ShoreTel, Inc.
ShoreTel Inc (Form: 10-Q, Received: 05/08/2015 15:09:20)

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 March 31, 2015
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      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      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.

Large accelerated filer ☐
Accelerated filer ☒
   
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 Exchange Act).    Yes      No  
 
As of April 24, 2015, 64,554,917 shares of the registrant’s common stock were outstanding.
 

 

SHORETEL, INC. AND SUBSIDIARIES
 
FORM 10-Q for the Quarter Ended March 31, 2015
 
INDEX

   
Page
PART I: Financial Information
 
     
Item 1
3
 
3
 
4
 
5
 
6
 
7
Item 2
19
Item 3
30
Item 4
30
   
PART II: Other Information
 
     
Item 1
31
Item 1A
31
Item 2
31
Item 3
31
Item 4
31
Item 5
31
Item 6
31
 
32
 
33
 
2

PART I. FINANCIAL INFORMATION
 
ITEM 1:
FINANCIAL STATEMENTS
 
SHORETEL, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)

   
March 31,
2015
   
June 30,
2014
 
ASSETS
 
   
 
Current assets:
       
Cash and cash equivalents
 
$
76,243
   
$
53,472
 
Short-term investments
   
8,141
     
2,673
 
Accounts receivable, net of allowances of $588 as of March 31, 2015 and $636 as of June 30, 2014
   
22,657
     
33,758
 
Inventories
   
16,887
     
26,501
 
Indemnification asset
   
-
     
5,606
 
Prepaid expenses and other current assets
   
13,460
     
7,991
 
Total current assets
   
137,388
     
130,001
 
Property and equipment, net
   
20,107
     
19,601
 
Goodwill
   
122,750
     
122,750
 
Intangible assets, net
   
23,518
     
28,479
 
Other assets
   
3,003
     
3,119
 
Total assets
 
$
306,766
   
$
303,950
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
 
$
13,414
   
$
16,975
 
Accrued liabilities and other
   
18,322
     
13,399
 
Accrued employee compensation
   
14,896
     
16,527
 
Accrued taxes and surcharges
   
9,603
     
12,186
 
Deferred revenue
   
48,782
     
46,937
 
Total current liabilities
   
105,017
     
106,024
 
                 
Long-term deferred revenue
   
17,557
     
17,539
 
Other long-term liabilities
   
3,472
     
2,994
 
Total liabilities
   
126,046
     
126,557
 
Commitments and contingencies (Note 12)
               
Stockholders' equity:
               
Preferred stock, par value $.001 per share, authorized 5,000 shares; no shares issued and outstanding
   
-
     
-
 
Common stock and additional paid-in capital, par value $.001 per share, authorized 500,000; issued and outstanding, 64,473 and 62,824 shares as of March 31, 2015 and June 30, 2014, respectively
   
356,948
     
344,546
 
Accumulated other comprehensive income (loss)
   
(4
)
   
1
 
Accumulated deficit
   
(176,224
)
   
(167,154
)
Total stockholders’ equity
   
180,720
     
177,393
 
Total liabilities and stockholders’ equity
$
306,766
   
$
303,950
 
 
See Notes to Condensed Consolidated Financial Statements
 
SHORETEL, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

   
Three Months Ended
March 31,
   
Nine Months Ended
March 31,
 
   
2015
   
2014
   
2015
   
2014
 
Revenue:
               
Product
 
$
39,461
   
$
43,410
   
$
134,081
   
$
137,649
 
Hosted and related services
   
27,220
     
22,617
     
77,874
     
65,075
 
Support and services
   
18,321
     
16,374
     
54,345
     
48,449
 
Total revenue
   
85,002
     
82,401
     
266,300
     
251,173
 
Cost of revenue:
                               
Product
   
15,646
     
15,817
     
48,038
     
48,454
 
Hosted and related services
   
14,873
     
14,357
     
46,129
     
40,968
 
Support and services
   
4,534
     
4,137
     
13,116
     
12,626
 
Total cost of revenue
   
35,053
     
34,311
     
107,283
     
102,048
 
Gross profit
   
49,949
     
48,090
     
159,017
     
149,125
 
Operating expenses:
                               
Research and development
   
13,557
     
11,480
     
40,490
     
37,041
 
Sales and marketing
   
29,249
     
27,960
     
87,566
     
82,981
 
General and administrative
   
9,328
     
9,479
     
29,881
     
30,506
 
Settlements and defense fees
   
53
     
-
     
8,475
     
-
 
Total operating expenses
   
52,187
     
48,919
     
166,412
     
150,528
 
Loss from operations
   
(2,238
)
   
(829
)
   
(7,395
)
   
(1,403
)
Other income (expense):
                               
Interest expense
   
(130
)
   
(94
)
   
(390
)
   
(586
)
Interest income and other (expense), net
   
(262
)
   
(29
)
   
(818
)
   
(503
)
Total other expense
   
(392
)
   
(123
)
   
(1,208
)
   
(1,089
)
Loss before provision for (benefit from) income tax
   
(2,630
)
   
(952
)
   
(8,603
)
   
(2,492
)
Provision for (benefit from) income tax
   
(36
)
   
252
     
467
     
687
 
Net loss
 
$
(2,594
)
 
$
(1,204
)
 
$
(9,070
)
 
$
(3,179
)
Net loss per share - basic and diluted
 
$
(0.04
)
 
$
(0.02
)
 
$
(0.14
)
 
$
(0.05
)
Shares used in computing net loss per share - basic and diluted
   
64,297
     
61,749
     
63,660
     
60,693
 

See Notes to Condensed Consolidated Financial Statements
 
SHORETEL, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
 
   
Three Months Ended
March 31,
   
Nine Months Ended
March 31,
 
   
2015
   
2014
   
2015
   
2014
 
         
Net loss
 
$
(2,594
)
 
$
(1,204
)
 
$
(9,070
)
 
$
(3,179
)
Other comprehensive income (loss), net of tax:
                               
Unrealized gains (loss) on short-term investments
   
3
     
(2
)
   
(5
)
   
4
 
Other comprehensive income (loss)
   
3
     
(2
)
   
(5
)
   
4
 
                                 
Comprehensive loss
 
$
(2,591
)
 
$
(1,206
)
 
$
(9,075
)
 
$
(3,175
)

See Notes to Condensed Consolidated Financial Statements
 
SHORETEL, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
   
Nine Months Ended
March 31,
 
   
2015
   
2014
 
CASH FLOWS FROM OPERATING ACTIVITIES:
       
Net loss
 
$
(9,070
)
 
$
(3,179
)
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation and amortization
   
14,338
     
13,629
 
Stock-based compensation expense
   
6,310
     
5,926
 
Amortization of premium on investments
   
86
     
96
 
Loss on disposal of property and equipment
   
12
     
278
 
Provision for doubtful accounts receivable
   
75
     
175
 
Change in fair value of purchase consideration
   
-
     
111
 
Impairment of indemnification asset
   
3,584
     
-
 
Fair value of escrow settlement modification
   
664
     
-
 
Changes in assets and liabilities:
               
Accounts receivable
   
11,026
     
5,348
 
Inventories
   
9,479
     
(4,981
)
Indemnification asset
   
2,022
     
825
 
Prepaid expenses and other current assets
   
(5,469
)
   
(1,786
)
Other assets
   
116
     
456
 
Accounts payable
   
(2,576
)
   
6,359
 
Accrued liabilities and other
   
6,439
     
(2,514
)
Accrued employee compensation
   
(1,631
)
   
538
 
Accrued taxes and surcharges
   
(2,583
)
   
(375
)
Purchase consideration
   
-
     
(320
)
Deferred revenue
   
1,863
     
6,958
 
Net cash provided by operating activities
   
34,685
     
27,544
 
                 
CASH FLOWS FROM INVESTING ACTIVITES:
               
Purchases of property and equipment
   
(9,393
)
   
(8,925
)
Purchases of investments
   
(9,566
)
   
(562
)
Proceeds from sales/maturities of investments
   
4,007
     
4,290
 
Purchases of patents, technology and internally developed software
   
(1,405
)
   
-
 
Net cash used in investing activities
   
(16,357
)
   
(5,197
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from issuance of common stock
   
6,431
     
14,247
 
Taxes paid on vested and released stock awards
   
(1,003
)
   
(616
)
Debt issuance costs
   
(611
)
   
-
 
Payments made under line of credit
   
-
     
(25,000
)
Payments made under capital leases
   
(374
)
   
(1,122
)
Payments of contingent consideration related to prior business combination
   
-
     
(3,368
)
Net cash provided by (used in) financing activities
   
4,443
     
(15,859
)
                 
NET INCREASE IN CASH AND CASH EQUIVALENTS
   
22,771
     
6,488
 
CASH AND CASH EQUIVALENTS - Beginning of period
   
53,472
     
43,775
 
CASH AND CASH EQUIVALENTS - End of period
 
$
76,243
   
$
50,263
 
                 
SUPPLEMENTAL CASH FLOW DISCLOSURE:
               
Cash paid for interest
 
$
226
   
$
424
 
Cash paid for taxes
 
$
656
   
$
610
 
                 
NONCASH INVESTING AND FINANCING ACTIVITIES:
               
                 
Property, plant and equipment acquired on capital lease
 
$
-
   
$
123
 
Unpaid portion of property and equipment purchases included in period-end accruals
 
$
61
   
$
590
 
 
  See Notes to Condensed Consolidated Financial Statements
 
SHORETEL, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.
Description of Business

ShoreTel, Inc. was incorporated in California on September 17, 1996 and reincorporated in Delaware on June 22, 2007. ShoreTel, Inc. and its subsidiaries (referred to herein as “the Company”) is a leading provider of brilliantly simple business communication solutions, comprised of integrated voice, video, data and mobile applications based on Internet Protocol (“IP”) technologies. The Company focuses on the small and medium sized businesses (less than 5,000 users), with a Unified Communications (“UC”) platform so that they can communicate anytime, anyplace, and through any device that they chose. The Company’s strategy is to provide customers with a flexible choice of deployment options: either operating its ShoreTel solution in their own premise-based data centers, subscribing to its cloud-based ShoreTel Sky communication services or a hybrid combination of both offerings.

2.
Basis of Presentation and Significant Accounting Policies

The accompanying condensed consolidated financial statements as of March 31, 2015, and for the three and nine months ended March 31, 2015 and 2014 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, 2014. In the opinion of management, all adjustments (primarily consisting of normal recurring adjustments) considered necessary for a fair statement have been included.

The condensed consolidated balance sheet as of June 30, 2014 has been derived from the audited consolidated financial statements as of that date but does not include all of the information and footnotes included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2014. The results of operations for the three and nine months ended March 31, 2015 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 2.4 million weighted shares and 2.1 million weighted shares were not included in the computation of diluted net loss per share for the three and nine months ended March 31, 2015, respectively because such securities were anti-dilutive. Dilutive securities of 1.3 million weighted shares and 2.9 million weighted shares were not included in the computation of diluted net loss per share for the three and nine months ended March 31, 2014, respectively, because such securities were anti-dilutive.

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash, cash equivalents, short-term investments and accounts receivable. As of March 31, 2015, all of the Company’s cash, cash equivalents and short-term investments were managed by several financial institutions. Accounts receivable are typically unsecured and are derived from revenue earned from customers. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses. Accounts receivable from one value-added distributor accounted for 25% of total accounts receivable at March 31, 2015. At June 30, 2014 the same value-added distributor accounted for 31% of the total accounts receivable .

Significant Accounting Policies

The Company’s significant accounting policies are included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2014.
 
Recent Accounting Pronouncements

Recent Accounting Standards or Updates Not Yet Effective

In May 2014, the FASB issued ASU No. 2014-9 Revenue from Contracts with Customers (Topic 606) - an accounting standard that supersedes the revenue recognition requirements in Topic 605, Revenue Recognition .  The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. New disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. This accounting guidance is effective for the Company in financial reporting periods beginning after December 15, 2016; early adoption is not permitted. The ASU may be applied retrospectively (a) to each reporting period presented or (b) with the cumulative effect in retained earnings at the beginning of the adoption period. The Company is currently evaluating the method of adoption and the impact that the adoption of this accounting guidance may have on its Consolidated Financial Statements.
 
3.
Balance Sheet Details
 
Balance Sheet Components Consist of the Following:
 
   
March 31,
2015
   
June 30,
2014
 
   
(Amounts in thousands)
 
Inventories:
       
Raw materials
 
$
94
   
$
120
 
Distributor inventory
   
1,132
     
1,535
 
Finished goods
   
15,661
     
24,846
 
Total inventories
 
$
16,887
   
$
26,501
 
                 
Property and equipment:
               
Computer equipment and tooling
 
$
38,969
   
$
33,286
 
Software
   
5,072
     
4,077
 
Furniture and fixtures
   
3,416
     
3,331
 
Leasehold improvements and others
   
7,931
     
6,554
 
Total property and equipment
   
55,388
     
47,248
 
Less accumulated depreciation and amortization
   
(35,281
)
   
(27,647
)
Property and equipment, net
 
$
20,107
   
$
19,601
 
                 
Deferred revenue:
               
Product
 
$
3,658
   
$
6,281
 
Support and services
   
56,564
     
53,290
 
Hosted and related services
   
6,117
     
4,905
 
Total deferred revenue
 
$
66,339
   
$
64,476
 

Depreciation expense for the three months ended March 31, 2015 and 2014 was $2.7 million and $2.3 million, respectively. Depreciation expense for the nine months ended March 31, 2015 and 2014 was $7.9 million and $6.0 million, respectively.

Intangible Assets:
 
Intangible assets consist of the following (in thousands):

 
 
March 31, 2015
   
June 30, 2014
 
 
 
Gross
Carrying
Amount
   
Accumulated‎
Amortization
   
Net
Carrying‎
Amount
   
Gross
Carrying
Amount
   
Accumulated‎
Amortization
   
Net
Carrying‎
Amount
 
Patents
 
$
3,970
   
$
(3,541
)
 
$
429
   
$
3,970
   
$
(3,185
)
 
$
785
 
Technology
   
26,644
     
(17,873
)
   
8,771
     
26,644
     
(14,486
)
   
12,158
 
Customer relationships
   
23,300
     
(10,228
)
   
13,072
     
23,300
     
(7,764
)
   
15,536
 
Intangible assets in process and other
   
1,246
     
-
     
1,246
     
-
     
-
     
-
 
Intangible assets
 
$
55,160
   
$
(31,642
)
 
$
23,518
   
$
53,914
   
$
(25,435
)
 
$
28,479
 

The intangible assets that are amortizable have estimated useful lives of two to eight years.
 
Research and development costs are expensed as incurred. In accordance with ASC 985-20, Costs of Computer Software to be Sold, Leased, or Marketed , development costs of computer software to be sold, leased, or otherwise marketed are subject to capitalization beginning when a product’s technological feasibility has been established and ending when a product is available for general release to customers. In most instances, the Company’s products are released soon after technological feasibility has been established; therefore, costs incurred subsequent to achievement of technological feasibility are usually not significant. However, during the three and nine months ended March 31, 2015, the Company capitalized $0.3 million and $1.2 million, respectively, of such software related to ongoing development of a product that has yet to be released to the market. The Company did not capitalize any software development costs for the three and nine months ended March 31, 2014. Such costs will be amortized using the straight-line method over the estimated economic life of the product. The Company will evaluate the realizability of the assets and the related periods of amortization on a regular basis. Judgment is required in determining when technological feasibility of a product is established as well as its economic life.
 
Amortization of intangible assets for the three months ended March 31, 2015 and 2014 was $1.9 million and $2.5 million, respectively. Amortization of intangible assets for the nine months ended March 31, 2015 and 2014 was $6.2 million and $7.5 million, respectively.
 
The estimated amortization expenses for intangible assets, excluding intangible assets in process and other that are not yet placed into service, as of March 31, 2015 for the next five years and thereafter are as follows (in thousands):

Years Ending June 30,
 
2015 (remaining 3 months)
   
1,914
 
2016
   
7,436
 
2017
   
5,946
 
2018
   
3,951
 
2019
   
2,815
 
Thereafter
   
210
 
Total
 
$
22,272
 

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 March 31, 2015
               
Corporate notes and commercial paper
 
$
8,145
   
$
1
   
$
(5
)
 
$
8,141
 
Total short-term investments
 
$
8,145
   
$
1
   
$
(5
)
 
$
8,141
 
                                 
As of June 30, 2014
                               
Corporate notes and commercial paper
 
$
2,672
   
$
1
   
$
-
   
$
2,673
 
Total short-term investments
 
$
2,672
   
$
1
   
$
-
   
$
2,673
 
 
The following table summarizes the maturities of the Company’s fixed income securities (in thousands):
 
 
 
Amortized
Cost
 
 
Fair
Value
 
As of March 31, 2015
   
Less than 1 year
 
$
7,794
   
$
7,790
 
Due in 1 to 3 years
   
351
     
351
 
Total
 
$
8,145
   
$
8,141
 
                 
 
 
Amortized
Cost
 
 
Fair
Value
 
As of June 30, 2014
               
Less than 1 year
 
$
2,672
   
$
2,673
 
Total
 
$
2,672
   
$
2,673
 

Actual maturities may differ from the contractual maturities because borrowers may have the right to call or prepay certain obligations.

4.
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 the Company’s 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.
 
The tables below set forth the Company’s financial instruments and liabilities measured at fair value on a recurring basis (in thousands):
 
 
March 31, 2015
 
 
Fair Value
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
Assets:
       
Cash and cash equivalents:
       
Money market funds
 
$
3,885
   
$
3,885
   
$
-
   
$
-
 
Short-term investments:
                               
Corporate notes and commercial paper
   
8,141
     
-
     
8,141
     
-
 
Total assets measured and recorded at fair value
 
$
12,026
   
$
3,885
   
$
8,141
   
$
-
 
 
The above table excludes $72.4 million of cash balances on deposit at banks.
 
   
June 30, 2014
 
   
Fair Value
   
Level 1
   
Level 2
   
Level 3
 
Assets:
               
Cash and cash equivalents:
               
Money market funds
 
$
11,011
   
$
11,011
   
$
-
   
$
-
 
Short-term investments:
                               
Corporate notes and commercial paper
   
2,673
     
-
     
2,673
     
-
 
Total assets measured and recorded at fair value
 
$
13,684
   
$
11,011
   
$
2,673
   
$
-
 
 
The above table excludes $42.5 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 other-than-temporary impairment charges during the three and nine months ended March 31, 2015 and 2014, respectively.   The Company reviews the fair value hierarchy on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels of certain securities within the fair value hierarchy. The Company recognizes transfers into and out of levels within the fair value hierarchy as of the date in which the actual event or change in circumstances that caused the transfer occurs. There were no transfers between Level 1 and Level 2 of the fair value hierarchy for any of the periods presented.

Assets and Liabilities That Are Measured at Fair Value on a Nonrecurring Basis

Non-financial assets such as goodwill, intangible assets, and property, plant, and equipment are evaluated for impairment and adjusted to fair value using Level 3 inputs, only when impairment is recognized. Fair values are considered Level 3 when management makes significant assumptions in developing a discounted cash flow model based upon a number of considerations including projections of revenues, earnings and a discount rate. In addition, in evaluating the fair value of goodwill impairment, further corroboration is obtained using the Company’s market capitalization. There were no indicators of impairment in the three and nine months ended March 31, 2015 that required a nonrecurring fair value analysis to be performed on non-financial assets.

5.
Line of Credit

On October 22, 2014 the Company entered into an Amended and Restated Credit Agreement (“New Credit Facility”). This New Credit Facility replaces the Company’s previous credit facility. The New Credit Facility includes a revolving loan facility for an aggregate principal amount not exceeding $100.0 million. The New Credit Facility matures on the fifth anniversary of its closing (October 22, 2019) and is payable in full upon maturity. The amounts borrowed and repaid under the New Credit Facility are available for future borrowings.  The borrowings under the New Credit Facility accrue interest (at the election of the Company) either at (i) the London interbank offered rate then in effect, plus a margin of between 1.50% and 2.25%, which is based on the Company’s consolidated EBITDA (as defined in the New Credit Facility), or (ii) the higher of (a) the bank’s publicly-announced prime rate then in effect and (b) the federal funds rate plus 0.50%, in each case of (a) or (b), plus a margin of between 0.00% and 0.50%, which will be based upon the Company’s consolidated EBITDA. The Company also pays annual commitment fees during the term of the New Credit Facility which varies depending on the Company’s consolidated EBITDA. The New Credit Facility is secured by substantially all of the Company’s assets. The amounts borrowed are recorded as long-term debt, net of the financing costs, in the Company’s consolidated financial statements. As of March 31, 2015, the Company had $94.0 million available for borrowing under the New Credit Facility.

The New Credit Facility contains customary affirmative and negative covenants, including compliance with financial ratios and metrics. The New Credit Facility and the related amendment requires the Company to maintain a minimum ratio of liquidity to its indebtedness (each as defined in the New Credit Facility) and varying amounts of Liquidity and Consolidated EBITDA specified in the New Credit Facility throughout the term of the agreement. The Company was in compliance with all such covenants as of March 31, 2015.
 
As of March 31, 2015, no amounts were outstanding under the New Credit Facility. The Company amortizes deferred financing costs to interest expense on a straight-line basis over the term of the New Credit Facility.

6.
Income Taxes

The Company recorded an income tax benefit of $36,000 and an income tax provision of $0.3 million for the three months ended March 31, 2015 and 2014, respectively and $0.5 million and $0.7 million for the nine months ended March 31, 2015 and 2014, respectively.

The tax benefit of $36,000 and tax provision of $0.5 million determined for the three months and nine months ended March 31, 2015 respectively, and the tax provisions of $0.3 million and $0.7 million for the three and nine months ended March 31, 2014, respectively, are primarily comprised of United States federal alternative minimum tax, state taxes and foreign income taxes. No income tax benefit was accrued for jurisdictions where the Company anticipates incurring a loss during the full fiscal year as the related deferred tax assets were fully offset by a valuation allowance.  The Company’s resulting effective tax rate differs from the applicable statutory rate primarily due to the valuation allowance against its deferred tax assets in select jurisdictions.

The Company maintains liabilities for uncertain tax positions. As of March 31, 2015 and June 30, 2014, the Company’s total amount of unrecognized tax benefits was $4.8 million and $4.2 million, respectively. Of the total of $4.8 million of unrecognized tax benefit as of March 31, 2015, none, if recognized, would impact the effective tax rate. The Company does not expect its unrecognized tax benefits to change materially over the next 12 months.

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 for federal, state and foreign tax related matters to be recorded in the future may change as revised estimates are made or as the underlying matters are settled or otherwise resolved.

The Company’s primary tax jurisdiction is in the United States. For federal and state tax purposes, the years 2002 through 2014 remain open and subject to tax examination by the appropriate federal or state taxing authorities.   The Tax Increase Prevention Act of 2014 (“Act”) was signed into law on December 19, 2014.  The Act contains a number of provisions including, most notably, an extension of the United States federal research tax credit through December 31, 2014.  The Act did not have a material impact on our effective tax rate for fiscal 2015 due to the effect of the valuation allowance on the Company's deferred tax assets.

7.
Common Stock

Common Shares Reserved for Issuance

At March 31, 2015, the Company has reserved shares of common stock for issuance as follows (in thousands):
 
Reserved under stock option plans
   
19,473
 
Reserved under employee stock purchase plan
   
1,063
 
Total
   
20,536
 
 
8.
Stock-Based Compensation

The following table shows total non-cash stock-based compensation expense included in the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended March 31, 2015 and 2014 (in thousands):

 
 
Three Months Ended
March 31,
   
Nine Months Ended
March 31,
 
 
 
2015
   
2014
   
2015
   
2014
 
Cost of product revenue
 
$
12
   
$
14
   
$
61
   
$
59
 
Cost of hosted and related services revenue
   
285
     
195
     
921
     
427
 
Cost of support and services revenue
   
96
     
112
     
394
     
485
 
Research and development
   
381
     
416
     
1,500
     
1,382
 
Sales and marketing
   
530
     
579
     
1,826
     
1,633
 
General and administrative
   
421
     
413
     
1,608
     
1,940
 
 
 
$
1,725
   
$
1,729
   
$
6,310
   
$
5,926
 

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
March 31,
 
Nine Months Ended
March 31,
   
2015
 
2014
 
2015
 
2014
Expected life from grant date of option (in years)
 
5.04
  
5.04
  
5.04 - 5.09
  
5.04 - 5.44
Expected life from grant date of ESPP (in years)
 
0.50
 
0.50
 
0.50
 
0.50
Risk free interest rate for options
 
1.45%
 
1.59%
 
1.45 - 1.70%
 
1.44 - 1.59%
Risk free interest rate for ESPP
 
0.09%
 
0.09%
 
0.06 - 0.09%
 
0.07 - 0.09%
Expected volatility  for options
 
50%
 
54%
 
50%
 
54 - 66%
Expected volatility  for ESPP
 
43%
 
48%
 
43%
 
42 - 48%
Expected dividend yield
 
0%
 
0%
 
0%
 
0%
 
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 March 31, 2015, total unrecognized compensation cost related to stock-based options and awards granted to employees and non-employee directors was $6.0 million. This cost will be amortized on a ratable basis over a weighted-average vesting period of approximately 2.6 years.
 
9.
Stock Option Plan

Transactions under the 1997 and 2007 option plans are summarized as follows (in thousands, except per share data and contractual term):

   
Options Outstanding
 
   
Shares
Subject to
Options
Outstanding
   
Weighted-
Average
Exercise
Price
   
Weighted-
Average
Remaining
Contractual
Term
(in years)
   
Aggregate
Intrinsic
Value
 
Balance at July 1, 2014
   
6,324
   
$
5.37
         
Options granted (weighted average fair value $3.02 per share)
   
1,391
     
6.69
         
Options exercised
   
(940
)
   
4.57
         
Options cancelled/forfeited
   
(157
)
   
5.81
         
Balance at March 31, 2015
   
6,618
   
$
5.75
     
6.25
   
$
9,285
 
Vested and expected to vest at March 31, 2015
   
5,597
   
$
5.72
     
5.83
   
$
8,269
 
Options exercisable at March 31, 2015
   
3,781
   
$
5.72
     
4.63
   
$
6,052
 

The total pre-tax intrinsic value for options exercised during the three and nine months ended March 31, 2015 was $0.9 million and $2.8 million, respectively, and $3.2 million and $6.8 million for the three and nine months ended March 31, 2014, 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 ESPP. The ESPP allows eligible employees to purchase shares of the Company’s common 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 purchase shares of the Company's common stock at 85% of the market value at either the beginning of the offering period or the end of the offering period, whichever price is lower.

In February of fiscal 2015 and 2014, 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 641,464 and 611,987 shares, respectively .

11.
Restricted Stock

Under the 2007 Plan, during the nine months ended March 31, 2015 and 2014 the Company issued fully vested restricted stock awards to non-employee directors electing to receive them in lieu of an annual cash retainer.

In addition, restricted stock units can be issued under the 2007 Plan to eligible employees and generally vest 25% at each one year anniversary from the date of grant.
 
Restricted stock award and restricted stock unit activity for the three and nine months ended March 31, 2015 and 2014 is as follows (in thousands):
 
   
Nine Months Ended
March 31,
 
   
2015
   
2014
 
Beginning outstanding
   
1,394
     
1,310
 
Awarded
   
790
     
812
 
Released
   
(526
)
   
(423
)
Forfeited
   
(133
)
   
(193
)
Ending outstanding
   
1,525
     
1,506
 


Information regarding restricted stock awards and restricted stock units outstanding at March 31, 2015 is summarized below:

   
Number of Shares (thousands)
   
Weighted Average Remaining
Contractual
Lives
   
Aggregate
Intrinsic
Value
(thousands)
 
Shares outstanding
   
1,525
     
1.49
   
$
10,399
 
Shares expected to vest
   
920
     
1.11
   
$
6,273
 
 
12.
Litigation, Commitments, Contingencies and Leases
 
Litigation — As of March 31, 2015, the Company is involved in litigation 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, 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. With the exception of the item specifically noted herein, due to the uncertainty surrounding the litigation process, the Company is unable to estimate a range of loss, if any, at this time, however the Company does not believe a material loss is probable.

On September 15, 2011, a lawsuit was filed against the Company and several other companies in the United States District Court for the Eastern District of Texas. The plaintiff, a patent holding company, alleges that the Company infringes plaintiff’s patent. On March 5, 2013, the court stayed the case pending the outcome of inter partes review proceedings with the United States Patent and Trademark Office. On January 6, 2015, the court issued an order reopening the case and lifting the stay. While the Company believes it has meritorious defenses against the suit , the ultimate resolution of the matter could result in a loss of up to $3.0 million in excess of the amount accrued as of March 31, 2015.

Arbitration — In addition, on March 21, 2013, the Company provided Fortis Advisors LLC (“Fortis”), as representative of the former shareholders of M5 Networks, with a Claim Certificate disclosing certain claims for indemnification under the January 31, 2012 Agreement and Plan of Reorganization between M5 and the Company (the “Purchase Agreement”). Thereafter, the Company and Fortis engaged in negotiations in an attempt to resolve the indemnification claims asserted by the Company. In September 2013, the Company received notice of commencement of an arbitration proceeding by Fortis on behalf of the former shareholders of M5.  Through the arbitration, Fortis sought a declaration that the Company’s claims for indemnification be precluded. On October 11, 2013, the Company served its response, denying all of Fortis’ allegations and asserting counterclaims for breach of the Purchase Agreement and declaratory relief. The arbitrator held a hearing with the parties from October 13, 2014 through October 16, 2014, addressing certain of the Company’s claims. The arbitrator issued his ruling on the matter on December 5, 2014.

On February 19, 2015, the Company and Fortis entered into an agreement to settle the escrow claim with a payout in cash to the Company in the amount of $2.1 million, with all other cash and shares held in escrow being released to the former shareholders of M5. As the settlement payout ratio of cash and stock mix differed from the Purchase Agreement, the Company recognized a $0.7 million modification accounting charge related to the change in fair value of foregone stock per the Purchase Agreement. The fair value of the common stock was measured using the closing price of our common stock as of February 19, 2015, the final settlement date.
 
Per the Purchase Agreement, the non- prevailing party was required to reimburse professional fees of the prevailing party. The arbitration ruling in December 2014 determined the former M5 shareholders to be the prevailing party, thus the Company was deemed to be required to reimburse professional fees incurred by former M5 shareholders related to the escrow proceedings. The Company and Fortis entered into an agreement to settle the professional fee reimbursement for $2.5 million, as such, the Company recognized this amount as a professional fee reimbursement charge classified as settlements and defense fees within the consolidated statement of operations for the nine months ended March 31, 2015.

Indemnification asset — As a result of the settlement made between the parties noted above, the Company recorded an impairment of the related indemnification asset to adjust the carrying value to the amount it realized from the related escrow proceeds. During the nine months ended March 31, 2015, the Company has recorded an impairment charge of $3.6 million classified as settlements and defense fees within the consolidated statement of operations. The carrying amount of the indemnification asset was zero at March 31, 2015 as the settlement amount of $2.1 million was received during the three months ended March 31, 2015.

Contingencies — During the three months ended December 31, 2014 the Internal Revenue Service (“IRS”) issued a Notice of Proposed Adjustment (“NOPA”) resulting from a withholding tax audit of payments made to non-U.S. vendors during calendar years 2008 through 2012.  The NOPA asserts a liability for under-withheld tax of approximately $2.0 million, plus related penalties and estimated interest of approximately $1.3 million. While the Company disagrees with a majority of the IRS’ assertions and proposed liability, the Company accrued for the probable liability and recorded an expense classified as settlements and defense fees within the consolidated statement of operations of $1.1 million for the nine months ended March 31, 2015.

Settlements and defense fees — Settlements and defense fees within the consolidated statement of operations of $8.5 million for the nine months ended March 31, 2015 were comprised of a $3.6 million impairment of the indemnification asset charge, a $2.5 million charge for professional fee reimbursement, a $0.7 million modification accounting charge related to the change in fair value of foregone stock per the Purchase Agreement , $1.1 million related to an IRS proposed adjustment and $0.6 million in professional fees incurred in connection with an unsolicited acquisition proposal . There were no corresponding charges for the nine months ended March 31, 2014.

Leases — The Company leases its facilities under noncancelable operating leases which expire at various times through 2023. The leases provide for the lessee to pay all costs of utilities, insurance, and taxes. Future minimum lease payments under the noncancelable capital and operating leases as of March 31, 2015, are as follows (in thousands):
 
Years Ending June 30,
 
Operating
Leases
   
Capital
Leases
 
2015 (remaining 3 months)
   
1,494
     
23
 
2016
   
5,866
     
48
 
2017
   
5,661
     
8
 
2018
   
5,022
     
-
 
2019
   
3,746
     
-
 
Therafter
   
4,944
     
-
 
Total minimum lease payments
 
$
26,733
     
79
 
                 
Less: amount representing interest
           
-
 
Present value of total minimum lease payments
           
79
 
Less: current portion liability
           
(54
)
Capital lease obligation, net of current portion
         
$
25
 
 
The current portion of the capital leases is included in accrued liabilities and other on the condensed consolidated balance sheet. The non-current portion of the capital leases is included in the other long-term liabilities on the consolidated balance sheet. 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 March 31, 2015.

Rent expense for the three months ended March 31, 2015 and 2014 was $1.2 million and $1.1 million, respectively. Rent expense for the nine months ended March 31, 2015 and 2014 was $4.1 million and $3.1 million, respectively.

Purchase commitments — The Company had purchase commitments with contract manufacturers for inventory totaling approximately $15.3 million as of March 31, 2015 and $21.2 million as of June 30, 2014.

Letters of credit   — Outstanding letters of credit maintained by the Company totaled $635,000   as of March 31, 2015.
 
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.

The Company also has entered into customary indemnification agreements with each of its officers and directors.

13.
Segment Information

ASC Topic 280,   Segment Reporting , establishes standards for reporting information about operating segments, products and services, geographic areas of operations and major customers. Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision maker or decision making group in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision-maker is its Chief Executive Officer (“CEO”). As a result of consolidating the management structure of the Company, commencing in the fourth quarter of fiscal 2014, the CEO reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance. On this basis, the Company is organized and operates in a single segment: the design, development, marketing, and sale of business communication solutions. Upon a change in reporting segments, ASC Topic 280 requires prior-period segment information to be recast to match the new reportable segment composition.   As the Company now operates as a single segment, no additional disclosure of segment measures of profit or loss and total assets is applicable for all periods presented.

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
March 31,
   
Nine Months Ended
March 31,
 
   
2015
   
2014
   
2015
   
2014
 
United States of America
 
$
78,063
   
$
74,948
   
$
244,702
   
$
227,697
 
International
   
6,939
     
7,453
     
21,598
     
23,476
 
Total
 
$
85,002
   
$
82,401
   
$
266,300
   
$
251,173
 
 
Revenue from one value-added distributor accounted for approximately 26% of the total revenue during both the three months ended March 31, 2015 and 2014, respectively and 26% and 25% of the total revenue during the nine months ended March 31, 2015 and 2014, respectively.

The Company’s assets are primarily located in the United States of America and not allocated to any specific region; furthermore, the Company does not measure the performance of its geographic regions based upon asset-based metrics.

The following presents a summary of long-lived assets, excluding deferred tax assets, other assets, goodwill and intangible assets (in thousands):

   
March 31,
2015
   
June 30,
2014
 
United States of America
 
$
19,165
   
$
18,704
 
International
   
942
     
897
 
Total
 
$
20,107
   
$
19,601
 
 
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 and nine months ended March 31, 2015, 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 other income and expenses during the period of change. These derivatives have maturities of approximately one month. The foreign exchange forward contracts outstanding as of March 31, 2015 are entered into by the Company on the last business day of the period. Given the relatively short duration such contracts are outstanding in relation to changes in potential market rates, the change in the fair value is not material and is not reflected either as an asset or a liability.
 
The following table presents the gross notional value of all of the Company’s foreign exchange forward contracts outstanding as of March 31, 2015 and June 30, 2014 (in thousands):
 
 
 
March 31, 2015
 
 
 
Local Currency
Amount
   
Notional Contract
Amount (USD)
 
Australian dollar
 
$
1,660
   
$
1,248
 
British pound
 
£
2,320
     
3,412
 
Canadian dollar
 
$
520
     
406
 
Euro
 
680
     
722
 
Total
         
$
5,788
 
                 
 
June 30, 2014
 
 
 
Local Currency
Amount
   
Notional Contract
Amount (USD)
 
Australian dollar
 
$
1,060
   
$
986
 
British pound
 
£
2,540
     
4,303
 
Euro
 
840
     
1,142
 
Total
         
$
6,431
 
 
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

ShoreTel is a leading provider of brilliantly simple business communication solutions, comprised of integrated voice, video, data and mobile applications based on Internet Protocol ("IP") technologies. We focus on the small and medium sized businesses (less than 5,000 users), with a Unified Communications ("UC") platform so that they can communicate anytime, anyplace, and through any device that they chose. Our strategy is to provide customers with a flexible choice of deployment options: either operating our ShoreTel solution in their own premise-based data centers, subscribing to our cloud-based ShoreTel Sky communication services or a hybrid combination of both.

Our solution is available for businesses to operate in their own premise-based data centers and on a hosted, cloud-based platform. Premise-based systems are comprised of our switches, IP phones and software applications which work with our unique IP distributed architecture to provide a brilliantly simple, integrated communication system. Our hosted systems are comprised of ShoreTel designed and developed software delivered to the customers as a managed service along with our phones and software applications. We anticipate that our cloud-based system sales will grow at a faster rate than our premise-based system sales. Accordingly, we will continue to invest in cloud-based infrastructure and channel development to help enable our growth.

ShoreTel is currently developing its next generation common platform that can be deployed across cloud, hybrid and on-premises environments through a single ShoreTel solution.
 
We sell our products through channel partners that market and sell our solutions to enterprises across all industry verticals, including small, medium and large companies and public institutions. Our channel partners include resellers as well as value-added distributors who in turn sell to the resellers. We also offer our hosted and related services via our direct sales organization. The number of our authorized channel partners around the world was approximately 1,200 as of March 31, 2015. Our internal sales and marketing personnel support these channel partners in their selling efforts.

We are headquartered in Sunnyvale, California and have offices located throughout North America, Europe, Asia and Australia. Additionally, our ShoreTel Sky services are provided primarily from our data center in Texas. While most of our customers are located in the United States, we have remained fairly consistent in revenue from international sales, which accounted for approximately 8% and 9% of our total revenue for the three months ended March 31, 2015 and 2014, respectively, and 8% and 9% for nine months ended March 31, 2015 and 2014, respectively. We expect sales to customers in the United States will continue to comprise the majority of our sales in the foreseeable future.

Our total revenue increased to $85.0 million for the three months ended March 31, 2015 from $82.4 million in the three months ended March 31, 2014, and total revenue increased to $266.3 million for the nine months ended March 31, 2015 from $251.2 million for the nine months ended March 31, 2014, driven by sales and services delivered to new customers and add-on sales and support services delivered to existing customers.

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.

Deferred revenue. Deferred revenue relates to the timing of revenue recognition for specific transactions based on delivery of service, support, specific commitments, product and services delivered to our value-added distributors that have not been delivered or sold through to resellers, and other factors. Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from our transactions and are recognized as the revenue recognition criteria are met. Nearly all of our premise system sales include the purchase of post-contractual support contracts with terms of up to five years, and our renewal rates 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 recognizing the related revenue, we carry a deferred revenue balance on our consolidated balance sheet. Almost all of our hosted services are billed a month in advance. Billings that are collected before the service is delivered are included in the deferred revenue balance on our consolidated balance sheet. These amounts are recognized as revenue as the services are delivered. Our deferred revenue balance at March 31, 2015 was $66.3 million, of which $48.8 million is expected to be recognized within one year.

Gross margin. Our gross margins for products are primarily affected by our ability to reduce hardware costs faster than the decline in average overall system sales prices. We strive to increase our product gross margin by reducing hardware costs through product redesign and volume discount pricing from our suppliers. 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 margins and increasing our profitability.

Gross margin for support and services is impacted primarily by labor-related expenses. The primary goal of our support and services function is to ensure a high level of 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 may be able to slightly improve gross margin for support and services through economies of scale. 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.

Gross margin for hosted and related services is lower than the gross margins for support and services and product and is impacted primarily by the reselling of broadband circuits to customers, employee-related expense, data communication cost, carrier cost, telecom taxes, and intangible asset amortization expense. We expect that with the growth in hosted and related services revenue, the gross margins may reflect improvement due to synergies and other cost reductions in our service delivery platform.

Operating expense. Our operating expenses are comprised primarily of compensation and benefits for our employees. Accordingly, increases in operating expenses historically have been primarily related to increases in our headcount. We intend to expand our workforce as we grow, and therefore, our ability to forecast revenue is critical to managing our operating expenses.
 
Average revenue per user . We calculate the monthly average revenue per user (“ARPU”) for our hosted and related services revenue as the average monthly revenue per customer divided by the average number of seats per customer. The average monthly revenue per customer is calculated as the monthly service revenue from customers in the period, divided by the simple average number of business customers during the period. Our ARPU includes telecommunication internet circuits that we resell that could, as a percentage of our business, decline over time as our average customer size increases and therefore they are more likely to have their own networks already established. Our monthly ARPU for the three months ended March 31, 2015 was approximately $53 as compared to $54 for the three months ended March 31, 2014. The decrease in ARPU was primarily due to a greater number of volume discounts related to increased sales to larger enterprise customers and a decrease in the resale of telecommunications circuits to new customers as compared to the existing customer base.

Revenue churn . Revenue churn for our hosted and related services revenue is calculated by dividing the monthly recurring revenue from customers that have terminated during a period by the simple average of the total monthly recurring revenue from all customers in that period. The effective management of the revenue churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Our annualized revenue churn for customers that have terminated services for the three months ended March 31, 2015 was approximately 8% as compared to 5% for the three months ended March 31, 2014.

Basis of Presentation

Revenue. We derive our revenue from sales of our premise IP telecommunications systems and related support and services as well as hosted services.

Product revenue . Product revenue consists of sales of our business communication systems. Our typical system includes a combination of IP phones, switches and software applications primarily for our premise-based solutions. We sell our products through channel partners that include resellers and value-added distributors. Prices to a given channel partner for hardware and software products depend on that channel partner's volume and other criteria, as well as our own strategic considerations. Product revenue has accounted for 46% and 53% of our total revenue for the three months ended March 31, 2015 and 2014, respectively and 50% and 55% of our total revenue for the nine months ended March 31, 2015 and 2014, respectively.

Support and services revenue.   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. Revenue from post-contractual support is recognized ratably over the contractual service period. Support and services revenues accounted for 22% and 20% of our total revenue for the three months ended March 31, 2015 and 2014, respectively, and 21% and 19% of our total revenue for the nine months ended March 31, 2015 and 2014, respectively.

Hosted and related services revenue. Hosted and related services and solutions consist primarily of our proprietary hosted VoIP Unified Communications system as well as other services such as foreign and domestic calling plans, certain UC applications, internet service provisioning, regulatory and telecommunications fees, training and other professional services. Our hosted and related services are sold through indirect channel resellers and a direct sales force. Our customers typically enter into 12 month service agreements whereby they are billed for such services on a monthly basis. Revenue from our hosted and related services is recognized on a monthly basis as services are delivered. Revenue associated with various calling plans and internet services are recognized as such services are provided. Hosted and related services revenues accounted for 32% and 27% of our total revenue for the three months ended March 31, 2015 and 2014, respectively, and 29% and 26% of our total revenue for the nine months ended March 31, 2015 and 2014, respectively.

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 products sold. Cost of support and services revenue consists of salary and related overhead costs of personnel engaged in support and service. Cost of hosted and related services revenue consists of personnel and related costs of the hosted services, data center costs, data communication cost, costs of regulatory and telecommunications fees, carrier cost and amortization of intangible assets.

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 have capitalized software development costs incurred during the period from the date of determination of technological feasibility through the date of general release of the product to customers. We are devoting substantial resources to the development of additional functionality for existing products and the development of new products and related software applications. We intend to continue to make investments in our research and development efforts because we believe they are essential to maintaining and improving our competitive position.
 
Sales and marketing expenses. Sales and marketing expenses primarily include personnel costs, sales commissions, travel, marketing, promotional and lead generation programs, branding and advertising, trade shows, sales demonstration equipment, professional services fees, amortization of intangible assets, 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 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 be our largest operating expense category.

General and administrative expenses. General and administrative expenses primarily relate to our executive, finance, human resources, legal and information technology organizations. General and administrative expenses primarily consist of personnel costs, professional fees for legal, board of directors' costs, accounting, tax, compliance and information systems, travel, recruiting expense, depreciation expense and facilities expenses.

Settlements and defense fees . Settlements and defense fees relate to one-time charges related to probable and estimable litigation settlement amounts and professional fees incurred in connection with an unsolicited acquisition proposal .

Interest expense. Interest expense primarily consists of interest expense on our debt as well as other miscellaneous items affecting our operating results.

Interest income and other (expense). Interest income and other (expense) primarily consists of interest earned on cash, cash equivalents and short-term investments, gains and losses on foreign currency translations and transactions as other miscellaneous items affecting our operating results.

Provision for (benefit from) income taxes. Provision for (benefit from) income taxes includes federal, state and foreign tax on our income as well as any adjustments made to our valuation allowance for deferred tax assets. Since our inception, we have 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 carryforwards and other tax credits measured by applying current 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, goodwill and purchased-intangible assets 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, the calculation of stock-based compensation expense, evaluation of the potential impairment of goodwill and purchased-intangible assets and the income tax related balances. 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 three and nine months ended March 31, 2015 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 Annual Report on Form 10-K for the fiscal year ended June 30, 2014 filed with the Securities and Exchange Commission. For a description of those accounting policies, please refer to our Annual Report on Form 10-K for the fiscal year ended June 30, 2014.
 
Results of Operations

The following table sets forth unaudited selected condensed consolidated statements of operations data for the three and nine months ended March 31, 2015 and 2014 (in thousands, except per share amounts):
 
   
Three Months Ended
March 31,
   
Nine Months Ended
March 31,
 
   
2015
   
2014
   
2015
   
2014
 
Revenue:
               
Product
 
$
39,461
   
$
43,410
   
$
134,081
   
$
137,649
 
Hosted and related services
   
27,220
     
22,617
     
77,874
     
65,075
 
Support and services
   
18,321
     
16,374
     
54,345
     
48,449
 
Total revenue
   
85,002
     
82,401
     
266,300
     
251,173
 
Cost of revenue:
                               
Product
   
15,646
     
15,817
     
48,038
     
48,454
 
Hosted and related services
   
14,873
     
14,357
     
46,129
     
40,968
 
Support and services
   
4,534
     
4,137
     
13,116
     
12,626
 
Total cost of revenue
   
35,053
     
34,311
     
107,283
     
102,048
 
Gross profit
   
49,949
     
48,090
     
159,017
     
149,125
 
Operating expenses:
                               
Research and development
   
13,557
     
11,480
     
40,490
     
37,041
 
Sales and marketing
   
29,249
     
27,960
     
87,566
     
82,981
 
General and administrative
   
9,328
     
9,479
     
29,881
     
30,506
 
Settlements and defense fees
   
53
     
-
     
8,475
     
-
 
Total operating expenses
   
52,187
     
48,919
     
166,412
     
150,528
 
Loss from operations
   
(2,238
)
   
(829
)
   
(7,395
)
   
(1,403
)
Other income (expense):
                               
Interest expense
   
(130
)
   
(94
)
   
(390
)
   
(586
)
Interest income and other (expense), net
   
(262
)
   
(29
)
   
(818
)
   
(503
)
Total other expense
   
(392
)
   
(123
)
   
(1,208
)
   
(1,089
)
Loss before provision for (benefit from) income tax
   
(2,630
)
   
(952
)
   
(8,603
)
   
(2,492
)
Provision for (benefit from) income tax
   
(36
)
   
252
     
467
     
687
 
Net loss
 
$
(2,594
)
 
$
(1,204
)
 
$
(9,070
)
 
$
(3,179
)
Net loss per share - basic and diluted
 
$
(0.04
)
 
$
(0.02
)
 
$
(0.14
)
 
$
(0.05
)
Shares used in computing net loss per share - basic and diluted
   
64,297
     
61,749
     
63,660
     
60,693
 
                                 
 
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
March 31,
   
Nine Months Ended
March 31,
 
   
2015
   
2014
   
2015
   
2014
 
Revenue:
               
Product
   
46
%
   
53
%
   
50
%
   
55
%
Hosted and related services
   
32
%
   
27
%
   
29
%
   
26
%
Support and services
   
22
%
   
20
%
   
21
%
   
19
%
Total revenue
   
100
%
   
100
%
   
100
%
   
100
%
Cost of revenue:
                               
Product
   
18
%
   
19
%
   
18
%
   
19
%
Hosted and related services
   
18
%
   
18
%
   
17
%
   
17
%
Support and services
   
5
%
   
5
%
   
5
%
   
5
%
Total cost of revenue
   
41
%
   
42
%
   
40
%
   
41
%
Gross profit
   
59
%
   
58
%
   
60
%
   
59
%
Operating expenses:
                               
Research and development
   
16
%
   
14
%
   
15
%
   
15
%
Sales and marketing
   
35
%
   
34
%
   
33
%
   
33
%
General and administrative
   
11
%
   
11
%
   
11
%
   
12
%
Settlements and defense fees
   
-
     
-
     
3
%
   
-
 
Total operating expenses
   
62
%
   
59
%
   
62
%
   
60
%
Loss from operations
   
(3
%)
   
(1
%)
   
(2
%)
   
(1
%)
Other income (expense):
                               
Interest expense
   
-
     
-
     
-
     
-
 
Interest income and other (expense), net
   
-
     
-
     
(1
%)
   
-
 
Total other expense
   
-
     
-
     
(1
%)     
-
 
Loss before provision for (benefit from) income tax
   
(3
%)
   
(1
%)
   
(3
%)
   
(1
%)
Provision for (benefit from) income tax
   
-
     
-
     
-
     
-
 
Net loss
   
(3
%)
   
(1
%)
   
(3
%)
   
(1
%)

Comparison of the three and nine months ended March 31, 2015 and March 31, 2014

Revenue.

   
Three Months Ended
March 31,
   
Nine Months Ended
March 31,
 
   
2015
   
2014
   
Change $
   
Change %
   
2015
   
2014
   
Change $
   
Change %
 
(in thousands, except percentages)
                               
Product revenue
 
$
39,461
   
$
43,410
   
$
(3,949
)
   
(9
%)
 
$
134,081
   
$
137,649
   
$
(3,568
)
   
(3
%)
Hosted and related services revenue
   
27,220
     
22,617
     
4,603
     
20
%
   
77,874
     
65,075
     
12,799
     
20
%
Support and services revenue
   
18,321
     
16,374
     
1,947
     
12
%
   
54,345
     
48,449
     
5,896
     
12
%
Total revenue
 
$
85,002
   
$
82,401
   
$
2,601
     
3
%
 
$
266,300
   
$
251,173
   
$
15,127
     
6
%
 
Total revenue increased by $2.6 million or 3% in the three months ended March 31, 2015 as compared to the three months ended March 31, 2014.

Total revenue increased by $15.1 million or 6% in the nine months ended March 31, 2015 as compared to the nine months ended March 31, 2014.
 
Product revenue

Product revenue decreased by $3.9 million or 9% during the three months ended March 31, 2015 as compared to the same period in the prior year. The decrease in product revenue during the three months ended March 31, 2015 was primarily due to the decline in new customer volume.

Product revenue decreased by $3.6 million or 3% during the nine months ended March 31, 2015 as compared to the same period in the prior year. The decrease in product revenue for the nine months ended March 31, 2015 was primarily due to the decline in new customer volume during the three months ended March 31, 2015.

Hosted and related services revenue

Hosted and related services revenue increased by $4.6 million or 20% and $12.8 million or 20% in the three and nine months ended March 31, 2015, respectively, as compared to the same periods in the prior year. The increases in hosted and related services revenue were primarily due to continued growth in our customer base, increase in our non-recurring revenue such as installation fees and usage based telecommunications charges as well as additional increases in the use of our services from existing customers.

Support and services revenue

Support and services revenue increased by $1.9 million or 12% and $5.9 million or 12% in the three and nine months ended March 31, 2015, respectively, as compared to the same periods in the prior year. The increases in support and services revenue were primarily due to our ability to maintain high renewal rates on maintenance contracts, increases in professional services revenue as well as the continued expansion of our customer base resulting from sales to new customers who entered into post-contractual support agreements.

Cost of revenue and gross profit.

   
Three Months Ended
March 31,
   
Nine Months Ended
March 31,
 
   
2015
   
2014
   
Change $
   
Change %
   
2015
   
2014
   
Change $
   
Change %
 
(in thousands, except percentages)
                               
Product cost of revenue
 
$
15,646
   
$
15,817
   
$
(171
)
   
(1
%)
 
$
48,038
   
$
48,454
   
$
(416
)
   
(1
%)
Hosted and related services cost of revenue
   
14,873
     
14,357
     
516
     
4
%
   
46,129
     
40,968
     
5,161
     
13
%
Support and services cost of revenue
   
4,534
     
4,137
     
397
     
10
%
   
13,116
     
12,626
     
490
     
4
%
Total cost of revenue
 
$
35,053
   
$
34,311
   
$
742
     
2
%
 
$
107,283
   
$
102,048
   
$
5,235
     
5
%
                                                                 
Product gross profit
 
$
23,815
   
$
27,593
   
$
(3,778
)
   
(14
%)
 
$
86,043
   
$
89,195
   
$
(3,152
)
   
(4
%)
Hosted and related services gross profit
   
12,347
     
8,260
     
4,087
     
49
%
   
31,745
     
24,107
     
7,638
     
32
%
Support and services gross profit
   
13,787
     
12,237
     
1,550
     
13
%
   
41,229
     
35,823
     
5,406
     
15
%
Total gross profit
 
$
49,949
   
$
48,090
   
$
1,859
     
4
%
 
$
159,017
   
$
149,125
   
$
9,892
     
7
%
                                                                 
 
   
Three Months Ended
March 31,
   
Nine Months Ended
March 31,
 
   
2015
   
2014
   
Net Change
   
2015
   
2014
   
Net Change
 
Product gross margin
   
60
%
   
64
%
   
(4
%)
   
64
%
   
65
%
   
(1
%)
Hosted and related services gross margin
   
45
%
   
37
%
   
8
%
   
41
%
   
37
%
   
4
%
Support and services gross margin
   
75
%
   
75
%
   
-
     
76
%
   
74
%
   
2
%
Total gross margin
   
59
%
   
58
%
   
1
%
   
60
%
   
59
%
   
1
%
 
The overall gross margin was 59% for the three months ended March 31, 2015 compared to 58% for the same period in the prior year.

The overall gross margin was 60% for the nine months ended March 31, 2015 compared to 59% for the same period in the prior year.

Product Gross Margin

Product gross margins decreased to 60% for the three months ended March 31, 2015 as compared to 64% in the same period in the prior year. The decrease from prior period was due to the recognition of a $1.9 million expense during the three months ended March 31, 2015 representing estimated legal settlement for a pending legal matter with no corresponding charge in the prior period.
 
Product gross margins decreased slightly to 64% in the nine months ended March 31, 2015 as compared to 65% in the same period in the prior year.

Hosted and Related Services Gross Margin

Hosted and related service gross margin increased to 45% in the three months ended March 31, 2015 as compared to 37% in the same period in the prior year. Hosted and related service gross margin increased to 41% in the nine months ended March 31, 2015 as compared to 37% in the same period in the prior year. The increases from prior periods are primarily due to operating efficiencies gained in our deployment model and related reorganization efforts to help enhance product development of the next generation products.

As the related hosted business continues to expand and grow, we anticipate that we may realize improvements in our gross margins as we achieve synergies and other operating leverage in our service delivery platform.

Our hosted business service offering includes cost elements that are unique to the hosted service offering which in turn, impacts the overall hosted service and related services gross margins. Specifically, as part of our hosted service offering, we provide our customers unlimited domestic calling plans and internet service plans. To provide calling services, we purchase and resell minutes and calling plans from various national and regional telecommunication carriers. Additionally, we purchase and resell telecommunications circuits from various local and national internet service providers as a service to our customers. As a result of reselling calling plans, telecommunications circuits and providing internet data plans to our customers, we incur various regulatory charges. In addition, the hosted gross margin is impacted by the amortization of intangible assets related to the acquisition of M5 Networks, Inc. (“M5”).

Upon completion of our acquisition of M5, we have developed a plan involving several initiatives to create greater efficiencies in the delivery of our hosted services.  These initiatives include:
 
 
·
Consolidation of data centers;
 
·
Integration to common IP phones;
 
·
Integration of our customer support services teams; and
 
·
Development of our next generation products.
 
While we believe that through the execution of these initiatives we will improve our gross margins over time, due to the nature of the unique costs identified above and the overall timing to execute our gross margin improvement initiatives, we do not anticipate that gross margins for our hosted and related services will be commensurate with that of premise business in the short term.

Support and Services Gross Margin

Support and services gross margins remained consistent at 75% for both the three months ended March 31, 2015 and 2014. Support and services gross margins increased to 76% in the nine months ended March 31, 2015 as compared to 74% in the same period in the prior year. This increase was driven by synergies achieved by existing headcount which allowed lower personnel costs to support a larger customer base and generate a higher revenue amount from the same period in the prior year.

Operating expenses .

   
Three Months Ended
March 31,
   
Nine Months Ended
March 31,
 
   
2015
   
2014
   
Change $
   
Change %
   
2015
   
2014
   
Change $
   
Change %
 
(in thousands, except percentages)
                               
Research and development
 
$
13,557
   
$
11,480
   
$
2,077
     
18
%
 
$
40,490
   
$
37,041
   
$
3,449
     
9
%
Sales and marketing
   
29,249
     
27,960
     
1,289
     
5
%
   
87,566
     
82,981
     
4,585
     
6
%
General and administration
   
9,328
     
9,479
     
(151
)
   
(2
%)
   
29,881
     
30,506
     
(625
)
   
(2
%)
Settlements and defense fees
   
53
     
-
     
53
     
N/A
   
8,475
     
-
     
8,475
     
N/A
 
 
Research and development. Research and development expenses increased by $2.1 million, or 18%, during the three months ended March 31, 2015 as compared to the same period in the prior year. The increase in research and development expenses from the prior period was primarily due to an increase in professional fees of $0.9 million and an increase in personnel related costs including benefits and bonus of $0.7 million due to an increase in headcount.

Research and development expenses increased by $3.4 million, or 9%, during the nine months ended March 31, 2015 as compared to the same period in the prior year. The increase in research and development expenses from the prior period was primarily due to an increase in personnel related costs including benefits and bonus of $1.5 million due to an increase in headcount and an increase in professional fees of $0.9 million.

Sales and marketing. Sales and marketing expenses increased by $1.3 million, or 5%, in the three months ended March 31, 2015 as compared to the same period in the prior year. This increase in sales and marketing expenses was due to an increase   in marketing expenses of $1.1 million primarily due to increased advertising, tradeshow costs and partner referral fees.

Sales and marketing expenses increased by $4.6 million, or 6%, in the nine months ended March 31, 2015 as compared to the same period in the prior year. This increase in sales and marketing expenses was primarily due to an increase in marketing expenses of $2.6 million primarily due to increased advertising costs and partner referral fees and an increase   in personnel related costs including benefits, bonus and commissions of $2.2 million due to an increase in headcount .

General and administrative. General and administrative expenses decreased slightly to $9.3 million for the three months ended March 31, 2015 from $9.5 million for the three months ended March 31, 2014.

General and administrative expenses decreased by $0.6 million or 2% in the nine months ended March 31, 2015 as compared to the same period in the prior year. The decrease in general and administrative expense was primarily due to a decrease in sales tax expense of $1.3 million and a decrease in personnel related costs including benefits and bonus of $0.6 million, offset by an increase in professional fees of $1.6 million.

Settlements and defense fees . Settlements and defense fees for the three months ended March 31, 2015 represented a $53,000 modification charge related to the change in fair value of foregone stock per the Agreement and Plan of Reorganization between M5 and the Company. There were no corresponding charges in the three months ended March 31, 2014.

Settlements and defense fees of $8.5 million for the nine months ended March 31, 2015 were comprised of $6.8 million related to a settlement on escrow claims related to the acquisition of M5, $1.1 million related to an Internal Revenue Service proposed adjustment for the 2008 through 2012 tax years and $0.6 million in professional fees incurred in connection with an unsolicited acquisition proposal . The $6.8 million expense related to the settlement on escrow claims was comprised of a $3.6 million impairment of the indemnification asset charge, a $2.5 million charge for professional fee reimbursement and a $0.7 million modification accounting charge related to the change in fair value of foregone stock per the Agreement and Plan of Reorganization between M5 and the Company . There were no corresponding charges for the nine months ended March 31, 2014.

Other income (expense), net.

   
Three Months Ended
March 31,
   
Nine Months Ended
March 31,
 
   
2015
   
2014
   
Change $
   
Change %
   
2015
   
2014
   
Change $
   
Change %
 
(in thousands, except percentages)
                               
Interest expense
 
$
(130
)
 
$
(94
)
 
$
36
     
38
%
 
$
(390
)
 
$
(586
)
 
$
(196
)
   
(33
%)
Interest income and other (expense), net
   
(262
)
   
(29
)
   
233
     
803
%
   
(818
)
   
(503
)
   
315
     
63
%
 
Interest expense. Interest expense remained consistent at $0.1 million for the both three months ended March 31, 2015 and 2014.  Interest expense decreased by $0.2 million or 33% in the nine months ended March 31, 2015 as compared to the same period in the prior year primarily due to lower outstanding borrowings under our line of credit agreement during the nine months ended March 31, 2015 as compared to the nine months ended March 31, 2014.

Interest income and other (expense), net. Interest income and other (expense), net, increased by $0.2 million and by $0.3 million for the three and nine months ended March 31, 2015, respectively, as compared to the same period in the prior year. These increases were primarily a result of an increase in our foreign exchange loss due to the weakening of certain foreign currencies in which we transact against the US dollar.
 
Provision for (benefit from) income tax.

   
Three Months Ended
March 31,
   
Nine Months Ended
March 31,
 
   
2015
   
2014
   
Change $
   
Change %
   
2015
   
2014
   
Change $
   
Change %
 
(in thousands, except percentages)
                               
Provision for (benefit from) income tax
 
$
(36
)
 
$
252
   
$
(288
)
   
(114
%)
 
$
467
   
$
687
   
$
(220
)
   
(32
%)
 
Provision for (benefit from) income tax. The provision for (benefit from) income taxes for the three and nine months ended March 31, 2015 and 2014 was primarily related to federal Alternative Minimum Tax, state and foreign income tax expense.

Liquidity and Capital Resources

Balance Sheet and Cash Flows

The following table summarizes our cash, cash equivalents and short-term investments (in thousands):


   
March 31,
2015
   
June 30,
2014
   
Increase/ (Decrease)
 
Cash and cash equivalents
 
$
76,243
   
$
53,472
   
$
22,771
 
Short-term investments
   
8,141
     
2,673
     
5,468
 
Total
 
$
84,384
   
$
56,145
   
$
28,239
 

As of March 31, 2015, our principal sources of liquidity consisted of cash, cash equivalents and short-term investments of $84.4 million, accounts receivable of $22.7 million and the balance of $94.0 million available for borrowing under our New Credit Facility.

On October 22, 2014, we entered into an Amended and Restated Credit Agreement (“New Credit Facility”) which provides for a revolving loan facility for an aggregate principal amount not exceeding $100.0 million. The New Credit Facility amended and restated the prior credit facility. The New Credit Facility matures on the fifth anniversary of its closing (October 22, 2019) and is payable in full upon maturity. The amounts borrowed and repaid under the New Credit Facility are available for future borrowings. The New Credit Facility contains customary representations and warranties and affirmative and negative covenants. As of March 31, 2015, no amounts were outstanding under the New Credit Facility.

The borrowings under the New Credit Facility accrue interest (at our election) either at (i) the London interbank offered rate then in effect, plus a margin of between 1.50% and 2.25%, which is based on our consolidated EBITDA (as defined in the New Credit Facility), or (ii) the higher of (a) the bank’s publicly-announced prime rate then in effect and (b) the federal funds rate plus 0.50%, in each case of (a) or (b), plus a margin of between 0.00% and 0.50%, which will be based upon our consolidated EBITDA. We also pay annual commitment fees during the term of the New Credit Facility which varies depending on our consolidated EBITDA. The New Credit Facility is secured by substantially all of our assets.

Historically, our principal uses of cash have consisted of the purchase of finished goods inventory from our contract manufacturers, payroll and other operating expenses related to the development and marketing of our new products, purchases of property and equipment and acquisitions.

Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities, the addition of new business initiatives, the timing and extent of our expansion into new territories, the timing of introductions of new products and enhancements to existing products, the continuing market acceptance of our products and acquisition and licensing activities. We may enter into agreements relating to potential investments in, or acquisitions of, complementary businesses or technologies in the future, which could also require us to seek additional equity or debt financing. If needed, additional funds may not be available on terms favorable to us or at all. We believe that the available amounts under the line of credit together with our cash flows from our operations will be sufficient to fund our operating requirements for at least the next twelve months.
 
The following table shows our cash flows from operating activities, investing activities and financing activities for the stated periods (in thousands):
 
   
Nine Months Ended
March 31,
 
   
2015
   
2014
 
Cash provided by operating activities
 
$
34,685
   
$
27,544
 
Cash used in investing activities
   
(16,357
)
   
(5,197
)
Cash provided by (used in) financing activities
   
4,443
     
(15,859
)
Net increase in cash and cash equivalents
 
$
22,771
   
$
6,488
 

Cash flows from operating activities

Net loss during the nine months ended March 31, 201