In Fantasy Grounds II, extensions are modifications to an existing ruleset that changes the functionality and/or user interface of the ruleset in some way. The changes can be minor or extensive.
As an example, SmiteWorks released a Dungeon Theme with FG v2.5.0 which replaces all the graphics for the d20, 3.5E and Foundation rulesets.
There is very little documentation of how to create extensions, but many examples floating around the FG forums as well as the ones downloaded with the FG client. Here is the thread where the extension feature was announced for FG v2.2. [[1]]