and updates installed by customers even less frequent. In contrast, our cloud-based ExtremeCloud IQ application provides a single, integrated management view across the entire network that a customer can access from virtually anywhere. We maintain and administer the network management application in global regional data centers from Amazon Web Services (“AWS”), Google Cloud Platform (“GCP”), and Microsoft Azure, delivering the industry’s only completely cloud-agnostic network management application which users then access as a subscription service that can be regularly updated in response to new features or urgent changes.

The Extreme Strategy

We are focused on delivering cloud-driven end-to-end networking and software solutions for today’s enterprise environments. From wireless and wired access technologies, through the campus, core, and into the datacenter, Extreme is developing solutions to deliver outstanding business outcomes for our customers. Leveraging a unified management approach, both on premises and in the cloud, we continue to accelerate adoption and delivery of new technologies in support of emerging trends in enterprise networking. We continue to execute on our growth objectives by seeking to maximize customer, partner, and stockholder value. As we advance our strategy to transition our business to subscription-oriented Cloud solutions, we also plan to change the mix of our revenues to a more recurring basis.

In fiscal 2017, we completed the acquisition of the Wireless Local Area Network (“WLAN”) Business from Zebra Technologies. In fiscal 2018, we completed the acquisitions of the Campus Fabric Business from Avaya and the Data Center Business from Brocade. In August 2019, we acquired the entire Cloud Networking portfolio from Aerohive. These acquisitions support our growth strategy to lead the enterprise network equipment market with end-to-end software-driven cloud and on-premises solutions for enterprise customers from the data center to the wireless edge. After the closing of the acquisitions of the Campus Fabric Business and Data Center Business, Extreme immediately became a networking industry leader with more than 30,000 customers. In addition, the acquisition of Aerohive brought us more than 20,000 additional customers and solidified our position as the second-ranked cloud networking provider globally. As a network switching leader in enterprise, datacenter, and cloud, we combine and extend our world-class products and technologies to provide customers with some of the most advanced, high performance and open solutions in the market as well as a superb overall customer experience. Extreme brings together distinct strengths addressing the key areas of the network, from unified wired and wireless edge, to the enterprise core, to the data center to offer a complete, unified portfolio of cloud-driven network access solutions.

Provider of high quality, cloud-driven, secure networking solutions and the industry’s #1 customer support organization

| • | Only end-to-end cloud-driven networking vendor with management, intelligence, and assurance values built into every solution.

| • | Delivering new releases of next generation portfolio Elements organically and through acquisition.

Key elements of our strategy include:

| • | Creating effortless networking solutions that allow all of us to advance. We believe that progress is achieved when we connect—allowing us to learn, understand, create, and grow. We make connecting simple and easy with effortless networking experiences that enable all of us to advance how we live, work, and share.

| • | Focus on being nimble and responsive to customers and partners. We work with our customers to deliver cloud-driven solutions from the IoT edge to the cloud that are agile, adaptive, and secure to enable digital transformation for our customers. We help our customers move beyond just “keeping the lights on”, so they can think strategically and innovate. By allowing customers to access critical decision-making intelligence, we are able reduce their daily tactical work, so they can spend their time on learning and understanding how to innovate their business with IT.

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| • | Provide the industry’s most differentiated end-to-end cloud architecture. Cloud technologies have evolved significantly over the past decade, from monolithic software images hosted remotely to microservices providing machine learning insights continuous integration and delivery of new features. We believe we deliver unrivaled innovation, reliability, and security with the leading end-to-end cloud management platform powered by machine learning (“ML”) and artificial intelligence (“AI”) that spans from the IoT edge to the enterprise data center. Key characteristics of our cloud architecture include being deployment agnostic, device agnostic and focus on the power of network data (availability/durability/unlimited) for our customers.

| • | Enable a common fabric to simplify and automate the network. Fabric technologies virtualize the network infrastructure (decoupling network services from physical connectivity) which enables network services to be turned up faster, with lower likelihood of error. They make the underlying network much easier to design, implement, manage and troubleshoot.

| • | Cloud-driven networking services-led solutions. Our cloud-driven solutions provide visibility, control and strategic intelligence from the edge to the data center, across networks and applications. Our solutions include wired switching, wireless switching, wireless access points, WLAN controllers, routers, and an extensive portfolio of software applications that deliver AI-enhanced access control, network and application analytics, as well as network management. All can be managed, assessed and controlled from a single pane of glass on premises or from the cloud.

| • | Offer customers choice – cloud or on-premises. We leverage the cloud where it makes sense for our customers and provide on premises solutions where customers need it and have a solution for those that want to harness the power of both. Our hybrid approach gives our customers options to adapt the technology to their business. At the same time, all of our solutions have visibility, control and strategic information built in, all tightly integrated with a single view across all of the installed products. Our customers can understand what’s going on across the network and applications in real time – who, when, and what is connected to the network, which is critical for bring your own device (“BYOD”) and IoT usage.

| • | Enable IoT without additional IT resources. In a recent IoT IT infrastructure survey, enterprise IT decision makers across industry verticals indicated their preference to opt for their existing wireless connectivity infrastructure to support IoT devices. These preferences will place unprecedented demand on network administrators to enhance management capabilities, scalability and programmability of the enterprise networks they manage without additional IT resources.

| • | Provide a strong value proposition for our customers. Our cloud-managed wired and wireless networking solutions provide additional choice and flexibility with cloud or on-premises options for device and application management coupled with our award-winning services and support. This delivers a strong value proposition to the following customers and applications:

| ○ | Enterprises and private cloud data centers use our products to deploy automated next-generation virtualized and high-density infrastructure solutions.

| ○ | Enterprises and organizations in education, healthcare, retail, manufacturing, hospitality, transportation and logistics, and government agencies use our solutions for their mobile campus and backbone networks.

| ○ | Enterprises, universities, stadiums, healthcare, and hospitality organizations use our solutions to enable better visibility and control of their data processing and analytics requirements.

| o | A wide range of service providers, such as regional service provider, cloud service provider, internet service providers and mobile service providers are using our products to transport mission critical data over their network infrastructure.

| • | Provide high-quality customer service and support. We seek to enhance customer satisfaction and build customer loyalty through high-quality service and support. This includes a wide range of standard support programs to provide the level of service our customers require, from standard business hours to global 24-hour-a-day, 365-days-a-year real-time responsive support.

| • | Extend switching and routing technology leadership. Our technological leadership is based on innovative switching, routing and wireless products, the depth and focus of our market experience and our operating systems - the software that runs on all of our networking products. Our products reduce operating expenses for our customers and enable a more flexible and dynamic network environment that will help them meet the upcoming demands of IoT, mobile, and cloud. Furthermore, our network operating systems, our primary merchant silicon vendor Broadcom, and select manufacturing partners permit us to leverage our engineering investment. We have invested in engineering resources to create leading-edge technologies to increase the performance and functionality of our products, and as a direct result, the value of our solution to our current and future customers. We look for maximum synergies from our engineering investment in our targeted verticals.

| • | Expand Wi-Fi technology leadership. Wireless is today’s network access method of choice and every business must deal with scale, density and BYOD challenges. The increase in demand being seen today, fueled by more users with multiple devices, increases the expectation that everything will just work. The network edge landscape is changing as the explosion of mobile devices increases the demand for mobile, transparent, and always-on wired to wireless edge services. The unified access layer requires distributed intelligent components to ensure that access control and resiliency of business services are available across the entire infrastructure and manageable from a single console. We are at a technology inflection point with the pending

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|  | migration from Wi-Fi 5 solutions to Wi-Fi 6 (802.11ax), focused on providing more effic ient a c cess to the broad array of connected de vices. We believe we have the industry’s broadest Wi-Fi 6 wireless portfolio providing intelligence for the wired/wireless edge and enhanced by our cloud architecture with machine learning and AI-driven insights.

| • | Continue to deliver unified management and a common fabric across the wired/wireless environment from the Data Center to the mobile Edge. Our rich set of integrated management capabilities provides centralized visibility and highly efficient anytime, anywhere control of enterprise wired and wireless network resources.

| • | Offer a superior quality of experience. Our network-powered application analytics provide actionable business insight by capturing and analyzing context-based data about the network and applications to deliver meaningful intelligence about applications, users, locations and devices. With an easy to comprehend dashboard, our applications help businesses turn their network into a strategic business asset that helps executives make faster and more effective decisions.

Data can be mined to show how applications are being used enabling a better understanding of user behavior on the network, identifying the level of user engagement and assuring business application delivery to optimize the user experience. Application adoption can be tracked to determine the return on investment associated with new application deployment.

Visibility into network and application performance enables our customers to pinpoint and resolve performance bottlenecks in the infrastructure whether they are caused by the network, application or server. This saves both time and money for the business and helps to ensure critical applications are running at the best possible performance.

| • | Cloud-driven networking solutions for the enterprise. We are a cloud-driven networking solution company focused on the enterprise. We focus our R&D team and our sales teams to execute against a refined set of requirements for optimized return on investment, faster innovation, and clearer focus on mega trends and changes in the industry. As a cloud-driven networking company, we offer solutions for the entire enterprise network, the data center, the campus, the core and the WLAN.

| • | Expand market penetration by targeting high-growth market segments. Within the Campus, we focus on the mobile user, leveraging our automation capabilities and tracking WLAN growth. Our Data Center approach leverages our product portfolio to address the needs of public and private Cloud Data Center providers. Within the Campus, we also target the high-growth physical security market, converging technologies such as Internet Protocol (“IP”) video across a common Ethernet infrastructure in conjunction with technology partners. Cloud networking compound annual growth rate will continue to outpace on premises managed networking and our focus is on expanding our technology foothold in this key segment with the acquisition of Aerohive to accelerate not only cloud management adoption, but also subscription-based licensing (SaaS) consumption.

| • | Leverage and expand multiple distribution channels. We distribute our products through select distributors, a large number of resellers and system-integrators worldwide, and several large strategic partners. We maintain a field sales force to support our channel partners and to sell directly to certain strategic accounts. As an independent networking vendor, we seek to provide products that, when combined with the offerings of our channel partners, create compelling solutions for end-user customers.

| • | Maintain and extend our strategic relationships. We have established strategic relationships with a number of industry-leading vendors to both provide increased and enhanced routes to market, but also to collaboratively develop unique solutions. We announced in October 2019, that we were selected by Broadcom, the industry’s largest merchant silicon provider, as a preferred choice for enterprise campus deployments. As a Broadcom preferred choice for enterprise campus networking solutions, Extreme attempts to give enterprise customers and partners powerful security, segmentation, resiliency, policy, telemetry, and performance advantages as they pursue cloud-driven digital transformation with the industry's most simple, secure, and intelligent campus architecture.

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We seek to differentiate ourselves in the market by delivering a value proposition based on a software-driven approach to network management, control and analytics.

Our key points of differentiation include:

| • | ExtremeCloud IQTM. ExtremeCloud IQ is a robust cloud management platform that delivers visibility, intelligence, and assurance from the IoT edge to the core. The application helps organizations automate end-to-end network operations, unlock new analytics, scale faster, and secure and optimize the end-user and application experience.

| • | Cloud-Driven end-to-end networking solutions. The acquisition of Aerohive enhances our cloud offering - with ML/AI insights. We believe this breadth of coverage from the edge to the enterprise data center will be unique in the industry, and cloud networking is projected to be the fastest growing segment of the networking industry.

| • | First Cloud Networking solution available on all major cloud providers. Extreme gives customers cloud choice. Unlike our competitors whose solution relies on one cloud platform, our cloud agnostic approach supports AWS, Azure, and GCP. Customers are seeking multi-cloud and distributed cloud options – support for the top three providers is increasingly an expected minimum.

| • | First Cloud Networking company to offer Unlimited Data. Data-driven analytics and insights power operational efficiency, helping customers adapt to unpredictable times. Data fuels ML and AI solutions and shorter periods of Data Duration reduces ML/AI effectiveness. Further, network data is especially useful in occupancy management and proximity tracking type capabilities. Most vendors only provide 30 or 90-day data durations. Extreme offers unlimited data duration for the length of the cloud subscription to improve an organization’s ability to make smarter, more effective business decisions.

| • | Award Winning, Market Defining Fabric Technology. Extreme’s fabric technology delivers the simplicity, security and automation capabilities that businesses demand. Featuring stealth attributes, Automation of services (L2-3, Multicast), Service Mapping to VSNs, End-to-end encapsulation via MacSec, Extension of the LAN without need for complex protocol stacks, Extreme has pioneered the benefits of fabric technology for more than a decade.

| • | Differentiated Security and Privacy (we are ISO 27001 Security Certified). Security and privacy remain a top priority for all businesses. Extreme’s zero-trust approach extends from the network edge, to the data cloud to the public cloud. Our holistic network security solution includes ExtremeCloud IQ security, Fabric Connect, Defender, NAC, Air Defense and more. Unlike networking vendors who rely solely on the ISO certification of the cloud platform, Extreme goes one step further with an independent ISO 27001 certification for ExtremeCloud IQ. ISO 27001 is internationally recognized as providing a best-practice specification for an information security management system (ISMS). Extreme’s unique approach to go beyond just AWS, GCP, and Azure certification levels represents our commitment to robust security, ongoing risk management and protecting sensitive information for our customers and those they serve.

| • | Leading “No 9’s” Reliability and Resiliency. Business continuity has become increasingly important and Extreme provides exceptional results as fully audited continuous operation is a minimum requirement of today’s enterprise network. In April 2020, ExtremeCloud IQ met an operational state of 100% uptime for the last calendar year – evidence of Extreme’s trustworthy operational effectiveness. To our knowledge, no other vendor has made such a claim.

| • | Consumption Flexibility. With declining budgets and uncertainty over the future, Enterprises want greater flexibility in how they purchase networking solutions and more flexible licensing. Extreme offers a range of financing and network purchase options. Our value-based subscription tiers (Connect, Pilot, etc.) provides customers flexibility to grow and they go. Extreme is the only vendor to offer pool-able and portable licenses that can be transferred between products (AP’s, switches etc.) at one fixed price.

| • | Data center to access edge wired and wireless solutions. Extreme offers a complete, unified portfolio of software-driven network access solutions from the edge to the cloud. We have the latest in wireless access points for both outdoor and indoor use plus a complete line of networking options for the Campus, Core, and Data Center, all of which are enhanced with our extensive portfolio of intelligent applications.

| • | Multi-vendor management from a “single pane-of-glass”. Extreme’s Management Center is a single unified management system that is designed to provide visibility, security, and control across the entire network. This can make the network easier to manage and troubleshoot, often with lower operating expenses. Extreme’s software can manage third-party vendors’ network devices, allowing our customers to potentially maximize device lifespan and protect investments.

| • | Software-driven vertical solutions. Extreme’s software-driven solutions are designed to be easily adaptable to vertical solutions in industries such as healthcare, education, manufacturing, retail, transportation and logistics, government and hospitality. Extreme solutions are also designed to be well-suited for vertical-specific partners in these industries.

| • | Extreme Validated Design. Helping customers consider, select, and deploy data center network solutions for current and planned needs is our mission. Extreme Validated Designs offer a fast track to success by accelerating that process. Validated designs are repeatable reference network architectures that have been engineered and tested to address specific use cases and deployment scenarios.

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| • | Application-aware Quality of Service and analytics. Extreme has innovative analytic software that enables our customers to see application usage across the network and apply policies t o maximize network capabilities. This allows our customers to improve the user experience.

| • | Built-in identity and access control. Our network access control and identity management solutions are delivered with our network infrastructure to reduce the need to add expensive software or hardware that may require complex compatibility testing.

| • | 100% in-sourced tech support. We believe ExtremeWorks delivers best-in-class customer support in the industry with 92% first call resolution through a 100% in-sourced support model.

| • | Strengthens the channel. Extreme sells products primarily through an ecosystem of channel partners, which combine our portfolio elements together to create customized IT solutions for end user customers.

Key Financial Metrics

During the first quarter of fiscal 2021, we achieved the following results:

| • | Net revenues of $235.8 million compared to $255.5 million in the first quarter of fiscal 2020.

| • | Product revenues of $161.4 million compared to $185.1 million in the first quarter of fiscal 2020.

| • | Service and subscription revenues of $74.4 million compared to $70.4 million in the first quarter of fiscal 2020.

| • | Total gross margin of 57.3% of net revenues compared to 53.7% of net revenues in the first quarter of fiscal 2020.

| • | Operating loss of $0.1 million compared to operating loss of $32.1 million in the first quarter of fiscal 2020.

| • | Net loss of $8.8 million compared to $37.7 million in the first quarter of fiscal 2020.

During the first three months of fiscal 2021, we reflected the following results:

| • | Cash flow provided by operating activities of $24.7 million compared to cash flow used in operating activities of $0.2 million in the three months ended September 30, 2019. Cash of $193.1 million compared to $193.9 million as of June 30, 2020.

Events relating to COVID-19

A novel strain of coronavirus emerged in December 2019. This coronavirus, now known as COVID-19, spread around the world and resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place orders and shutdowns and was declared a pandemic in March 2020. COVID-19 has had and we expect will continue to have an adverse effect on our results of operations due to supply chain disruptions and reduced demand for our products. Because if this, we realigned our operations and recorded severance and benefits charges of $5.8 million during the third quarter of our fiscal 2020. Although we expect to reduce research and development and sales and marketing costs for the year ended June 30, 2021 compared to the year ended June 30, 2020, given the uncertainty around the extent and timing of the potential future spread or mitigation of COVID-19 and around the imposition or relaxation of protective measures, we cannot further reasonably estimate the impact of the COVID-19 pandemic on our future results of operations or financial position. See also Part II, Item 1A – Risk Factors.

Net Revenues

The following table presents net product and service and subscription revenues for the periods presented (dollars in thousands):

|  | Three Months Ended |  |
|  | September 30, 2020 |  |  | September 30, 2019 |  |  | $ Change |  |  | % Change |  |
Net revenues: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Product |  | $ | 161,396 |  |  | $ | 185,134 |  |  | $ | (23,738 | ) |  |  | (12.8 | )% |
Percentage of net revenues |  |  | 68.4 | % |  |  | 72.5 | % |  |  |  |  |  |  |  |  |
Service and subscription |  |  | 74,406 |  |  |  | 70,372 |  |  |  | 4,034 |  |  |  | 5.7 | % |
Percentage of net revenues |  |  | 31.6 | % |  |  | 27.5 | % |  |  |  |  |  |  |  |  |
Total net revenues |  | $ | 235,802 |  |  | $ | 255,506 |  |  | $ | (19,704 | ) |  |  | (7.7 | )% |

Product revenues decreased $23.7 million or 12.8% for the three months ended September 30, 2020, as compared to the corresponding period of fiscal 2020. The product revenues decline was primarily due to the continued impact of the global outbreak of COVID-19 across all geographies.

Service and subscription revenues increased $4.0 million, or 5.7% for the three months ended September 30, 2020 as compared to the corresponding period in fiscal 2020. The increase in service and subscription revenues was primarily due to growth in subscription revenues.

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The following table presents the product and service and subscription, gross profit and the respective gross profit percentages for the periods presented (dollars in thousands):

|  | Three Months Ended |  |
|  | September 30, 2020 |  |  | September 30, 2019 |  |  | $ Change |  |  | % Change |  |
Gross profit: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Product |  | $ | 88,001 |  |  | $ | 93,743 |  |  | $ | (5,742 | ) |  |  | (6.1 | )% |
Percentage of product revenues |  |  | 54.5 | % |  |  | 50.6 | % |  |  |  |  |  |  |  |  |
Service and subscription |  |  | 47,017 |  |  |  | 43,500 |  |  |  | 3,517 |  |  |  | 8.1 | % |
Percentage of service and subscription revenues |  |  | 63.2 | % |  |  | 61.8 | % |  |  |  |  |  |  |  |  |
Total gross profit |  | $ | 135,018 |  |  | $ | 137,243 |  |  | $ | (2,225 | ) |  |  | (1.6 | )% |
Percentage of net revenues |  |  | 57.3 | % |  |  | 53.7 | % |  |  |  |  |  |  |  |  |

Product gross profit decreased $5.7 million or 6.1% for the three months ended September 30, 2020, as compared to the corresponding period in fiscal 2020. The decrease in product gross profit was primarily due to lower revenues and higher distribution charges of $2.0 million, which were mainly due to increased freight and tariffs. This was partially offset by lower excess and obsolete inventory charges of $3.8 million, lower expensing of the fair value step-up of inventories acquired from Aerohive of $3.9 million, lower warranty costs of $2.9 million and more favorable manufacturing costs due to cost reduction efforts including a reduction in headcount during the current quarter.

Service and subscription gross profit increased $3.5 million or 8.1% for the three months ended September 30, 2020, as compared to the corresponding period in fiscal 2020. The increases were primarily due to higher level of service and subscription revenues including increased cloud service costs and higher personnel costs due to increased headcount, partially offset by reduced return costs for the three months ended September 30, 2020.

Operating Expenses

The following table presents operating expenses for the periods presented (dollars in thousands):

|  | Three Months Ended |  |  |
|  | September 30, 2020 |  |  | September 30, 2019 |  |  | $ Change |  |  | % Change |  |  |
Research and development |  | $ | 49,524 |  |  | $ | 59,116 |  |  | $ | (9,592 | ) |  |  | (16.2 | )% |  |
Sales and marketing |  |  | 64,325 |  |  |  | 71,357 |  |  |  | (7,032 | ) |  |  | (9.9 | )% |  |
General and administrative |  |  | 16,461 |  |  |  | 14,982 |  |  |  | 1,479 |  |  |  | 9.9 | % |  |
Acquisition and integration costs |  |  | 1,975 |  |  |  | 15,925 |  |  |  | (13,950 | ) |  |  | (87.6 | )% |  |
Restructuring and related charges, net of reversals |  |  | 1,001 |  |  |  | 6,137 |  |  |  | (5,136 | ) |  |  | (83.7 | )% |  |
Amortization of intangibles |  |  | 1,792 |  |  |  | 1,930 |  |  |  | (138 | ) |  |  | (7.2 | )% |  |
Total operating expenses |  | $ | 135,078 |  |  | $ | 169,447 |  |  | $ | (34,369 | ) |  |  | (20.3 | )% |  |

Research and Development Expenses

Research and development expenses consist primarily of personnel costs (which consist of compensation, benefits and share-based compensation), consultant fees and prototype expenses related to the design, development, and testing of our products.

Research and development expenses decreased by $9.6 million or 16.2% for the three months ended September 30, 2020, as compared to the corresponding period in fiscal 2020. The decrease in research and development expenses was due to a $9.5 million decrease in personnel costs primarily due to lower headcount as a result of the cost reduction actions taken in fiscal 2020, a $1.2 million decrease in facility and information technology costs, a $0.9 million decrease in engineering project costs and a $0.5 million decrease in travel and other expenses, partially offset by a $2.5 million increase in professional and contractor fees.

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of personnel costs (which consist of compensation, benefits and share-based compensation), as well as trade shows and promotional expenses.

Sales and marketing expenses decreased by $7.0 million or 9.9% for the three months ended September 30, 2020, as compared to the corresponding period in fiscal 2020. The decrease in sales and marketing expenses was primarily due to a $2.3 million decrease in personnel costs, a $3.1 million decrease in travel costs, a $1.4 million decrease in professional and recruiting fees and a $0.6 million decrease in equipment related costs and other expenses, partially offset by a $0.4 million increase in marketing related expenses.

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General and Administrative Expenses

General and administrative expenses consist primarily of personnel costs (which consist of compensation, benefits and share-based compensation), legal and professional service costs, travel and facilities and information technology costs.

General and administrative expenses increased by $1.5 million or 9.9% for the three months ended September 30, 2020, as compared to the corresponding period in fiscal 2020. The increase in general and administrative expenses was primarily due to a $1.0 million increase in personnel costs, a $0.2 million increase in professional fees, and a $0.7 million increase in facility and information technology costs, partially offset by a $0.4 million decrease in travel and other expenses.

Acquisition and Integration Costs

During the three months ended September 30, 2020, we incurred $2.0 million of acquisition and integration costs. Acquisition and integration costs consisted primarily of additional professional fees for system integration and financial services related to the Aerohive acquisition.

During the three months ended September 30, 2019, we incurred $15.9 million of integration costs including a $6.8 million compensation charge for certain Aerohive Executives’ stock awards which were accelerated due to change-in-control and termination provisions included in the Executives’ employment contracts. Other acquisition and integration costs consist primarily of professional fees for financial and legal advisory services and severance charges for Aerohive employees.

Restructuring Charges, Net of Reversals and Impairment

For the three months ended September 30, 2020, we recorded restructuring charges of $1.0 million. We continued our reduction-in-force initiative began in the third quarter of fiscal 2020 and recorded related severance and benefits charges of $0.7 million related to the 2020 Plan. In addition, we had facility-related charges of $0.3 million related to our previously impaired facilities.

For the three months ended September 30, 2019, we recorded restructuring charges of $6.1 million. The charges consisted of excess facility charges of $3.9 million for impairment of right-of-use assets related to our San Jose California and Salem, New Hampshire facilities. Additionally, we continued our reduction-in-force initiative begun in the fourth quarter of fiscal 2019 and we recorded severance and benefits charges of $2.2 million.

Amortization of Intangibles

During the three months ended September 30, 2020 and 2019, we recorded $1.8 million and $1.9 million, respectively, of operating expenses for amortization of intangibles in the accompanying condensed consolidated statements of operations. The decrease was primarily due to lower amortization related to certain acquired intangibles from previous acquisitions becoming fully amortized, partially offset by an increase from full period amortization of acquired intangibles from the Aerohive acquisition.

Interest Expense

During the three months ended September 30, 2020 and 2019, we recorded $6.7 million and $5.2 million, respectively, in interest expense. The increase in interest expense was primarily driven by higher average loan balances for the period ended September 30, 2020 under our Credit Agreement.

Other (Expense) Income, Net

During the three months ended September 30, 2020 and 2019, we recorded other expense of $0.9 million and other income of $0.6 million, respectively, in other (expense) income, net. The change for the three months ended September 30, 2020 was primarily due to foreign exchange losses from the revaluation of certain assets and liabilities denominated in foreign currencies into U.S. Dollars.

Provision for Income Taxes

For the three months ended September 30, 2020 and 2019, we recorded an income tax provision of $1.3 million and $1.6 million, respectively.

The income tax provisions for the three months ended September 30, 2020 and 2019 consisted of (1) taxes on the income of our foreign subsidiaries, (2) foreign withholding taxes, (3) 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 WLAN Business, the Campus Fabric Business and the Data Center Business, and (4) state taxes in jurisdictions where we have no remaining state net operating losses.

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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. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted under SEC rules and regulations. 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, 2020, we consider the following accounting policies to be the most critical in understanding the judgments that are involved in preparing our consolidated financial statements:

| • | Revenue Recognition

| • | Inventory Valuation and Purchase Commitments

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 2 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 table summarizes information regarding our cash (in thousands):

|  | September 30, 2020 |  |  | June 30, 2020 |
Cash |  | $ | 193,116 |  |  | $ | 193,872 |

As of September 30, 2020, our principal sources of liquidity consisted of cash of $193.1 million and accounts receivable, net of $123.6 million, and available borrowings under our five-year 2019 Revolving Facility of $20.0 million. Our principal uses of cash include the purchase of finished goods inventory from our contract manufacturers, payroll and other operating expenses related to the development and marketing of our products, purchases of property and equipment, and repayments of debt and related interest. We believe that our $193.1 million of cash at September 30, 2020, our cash flow from operations, and the availability of borrowings from the 2019 Revolving Facility will be sufficient to fund our planned operations for at least the next 12 months.

On November 2, 2018, our Board of Directors announced that it had authorized management to repurchase up to $60.0 million of its shares of common stock for two years from the date of authorization, of which $15.0 million was used for repurchases in fiscal 2019 and $30.0 million was used for repurchases in fiscal 2020. Purchases may be made from time to time in the open market or in privately negotiated transactions. The manner, timing and amount of any future purchases will be determined by our management based on their evaluation of market conditions, stock price, Extreme’s ongoing determination that it is the best use of available cash and other factors. The repurchase program does not obligate Extreme to acquire any shares of its common stock, may be suspended or terminated at any time without prior notice and will be subject to regulatory considerations. There were no repurchases in the three months ended September 30, 2020.

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In connection with the acquisition of Aerohive as discussed in Note 4 of the accompanying condensed consolidated financial statements, as of August 9, 2019, we amended the 2018 Credit Agreement, which is no longer outstanding, and entered into the 2019 Credit Agreement, by and among us, as borrower, several banks and other financial institutions as Lenders, BMO Harris Bank N.A., as an issuing lender and swingline lender, Silicon Valley Bank, as an Issuing Lender, and Bank of Montreal, as administrative agent and collateral agent for the Lenders. The 2019 Credit Agreement provides for a five-year first lien term loan facility in an aggregate principal amount of $380 million and a five-year revolving loan facility in an aggregate principal amount of $75 million (“2019 Revolving Facility”). In addition, we may request incremental term loans and/or incremental revolving loan commitments in an aggregate amount not to exceed the sum of $100 million plus an unlimited amount that is subject to pro forma compliance with certain financial tests. On August 9, 2019, we used the proceeds to partially fund the acquisition of Aerohive and for working capital and general corporate purposes.

At our election, the initial term loan (the “Initial Term Loan”) under the 2019 Credit Agreement may be made as either base rate loans or Eurodollar loans. The applicable margin for base rate loans ranges from 0.25% to 2.50% per annum and the applicable margin for Eurodollar loans ranges from 1.25% to 3.50%, in each case based on Extreme’s Consolidated Leverage Ratio. All Eurodollar loans are subject to a Base Rate floor of 0.00%. The 2019 Credit Agreement is secured by substantially all of our assets.

The 2019 Credit Agreement requires us to maintain certain minimum financial ratios at the end of each fiscal quarter. The 2019 Credit Agreement also includes covenants and restrictions that limit, among other things, our ability to incur additional indebtedness, create liens upon any of our property, merge, consolidate or sell all or substantially all of our assets. The 2019 Credit Agreement also includes customary events of default which may result in acceleration of the outstanding balance.

Financial covenants under the 2019 Credit Agreement require us to maintain a minimum consolidated fixed charge and consolidated leverage ratio at the end of each fiscal quarter through maturity. The 2019 Credit Agreement also includes covenants and restrictions that limit, among other things, our ability to incur additional indebtedness, create liens upon any of our property, merge, consolidate or sell all or substantially all of our assets. The 2019 Credit Agreement also includes customary events of default which may result in acceleration of the outstanding balance.

On April 8, 2020, we entered into the first amendment to our 2019 Credit Agreement (the “First Amendment”) to waive certain terms and financial covenants of the 2019 Credit Agreement through July 31, 2020. On May 8, 2020, we entered into the second amendment to the 2019 Credit Agreement (the “Second Amendment”) which supersedes the First Amendment and provides certain revised terms and financial covenants effective through March 31, 2021. Subsequent to March 31, 2021, the original terms and financial covenants under the 2019 Credit Agreement will resume in effect. The Second Amendment requires us to maintain certain minimum cash requirement and certain financial metrics at the end of each fiscal quarter through March 31, 2021. Under the terms of the Second Amendment, we are not permitted to exceed $55.0 million in our outstanding balance under the 2019 Revolving Facility, the applicable margin for Eurodollar rate will be 4.5% and we are restricted from pursuing certain activities such as incurring additional debt, stock repurchases, making acquisitions or declaring a dividend, until we are in compliance with the original covenants of the 2019 Credit Agreement. We expect to be in compliance with the original terms of the 2019 Credit Agreement prior to June 30, 2021.

We have already experienced an adverse effect on our revenues and results of operations due to the coronavirus outbreak. The full extent to which the COVID-19 outbreak impacts our results and cash flows will depend on future developments, which are highly uncertain and cannot be predicted at this time, including new information which may emerge concerning the severity of the coronavirus and the actions taken to contain the virus or treat its impact, among others. Complications from the COVID-19 outbreak could have a material adverse effect on the results of our operations, financial position, and cash flows particularly if such complications have an extended duration. See also Part II, Item 1A – Risk Factors.

Key Components of Cash Flows and Liquidity

A summary of the sources and uses of cash is as follows (in thousands):

|  | Three Months Ended |
|  | September 30, 2020 |  |  | September 30, 2019 |
Net cash provided by (used in) operating activities |  | $ | 24,745 |  |  | $ | (202 | )
Net cash used in investing activities |  |  | (3,023 | ) |  |  | (209,194 | )
Net cash (used in) provided by financing activities |  |  | (22,772 | ) |  |  | 171,387 |
Foreign currency effect on cash |  |  | 294 |  |  |  | (229 | )
Net decrease in cash and cash equivalents |  | $ | (756 | ) |  | $ | (38,238 | )

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Net Cash Provided by (Used in) Operating Activities

Cash flows provided by operations in the three months ended September 30, 2020, were $24.7 million, including our net loss of $8.8 million and non-cash expenses of $30.4 million for items such as amortization of intangibles, share-based compensation, depreciation, reduction in carrying amount of right-of-use assets, deferred income taxes and imputed interest. Other sources of cash for the period included a decrease in inventory and increases in accounts payable and deferred revenues. This was partially offset by decreases in accrued compensation, other current and long-term liabilities, and operating lease liabilities, and increases in accounts receivables and prepaid expenses and other current assets.

Cash flows used in operations in the three months ended September 30, 2019, were $0.2 million, including our net loss of $37.7 million and non-cash expenses of $34.1 million for items such as amortization of intangibles, amortization of right-of-use assets, share-based compensation, depreciation, restructuring, deferred income taxes and imputed interest. Other sources of cash for the current quarter included a decrease in accounts receivables and increases in deferred revenues. This was fully offset by decreases in accounts payable, accrued compensation, other current liabilities and operating lease liabilities, and increases in inventories.

Net Cash Used in Investing Activities

Cash flows used in investing activities in the three months ended September 30, 2020 were $3.0 million for the purchases of property and equipment.

Cash flows used in investing activities in the three months ended September 30, 2019 were $209.2 million, including $219.5 million for the acquisition of Aerohive (net of cash acquired), purchases of property and equipment of $5.2 million, which was partially offset by proceeds of $15.5 million related to the maturity of short-term investments.

Net Cash Provided by (Used in) Financing Activities

Cash flows used in financing activities in the three months ended September 30, 2020 were $22.8 million due primarily to debt repayments of $24.8 million, payment of contingent consideration of $0.6 million, and $1.0 million for deferred payments on acquisitions. This was partially offset by $3.6 million of proceeds from the issuance of shares of our common stock under our Employee Stock Purchase Plan (“ESPP”) and exercise of stock options, net of taxes paid on vested and released stock awards.

Cash flows provided by financing activities in the three months ended September 30, 2019 were $171.4 million due primarily to additional borrowings of $199.5 million under our 2019 Credit Agreement to partially fund our acquisition of Aerohive, $4.1 million of proceeds from the issuance of shares of our common stock under our ESPP, the exercise of stock options and net of taxes paid on vested and released stock awards. This was partially offset by debt repayments of $20.1 million, assumed from the Aerohive acquisition, payment of loan fees of $10.5 million, contingent consideration of $0.6 million, and $1.0 million for deferred payments on acquisitions.

Foreign Currency Effect on Cash

Foreign currency effect on cash increased in the three months ended September 30, 2020 and 2019, primarily due to changes in foreign currency exchange rates between the U.S. Dollar and particularly the Indian Rupee, the UK Pound, and the EURO.

Contractual Obligations

The following summarizes our contractual obligations as of September 30, 2020, and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands):

|  | Payments due by Period |
|  | Total |  |  | Less than 1 Year |  |  | 1-3 years |  |  | 3-5 years |  |  | More than 5 years |
Contractual obligations: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Debt obligations |  | $ | 396,000 |  |  | $ | 54,000 |  |  | $ | 66,500 |  |  | $ | 275,500 |  |  | $ | — |
Interest on debt obligations |  |  | 60,742 |  |  |  | 19,278 |  |  |  | 30,460 |  |  |  | 11,004 |  |  |  | — |
Unconditional purchase obligations |  |  | 33,895 |  |  |  | 33,895 |  |  |  | — |  |  |  | — |  |  |  | — |
Contractual commitments |  |  | 90,475 |  |  |  | 20,367 |  |  |  | 37,796 |  |  |  | 17,233 |  |  |  | 15,079 |
Lease payments on operating leases |  |  | 72,201 |  |  |  | 16,748 |  |  |  | 36,354 |  |  |  | 10,919 |  |  |  | 8,180 |
Deferred payments for an acquisition |  |  | 10,000 |  |  |  | 4,000 |  |  |  | 6,000 |  |  |  | — |  |  |  | — |
Contingent consideration for an acquisition |  |  | 1,576 |  |  |  | 1,120 |  |  |  | 456 |  |  |  | — |  |  |  | — |
Other liabilities |  |  | 899 |  |  |  | 129 |  |  |  | 538 |  |  |  | 232 |  |  |  | — |
Total contractual cash obligations |  | $ | 665,788 |  |  | $ | 149,537 |  |  | $ | 178,104 |  |  | $ | 314,888 |  |  | $ | 23,259 |

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The contractual obligations referenced above are more specifically defined as follows:

Debt obligations related to amounts owed under our 2019 Credit Agreement.

Unconditional purchase obligations represent the purchase of long lead-time component inventory that our contract manufacturers procure in accordance with our forecasts. We expect to honor the inventory purchase commitments within the next 12 months.

Contractual commitments to suppliers for future services.

Lease payments on operating leases represent base rents and operating expense obligations to landlords for facilities we occupy at various locations.

Deferred payments for the acquisition of the Data Center Business represent payments of $1.0 million per quarter.

Contingent consideration for an acquisition of a capital financing business in December 2017 from Broadcom, at the estimated fair value. Actual payments could be different.

Other liabilities include our commitments towards debt related fees and specific arrangements other than inventory.

The amounts in the table above exclude immaterial income tax liabilities related to uncertain tax positions as we are unable to reasonably estimate the timing of settlement.

We did not have any material commitments for capital expenditures as of September 30, 2020.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of September 30, 2020.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity

Our exposure to market risk for changes in interest rates relates primarily to debt and foreign currencies.

Debt

At certain points in time, we are exposed to the impact of interest rate fluctuations, primarily in the form of variable rate borrowings from the 2019 Credit Agreement, which is described in Note 8, Debt, of the notes to the condensed consolidated financial statements in this quarterly report on Form 10-Q. At September 30, 2020, we had $396.0 million of debt outstanding, all of which was from the 2019 Credit Agreement. During the quarter ended September 30, 2020, the average daily outstanding amount was $420.5 million with a high of $420.8 million and a low of $396.0 million.

The following table presents hypothetical changes in interest expense for the quarter ended September 30, 2020, on borrowings under the 2019 Credit Agreement as of September 30, 2020, that are sensitive to changes in interest rates (in thousands):

Change in interest expense given a decrease in interest rate of X bps* |  |  | Average outstanding debt |  |  | Change in interest expense given an increase in interest rate of X bps |
(100 bps) |  |  | (50 bps) |  |  | As of September 30, 2020 |  |  | 100 bps |  |  | 50 bps |
$ | (4,205 | ) |  | $ | (2,012 | ) |  | $ | 420,481 |  |  | $ | 4,205 |  |  | $ | 2,102 |

* | Underlying interest rate was 4.85% as of September 30, 2020.

Cash Flow Hedges of Interest Rate Risk

In conjunction with our term loan under the 2019 Credit Agreement, we entered into interest rate swap contracts with large financial institutions. This involves the receipt of variable rate amounts from these institutions in exchange for us making fixed-rate payments without exchange of the underlying notional amount of $200.0 million of our debt. The derivative instruments hedge the impact of the changes in variable interest rates. We record the changes in the fair value of these cash flow hedges of interest rate risk in accumulated other comprehensive income (loss) until termination of the derivative agreements.

Exchange Rate Sensitivity

A majority of our sales and expenses are denominated in United States Dollars. While we conduct some sales transactions and incur certain operating expenses in foreign currencies and expect to continue to do so, we do not anticipate that foreign exchange gains or losses will be significant, in part because of our foreign exchange risk management process discussed below.

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Foreign Exchange Forward Contracts

We record all derivatives on the balance sheet at fair value. Changes in the fair value of derivatives are recognized in earnings as Other (expense) income, net. From time to time, we enter into foreign exchange forward contracts to mitigate the effect of gains and losses generated by the foreign currency forecast 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. Changes in the fair value of these foreign exchange forward contracts are offset largely by re-measurement of the underlying assets and liabilities. As of September 30, 2020, foreign exchange forward contracts had a notional principal amount of $7.5 million and as of the three months ended September 30, 2020 there were gains of less than $0.1 million. These contracts have maturities of less than 30 days. Changes in the fair value of these foreign exchange forward contracts are offset largely by re-measurement of the underlying assets and liabilities. At September 30, 2019, we did not have any forward foreign currency contracts outstanding.

Foreign currency transaction gains and losses from operations was a loss of $1.2 million and a gain of $0.6 million for the three months ended September 30, 2020 and 2019, respectively.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, such as this Report, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and to reasonably assure that such information is accumulated and communicated to our management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), as appropriate to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our CEO and CFO, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Report. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Report.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a – 15(f) and 15d – 15(f) under the Securities Exchange Act of 1934, as amended) during the three months ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including the CEO and CFO, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Our controls and procedures are designed to provide reasonable assurance that our control system’s objective will be met, and our CEO and CFO have concluded that our disclosure controls and procedures are effective at the reasonable assurance level. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within Extreme Networks have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events. Projections of any evaluation of the effectiveness of controls in future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Notwithstanding these limitations, our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. Our CEO and CFO have concluded that our disclosure controls and procedures are, in fact, effective at the “reasonable assurance” level.

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PART II. Other Information

Item 1. Legal Proceedings

For information regarding litigation matters required by this item, refer to Part I, Item 3, Legal Proceedings of our Annual Report on Form 10-K for the fiscal year ended June 30, 2020, and Note 9 to the Notes to condensed consolidated financial statements, included in Part I, Item 1 of this Report which are incorporated herein by reference.

Item 1A. Risk Factors

Our operations and financial results are subject to various risks and uncertainties, including those described in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended June 30, 2020, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock. There have been no material changes to our risk factors since our Annual Report on Form 10-K for the year ended June 30, 2020.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - Not Applicable

Item 3. Defaults Upon Senior Securities - Not Applicable

Item 4. Mine Safety Disclosures - Not Applicable

Item 5. Other Information - Not Applicable

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Item 6. E xhibits

(a) | Exhibits:

|  |  |  | Incorporated by Reference |  |
Exhibit Number |  | Description of Document |  | Form |  | Filing Date |  | Number |  | Filed Herewith
31.1 |  | Section 302 Certification of Chief Executive Officer. |  |  |  |  |  |  |  | X
31.2 |  | Section 302 Certification of Chief Financial Officer. |  |  |  |  |  |  |  | X
32.1* |  | Section 906 Certification of Chief Executive Officer. |  |  |  |  |  |  |  | X
32.2* |  | Section 906 Certification of Chief Financial Officer. |  |  |  |  |  |  |  | X
101.INS |  | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |  |  |  |  |  |  |  | X
101.SCH |  | Inline XBRL Taxonomy Extension Schema Document. |  |  |  |  |  |  |  | X
101.CAL |  | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |  |  |  |  |  |  |  | X
101.DEF |  | Inline XBRL Taxonomy Extension Definition Linkbase Document. |  |  |  |  |  |  |  | X
101.LAB |  | Inline XBRL Taxonomy Extension Label Linkbase Document. |  |  |  |  |  |  |  | X
101.PRE |  | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |  |  |  |  |  |  |  | X
104 |  | Cover Page Interactive Data File (embedded within the Inline XBRL document). |  |  |  |  |  |  |  |

* | Furnished herewith. Exhibits 32.1 and 32.2 are being furnished and shall not be deemed to be “filed” for purposes of section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section, nor shall such exhibits be deemed to be incorporated by reference in any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as otherwise specifically stated in such filing.

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SIGNAT URES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EXTREME NETWORKS, INC. (Registrant)
/ S / REMI THOMAS
Remi Thomas
Executive Vice President, Chief Financial Officer (Principal Accounting Officer)

October 29, 2020

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