ShoreTel, Inc.
ShoreTel Inc (Form: 10-Q, Received: 02/09/2012 16:18:45)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark one)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended December 31, 2011
 
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 001-33506

SHORETEL, INC.
(Exact name of Registrant as specified in its charter)

 
Delaware
 
77-0443568
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
960 Stewart Drive, Sunnyvale, California
 
94085-3913
(Address of principal executive offices)
 
(Zip Code)
 
(408) 331-3300
(Registrant’s telephone number, including area code)

 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No    ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No    ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
¨
Accelerated filer
x
       
Non-accelerated filer
¨   (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes   ¨     No    x
 
As of January 25, 2012, 48,165,674 shares of the registrant’s common stock were outstanding.
 


 
 

 
 
SHORETEL, INC. AND SUBSIDIARIES
FORM 10-Q for the Quarter Ended December 31, 2011
IN DEX
 
   
Page
 
3
     
Item 1
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4
 
5
 
6
Item 2
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Item 3
27
Item 4
27
   
 
27
     
Item 1
27
Item 1A
27
Item 2
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Item 6
29
 
30
 
31
 
 
2

 
PA RT I. FINANCIAL INFORMATION
 
ITEM 1:
 
SHORETEL, INC. AND SUBSIDIARIES
 
(In thousands, except per share amounts)
(Unaudited)
 
   
December 31,
2011
   
June 30,
 2011
 
ASSETS
 
 
   
 
 
Current assets:
           
Cash and cash equivalents
  $ 94,491     $ 89,695  
Short-term investments
    21,359       16,057  
Accounts receivable, net of allowances of $707 as of December 31, 2011 and $737 as of June 30, 2011
    30,948       33,812  
Inventories
    22,602       19,062  
Prepaid expenses and other current assets
    4,598       3,540  
Total current assets
    173,998       162,166  
Property and equipment - net
    7,659       8,236  
Goodwill
    7,415       7,415  
Intangible assets
    7,828       8,570  
Other assets
    864       714  
Total assets
  $ 197,764     $ 187,101  
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 7,882     $ 6,394  
Accrued liabilities and other
    10,122       8,533  
Accrued employee compensation
    9,486       11,022  
Deferred revenue
    32,965       26,362  
Total current liabilities
    60,455       52,311  
                 
Long-term deferred revenue
    12,241       11,321  
Other long-term liabilities
    2,298       2,045  
Total liabilities
    74,994       65,677  
Commitments and contingencies (Note 12)
           
Stockholders' equity:
               
Preferred stock, par value $.001 per share, authorized 5,000 shares; none issued and outstanding
           
Common stock and additional paid-in capital, par value $.001 per share, authorized 500,000; shares issued and outstanding, 48,143 and 47,455 shares as of December 31, 2011 and June 30, 2011, respectively
    249,659       241,063  
Accumulated other comprehensive income (loss)
    (30 )     40  
Accumulated deficit
    (126,859 )     (119,679 )
Total stockholders’ equity
    122,770       121,424  
Total liabilities and stockholders’ equity
  $ 197,764     $ 187,101  
 
See Notes to Condensed Consolidated Financial Statements
 
 
3

 
SHORETEL, INC. AND SUBSIDIARIES
 
(In thousands, except per share amounts)
(Unaudited)
 
   
Three Months Ended
   
Six Months Ended
 
   
December 31,
   
December 31,
 
   
2011
   
2010
   
2011
   
2010
 
Revenue:
                       
Product
  $ 46,277     $ 37,913     $ 88,461     $ 73,139  
Support and services
    11,735       9,816       23,409       18,869  
Total revenue
    58,012       47,729       111,870       92,008  
Cost of revenue:
                               
Product  (1)
    16,103       12,847       30,558       24,614  
Support and services  (1)
    3,969       3,125       7,884       6,101  
Total cost of revenue
    20,072       15,972       38,442       30,715  
Gross profit
    37,940       31,757       73,428       61,293  
Operating expenses:
                               
Research and development  (1)
    12,240       10,512       24,053       20,834  
Sales and marketing  (1)
    21,596       18,314       42,818       35,517  
General and administrative  (1)
    6,349       6,608       12,978       12,741  
Total operating expenses
    40,185       35,434       79,849       69,092  
Loss from operations
    (2,245 )     (3,677 )     (6,421 )     (7,799 )
Other income (expense):
                               
Interest income
    36       133       78       341  
Other  income (expense), net
    (232 )     (106 )     (673 )     273  
Total other income (expense)
    (196 )     27       (595 )     614  
Loss before provision for tax
    (2,441 )     (3,650 )     (7,016 )     (7,185 )
Provision for income tax
    97       41       164       151  
Net loss
  $ (2,538 )   $ (3,691 )   $ (7,180 )   $ (7,336 )
Net loss per share - basic and diluted
  $ (0.05 )   $ (0.08 )   $ (0.15 )   $ (0.16 )
Shares used in computing net loss per share - basic and diluted
    47,946       45,900       47,666       45,672  
                                 
                                 
(1)   Includes stock-based compensation expense as follows:
                               
Cost of product revenue
  $ 33     $ 27     $ 74     $ 62  
Cost of support and services revenue
    209       161       408       361  
Research and development
    911       778       1,923       1,602  
Sales and marketing
    1,053       885       2,067       1,753  
General and administrative
    1,066       777       2,050       1,674  
Total stock-based compensation expense
  $ 3,272     $ 2,628     $ 6,522     $ 5,452  
 
See Notes to Condensed Consolidated Financial Statements
 
 
4

 
SHORETEL, INC. AND SUBSIDIARIES
 
(In thousands)
(Unaudited)
 
   
Six Months Ended
 
   
December 31,
 
   
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
  $ (7,180 )   $ (7,336 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation and amortization
    3,262       1,932  
Stock-based compensation expense
    6,522       5,452  
Amortization of premium on investments
    136       354  
Loss on disposal of property and equipment
    27       82  
Provision (benefit) for doubtful accounts receivable
    -       (98 )
Changes in assets and liabilities:
               
Accounts receivable
    2,864       126  
Inventories
    (3,540 )     (2,745 )
Prepaid expenses and other current assets
    (1,058 )     4,237  
Other assets
    (151 )     273  
Accounts payable
    1,476       459  
Accrued liabilities and other
    1,842       (1,299 )
Accrued employee compensation
    (1,536 )     (195 )
Deferred revenue
    7,523       2,972  
Net cash provided by operating activities
    10,187       4,214  
                 
CASH FLOWS FROM INVESTING ACTIVITES:
               
Purchases of property and equipment
    (1,408 )     (4,033 )
Purchases of investments
    (24,916 )     (3,136 )
Proceeds from sale/maturities of investments
    19,408       -  
Cost of acquisition of business
    -       (11,375 )
Purchases of patents and technology
    (550 )     (770 )
Net cash provided by (used in) investing activities
    (7,466 )     (19,314 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from issuance of common stock
    2,527       2,330  
Taxes paid on vested and released stock awards
    (452 )     (352 )
Net cash provided by (used in) financing activities
    2,075       1,978  
                 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    4,796       (13,122 )
CASH AND CASH EQUIVALENTS - Beginning of period
    89,695       68,426  
CASH AND CASH EQUIVALENTS - End of period
  $ 94,491     $ 55,304  
                 
SUPPLEMENTAL CASH FLOW DISCLOSURE:
               
Cash paid (refunds received) for taxes
  $ 183     $ (1,547 )
                 
NONCASH INVESTING AND FINANCING ACTIVITIES:
               
Unpaid portion of property and equipment purchases included in period-end accruals
  $ 203     $ 174  
 
See Notes to Condensed Consolidated Financial Statements
 
 
5

 
SHORETEL, INC. AND SUBSIDIARIES
 
(Unaudited)
 
1. Description of Business
 
ShoreTel, Inc. and its subsidiaries (referred herein as “the Company”) is a leading provider of Pure Internet Protocol, or IP, unified communications systems for enterprises. The Company’s systems are based on its distributed software architecture and switch-based hardware platform which enable multi-site enterprises to be served by a single telecommunications system. The Company’s systems enable a single point of management, easy installation and a high degree of scalability and reliability, and provide end users with a consistent, full suite of features across the enterprise, regardless of location. As a result, management believes that the Company’s systems enable enhanced end user productivity and provide lower total cost of ownership and higher customer satisfaction than alternative systems.
 
2. Basis of Presentation and Significant Accounting Policies
 
The accompanying condensed consolidated financial statements as of December 31, 2011 and for the three and six months ended December 31, 2011 and 2010 have been prepared by the Company, without audit, pursuant to 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 accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2011.
 
In the opinion of the management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of financial position as of December 31, 2011, results of operations for the three and six months ended December 31, 2011 and 2010, and cash flows for the six months ended December 31, 2011 and 2010, as applicable, have been made. The results of operations for the three and six months ended December 31, 2011 are not necessarily indicative of the operating results to be expected for the full fiscal year or any future periods.
 
Computation of Net Loss per Share
 
Basic net loss per share is determined by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is determined by dividing net loss by the weighted average number of common shares used in the basic loss per share calculation plus the number of common shares that would be issued assuming conversion of all potentially dilutive securities outstanding under the treasury stock method. Dilutive securities of ­­­­9.7 million and 9.8 million shares were not included in the computation of diluted net loss per share for the three and six months ended December 31, 2011 and 2010, respectively, because to do so would have been anti-dilutive.
 
Comprehensive Income (loss)
 
Other comprehensive income consists of net income (loss) for the period plus unrealized gains (losses) on short-term investments. Accordingly, comprehensive loss was $(2.5) million and $(3.6) million for the three months ended December 31, 2011 and 2010 and $(7.3) million and $(7.3) million for the six months ended December 31, 2011 and 2010, respectively.
 
Concentration of Credit Risk
 
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of accounts receivable, cash and cash equivalents and short-term investments. Ongoing credit evaluations of customers' financial condition are performed and the amount of credit is limited when deemed necessary. Accounts receivable from one value-added distributor accounted for 29% of total accounts receivable at December 31, 2011. At June 30, 2011, there were no individual customers constituting 10% or more of accounts receivable. The Company invests its cash and cash equivalents and short-term investments with high credit quality financial institutions. However, balances held with these institutions may exceed the amount of insurance provided on such balances.
 
3. Business Combination
 
Proposed Acquisition
 
On January 31, 2012, the Company entered into a Definitive Agreement (“agreement”) with M5 Networks, Inc. (“M5”), a privately-held company headquartered in New York and a provider of hosted unified communications solutions.  Under the terms of the agreement, the Company will acquire M5 for an aggregate purchase price of approximately $159.7 million, which includes $84.1million in cash and 9.5 million shares of ShoreTel common stock, and up to $13.7 million in additional contingent and deferred consideration upon the achievement of certain performance milestones within the twelve months ended December 31, 2012. The contingent payments are payable over the two years after closing and are based upon the achievement of certain performance milestones for the twelve months ended December 31, 2012.  In connection with the agreement, the Company is in the process of establishing a financing arrangement with a bank. The acquisition of M5 enables ShoreTel to expand its product and service offerings by providing a cloud based solution and enter a growing market segment consisting of customers that are looking to deploy unified communications through a hosted model. The Company expects that the proposed acquisition will close in the third quarter of its fiscal 2012, subject to certain closing conditions.
 
 
6

 
Agito Networks, Inc. Acquisition
 
On October 19, 2010, the Company acquired Agito Networks, Inc. (“Agito”), a leader in platform-agnostic enterprise mobility, for total cash consideration of $11.4 million. The acquisition of Agito expands and enhances the Company’s product offering by adding Agito’s mobility solution to the Company’s existing range of products, software and services. In accordance with ASC 805, Business Combinations , the total consideration paid for Agito was first allocated to the net tangible assets acquired based on the estimated fair values of the assets at the acquisition date.  The excess of the fair value of the consideration paid over the fair value of Agito’s net tangible and identifiable intangible assets acquired resulted in the recognition of goodwill of approximately $7.4 million, primarily related to expected synergies to be achieved in connection with the acquisition. The goodwill recognized is deductible for income tax purposes.
 
The table below shows the allocation of the purchase price to tangible and intangible assets and liabilities assumed (in thousands):
 
Tangible assets
  $ 261  
Goodwill
    7,415  
Intangible assets
    4,220  
Liabilities assumed
    (521 )
    $ 11,375  
 
The unaudited pro forma financial information in the table below summarizes the combined results of operations for the Company and Agito as though the companies were combined as of the beginning of fiscal year 2010. The pro forma financial information for the period presented also includes the business combination accounting effects resulting from the acquisition, including amortization charges from acquired intangible assets, adjustments to interest expenses for certain borrowings and exclusion of acquisition- related expenses and the related tax effects as though the companies were combined as of the beginning of fiscal year 2010. The pro forma financial information as presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal year 2010.
 
   
(Unaudited)
 
   
Three Months Ended
   
Six Months Ended
 
(in thousands, except per share amounts)
 
December 31, 2010
   
December 31, 2010
 
Total revenue
  $ 47,832     $ 92,451  
Net loss
    (4,106 )     (9,721 )
Basic and diluted earnings per share
    (0.09 )     (0.21 )
 
 
7

 
4. Balance Sheet Details
 
Balance sheet components consist of the following:
 
   
December 31,
2011
   
June 30,
2011
 
   
(Amounts in thousands)
 
Inventories:
           
Raw materials
  $ 350     $ 283  
Distributor inventory
    2,472       1,091  
Finished goods
    19,780       17,688  
Total inventories
  $ 22,602     $ 19,062  
                 
                 
Property and equipment:
               
Computer equipment and tooling
  $ 11,948     $ 10,868  
Software
    2,375       2,311  
Furniture and fixtures
    2,043       1,925  
Leasehold improvements & others
    2,629       2,568  
Total property and equipment
    18,995       17,672  
Less accumulated depreciation and amortization
    (11,336 )     (9,436 )
Property and equipment – net
  $ 7,659     $ 8,236  
                 
Deferred revenue:
               
Product
  $ 8,229     $ 3,195  
Support and services
    36,977       34,488  
Total deferred revenue
  $ 45,206     $ 37,683  
 
Intangible Assets:
 
The following is a summary of the Company’s intangible assets as of the following dates (in thousands):
 
   
December 31, 2011
   
June 30, 2011
 
   
Gross
Carrying
  ‎ Amount
   
Accumulated‎
Amortization
   
Net   Carrying
‎ Amount
   
Gross
  Carrying
‎ Amount
   
Accumulated‎
Amortization
   
Net   Carrying
‎ Amount
 
Patents
  $ 3,485     $ (1,330 )   $ 2,155     $ 2,935     $ (1,022 )   $ 1,913  
Technology
    6,248       (1,785 )     4,463       6,127       (861 )     5,266  
Customer relationships
    300       (90 )     210       300       (30 )     270  
Intangible assets in process
    1,000       -       1,000       1,121       -       1,121  
Intangible assets
  $ 11,033     $ (3,205 )   $ 7,828     $ 10,483     $ (1,913 )   $ 8,570  
 
The intangible assets are all amortizable and have original estimated useful lives of three to six years. Amortization of intangible assets for the three months ended December 31, 2011 and 2010 was $0.7 million and $0.4 million, respectively, and for the six months ended December 31, 2011 and 2010 was $1.3 million and $0.5 million, respectively.
 
The estimated amortization expenses for intangible assets for the next five years and thereafter are as follows (in thousands):
 
Years Ending June 30,
 
 
 
2012 (remaining six months)
  $ 1,329  
2013
    2,657  
2014
    2,151  
2015
    526  
2016
    129  
Thereafter
    36  
Total
  $ 6,828  
 
 
8

 
Short-Term Investments:
 
The following tables summarize the Company’s short-term investments (in thousands):
 
   
Amortized
Cost
   
Gross Unrealized
Gains
   
Gross Unrealized
Losses
   
Fair Value
 
As of December 31, 2011
                       
Corporate notes and commercial paper
  $ 7,389     $ 1     $ (27 )   $ 7,363  
U.S. Government agency securities
    14,000       -       (4 )     13,996  
Total short-term investments
  $ 21,389     $ 1     $ (31 )   $ 21,359  
                                 
As of June 30, 2011
                               
Corporate notes and commercial paper
  $ 6,105     $ 24     $ -     $ 6,129  
U.S. Government agency securities
    9,912       16       -       9,928  
Total short-term investments
  $ 16,017     $ 40     $ -     $ 16,057  
 
The following table summarizes the maturities of the Company’s fixed income securities (in thousands):
 
   
Amortized
 Cost
   
Fair Value
 
As of December 31, 2011
           
Less than 1 year
  $ 21,033     $ 21,003  
Due in 1 to 3 years
    356       356  
Total
  $ 21,389     $ 21,359  
                 
   
Amortized
 Cost
   
Fair Value
 
As of June 30, 2011
               
Less than 1 year
  $ 16,017     $ 16,057  
Due in 1 to 3 years
    -       -  
Total
  $ 16,017     $ 16,057  
 
Actual maturities may differ from the contractual maturities because borrowers may have the right to call or prepay certain obligations.
 
5. Fair Value Disclosure
 
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal market (or most advantageous market, in the absence of a principal market) for the asset or liability in an orderly transaction between market participants at the measurement date. Further, entities are required to maximize the use of observable inputs and minimize the use of unobservable inputs in measuring fair value, and to utilize a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:
 
 
Level 1 — Quoted prices in active markets for identical assets or liabilities.
 
 
Level 2 — Observable inputs other than quoted prices included within Level 1, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs other than quoted prices that are observable or are derived principally from, or corroborated by, observable market data by correlation or other means.
 
 
Level 3 — Unobservable inputs that are supported by little or no market activity, are significant to the fair value of the assets or liabilities, and reflect our own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

 
9

 
The tables below set forth the Company’s cash equivalents and short-term investments measured at fair value on a recurring basis (in thousands):
 
   
December 31, 2011
 
   
Fair Value
   
Level 1
   
Level 2
   
Level 3
 
Assets:
                       
Cash and cash equivalents:
                       
Money market funds
  $ 67,209     $ 67,209     $ -     $ -  
Short-term investments:
                               
Corporate notes and commercial paper
    7,363       -       7,363       -  
U.S. Government agency securities
    13,996       -       13,996       -  
Total financial instruments measured and recorded at fair value
  $ 88,568     $ 67,209     $ 21,359     $ -  

The above table excludes $27.3 million of cash balances on deposit at banks
 
   
June 30, 2011
 
   
Fair Value
   
Level 1
   
Level 2
   
Level 3
 
Assets:
                       
Cash and cash equivalents:
                       
Money market funds
  $ 72,445     $ 72,445     $ -     $ -  
Short-term investments:
                               
Corporate notes and commercial paper
    6,129       -       6,129       -  
U.S. Government agency securities
    9,928       -       9,928       -  
Total financial instruments measured and recorded at fair value
  $ 88,502     $ 72,445     $ 16,057     $ -  

The above table excludes $17.3 million of cash balances on deposit at banks.
 
Money market funds are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets. Short-term investments are classified within Level 2 of the fair value hierarchy because they are valued based on other observable inputs, including broker or dealer quotations, or alternative pricing sources. When quoted prices in active markets for identical assets or liabilities are not available, the Company relies on non-binding quotes from independent pricing services. Non-binding quotes are based on proprietary valuation models prepared by independent pricing services. These models use algorithms based on inputs such as observable market data, quoted market prices for similar instruments, historical pricing trends of a security as relative to its peers, internal assumptions of the independent pricing service and statistically supported models. The Company corroborates the reasonableness of non-binding quotes received from the independent pricing service by comparing them to the a) actual experience gained from the purchases and redemption of investment securities, b) quotes received on similar securities obtained when purchasing securities and c) monitoring changes in ratings of similar securities and the related impact on the fair value. The types of instruments valued based on other observable inputs include corporate notes and commercial paper and U.S. Government agency securities. The Company reviewed financial and non-financial assets and liabilities and concluded that there were no material impairment charges during the six months ended December 31, 2011 and 2010, respectively.
 
6. Income Taxes
 
The Company recorded an income tax expense of $97,000 and $41,000 for the three months ended December 31, 2011 and 2010, respectively and $0.2 million for both, the three and six months ended December 31, 2011 and 2010, respectively.
 
The income tax provision of $0.2 million for the six months ended December 31, 2011 represents the income tax provisions for profitable jurisdictions based upon income earned during this period and tax provisions for certain states that are determined on a basis other than income earned.  No tax benefit was accrued for jurisdictions where we anticipate incurring a loss during the full fiscal year.
 
The Company maintains liabilities for uncertain tax positions. As of December 31, 2011 and June 30, 2011, the Company’s total amount of unrecognized tax benefits were $3.1 million. Of the total $3.1 million of unrecognized tax benefit as of December 31, 2011, only $0.1 million, if recognized would impact the effective tax rate.
 
While management believes that the Company has adequately provided for all tax positions, amounts asserted by tax authorities could be greater or less than the Company’s current position. Accordingly, the Company’s provisions on federal, state and foreign tax related matters to be recorded in the future may change as revised estimates are made or the underlying matters are settled or otherwise resolved. The Company does not expect its unrecognized tax benefits to change materially over the next 12 months.
 
 
10

 
The Company’s primary tax jurisdiction is in the United States. For federal and state tax purposes, the tax years 2000 through 2011 remain open and subject to tax examination by the appropriate federal or state taxing authorities.
 
  7. Common Stock
 
 Common Shares Reserved for Issuance
 
At December 31, 2011, the Company has reserved shares of common stock for issuance as follows (in thousands):
 
Reserved under stock option plans
    13,284  
Reserved under employee stock purchase plan
    164  
Total
    13,448  
 
  8. Stock-Based Compensation
 
The Company estimated the grant date fair value of stock option awards and Employee Stock Purchase Plan (ESPP) rights using the Black-Scholes option valuation model with the following assumptions:
 
   
Three Months Ended
December 31,
   
Six Months Ended
December 31,
 
    2011     2010     2011     2010  
                                 
Expected life from grant date of option (in years)
    6.08       6.08       6.08       6.16  
Expected life from grant date of ESPP (in years)
    0.50       0.50       0.50       0.50  
Risk free interest rate for option
    0.95 %     1.44 %     1.14 %     1.49 %
Risk free interest rate for ESPP
    0.05 - 0.07 %     0.19-0.20 %     0.05 - 0.07 %     0.19-0.20 %
Expected volatility  for option
    66 %     57 %     65 %     57 %
Expected volatility  for ESPP
    52 -74 %     46-51 %     52 -74 %     46-51 %
Expected dividend yield
    0 %     0 %     0 %     0 %
 
During the three months ended December 31, 2011 and 2010, the Company recorded non-cash stock-based compensation expense of $3.3 million and $2.6 million, respectively. During the six months ended December 31, 2011 and 2010, the Company recorded non-cash stock-based compensation expense of $6.5 million and $5.5 million, respectively.
 
Compensation expense is recognized only for the portion of stock options that are expected to vest, assuming an expected forfeiture rate in determining stock-based compensation expense, which could affect the stock-based compensation expense recorded if there is a significant difference between actual and estimated forfeiture rates. As of December 31, 2011, total unrecognized compensation cost related to stock-based awards granted to employees and non-employee directors was $17.5 million. This cost will be amortized on a ratable basis over a weighted-average vesting period of approximately 2.5 years.
 
9. Stock Option Plan
 
In January 1997, the Board of Directors and stockholders adopted the 1997 stock option plan (the “1997 Plan”) which, as amended, provided for granting incentive stock options (“ISOs”) and nonqualified stock options (“NSOs”) for shares of common stock to employees, directors, and consultants of the Company. This plan was terminated in January 2007 for new issuances.
 
 
11

 
In February 2007, the Company adopted the 2007 Equity Incentive Plan (the “2007 Plan”) which, as amended, provides for grants of ISOs, NSOs, restricted stock units (“RSUs”) and restricted stock awards (“RSAs”) to employees, directors and consultants of the Company. Options granted generally vest ratably over four years from the date of grant. The 2007 Plan provides that the options shall be exercisable over a period not to exceed ten years. Five million shares of common stock were initially reserved for future issuance in the form of stock options, restricted stock awards or units, stock appreciation rights and stock bonuses. In February of each fiscal year, pursuant to the automatic increase provisions of the 2007 Plan, the Company’s board of directors increased the number of shares authorized and reserved for issuance under the 2007 Plan by 2.4 million shares in January 2012 and 2.3 million shares in February 2011.
 
Transactions under the 1997 and 2007 option plans are summarized as follows (in thousands, except per share data and contractual term):
 
             
Options Outstanding
 
     
Shares
 Available for
Grant
     
Shares
 Subject to
 Options
Outstanding
     
Weighted-
Average
 Exercise
Price
   
Weighted-
Average
Remaining
Contractual
 Term
(in years)
     
Weighted-
Average
Intrinsic
 Value
 
Balance at July 1, 2011
    4,475       7,931     $ 5.45              
Options expired
    (1 )     -       -              
Options granted (weighted average fair value $4.67 per share)
    (774 )     774       7.90              
Options exercised
    -       (163 )     4.19              
Options cancelled/forfeited
    234       (234 )     4.16              
Restricted stock units granted (see Note 11)
    (501 )     -       -              
Restricted stock units cancelled/forfeited
    135       -       -              
Balance at December 31, 2011
    3,568       8,308     $ 5.70       6.61     $ 11,138  
Vested and expected to vest at December 31, 2011
            7,840     $ 5.61       6.46     $ 10,907  
Options exercisable at December 31, 2011
            4,362     $ 4.86       5.37     $ 8,255  
 
The total pre-tax intrinsic value for options exercised in the three months ended December 31, 2011 and 2010 was $0.1 million and $0.7 million, respectively, and for the six months ended December 31, 2011 and 2010 was $0.4 million and $1.1 million, respectively, representing the difference between the fair values of the Company’s common stock underlying these options at the dates of exercise and the exercise prices paid.
 
10. Employee Stock Purchase Plan
 
On September 18, 2007, the Board of Directors approved the commencement of offering periods under a previously-approved employee stock purchase plan (the “ESPP”). The ESPP allows eligible employees to purchase shares of Company stock at a discount through payroll deductions. The ESPP consists of six-month offering periods commencing on May 1 st and November 1 st , each year. Under the ESPP, employees purchased shares of the Company's common stock at 90% of the market value at either the beginning of the offering period or the end of the offering period, whichever price is lower. The ESPP was amended in November 2010 to permit employees to purchase shares of the Company’s common stock at 85% of market value at either the beginning of the offering period or the end of the offering period, whichever price is lower, effective for the offering period commencing on and after May 1, 2011 .
 
In January 2012 and February 2011, pursuant to the automatic increase provisions of the ESPP, the Company’s Board of Directors approved increases to the number of shares authorized and reserved for issuance under the ESPP by 481,433 and 469,980 shares, respectively .
 
As of December 31, 2011, 164,168 shares are reserved for future issuance.
 
11. Restricted Stock
 
Under the 2007 Plan, the Company issued restricted stock awards to non-employee directors electing to receive them in lieu of an annual cash retainer during the six months ended December 31, 2011 which vest immediately upon issuance.
 
In addition, restricted stock units can be issued under the 2007 Plan to eligible employees, and generally vest 25% at one year or 50% at two years from the date of grant and 25% annually thereafter.
 
 
12

 
Restricted stock award and restricted stock unit activity for the six months ended December 31, 2011 and 2010 is as follows (in thousands):
 
   
Six Months Ended
 
   
December 31,
 
   
2011
   
2010
 
Beginning units outstanding
    1,196       809  
Awarded
    501       767  
Released
    (221 )     (213 )
Forfeited
    (69 )     (177 )
Ending units outstanding
    1,407       1,186  

Information regarding restricted stock units outstanding at December 31, 2011 is summarized below:
 
   
Number of Shares
 (thousands)
 
Weighted Average
Remaining
Contractual Lives
 
Average Intrinsic
Value (thousands)
 
Shares outstanding
    1,407  
1.59 years
  $ 8,980  
Shares vested and expected to vest
    1,170  
1.55 years
    7,467  
 
  12. Litigation, Commitments and Contingencies
 
Litigation — At December 31, 2011, the Company is involved in litigations relating to claims arising out of the ordinary course of business or otherwise. Any litigation, regardless of outcome, is costly and time-consuming, can divert the attention of management and key personnel from business operations and deter distributors from selling the Company’s products and dissuade potential customers from purchasing the Company’s products. The Company defends itself vigorously against any such claims. Based on the information currently available, management believes that there are no claims or actions pending or threatened against us whose ultimate resolution will have a material adverse effect on our financial position, liquidity or results of operations, although the results of litigation are inherently uncertain. During the three months ended December 31, 2011, the Company settled one of the claims against it by entering into a patent license and a settlement agreement for $0.5 million. The settlement amount is included in general and administrative expenses during the quarter.
 
Leases — The Company leases its facilities under noncancelable operating leases which expire at various times through 2018. The leases provide for the lessee to pay all cost of utilities, insurance, and taxes. Future minimum lease payments under the noncancelable leases as of December 31, 2011, are as follows (in thousands):
 
Years Ending June 30,
 
 
 
2012 (remaining six months)
  $ 1,060  
2013
    2,425  
2014
    2,334  
2015
    1,537  
2016
    1,293  
Therafter
    1,860  
Total
  $ 10,509  
 
Lease obligations for the Company’s foreign offices are denominated in foreign currencies, which were converted in the above table to U.S. dollars at the interbank exchange rate on December 31, 2011.
 
Rent expense for the three months ended December 31, 2011 and 2010 was $0.5 million and $0.5 million, respectively and for the six months ended December 31, 2011 and 2010 was $1.0 million and $0.9 million, respectively.
 
Purchase commitments —The Company had purchase commitments with contract manufacturers for inventory and with technology firms for usage of software licenses totaling approximately $19.6 million as of December 31, 2011 and $19.9 million as of June 30, 2011.
 
Indemnification — Under the indemnification provisions of the Company’s customer agreements, the Company agrees to indemnify and defend its customers against infringement of any patent, trademark, or copyright of any country or the misappropriation of any trade secret, arising from the customers’ legal use of the Company’s services. The exposure to the Company under these indemnification provisions is generally limited to the total amount paid by the customers under pertinent agreements. However, certain indemnification provisions potentially expose the Company to losses in excess of the aggregate amount received from the customer. To date, there have been no claims against the Company or its customers pertaining to such indemnification provisions and no amounts have been recorded.
 
 
13

 
The Company also has entered into customary indemnification agreements with each of its officers and directors.
 
13. Segment Information
 
The Company is organized as, and operates in, one reportable segment: the development and sale of IP voice communication systems. The Company’s chief operating decision-maker is its Chief Executive Officer. The Company’s Chief Executive Officer reviews financial information presented on a consolidated basis for purposes of evaluating financial performance and allocating resources, accompanied by information about revenue by geographic regions. The Company’s assets are primarily located in the United States of America and not allocated to any specific region and it does not measure the performance of its geographic regions based upon asset-based metrics. Therefore, geographic information is presented only for revenue. Revenue by geographic region is based on the ship to address on the customer order.
 
The following presents total revenue by geographic region (in thousands):
 
   
Three Months Ended
   
Six Months Ended
 
   
December 31,
   
December 31,
 
   
2011
   
2010
   
2011
   
2010
 
United States of America
  $ 50,858     $ 42,113     $ 97,988     $ 81,620  
International
    7,154       5,616       13,882       10,388  
Total
  $ 58,012     $ 47,729     $ 111,870     $ 92,008  
 
Revenue from one value-added distributor accounted for approximately 25% and 20% of the total revenue during the three and six months ended December 31, 2011, respectively. No one reseller or end customer accounted for more than 10% of the total revenue during the three and six months ended December 31, 2010.
 
The following is a summary of long-lived assets, excluding financial instruments, deferred tax assets, other assets, goodwill and intangible assets (in thousands):
 
   
December 31,
   
June 30,
 
   
2011
   
2011
 
United States of America
  $ 6,781     $ 7,725  
International
    878       511  
Total
  $ 7,659     $ 8,236  
 
14. Derivative Instruments and Hedging Activities
 
In the normal course of business, the Company is exposed to fluctuations in interest rates and the exchange rates associated with foreign currencies. During the three months ended December 31, 2011, the Company used derivative instruments to reduce the volatility of earnings associated with changes in foreign currency exchange rates. The Company used foreign exchange forward contracts to mitigate the gains and losses generated from the re-measurement of certain foreign monetary assets and liabilities, primarily including cash balances, third party accounts receivable and intercompany transactions recorded on the balance sheet. These derivatives are not designated and do not qualify as hedge instruments. Accordingly, changes in the fair value of these instruments are recognized in earnings during the period of change. The change in the fair value recorded during the three and six months ended December 31, 2011 was not material. These derivatives have maturities of approximately one month.
 
The following table presents the gross notional value of all our foreign exchange forward contracts outstanding as of December 31, 2011 and June 30, 2011 (in thousands):
 
   
December 31, 2011
   
June 30, 2011
 
   
Local
 Currency
Amount
   
Notional
Contract
 Amount
 (USD)
   
Local
Currency
 Amount
   
Notional
 Contract
Amount
(USD)
 
Australian dollar
    1,900     $ 1,938       -     $ -  
British pound
    2,600       4,031       -       -  
Euro
    660       852       -       -  
Total
          $ 6,821             $ -  
 
 
14

 
ITEM 2.             MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this document. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section entitled “Risk Factors.”
 
Overview
 
We are a leading provider of IP telecommunications solutions for enterprises. Our solution is comprised of our ShoreGear switches, ShorePhone IP phones and ShoreWare software applications. We were founded in September 1996 and shipped our first system in 1998. We have continued to develop and enhance our product line since that time. Our acquisition of Agito Networks, Inc. (“Agito”), a leader in platform-agnostic enterprise mobility, in the second quarter of fiscal 2011, expands our existing mobile solution with the vision of allowing users to communicate on any device, such as a desk phone, mobile phone, or computer, at any location using any cellular or Wi-Fi network  simply and cost effectively.
 
We sell our products using single-tier or two-tier distribution channel to enterprises across all industries, including small, medium and large companies and public institutions. Our single-tier distribution channel consists of resellers that usually sell our products to end customers. Resellers usually do not stock our products and do not have rights of return. Our two-tier distribution channel consists of value-added distributors that stock and sell our products to other resellers or to end customers. The value-added distributors have limited rights of return. We refer to our resellers and value-added distributors collectively as “channel partners”.
 
We believe our channel strategy allows us to reach a larger number of prospective enterprise customers more effectively than if we were to sell directly. As of December 31, 2011, we worked with over 1,000 channel partners to sell our products. Our internal sales and marketing personnel support these channel partners in their selling efforts. In some circumstances, the enterprise customer will purchase products directly from us, but in these situations we typically compensate the channel partner for its sales efforts. At the request of the channel partner, we will ship our products directly to the enterprise customer.
 
Most channel partners generally perform installation and implementation services for the enterprises that use our systems. In most cases, our channel partners provide the post-contractual support to the enterprise customer by providing first-level support services and purchasing additional services from us under a post-contractual support contract. For channel partners without support capabilities or that do not desire to provide support, we offer full support contracts to provide all of the support to enterprise customers. Our channel partners may provide managed services offerings to the enterprise customer under which the channel partner may purchase our products and services and, in turn, charge the enterprise customer a monthly subscription fee to access those products and services. In addition, we have begun to engage some of our channel partners to purchase our products and services from us under a monthly managed services model.
 
We outsource the manufacturing of our products to contract manufacturers. Our outsourced manufacturing model allows us to scale our business without the significant capital investment and on-going expenses required to establish and maintain a manufacturing operation. Our phone and switch products are manufactured by contract manufacturers located in Austin, Texas and in China. Our contract manufacturers provide us with a range of operational and manufacturing services, including component procurement, final testing and assembly of our products. We work closely with our contract manufacturers to manage the cost of components, since our total manufacturing costs are directly tied to component costs. We regularly provide forecasts to our contract manufacturers, and we order products from our contract manufacturers based on our projected sales levels well in advance of receiving actual orders from our enterprise customers. We seek to maintain sufficient levels of finished goods inventory to meet our forecasted product sales with limited levels of inventory to compensate for unanticipated shifts in sales volume and product mix.
 
Although we have historically sold our systems primarily to small and medium sized enterprises, we have expanded our sales and marketing activities to increase our focus on larger enterprise customers. Accordingly, we have a major accounts program whereby our sales personnel assist our channel partners to sell to large enterprise accounts, and we coordinate with our channel partners to enable them to better serve large multi-site enterprises. To the extent we are successful in penetrating larger enterprise customers; we expect that the sales cycle for our products will increase, and that the demands on our sales and support infrastructure will also increase.
 
 
15

 
We are headquartered in Sunnyvale, California and have sales, customer support, general and administrative and engineering functions in Austin, Texas. The majority of our personnel work at these locations. Sales, engineering, and support personnel are located throughout the United States and, to a lesser extent, in the United Kingdom, Germany, Belgium, Spain, Hong Kong, Singapore, Mexico, Australia, Canada and India. Most of our enterprise customers are located in the United States. Revenue from international sales was 12% and 12% of our total revenue for the three months ended December 31, 2011 and 2010, respectively and was 12% and 11% of our total revenue for the six months ended December 31, 2011 and 2010, respectively. Although we intend to focus on increasing international sales and expect those revenues to grow faster than the overall company revenue, we expect that sales to enterprise customers in the United States will continue to comprise the significant majority of our sales.
 
Key Business Metrics
 
We monitor a number of key metrics to help forecast growth, establish budgets, measure the effectiveness of sales and marketing efforts and measure operational effectiveness.
 
Initial and repeat sales orders. Our goal is to attract a significant number of new enterprise customers and to encourage existing enterprise customers to purchase additional products and support. Many enterprise customers make an initial purchase and deploy additional sites at a later date, and also buy additional products and support as their businesses expand. As our installed enterprise customer base has grown we have experienced an increase in revenue attributable to existing enterprise customers, which currently represents a significant portion of our total revenue.
 
Deferred revenue . Deferred revenue relates to the timing of revenue recognition for specific transactions based on service, support, specific commitments, product and services delivered to our value-added distributors that have not sold through to resellers, and other factors. Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from the Company’s transactions described above and are recognized as the revenue recognition criteria are met. Nearly all system sales include the purchase of post-contractual support contracts with terms of up to five years, and the rate of renewal on these contracts have been high historically. We recognize support revenue on a ratable basis over the term of the support contract. Since we receive payment for support in advance of our recognizing the related revenue, we carry a deferred revenue balance on our consolidated balance sheet. This deferred revenue helps provide predictability to our future support and services revenue. Accordingly, the level of purchases of post-contractual support with our product sales is an important metric for us along with the renewal rates for these services. Our deferred revenue balance at December 31, 2011 was $45.2 million, consisting of $8.2 million of deferred product revenue and $37.0 million of deferred support and services revenues, of which $33.0 million is expected to be recognized within one year.
 
Gross margin. Our gross margin for products is primarily affected by our ability to reduce hardware costs faster than the decline in average overall system prices and our channels sales mix as we expand our two-tier distribution channel in the domestic market. Since sales channeled through our distributors typically have a lower margin than sales made directly to our resellers, we have experienced a decline in our gross margins as the two-tier channel grows. We continue to work on introducing new lower cost hardware which will help improve our product gross margin. In general, product gross margin on our switches is greater than product gross margin on our IP phones. We consider our ability to monitor and manage these factors to be a key aspect of maintaining product gross margin and increasing our profitability.
 
Gross margin for support and services is impacted primarily by the growth in revenue, personnel costs and labor related expenses. The primary goal of our support and services function is to ensure maximum customer satisfaction and our investments in support personnel and infrastructure are made with this goal in mind. We expect that as our installed enterprise customer base grows, we will be able to maintain our gross margin for support and services. However, the timing of additional investments in our support and services infrastructure could materially affect our cost of support and services revenue, both in absolute dollars and as a percentage of support and services revenue and total revenue, in any particular period.
 
Operating expenses. Our operating expenses are comprised primarily of compensation and benefits for our employees and, therefore, the increase in operating expenses has been primarily related to increases in our headcount. We intend to expand our workforce to support our anticipated growth, and therefore our ability to forecast and increase revenue is critical to managing our operating expenses and profitability.
 
Basis of Presentation
 
Revenue. We derive our revenue from sales of our IP telecommunications systems and related support and services. Our typical system includes a combination of IP phones, switches and software applications. Prices to a given channel partner for hardware and software products depend on that channel partner’s volume and certain certifications, as well as our own strategic considerations.
 
Support and services revenue primarily consists of post-contractual support, and to a lesser extent revenue from training services, professional services and installations that we perform. Post-contractual support includes software updates which grant rights to unspecified software license upgrades and maintenance releases issued during the support period. Post-contractual support also includes both Internet-and phone-based technical support. Post-contractual support revenue is recognized ratably over the contractual service period.
 
 
16

 
Cost of revenue. Cost of product revenue consists primarily of hardware costs, royalties and license fees for third-party software included in our systems, salary and related overhead costs of operations personnel, freight, warranty costs and provision for excess inventory. The majority of these costs vary with the unit volumes of product sold. Cost of support and services revenue consists of salary and related costs of personnel engaged in support and services.
 
Research and development expenses . Research and development expenses primarily include personnel costs, outside engineering costs, professional services, prototype costs, test equipment, software usage fees and facilities expenses. Research and development expenses are recognized when incurred. We are devoting substantial resources to the development of additional functionality for existing products and the development of new products and related software applications.
 
Sales and marketing expenses. Sales and marketing expenses primarily include personnel costs, sales commissions, travel, marketing promotional and lead generation programs, our annual partner conference, advertising, trade shows, demonstration equipment, professional services fees and facilities expenses. We plan to continue to invest in development of our distribution channel by increasing the size of our field sales force to enable us to expand into new geographies and further increase our sales to large enterprise customers.  We plan to continue investing in our domestic and international marketing activities to help build brand awareness and create sales leads for our channel partners.  We expect that sales and marketing expenses will increase in absolute dollars and remain our largest operating expense category.
 
General and administrative expenses. General and administrative expenses relate to our executive, finance, human resources, legal and information technology organizations. Expenses primarily include personnel costs, professional fees for legal, accounting, tax, compliance and information systems, travel, allowance for doubtful accounts, recruiting expense, software amortization costs, depreciation expense and facilities expenses. As we expand our business, we expect to increase our general and administrative expenses.
 
Other income (expense). Other income (expense) primarily consists of interest earned on cash, cash equivalents and short-term investments, gains and losses on foreign currency translations and transactions, as well as other miscellaneous items affecting our operating results.
 
Provision for income tax. Provision for   income tax includes federal, state and foreign tax on our taxable income. Since our inception, we accumulated substantial net operating loss and tax credit carryforwards. We account for income taxes under an asset and liability approach. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax reporting purposes, net operating loss carry-forwards and other tax credits measured by applying currently enacted tax laws. Valuation allowances are provided when necessary to reduce deferred tax assets to an amount that is more likely than not to be realized.
 
Critical Accounting Policies and Estimates
 
The preparation of our financial statements and related disclosures in conformity with generally accepted accounting principles in the United States of America, or GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are based on historical experience and various other factors that we believe are reasonable under the circumstances. We consider our accounting policies related to revenue recognition, stock-based compensation and accounting for income taxes to be critical accounting policies. A number of significant estimates, assumptions, and judgments are inherent in our determination of when to recognize revenue, how to estimate the best evidence of selling price for revenue recognition and the calculation of stock-based compensation expense. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates. Management believes there have been no significant changes during the six months ended December 31, 2011 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission. For a description of those accounting policies, please refer to our 2011 Annual Report on Form 10-K.
 
 
17

 
Results of Operations
 
The following table sets forth unaudited selected condensed consolidated statements of operations data for three and six months ended December 31, 2011 and 2010 (Amounts in thousands, except per share amounts).

   
Three Months Ended
   
Six Months Ended
 
   
December 31,
   
December 31,
 
   
2011
   
2010
   
2011
   
2010
 
Revenue:
                       
Product
  $ 46,277     $ 37,913     $ 88,461     $ 73,139  
Support and services
    11,735       9,816       23,409       18,869  
Total revenue
    58,012       47,729       111,870       92,008  
Cost of revenue:
                               
Product  (1)
    16,103       12,847       30,558       24,614  
Support and services  (1)
    3,969       3,125       7,884       6,101  
Total cost of revenue
    20,072       15,972       38,442       30,715  
Gross profit
    37,940       31,757       73,428       61,293  
Gross profit %
    65.4 %     66.5 %     65.6 %     66.6 %
                                 
Operating expenses:
                               
Research and development  (1)
    12,240       10,512       24,053       20,834  
Sales and marketing  (1)
    21,596       18,314       42,818       35,517  
General and administrative  (1)
    6,349       6,608       12,978       12,741  
Total operating expenses
    40,185       35,434       79,849       69,092  
Loss from operations
    (2,245 )     (3,677 )     (6,421 )     (7,799 )
Other  income (expense), net
    (196 )     27       (595 )     614  
Loss before provision for tax
    (2,441 )     (3,650 )     (7,016 )     (7,185 )
Provision for income tax
    97       41       164       151  
Net loss
  $ (2,538 )   $ (3,691 )   $ (7,180 )   $ (7,336 )
Net loss per share - basic and diluted  (2)
  $ (0.05 )   $ (0.08 )   $ (0.15 )   $ (0.16 )
Shares used in computing net loss per share - basic and diluted  (2)
    47,946       45,900       47,666       45,672  
                                 
                                 
(1)   Includes stock-based compensation expense as follows:
                               
Cost of product revenue
  $ 33     $ 27     $ 74     $ 62  
Cost of support and services revenue
    209       161       408       361  
Research and development
    911       778       1,923       1,602  
Sales and marketing
    1,053       885       2,067       1,753  
General and administrative
    1,066       777       2,050       1,674  
Total stock-based compensation expense
  $ 3,272     $ 2,628     $ 6,522     $ 5,452  

(2)  Potentially dilutive securities were not included in the compilation of diluited net loss per share for the periods which had a net loss because to do so would have been anti-dilutive.
 
 
18

 
The following table sets forth selected condensed consolidated statements of operations data as a percentage of total revenue for each of the periods indicated.
 
   
Three Months Ended
   
Six Months Ended
 
   
December 31,
   
December 31,
 
   
2011
   
2010
   
2011
   
2010
 
Revenue:
                       
Product
    80 %     79 %     79 %     79 %
Support and services
    20 %     21 %     21 %     21 %
Total revenue
    100 %     100 %     100 %     100 %
Cost of revenue:
                               
Product
    28 %     27 %     27 %     27 %
Support and services
    7 %     6 %     7 %     6 %
Total cost of revenue
    35 %     33 %     34 %     33 %
Gross profit
    65 %     67 %     66 %     67 %
Operating expenses:
                               
Research and development
    21 %     22 %     22 %     23 %
Sales and marketing
    37 %     39 %     38 %     39 %
General and administrative
    11 %     14 %     12 %     14 %
Total operating expenses
    69 %     75 %     72 %     76 %
Loss from operations
    (4 %)     (8 %)     (6 %)     (9 %)
Other income (expense), net
    -       -       -       1 %
Loss before provision for income tax
    (4 %)     (8 %)     (6 %)     (8 %)
Provision for income tax
    -       -       -       -  
Net loss
    (4 %)     (8 %)     (6 %)     (8 %)
 
Use of Non-GAAP Financial Measures
 
We believe that evaluating our ongoing operating results may limit the reader’s understanding if limited to reviewing only generally accepted accounting principles (GAAP) financial measures. Many investors and analysts have requested that, in addition to reporting financial information in accordance with GAAP we also disclose certain non-GAAP information because it is useful in understanding our performance as it excludes non-cash and other special charges or credits that many investors and management feel may obscure our true operating performance. Likewise, we use these non-GAAP financial measures to manage and assess the profitability of the business and determine a portion of our employee compensation. We do not consider stock-based compensation expenses, amortization of acquisition-related intangibles, litigation settlement, severance paid to former Chief Executive Officer and related tax adjustments in managing our core operations. These measures are not based on any standardized methodology prescribed by GAAP and are not necessarily comparable to similar measures presented by other companies. Non-GAAP net loss excludes stock-based compensation expense, amortization of acquisition-related intangible assets, litigation settlement, severance paid to former Chief Executive Officer and their related tax effect. Non-GAAP net loss per share is calculated by dividing Non-GAAP net loss by the weighted average number of diluted shares outstanding for the period. These measures should not be considered in isolation or as a substitute for measures prepared in accordance with GAAP, and because these amounts are not determined in accordance with GAAP, they should not be used exclusively in evaluating our business and operations. We have provided a reconciliation of non-GAAP financial measures in the table below.
 
 
19

 
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
(Amounts in thousands, except per share amounts)
(Unaudited)
 
   
Three Months Ended
   
Six Months Ended
 
   
December 31, 2011
   
December 31, 2011
 
   
GAAP
   
Excludes
 
 
 
Non-GAAP
   
GAAP
   
Excludes
 
 
 
Non-GAAP
 
Revenue:
 
 
   
 
 
 
 
 
   
 
   
 
 
 
 
 
 
Product
  $ 46,277     $ -       $ 46,277     $ 88,461     $ -       $ 88,461  
Support and services
    11,735       -         11,735       23,409       -         23,409  
Total revenues
    58,012       -         58,012       111,870       -         111,870  
Cost of revenue
                                                   
Product
    16,103       (218 )
 (a),(b)
    15,885       30,558       (444 )
 (a),(b)
    30,114  
Support and services
    3,969       (209 )
 (a)
    3,760       7,884       (408 )
 (a)
    7,476  
Total cost of revenue
    20,072       (427 )       19,645       38,442       (852 )       37,590  
Gross profit
    37,940       427         38,367       73,428       852         74,280  
Gross profit %
    65.4 %               66.1 %     65.6 %               66.4 %
Operating expenses:
                                                   
Research and development
    12,240       (911 )
 (a)
    11,329       24,053       (1,923 )
 (a)
    22,130  
Sales and marketing
    21,596       (1,083 )
 (a),(b)
    20,513       42,818       (2,127 )
 (a),(b)
    40,691  
General and administrative
    6,349       (1,566 )
 (a),(c)
    4,783       12,978       (2,550 )
 (a),(c)
    10,428  
Total operating expenses
    40,185       (3,560 )       36,625       79,849       (6,600 )       73,249  
Income (Loss) from operations
    (2,245 )     3,987         1,742       (6,421 )     7,452         1,031  
Other income (expense), net
    (196 )     -         (196 )     (595 )     -         (595 )
Income (Loss) before provision for income tax
    (2,441 )     3,987         1,546       (7,016 )     7,452         436  
Provision for income tax
    97       12  
 (d)
    109       164       12  
 (d)
    176  
Net income (loss)
  $ (2,538 )   $ 3,975       $ 1,437     $ (7,180 )   $ 7,440       $ 260  
Net income (loss) per share:
                                                   
Basic
  $ (0.05 )   $ 0.08       $ 0.03     $ (0.15 )   $ 0.16       $ 0.01  
Diluted
  $ (0.05 )   $ 0.08       $ 0.03     $ (0.15 )   $ 0.16       $ 0.01  
Shares used in computing net loss per share:
                                                   
Basic
    47,946                 47,946       47,666                 47,666  
Diluted
    47,946                 49,228       47,666                 49,202  
                                                     
(a)    Excludes stock-based compensation as follows:
                                     
Cost of product revenue
          $ 33                       $ 74            
Cost of support and services revenue
            209                         408            
Research and development
            911                         1,923            
Sales and marketing
            1,053                         2,067            
General and administrative
            1,066