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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
 

x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018.

o    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: 001-36355
Aerohive Networks, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
 
 
20-4524700
(State or other jurisdiction of
incorporation or organization)
 
 
 
(I.R.S. Employer
Identification Number)
 

1011 McCarthy Boulevard
Milpitas, California 95035
(408) 510-6100
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer   ¨
 
Accelerated filer   x
Non-accelerated filer   ¨ (Do not check if a smaller reporting company)
 
Smaller reporting company   ¨
 
 
Emerging growth company  x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
The number of shares of the registrant's common stock, par value $0.001, outstanding as of October 26, 2018 was 55,555,420.





TABLE OF CONTENTS
 
 
Page
 
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 

The Aerohive Networks design logo and the marks “Aerohive®,” “HiveManager®,” “HiveOS®,” "Aerohive Networks™, "Aerohive Atom AP30™,” “Aerohive Connect™,” “HiveManager Connect™,” “Aerohive Select™,” and “HiveCare Select™” are the property of Aerohive Networks, Inc. All Rights Reserved. This Quarterly Report on Form 10-Q contains additional trade names, trademarks and service marks of other companies.


1



PART I. FINANCIAL INFORMATION
ITEM 1.    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AEROHIVE NETWORKS, INC.
Condensed Consolidated Balance Sheets
(unaudited, in thousands, except share and per share amounts)
 
September 30,
 
December 31,
 
2018
 
2017
ASSETS
 
 
(As Adjusted)*
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
32,473

 
$
27,249

Short-term investments
62,270

 
57,675

Accounts receivable, net of allowance for doubtful accounts of $22 and $127 as of September 30, 2018 and December 31, 2017, respectively
14,810

 
17,662

Inventories
13,690

 
13,495

Prepaid expenses and other current assets
6,430

 
6,396

Total current assets
129,673

 
122,477

Property and equipment, net
6,529

 
6,381

Goodwill
513

 
513

Other assets
5,244

 
4,900

Total assets
$
141,959

 
$
134,271

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
15,117

 
$
11,946

Accrued liabilities
8,568

 
8,602

Debt, current
20,000

 

Deferred revenue, current
38,183

 
33,279

Total current liabilities
81,868

 
53,827

Debt, non-current

 
20,000

Deferred revenue, non-current
37,642

 
33,761

Other liabilities
1,612

 
1,769

Total liabilities
121,122

 
109,357

Commitments and contingencies (Note 5)

 

Stockholders’ equity:
 
 
 
Preferred stock, par value of $0.001 per share - 25,000,000 shares authorized as of September 30, 2018 and December 31, 2017; no shares issued and outstanding as of September 30, 2018 and December 31, 2017

 

Common stock, par value of $0.001 per share - 500,000,000 shares authorized as of September 30, 2018 and December 31, 2017; 55,505,380 and 54,171,498 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively
56

 
55

Additional paid–in capital
289,383

 
278,528

Treasury stock - 1,929,016 and 1,361,243 shares as of September 30, 2018 and December 31, 2017, respectively
(8,572
)
 
(6,216
)
Accumulated other comprehensive loss
(25
)
 
(30
)
Accumulated deficit
(260,005
)
 
(247,423
)
Total stockholders’ equity
20,837

 
24,914

Total liabilities and stockholders’ equity
$
141,959

 
$
134,271

See notes to condensed consolidated financial statements.
* The Company has adjusted certain amounts for the retrospective change in accounting policy for revenue recognition
(See Note 1).

2



AEROHIVE NETWORKS, INC.
Condensed Consolidated Statements of Operations
(unaudited, in thousands, except share and per share amounts)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenue:
 
 
(As Adjusted)*
 
 
 
(As Adjusted)*
Product
$
28,817

 
$
29,162

 
$
83,151

 
$
88,234

Subscription and support
11,735

 
10,139

 
33,643

 
29,597

Total revenue
40,552

 
39,301

 
116,794

 
117,831

Cost of revenue (1):
 
 
 
 
 
 
 
Product
10,595

 
9,880

 
29,645

 
29,165

Subscription and support
3,344

 
3,244

 
10,131

 
9,573

Total cost of revenue
13,939

 
13,124

 
39,776

 
38,738

Gross profit
26,613

 
26,177

 
77,018

 
79,093

Operating expenses:
 
 
 
 
 
 
 
Research and development (1)
8,529

 
9,260

 
26,389

 
28,032

Sales and marketing (1)
15,449

 
16,153

 
46,850

 
51,001

General and administrative (1)
5,243

 
5,700

 
16,469

 
17,486

Total operating expenses
29,221

 
31,113

 
89,708

 
96,519

Operating loss
(2,608
)
 
(4,936
)
 
(12,690
)
 
(17,426
)
Interest income
437

 
180

 
1,063

 
484

Interest expense
(196
)
 
(135
)
 
(543
)
 
(412
)
Other expense, net
(6
)
 
(90
)
 
(210
)
 
(268
)
Loss before income taxes
(2,373
)
 
(4,981
)
 
(12,380
)
 
(17,622
)
Provision for income taxes
60

 
75

 
202

 
369

Net loss
$
(2,433
)
 
$
(5,056
)
 
$
(12,582
)
 
$
(17,991
)
Net loss per share, basic and diluted
$
(0.04
)
 
$
(0.09
)
 
$
(0.23
)
 
$
(0.34
)
Weighted-average shares used in computing net loss per share, basic and diluted
55,381,268

 
53,683,727

 
54,851,435

 
53,070,863

 
 
 
 
 
 
 
 
(1) Includes stock-based compensation as follows:
 
 
 
 
 
 
 
Cost of revenue
$
170

 
$
313

 
$
672

 
$
860

Research and development
1,094

 
1,329

 
3,108

 
3,082

Sales and marketing
1,152

 
1,566

 
3,259

 
4,361

General and administrative
1,415

 
1,756

 
4,047

 
4,658

Total stock-based compensation
$
3,831

 
$
4,964

 
$
11,086

 
$
12,961


See notes to condensed consolidated financial statements.  
* The Company has adjusted certain amounts for the retrospective change in accounting policy for revenue recognition
(See Note 1).




3



AEROHIVE NETWORKS, INC.
Condensed Consolidated Statements of Comprehensive Loss
(unaudited, in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
(As Adjusted)*
 
 
 
(As Adjusted)*
Net loss
$
(2,433
)
 
$
(5,056
)
 
$
(12,582
)
 
$
(17,991
)
Unrealized gain on available-for-sale investments, net of tax
19

 
29

 
5

 
22

Comprehensive loss
$
(2,414
)
 
$
(5,027
)
 
$
(12,577
)
 
$
(17,969
)

See notes to condensed consolidated financial statements.  
* The Company has adjusted certain amounts for the retrospective change in accounting policy for revenue recognition (See Note 1).





4



AEROHIVE NETWORKS, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
 
Nine Months Ended September 30,
 
2018
 
2017
Cash flows from operating activities
 
 
(As Adjusted)*
Net loss
$
(12,582
)
 
$
(17,991
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
2,277

 
2,371

Stock-based compensation
11,086

 
12,961

Other
(494
)
 
(45
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
2,852

 
9,004

Inventories
(195
)
 
(577
)
Prepaid expenses and other current assets
(34
)
 
(1,054
)
Other assets
(344
)
 
(183
)
Accounts payable
2,874

 
(911
)
Accrued liabilities
(30
)
 
(329
)
Other liabilities
(20
)
 
93

Deferred revenue
8,785

 
4,476

Net cash provided by operating activities
14,175

 
7,815

Cash flows from investing activities
 
 
 
Purchases of property and equipment
(2,129
)
 
(510
)
Maturities of short-term investments
60,551

 
29,600

Purchases of short-term investments
(64,647
)
 
(36,189
)
Net cash used in investing activities
(6,225
)
 
(7,099
)
Cash flows from financing activities
 
 
 
Proceeds from employee stock option exercises and employee stock purchase plan
1,659

 
3,113

Payment for shares withheld for tax withholdings on vesting of restricted stock units
(1,888
)
 
(1,070
)
Payment to repurchase common stock
(2,356
)
 
(3,030
)
Payment on capital lease obligations
(141
)
 
(126
)
Net cash used in financing activities
(2,726
)
 
(1,113
)
Net increase (decrease) in cash and cash equivalents
5,224

 
(397
)
Cash and cash equivalents at beginning of period
27,249

 
34,346

Cash and cash equivalents at end of period
$
32,473

 
$
33,949

Supplemental disclosure of cash flow information
 
 
 
Income taxes paid
$
102

 
$
295

Interest paid
$
557

 
$
424

Supplemental disclosure of noncash investing and financing activities
 
 
 
Unpaid property and equipment purchases
$
363

 
$
62


See notes to condensed consolidated financial statements.
* The Company has adjusted certain amounts for the retrospective change in accounting policy for revenue recognition
(See Note 1).


5



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Aerohive Networks, Inc. was incorporated in Delaware on March 15, 2006, and, together with its subsidiaries (the "Company"), has designed and developed a leading cloud and enterprise Wi-Fi solution that enables the Company's customers to use the power of the Wi-Fi, cloud, analytics and applications to transform how they serve their customers. The Company's products include Wi-Fi access points, access switches and SD-WAN-capable routers required to build an edge-access network; a cloud-based services platform for centralized management; data collection and analytics; and applications that leverage the network to provide additional capabilities to the business and IT organizations. Together, these products, service platforms and applications create a simple, scalable, and secure solution to deliver a better-connected experience.
The Company has offices in North America, Europe and Asia Pacific and employs staff around the world.
Basis of Presentation and Consolidation
The Company prepared the accompanying consolidated financial statements in accordance with generally accepted accounting principles in the United States (GAAP), which include the accounts of Aerohive Networks, Inc. and its wholly owned subsidiaries. The Company has eliminated all intercompany accounts and transactions in consolidation.
Use of Estimates
When preparing the accompanying consolidated financial statements in conformity with GAAP, management makes estimates and assumptions that affect the amounts the Company reports in the consolidated financial statements and accompanying notes. Those estimates and assumptions include, among others, the determination of a standalone selling price (SSP) for revenue arrangements with multiple performance obligations, determination of fair value of stock-based awards, inventory valuation, accounting for income taxes, including the valuation reserve on deferred tax assets and uncertain tax positions, allowance for sales reserves, allowance for rebate reserves, allowance for doubtful accounts, and warranty costs. Management evaluates estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. As the Company cannot determine future events and their effects with precision, actual results could differ from these estimates and assumptions, and those differences could be material to the consolidated financial statements.
Foreign Currency
The functional currency of the Company’s foreign subsidiaries is the U.S. dollar. The Company remeasures the transactions denominated in currencies other than the functional currency at the average exchange rate in effect during the reporting period. At the end of each reporting period, the Company remeasures its subsidiaries’ monetary assets and liabilities to the U.S. dollar using exchange rates in effect at the end of the reporting period. The Company remeasures its non-monetary assets and liabilities at historical exchange rates. The Company records gains and losses related to remeasurement in other income (expense), net in the consolidated statements of operations. Foreign currency exchange losses have not been significant in any period presented and the Company has not undertaken any hedging transactions related to foreign currency exposure.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Revenue Recognition (Topic 605) and most industry-specific guidance. This standard requires entities to recognize revenue when they transfer promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In the first quarter of 2018, the Company adopted ASC 606, using the full retrospective method, which required the Company to restate its historical financial information to be consistent with the standard. The most significant impact of the standard related to the way the Company accounts for arrangements with its stocking distributors. The Company previously deferred the recognition of revenue and the cost of revenue from sales to these stocking distributors until the stocking distributors had sold the products to their customers (known as “sell-through” revenue recognition). Under the new standard, the Company recognizes all revenue and related cost of revenue on sales to stocking distributors upon shipment and transfer of control (known as “sell-in” revenue recognition), rather than deferring recognition until the stocking distributors report that they have sold the products to their

6



customers, provided that all other revenue recognition criteria have been met. The Company also attributes the impact to its revenue and deferred revenue balance to the removal of the limitation on contingent revenue, which accelerates revenue recognition for certain contracts. Further, the adoption of this standard also resulted in differences in the timing of recognition of contract costs, such as sales commissions.    
The Company has finalized the adoption of the standard and adjusted product revenue was $113.1 million and $134.6 million for fiscal years ended December 31, 2017 and 2016, respectively, and subscription and support revenue was $40.4 million and $33.3 million for fiscal years ended December 31, 2017 and 2016, respectively. The adoption of the standard resulted in a decrease in total deferred revenue of $3.3 million as of December 31, 2017, driven by the Company's recognition in the period of revenue related to stocking distributors upon shipment and also the removal of the limitation on contingent revenue accelerating revenue recognition for certain contracts. The adoption of the standard resulted in a decrease of $0.3 million in capitalized contract costs as of December 31, 2017. The adoption of this standard resulted in an increase in total revenue by $2.2 million and $2.1 million, respectively, for the three and nine months ended September 30, 2017. The adoption of this standard did not have a significant impact on the Company's total costs of revenue and sales commission for the three and nine months ended September 30, 2017. In addition, the adoption of the standard had no significant impact on the provision for income taxes and the net cash provided by (used in) operating, investing, or financing activities on the Company's consolidated statements of cash flows.
ASC 606 Adoption Impact to Previously Reported Results
The following tables present the impacts to reported results from the Company's adoption of the standard on the Company's condensed consolidated balance sheets and condensed consolidated statements of operations.
Consolidated Balance Sheet (in thousands)
 
 
 
 
 
 
 
As of December 31, 2017
 
As Reported
 
Impact of Adoption
 
As Adjusted
 
 
Prepaid expenses and other current assets
$
6,513

 
$
(117
)
 
$
6,396

Total current assets
122,594

 
(117
)
 
122,477

Other assets
5,124

 
(224
)
 
4,900

Total assets
134,612

 
(341
)
 
134,271

Deferred revenue, current
34,281

 
(1,002
)
 
33,279

Total current liabilities
54,829

 
(1,002
)
 
53,827

Deferred revenue, non-current
36,083

 
(2,322
)
 
33,761

Total liabilities
112,681

 
(3,324
)
 
109,357

Accumulated deficit
(250,406
)
 
2,983

 
(247,423
)
Total stockholders' equity
21,931

 
2,983

 
24,914

Total liabilities and stockholders' equity
$
134,612

 
$
(341
)
 
$
134,271


7



Consolidated Statements of Operations (in thousands, except per share amounts)
 
 
 
 
 
 
 
Three Months Ended September 30, 2017
 
As Reported
 
Impact of Adoption
 
As Adjusted
 
 
Product revenue
$
26,750

 
$
2,412

 
$
29,162

Subscription and support
10,318

 
(179
)
 
10,139

Total Revenue
37,068

 
2,233

 
39,301

Cost of revenue - Product
9,408

 
472

 
9,880

Total cost of revenue
12,652

 
472

 
13,124

Gross profit
24,416

 
1,761

 
26,177

Sales and marketing
15,948

 
205

 
16,153

Total operating expenses
30,908

 
205

 
31,113

Operating loss
(6,492
)
 
1,556

 
(4,936
)
Net loss
$
(6,612
)
 
$
1,556

 
$
(5,056
)
Net loss per share, basic and diluted
$
(0.12
)
 
$
0.03

 
$
(0.09
)
 
Nine Months Ended September 30, 2017
 
As Reported
 
Impact of Adoption
 
As Adjusted
Product revenue
$
85,666

 
2,568

 
88,234

Subscription and support
30,053

 
(456
)
 
29,597

Total Revenue
115,719

 
2,112

 
117,831

Cost of revenue - Product
28,760

 
405

 
29,165

Total cost of revenue
38,333

 
405

 
38,738

Gross profit
77,386

 
1,707

 
79,093

Sales and marketing
50,807

 
194

 
51,001

Total operating expenses
96,325

 
194

 
96,519

Operating loss
(18,939
)
 
1,513

 
(17,426
)
Net loss
$
(19,504
)
 
$
1,513

 
$
(17,991
)
Net loss per share, basic and diluted
$
(0.37
)
 
$
0.03

 
$
(0.34
)

Effect on certain items in the Statement of Cash Flows (operating activities, in thousands)
 
 
 
 
 
 
 
Nine Months Ended September 30, 2017
 
As Reported
 
Impact of Adoption
 
As Adjusted
Cash flows from operating activities:
 
   Net loss:
$
(19,504
)
 
$
1,513

 
$
(17,991
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
 
      Prepaid expenses and other current assets
(1,575
)
 
521

 
(1,054
)
      Other assets
(262
)
 
79

 
(183
)
      Deferred revenue
6,589

 
(2,113
)
 
4,476


8



Revenues by geographic location, based on the billing address of the respective channel partner’s bill-to location, which reflect the Company's adoption of ASC 606, are as follows: (in thousands)
 
 
 
 
 
 
 
Three Months Ended September 30, 2017
 
As Reported
 
Impact of Adoption
 
As Adjusted
Americas
$
22,613

 
$
1,461

 
$
24,074

Europe, Middle East and Africa
11,141

 
315

 
11,456

Asia Pacific
3,314

 
457

 
3,771

     Total revenues
$
37,068

 
$
2,233

 
$
39,301

 
Nine Months Ended September 30, 2017
 
As Reported
 
Impact of Adoption
 
As Adjusted
Americas
$
75,672

 
$
1,679

 
$
77,351

Europe, Middle East and Africa
31,371

 
610

 
31,981

Asia Pacific
8,676

 
(177
)
 
8,499

     Total revenues
$
115,719

 
$
2,112

 
$
117,831

Under ASC 606, the Company recognizes revenue as of the time of transfer of promised goods or services to customers in an amount that reflects the consideration the Company expects to be entitled to from those goods or services. As shown on the condensed consolidated statement of operations, the Company derives revenue from two sources: (i) product, which includes hardware and software license revenue, and (ii) subscription and support, which includes post-contract customer support (PCS) and software delivered as a service (SaaS).
Beginning with its first quarter, fiscal year 2018, the Company follows the following five-step approach in recognizing revenue:
Identification of the contract, or contracts, with a customer - A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract has commercial substance, and (iii) the Company determines that collection of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which the Company bases on a variety of factors, including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.
Identification of the performance obligations in the contract - The Company identifies performance obligations promised in a contract based on the goods or services that the Company will transfer to the customer that are both capable of being distinct, whereby the customer can benefit from the goods or services either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised goods or services, the Company applies judgment to determine whether promised goods or services are capable of being distinct and distinct in the context of the contract.
Determination of the transaction price - The Company determines the transaction price based on the consideration to which the Company will be entitled in exchange for transferring goods or services to the customer.
Allocation of the transaction price to the performance obligations in the contract - If the contract contains a single performance obligation, the Company allocates the entire transaction price to the single performance obligation. The Company allocates the transaction price of contracts that contain multiple performance obligations to each performance obligation based on a relative SSP. The Company determines SSP based on the price at which the performance obligation is sold separately. If the Company cannot observe SSP through past transactions, the Company estimates SSP by taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.

9



Recognition of revenue when, or as, the Company satisfies a performance obligation - The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. The Company recognizes revenue at the time the related performance obligation is satisfied by transferring a promised good or service to a customer.
Revenue Recognition
The Company’s product revenue consists of sales to distributors, and value-added resellers, or VARs and an original equipment manufacturing partner, or OEM partner. The Company considers purchase orders such distributors, VARs and OEM partner issue to the Company, which are in some cases governed by master sales agreements, to be the Company's contracts with such customers, as such documents provide enforceable rights and obligations between the Company and distributor, VAR or OEM partner. As part of its consideration of the contract, the Company evaluates certain factors, including the customer’s ability to pay (or credit risk). For each contract, the Company considers the promise to transfer goods or services to be the identified performance obligation. In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which the Company expects to be entitled. The Company allocates the transaction price to each distinct performance obligation based on a relative standalone selling price. The Company recognizes revenue when control of the product or service is transferred to the customer (i.e., when the performance obligation is satisfied). Further, in determining whether control has transferred, the Company considers if there is a present right to payment and legal title, along with risks and rewards of ownership has transferred to the customer.
The Company makes sales of products to most distributors under terms allowing certain price adjustments and limited rights of return (known as “stock rotation”) of the Company’s products held in their inventory. The Company recognizes revenue from sales to distributors upon the transfer of control of the product to the distributor. Frequently, distributors need to sell product at a discounted price lower than the standard distribution price in order to win business. After the Company verifies that the distributor had obtained the Company's pre-approval for the discount claim, the Company may issue a credit memo to the distributor representing a rebate of the amount of the discount. In determining the transaction price, the Company considers these price adjustments to be variable consideration. The Company estimates such price adjustments using the expected-value method based on an analysis of actual credit claims at the distributor level, over a period of time the Company considers adequate to account for current pricing and business trends. Historically, actual price adjustments relative to those the Company estimates and includes when determining the transaction price have not materially differed. Stock rotation rights provide distributor with the ability to return certain specified amounts of inventory. Stock rotation adjustments are an additional form of variable consideration which the Company also estimates using the expected-value method based on historical return rates. Historically, distributor stock rotation adjustments have not been material.

The Company makes sales to certain distributors, VARs and its OEM partner under terms that do not include rights of return or price concessions after the product is shipped. Accordingly, upon application of steps one through five above, the Company recognizes product revenue upon shipment and transfer of control.

The Company generally provides a limited lifetime warranty that its products will substantially conform to the published specifications. The Company limits its liability to either a credit equal to the purchase price or replacement of the defective part. The Company does not consider activities related to such warranty a separate performance obligation.

Payment terms and conditions vary by contract, although terms generally include a requirement of payment within 30 to 90 days. In instances where the timing of the Company's revenue recognition differs from the timing of its invoicing, the Company has determined that its contracts generally do not include a significant financing component. The primary purpose of the Company's invoicing terms is to provide customers with simplified and predictable ways of purchasing the Company's products and services, not for the Company's customers to provide financing or for the Company to provide customers with financing.

The Company records accounts receivable at the invoiced amount, net of an allowance for doubtful accounts. The Company recognizes a receivable in the period the Company delivers goods or provide services or when the Company's right to consideration is unconditional.

Significant Judgments

The Company's contracts with customers often include promises to transfer multiple products and services to the customer. The Company may exercise significant judgment when determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together. The Company may also exercise

10



judgment to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the hardware and recognized upon transfer of control.

The Company may further require judgment to determine the SSP for each distinct performance obligation. The Company determines SSP for the purposes of allocating the arrangement, primarily based on historical transaction pricing. The Company segregates historical transactions based on its pricing model and go-to-market strategy, which includes factors such as type of sales channel (VAR, OEM or distributor), the geographies in which the Company sells its products and services (domestic or international) and offering type (product series, software subscriptions and level of support for PCS).

Disaggregation of Revenue

Product Revenue - The Company’s product revenue consists of revenue from the sale of the Company’s hardware products, majority of which contains an embedded HiveOS software, the Company's proprietary operating system that is not considered to be distinct in the context of the contract. Therefore, the Company considers its hardware appliances together with related embedded HiveOS software (collectively, the "hardware”) as a single performance obligation. The Company transfers these items to the customer concurrently. The Company recognizes hardware revenue upon transfer of control to its customers, which occurs upon shipment. The Company’s product revenue includes the sales of software licenses of HiveManager, a license-based unified networking management system, which consists of the purchase of a perpetual license of the HiveManager software. The Company generally recognizes revenue from its software licenses upon transfer of control to its customers.

Subscription and Support Revenue - The Company’s subscription and support revenue consists of revenue from SaaS and PCS arrangements. SaaS arrangements with customers do not provide the right to take possession of the software at any time during the hosting period and have a defined contract term. PCS arrangements include software updates, access to technical support personnel, and expedited replacement of defective hardware products. Each of the promised services is distinct in the context of the contract as the services are not inputs to a combined output for which the Company provides any significant integration service, the provision of each service does not significantly modify or customize the other, and the Company could provide each service independently of the other. Though the Company has identified that each of the performance obligations is distinct, as each of the performance obligations represents a series of distinct services that has the same pattern of transfer (stand ready obligations) and the same measure of progress of transfer (days of service) the Company will account for the all series as a single performance obligation. The Company recognizes revenue from SaaS and PCS arrangements on a straight-line basis over the service contract term, which is typically one, three or five years. The contract term typically commences upon transfer of control of the corresponding products to our customer.

See the condensed consolidated statement of operations for the Company's product revenue and subscription and support revenue amounts for the three and nine months ended September 30, 2018 and 2017, respectively.
Costs to Obtain and Fulfill a Contract

The Company capitalizes certain contract acquisition costs consisting primarily of commissions paid and the related payroll taxes when customer contracts are signed. The Company capitalizes commission expenses earned by sales personnel and the related payroll taxes that are incremental to obtaining customer contracts. The Company amortizes deferred sales commission amounts based on the expected future revenue streams under the customer contracts. The Company includes amortization of deferred sales commissions in sales and marketing expense in the accompanying consolidated statements of operations. The Company classifies deferred commissions as current or non-current based on the timing of when the Company expects to recognize the expense. The Company periodically reviews these costs for impairment.

The Company records deferred revenue when it invoices the customer, collection is probable, and the associated revenue has not yet been earned. The current portion of deferred revenue represents the amounts the Company expects to recognize as revenue within one year of the condensed consolidated balance sheet date. See Note 3, Consolidated Balance Sheet Components, for the changes in the deferred revenue and deferred commissions during the three and nine months ended September 30, 2018 and 2017, respectively.
Contracted-But-Not-Recognized Revenue

The Company's contracted-but-not-invoiced performance obligations do not include the option for its customers to cancel. The Company's revenue allocated to remaining performance obligations represents contracted revenue that the Company has not yet recognized (“contracted-but-not-recognized”), which includes deferred revenue and non-cancelable amounts that the Company will invoice and recognize as revenue in future periods. Contracted-but-not-recognized revenue

11



was $77.7 million as of September 30, 2018, of which the Company expects to recognize approximately 52% over the next 12 months and the remainder thereafter.
Other Recently Adopted Accounting Pronouncements
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which provides guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities. In February 2018, the FASB issued ASU No. 2018-03, Technical Corrections and Improvements to Financial Instruments, to clarify certain aspects of ASU No. 2016-01. The Company adopted these standards effective January 1, 2018. The Company's adoption of these standards did not have a material impact on the Company's financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments, which provides guidance to decrease the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The Company adopted ASU 2016-15 in the first quarter of 2018. The Company's adoption of this standard did not have a material impact on the Company's financial statements.
    
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the lease accounting requirements in Topic 840. This standard requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee would recognize a straight-line total lease expense. The standard also requires qualitative and quantitative disclosures to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities, including the Company's significant judgments and changes in judgments. This standard is effective beginning January 1, 2019. The Company currently believes the standard will have a material impact on its consolidated balance sheet but will not have a material impact on its consolidated income statement. The most significant impact relates to our accounting for real-estate leases which will be recorded as Right of Use (ROU) assets with associated lease liabilities on the balance sheet upon adoption. The Company is continuing to evaluate the potential impact of this standard on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. An impairment charge will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The standard is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. The Company currently plans to adopt this standard in 2021 when it becomes effective.
Concentrations of Credit Risk and Significant Customers
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments and accounts receivable. The Company maintains cash equivalents in money market funds. The Company maintains short-term investments in U.S. treasuries, corporate securities, and commercial paper.
The Company sells its products primarily to channel partners, which include value-added resellers, or VARs, distributors, managed service providers, or MSPs, and original equipment manufacturers, or OEMs. The Company’s accounts receivable are typically unsecured and are derived from revenue earned from customers located in the Americas, Europe, the Middle East and Africa, and Asia Pacific. The Company performs ongoing credit evaluations to determine customer credit, but generally does not require collateral from its customers. The Company maintains reserves for estimated credit losses and these losses have historically been within management’s expectations. 
The Company has entered into separate agreements with certain individual channel partners that are part of a consolidated group of entities which collectively constitute greater than 10% of the Company’s total revenue or accounts receivable balance for certain periods, as presented in the tables below.

12



The percentages of revenue from a consolidated group of entities (Channel Partner A and Channel Partner B) greater than 10% of total consolidated revenue were as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
(As Adjusted)
 
 
 
(As Adjusted)
Channel Partner A
 
13.3
%
 
16.3
%
 
15.0
%
 
15.1
%
Channel Partner B
 
48.3
%
 
39.2
%
 
41.3
%
 
25.6
%
 
The percentages of receivables from a consolidated group of entities (Channel Partner A, Channel Partner B and Channel Partner C) greater than 10% of total consolidated accounts receivable were as follows:
 
 
September 30,
 
December 31,
 
 
2018
 
2017
Channel Partner A
 
21.7
%
 
27.9
%
Channel Partner B
 
31.0
%
 
29.4
%
Channel Partner C
 
13.1
%
 
*

 
 
 
 
 
* Less than 10%
 
 
 
 

2. FAIR VALUE MEASUREMENTS
The Company records its financial assets and liabilities at fair value. The Company categorizes these assets and liabilities based upon the level of judgment associated with inputs the Company uses to measure the fair value. The categories are as follows:
Level 1
 
Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities.
Level 2
 
Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3
 
Unobservable inputs are used when little or no market data is available.
The Company classified its cash equivalents and short-term marketable investments within Level 1 and Level 2 in the fair value hierarchy as of September 30, 2018 and December 31, 2017, respectively. Level 1 assets include highly liquid money market funds that the Company includes in cash equivalents. The Company classifies these instruments within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets. Level 2 assets include U.S. treasuries, corporate securities, agency securities and commercial paper. The Company classifies these instruments within Level 2 of the fair value hierarchy because they are valued based on pricing obtained from an independent pricing service, which may use quoted market prices for identical or comparable instruments or model driven valuations using observable market date or inputs corroborated by observable market data. The Company classifies these instruments as short-term investments unless their maturities are three months or less when purchased, in which case the Company includes them in cash and cash equivalents. The Company uses inputs such as actual trade data, benchmark yields, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency, which the Company obtains from quoted market prices, independent pricing vendors, or other sources, to determine the ultimate fair value of these assets.

13



The components of the Company’s Level 1 and Level 2 assets were as follows:
 
September 30, 2018
 
Amortized Cost
 
Gross Unrealized Gain (Loss)
 
Estimated Fair Value
 
Cash equivalents
 
Short-term investments
 
(in thousands)
Level 1:
 
 
 
 
 
 
 
 
 
Money market funds
7,806

 

 
7,806

 
7,806

 

 
$
7,806

 
$

 
$
7,806

 
$
7,806

 
$

Level 2:
 
 
 
 
 
 
 
 
 
U.S. treasuries
12,446

 
(10
)
 
12,436

 

 
12,436

Corporate securities
20,517

 
(15
)
 
20,502

 
2,000

 
18,502

Commercial paper
33,328

 

 
33,328

 
1,996

 
31,332

 
$
66,291

 
$
(25
)
 
$
66,266

 
$
3,996

 
$
62,270

Total
$
74,097

 
$
(25
)
 
$
74,072

 
$
11,802

 
$
62,270


 
December 31, 2017
 
Amortized Cost
 
Gross Unrealized Gain (Loss)
 
Estimated Fair Value
 
Cash equivalents
 
Short-term investments
 
(in thousands)
Level 1:
 
 
 
 
 
 
 
 
 
Money market funds
7,538

 

 
7,538

 
7,538

 

 
$
7,538

 
$

 
$
7,538

 
$
7,538

 
$

Level 2:
 
 
 
 
 
 
 
 
 
U.S. treasuries
9,480

 
(3
)
 
9,477

 

 
9,477

Corporate securities
15,293

 
(27
)
 
15,266

 

 
15,266

Commercial paper
32,932

 

 
32,932

 

 
32,932

 
$
57,705

 
$
(30
)
 
$
57,675

 
$

 
$
57,675

Total
$
65,243

 
$
(30
)
 
$
65,213

 
$
7,538

 
$
57,675

All short-term investments the Company held as of September 30, 2018 and December 31, 2017 contractually mature within one year from these respective dates.
Unrealized gains and losses related to these investments are due to interest rate fluctuations as opposed to credit quality. In addition, the Company does not intend to sell, and it is not more likely than not that the Company would be required to sell, these investments before recovery of their cost basis. As a result, there was no other-than-temporary impairment for these investments as of September 30, 2018 and December 31, 2017.  
3. CONSOLIDATED BALANCE SHEET COMPONENTS
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
 
 
 
September 30,
 
December 31,
 
 
 
2018
 
2017
 
 
 
 
 
(As Adjusted)
 
 
 
(in thousands)
Deferred sales commissions, current portion
 
 
$
3,216

 
$
3,072

Prepaid expenses
 
 
2,464

 
2,543

Other
 
 
750

 
781

Total prepaid expenses and other current assets
 
 
$
6,430

 
$
6,396


14



Property and Equipment, Net
Property and equipment, net consists of the following:
 
 
 
 
September 30,
 
December 31,
 
 
Estimated Useful Lives
 
2018
 
2017
 
 
 
 
(in thousands)
Computer and other equipment
 
3 years
 
$
1,743

 
$
1,713

Manufacturing, research and development laboratory equipment
 
3 years
 
5,540

 
4,630

Software
 
2 to 5 years
 
9,595

 
8,182

Office furniture and equipment
 
3 to 7 years
 
2,066

 
2,061

Leasehold improvements
 
shorter of useful life or lease term
 
1,049

 
1,017

Property and equipment, gross
 
 
 
19,993

 
17,603

Less: Accumulated depreciation and amortization
 
 
 
(13,464
)
 
(11,222
)
Property and equipment, net
 
 
 
$
6,529

 
$
6,381

The software category includes the capitalized software for the Company's cloud service platform. The Company amortizes these capitalized costs to cost of subscription and support revenue on a straight-line basis over an estimated useful life of the software of five years.
Depreciation and amortization expense was $0.8 million and $0.7 million for the three months ended September 30, 2018 and 2017, respectively, and $2.3 million and $2.4 million for the nine months ended September 30, 2018 and 2017, respectively.
Office furniture and equipment classified under capital lease was $1.2 million at September 30, 2018 and December 31, 2017 respectively, and the related accumulated depreciation was $0.6 million and $0.4 million at September 30, 2018 and December 31, 2017, respectively.
Other Assets
Other assets consist of the following:
 
 
 
September 30,
 
December 31,
 
 
 
2018
 
2017
 
 
 
 
 
(As Adjusted)
 
 
 
(in thousands)
Deferred sales commissions, non-current portion
 
 
$
3,129

 
$
2,947

Investment in privately held company
 
 
1,500

 
1,500

Other
 
 
615

 
453

Total other assets
 
 
$
5,244

 
$
4,900


Deferred Sales Commission
The current portion of deferred commission represents the amounts that the Company expects to recognize as commission expense within one year of the consolidated balance sheet date. Significant changes in the balance of total deferred commission (contract asset) during the three and nine months ended September 30, 2018 and 2017 are as follows:


15



 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
(As Adjusted)
 
 
 
(As Adjusted)
 
(in thousands)
 
(in thousands)
Beginning balance
$
6,475

 
$
6,349

 
$
6,019

 
$
5,766

Recognized
(3,374
)
 
(3,219
)
 
(10,140
)
 
(10,512
)
Additions
3,244

 
3,217

 
10,466

 
11,093

Total deferred commission
$
6,345

 
$
6,347

 
$
6,345

 
$
6,347

Current portion
$
3,216

 
$
3,206

 
$
3,216

 
$
3,206

Non-current portion
$
3,129

 
$
3,141

 
$
3,129

 
$
3,141


Of the $6.3 million total deferred commission balance as of September 30, 2018, the Company expects to recognize approximately 51% as commission expense over the next 12 months and the remainder thereafter.
Investment in Privately Held Company
In January 2016, the Company paid $1.5 million in cash to purchase a convertible note issued by a privately held company, which provides Wi-Fi application and analytics. In June 2017, the convertible note and accrued interest on the note converted into shares of preferred stock of the privately held company and the note was canceled. The accrued interest on the note was immaterial. The Company currently has no significant voting rights, investor rights or influence over the privately held company. Since the investment has no readily determinable market value, the Company elected the measurement alternative. As of September 30, 2018, the Company carried the investment at the value of original principal and the Company reviews such carried value quarterly for indicators of fair-value changes when there are observable prices less any potential impairment. The Company did not recognize a change in value or impairment for the three months ended September 30, 2018 and 2017, as there were no identified events or changes in circumstances that might have a significant impact on the carrying value. The Company has classified the investment as other assets on the condensed consolidated balance sheet.
Accrued Liabilities
Accrued liabilities consist of the following:
 
 
 
September 30,
 
December 31,
 
 
 
2018
 
2017
 
 
 
(in thousands)
Accrued compensation
 
 
$
7,203

 
$
6,971

Accrued expenses and other liabilities
 
 
1,177

 
1,385

Warranty liability, current portion
 
 
188

 
246

Total accrued liabilities
 
 
$
8,568

 
$
8,602

Deferred Revenue
The current portion of deferred revenue represents the amounts that the Company expects to recognize as revenue within one year of the consolidated balance sheet date. Significant changes in the balance of total deferred revenue (contract liability) during the three and nine months ended September 30, 2018 and 2017 are as follows:

16



 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
(As Adjusted)
 
 
 
(As Adjusted)
 
(in thousands)
 
(in thousands)
Beginning balance
$
71,307

 
$
65,369

 
$
67,040

 
$
63,239

Recognized
(11,735
)
 
(10,139
)
 
(33,643
)
 
(29,597
)
Additions
16,253

 
12,487

 
42,428

 
34,075

Total deferred revenue
$
75,825

 
$
67,717

 
$
75,825

 
$
67,717

Current portion
$
38,183

 
$
33,952

 
$
38,183

 
$
33,952

Non-current portion
$
37,642

 
$
33,765

 
$
37,642

 
$
33,765


Of the $75.8 million total deferred revenue balance as of September 30, 2018, the Company expects to recognize approximately 50% as revenue over the next 12 months and the remainder thereafter.
Warranty Liability
The following table summarizes the activity related to the Company’s accrued liability for estimated future warranty:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Beginning balance
$
540

 
$
930

 
$
577

 
$
975

Charges to operations
154

 
141

 
428

 
492

Obligations fulfilled
(177
)
 
(247
)
 
(484
)
 
(586
)
Changes in existing warranty
(3
)
 
(11
)
 
(7
)
 
(68
)
Total product warranties
$
514

 
$
813

 
$
514

 
$
813

Current portion
$
188

 
$
480

 
$
188

 
$
480

Non-current portion
$
326

 
$
333

 
$
326

 
$
333

Changes in existing warranty reflect a combination of changes in expected warranty claims and changes in the related costs to service such claims.
4. DEBT
Financing Agreements
In June 2012, the Company entered into a revolving credit facility with Silicon Valley Bank (the "Revolving Credit Facility"). The Revolving Credit Facility is collateralized by substantially all of the Company’s property, other than intellectual property. Since January 1, 2016, the Revolving Credit Facility bears interest rate at the lesser of (i) LIBOR rate plus 1.75% or (ii) prime rate minus 1.0%. In March 2017, the Company further amended the Revolving Credit Facility to extend the maturity date by two years and reduce the minimum cash requirements. The weighted-average interest rate of the Revolving Credit Facility was 3.89% and 3.09% for the three months ended September 30, 2018 and 2017, respectively, and 3.62% and 2.85% for the nine months ended September 30, 2018 and 2017, respectively.
The Revolving Credit Facility contains customary negative covenants which, unless waived by the bank, limit the Company’s ability to, among other things, incur additional indebtedness, grant liens, make investments, repurchase stock, pay dividends, transfer assets or engage in merger and acquisition activity, including merge or consolidate with a third party. The Revolving Credit Facility also requires the Company to maintain a minimum adjusted quick ratio of 1.25 to 1.00 and a minimum net cash, cash equivalent and investment balance with the bank as of the last day of each month of $35.0 million and to demonstrate the absence of defined events of default in order to assure full access to the available borrowing. The Revolving Credit Facility also contains customary events of default, subject to customary cure periods for certain defaults, that include, among other things, non-payment defaults, covenant defaults, material judgment defaults, bankruptcy and insolvency defaults, cross-defaults to certain other material indebtedness, and defaults due to inaccuracy of representation and warranties. Upon an event of default, the lender may declare all or a portion of the outstanding obligations payable by the Company to be immediately due and payable and exercise other rights and remedies provided for under the Revolving Credit Facility. During

17



the existence of an event of default, interest on the obligations under the Revolving Credit Facility could be increased by 5.0%. As of September 30, 2018, the Company was in compliance with these covenants.
The Revolving Credit facility currently provides, among other things (i) a maturity date of March 31, 2019; and (ii) a revolving line up to $20.0 million, subject to certain conditions.
As of September 30, 2018$20.0 million remains outstanding under the Revolving Credit Facility, and the Company classifies this amount as a current liability in the condensed consolidated balance sheet.
5. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company currently leases its main office facility in Milpitas, California, which lease is set to expire in June 2023. In addition, the Company leases office space for its subsidiaries in the United Kingdom, the Netherlands, Korea, France and China under non-cancelable operating leases that expire at various times through September 2022. The Company has also entered into various lease agreements in other locations in the United States and globally to support its sales and research and development functions.
The Company recognizes rent expense on a straight-line basis over the respective lease period. Future minimum lease payments by year under operating leases as of September 30, 2018 are as follows:
 
Amount
Year Ending December 31,
(in thousands)
2018 (remaining three months)
$
457

2019
1,567

2020
1,087

2021
1,075

2022
990

Thereafter
445

Total
$
5,621

Rent expense was $0.5 million for the three months ended September 30, 2018 and 2017, respectively, and was $1.4 million and $1.5 million for the nine months ended September 30, 2018 and 2017, respectively.
Capital Lease Obligations
The Company has certain office furniture and equipment that it classifies under capital leases. The terms of the capital leases range from three years to seven years. The interest expense is immaterial in any particular period. Future minimum lease payments by year under capital lease obligations as of September 30, 2018 are as follows:
 
Amount
Year Ending December 31,
(in thousands)
2018 (remaining three months)
$
45

2019
178

2020
172

2021
170

2022
162

Thereafter
83

Total
$
810

Manufacturing Commitments
The Company subcontracts with manufacturing companies to manufacture its hardware. The contract manufacturers procure components based on non-cancelable orders the Company places with them. If the Company cancels all or part of an

18



order, the Company is liable to the contract manufacturers for the cost of the related components they purchased under such orders.
As of September 30, 2018 and December 31, 2017, the Company had manufacturing commitments with contract manufacturers for inventory totaling approximately $9.7 million and $6.0 million, respectively.
Other Purchase Commitments
In August 2018, the Company amended an agreement with a third-party provider for our use of certain cloud services. Under the non-cancelable addendum, the Company is committed to a minimum purchase of $11.7 million between September 2018 and August 2021. As of September 30, 2018, the Company's remaining purchase commitment under the addendum was $11.7 million.
Contingencies
The Company may be subject to legal proceedings and litigation arising from time to time. The Company will record a liability when it believes that it is both probable that a loss has been incurred and the amount can be reasonably estimated. The Company expects periodically to evaluate developments in its legal matters that could affect the amount of liability that it has previously accrued, if any, and make adjustments as appropriate. The Company exercises significant judgment to determine both likelihood of there being, and the estimated amount of, a loss related to such matters, and the Company’s judgment may be incorrect. The Company cannot reasonably determine in advance the outcome of any litigation proceeding. Until the final resolution of any such matter for which the Company may be required to accrue, the Company may have an exposure to loss in excess of the amount the Company has accrued, and such excess amount could be significant.
The Company is currently engaged in the following separate security litigations:
In January 2018, three purported class actions were filed in the United States District Court for the Northern District of California against the Company and two of its officers. Those actions were subsequently consolidated into a single action titled as McGovney v. Aerohive Networks, Inc., et al., Case No. 5:18-cv-00435. The consolidated complaint, as amended, alleges that the defendants made false and misleading statements, in particular regarding the Company’s financial outlook for the fourth quarter of 2017. The complaint asserts claims for violations of Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5 on behalf of those who purchased the Company’s common stock between November 1, 2017 and January 16, 2018, inclusive. The complaint seeks monetary damages in an unspecified amount. 
On March 26, 2018, a purported shareholder derivative complaint was filed in the California Superior Court for the County of Santa Clara against the Company’s board of directors and two of its officers. The action is titled Flores v. Flynn, et.al, Case No. 18CV325517. The complaint alleges that the same general conduct alleged in the securities class actions also constituted a breach of fiduciary duty, waste of corporate assets, abuse of control, mismanagement, and unjust enrichment. The complaint seeks monetary damages in an unspecified amount, restitution, and certain changes to the Company’s corporate governance and internal procedures. On July 9, 2018, pursuant to a stipulation between the parties, the Court stayed the case until the completion of the motion-to-dismiss stage of the federal class action described above.
In September 2018, Modern Telecom Systems, LLC, or MTS, filed a complaint in the U.S. District Court, for the District of Delaware, asserting that certain of the Company's products which utilize aspects of the IEEE 802.11 standard infringed United States Patent No. 6,504,886 prior to such patent's expiration. The Company is evaluating the possible application of these claims, if any, to its products.
The outcomes of the legal proceedings are inherently unpredictable, subject to significant uncertainties, and could be material to the Company's operating results and cash flows for any particular period.
The Company intends to defend these lawsuits vigorously, and is not able to predict or estimate any range of reasonably possible loss related to these lawsuits. If these matters have an adverse outcome, they may have a material impact on the Company’s financial position, results of operations or cash flows.       
Guarantees

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The Company typically enters into agreements with its customers that contain indemnification provisions in the event of claims alleging that the Company’s products infringe the intellectual property rights of a third party. The Company has at its option and expense, the ability to resolve any infringement, replace product with a non-infringing product that is equivalent-in-function, or refund to the customers the total product price. These agreements also typically include guarantees of product and service performance. The Company has not recorded a liability related to these indemnification and guarantee provisions and the Company’s indemnification and guarantee provisions have not had any impact on the consolidated financial statements to date.
6. STOCKHOLDERS' EQUITY
Common Stock Reserved for Future Issuance
As of September 30, 2018, the Company had the following reserved shares of common stock for future issuance:
 
September 30,
 
2018
Common stock reserved for future grant under the 2014 Equity Incentive Plan
9,085,238

Common stock reserved for future purchase under the 2014 Employee Stock Purchase Plan
1,680,335

Options and Restricted Stock Units issued and outstanding
8,550,265

Total reserved shares of common stock for future issuance
19,315,838


Stock Repurchase Program
In February 2016, the Company's board of directors authorized a stock repurchase program of up to $10.0 million, with stock purchases made from time to time in compliance with applicable securities laws in the open market or in privately negotiated transactions. The timing and amounts of any purchases will be based on market conditions and other factors including price, regulatory requirements and capital availability. The authorization does not require the purchase of any minimum number of shares, and the Company may suspend, modify or discontinue the program at any time without prior notice. In August 2017, the Company's board of directors extended this program to June 30, 2018. In November 2017, the Company's board of directors increased the authorized amount under this program to $20.0 million. In July 2018, the Company's board of directors further extended this program through June 30, 2020.
During the three months ended September 30, 2018, the Company repurchased a total of 318,812 shares of its common stock on the open market at a total cost of $1.3 million with an average price per share of $4.18. During the three months ended September 30, 2017, the Company repurchased a total of 587,837 shares at a total cost of $2.0 million with an average price per share of $3.42. During the nine months ended September 30, 2018, the Company repurchased a total of 567,773 shares of its common stock on the open market at a total cost of $2.4 million with an average price per share of $4.15. During the nine months ended September 30, 2017, the Company repurchased a total of 796,616 shares of its common stock on the open market at a total cost of $3.0 million with an average price per share of $3.80. As of September 30, 2018, the Company had repurchased under this program 1,929,016 shares of its common stock at a total price $8.6 million with an average purchase price $4.44 per share of our common stock. Approximately $11.4 million remains available to the Company as of September 30, 2018 for repurchases under this program.

7. STOCK-BASED COMPENSATION
2014 Equity Incentive Plan
On March 26, 2014, the Company's 2014 Equity Incentive Plan ("2014 Plan") became effective. On March 27, 2014, the Company terminated its earlier 2006 Global Share Plan ("2006 Plan"), added all reserved-but-unissued shares under the 2006 Plan to the 2014 Plan and rolled into the 2014 Plan all shares underlying stock awards granted under the 2006 Plan that otherwise would return to the 2006 Plan. The Company may not grant additional awards under the 2006 Plan, but the 2006 Plan will continue to govern outstanding awards previously granted under the 2006 Plan.
The 2014 Plan provides for the grant of incentive stock options within the meaning of Section 422 of the Internal Revenue Code, only to employees of the Company or any parent or subsidiary of the Company, and for the grant of nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and performance

20



shares to employees, directors and consultants of the Company, and the employees and consultants of any parent or subsidiary of the Company.
In January 2018, the Company effected an increase of 2,708,575 shares reserved under the 2014 Plan. As of September 30, 2018, the Company had 9,085,238 total shares of common stock reserved and available for grant under the 2014 Plan.
The following table summarizes the total number of shares available for grant under the 2014 Plan as of September 30, 2018:
 
 
 
Shares Available for Grant
 
 
Balance, December 31, 2017
7,997,691

Authorized
2,708,575

Options granted

Options canceled
348,767

Awards granted
(3,174,932
)
Awards canceled
1,205,137

Balance, September 30, 2018
9,085,238

Stock Options
The following table summarizes the information about outstanding stock option activity:
 
Options Outstanding
 
Number of
Shares
Underlying
Outstanding
Options
 
Weighted
Average
Exercise 
Price
 
Weighted
Average
Remaining
Contractual Term
(Years)
 
Aggregate
Intrinsic
Value
 
 
 
 
 
 
 
(in thousands)
Balance, December 31, 2017
4,247,911

 
$
6.03

 
5.80
 
$
4,472

Options granted

 

 
 
 
 
Options exercised
(43,209
)
 
1.59

 
 
 
 
Options canceled
(348,767
)
 
6.58

 
 
 
 
Balance, September 30, 2018
3,855,935

 
$
6.03

 
4.58
 
$
2,573

Options exercisable, September 30, 2018
3,585,172

 
$
5.99

 
4.39
 
$
2,573

There were no options granted during the three and nine months ended September 30, 2018 and 2017.
The aggregate intrinsic value of stock options exercised during the three months ended September 30, 2018 and 2017 was $0.08 million and $0.03 million, respectively and during the nine months ended September 30, 2018 and 2017 was $0.13 million and $1.2 million, respectively. The intrinsic value for each share underlying an option represents the difference between the option exercise price per share and the closing stock price of a share of the Company’s common stock. The total grant-date fair value of the options vested was $0.3 million and $0.7 million, respectively, during the three months ended September 30, 2018 and 2017, respectively, and $1.3 million and $2.6 million during the nine months ended September 30, 2018 and 2017, respectively.
Restricted Stock Units
The Company currently grants Restricted Stock Units (RSUs) to certain employees and directors. The RSUs vest over a period of time, generally one-to-three years, and are subject to the participant’s continuing service to the Company over that period. Until vested, RSUs do not have the voting and dividend participation rights of common stock and the shares underlying the awards are not considered issued and outstanding.

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The following is a summary of the Company’s RSU grant activity and related information for the three months ended September 30, 2018:
 
Restricted Stock Units Outstanding
 
Shares
 
Weighted-Average
Grant-Date
Fair Value Per Share
 
 
 
 
Balance, December 31, 2017
4,089,067

 
$
6.47

Awards granted
3,174,932

 
4.13

Awards vested
(1,812,433
)
 
5.23

Awards canceled
(757,236
)
 
5.25

Balance, September 30, 2018
4,694,330

 
$
4.63


The weighted-average grant-date fair value of RSUs the Company granted during the three months ended September 30, 2018 and 2017 was $4.06 and $4.66 per share, respectively, and during the nine months ended September 30, 2018 and 2017 was $4.13 and $4.96 per share, respectively. The aggregate grant-date fair value of RSUs the Company granted during the three months ended September 30, 2018 and 2017 was $0.6 million and $0.4 million, respectively, and during the nine months ended September 30, 2018 and 2017 was $13.1 million and $16.3 million, respectively. The aggregate fair value of shares vested as of the respective vesting dates during the three months ended September 30, 2018 and 2017 was $2.7 million and $1.7 million, respectively, and during the nine months ended September 30, 2018 and 2017 was $7.6 million and $6.3 million, respectively.
The number of RSUs vested during a particular period includes shares that the Company withheld during the period on behalf of certain employees to satisfy the minimum statutory tax withholding requirements, as determined by the Company. During the three months ended September 30, 2018 and 2017, the Company withheld 50,699 and 180,345 shares of stock, respectively, for an aggregate value of $0.2 million and $0.6 million, respectively. During the nine months ended September 30, 2018 and 2017, the Company withheld 447,901 and 275,922 shares of stock, respectively, for an aggregate value of $1.9 million and $1.1 million, respectively. The Company returned such withheld shares to the 2014 Plan, which were then available under the plan terms for future issuance.
In the three months ended March 31, 2017, the Company granted 378,644 shares of RSUs as performance-based restricted stock units (PBRSUs) to certain executives pursuant to the 2014 Plan. Each PBRSU represents the right to receive one share of the Company's common stock upon vesting, subject to the Company's achievement of certain performance conditions. 251,037 of these PBRSU awards vested during the nine months ended September 30, 2018. The Company does not expect additional PBRSUs to vest during the remainder of the fiscal year 2018. The Company did not grant any PBRSUs during the three and nine months ended September 30, 2018.
The Company granted 351,500 and 358,000 market-based restricted stock units (MBRSUs) to certain executives during the three months ended June 30, 2018 and 2017 respectively, pursuant to the 2014 Plan. The Company did not grant any MBRSUs during the three months ended September 30, 2018. Each MBRSU represents the right to receive one share of the Company's common stock upon vesting subject to the Company's achievement of certain stock price targets. The Company estimated the fair value of the MBRSUs using the Monte Carlo option-pricing model as of the date of grant as the MBRSUs contain both market and service conditions. The weighted-average grant-date fair value of these MBRSUs granted during the three months ended June 30, 2018 and 2017 was $3.05 and $4.18 per share, respectively. The Company records the total expense related to all of the MBRSUs on a graded-vesting method over the estimated term.  32,875 and 106,125 shares of these MBRSU shares vested during the three and nine months ended September 30, 2018, respectively. The Company expects an additional 32,875 MBRSU shares to vest during the remainder of the fiscal year 2018.
2014 Employee Stock Purchase Plan
The 2014 Employee Stock Purchase Plan ("ESPP") is a ten-year plan, effective in March 2014. The ESPP authorizes the Company to issue shares of common stock pursuant to purchase rights it grants to its employees and those of its designated subsidiaries. In January 2018, the Company effected an increase of 541,715 shares reserved under the ESPP. As of September 30, 2018, the Company had 1,680,335 total shares of common stock reserved and available for issuance under the ESPP.

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Under the ESPP, the Company grants stock purchase rights to all eligible employees, currently covering a one-year offering period ending December 1, 2018, with purchase dates at the end of each interim six-month purchase period. Employees purchase shares using employee payroll deductions at purchase prices equal to 85% of the lesser of the fair market value of the Company’s common stock at either the first day of each offering period or the date of purchase. The ESPP currently has a reset provision: If the closing price of the Company’s common stock on the last day of any purchase period during an offering period is lower than the closing sales price on the first day of the related offering period, that offering period will terminate upon the purchase of shares for such purchase period and participants will be automatically re-enrolled in the immediately following offering period. As a result, the reference price for purposes of determining the purchase price of shares for subsequent purchase periods for all participants of the new offering period resets to such lower price. No participant may purchase more than $25,000 worth of common stock in any calendar year, or 5,000 shares of common stock in any six-month purchase period. During the nine months ended September 30, 2018 and 2017, the Company issued 493,914 and 563,174 shares respectively, under the ESPP.
Determination of Fair Values
The Company used the following weighted-average assumptions to value MBRSUs under the Monte Carlo model:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
MBRSUs:
 
 
 
 
 
 
 
Expected volatility
N/A
 
N/A
 
44
%
 
46
%
Risk free interest rate
N/A
 
N/A
 
2.61
%
 
1.45
%
The Company used the following weighted-average assumptions to value employee stock purchase rights under the Black-Scholes model:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
ESPP purchase rights:
 
 
 
 
 
 
 
Expected term (in years)
0.50 - 1.00
 
0.50 - 1.00
 
0.50 - 1.00
 
0.50 - 1.00
Expected volatility
46% - 52%
 
34% - 39%
 
46% - 52%
 
34% - 39%
Risk free interest rate
1.45% - 2.10%
 
0.60% - 1.07%
 
1.45% - 2.10%
 
0.60% - 1.07%
Stock-based Compensation Expense
The Company recognized total stock-based compensation for stock-based awards in the condensed consolidated statements of operations as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Cost of revenue
$
170

 
$
313

 
$
672

 
$
860

Research and development
1,094

 
1,329

 
3,108

 
3,082

Sales and marketing
1,152

 
1,566

 
3,259

 
4,361

General and administrative
1,415

 
1,756

 
4,047

 
4,658

Total stock-based compensation
$
3,831

 
$
4,964

 
$
11,086

 
$
12,961

The following table presents stock-based compensation expense by award-type:

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Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
 
 
 
 
Stock Options
$
291

 
$
652

 
$
1,312

 
$
2,355

Restricted Stock Units
3,140

 
3,945

 
8,505

 
9,408

Employee Stock Purchase Plan
400

 
367

 
1,269

 
1,198

Total stock-based compensation
$
3,831

 
$
4,964

 
$
11,086

 
$
12,961

The stock-based compensation expense the Company recorded for RSU for the three months ended September 30, 2018 and 2017 includes the amount of stock-based compensation recorded for MBRSUs of approximately $0.3 million and $0.6 million, respectively, and for the three months ended September 30, 2017 includes the amount of stock-based compensation the Company recorded for PBRSUs of approximately $0.3 million. The stock-based compensation expense the Company recorded for RSU for the nine months ended September 30, 2018 and 2017 includes the amount of stock-based compensation the Company recorded for PBRSUs of approximately $0.2 million and $0.7 million, respectively, and for MBRSUs of approximately $0.7 million and $0.9 million, respectively.
As of September 30, 2018, unrecognized stock-based compensation related to outstanding stock options, RSUs (including PBRSUs and MBRSUs) and ESPP purchase rights, was $0.8 million, $17.7 million and $0.3 million, respectively, which the Company expects to recognize over weighted-average periods of 0.75 years, 2.01 years and 0.17 years, respectively.
8. NET LOSS PER SHARE
The Company calculates basic and diluted net loss per share by dividing the net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is the same as basic net loss per share, since the effects of potentially dilutive securities are antidilutive.
The following table presents the Company's computation of basic and diluted net loss per share:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
  
2018
 
2017
 
2018
 
2017
 
 
 
(As Adjusted)
 
 
 
(As Adjusted)
 
(in thousands, except for share and per share data)
Numerator:
 
 
 
 
 
 
 
Net loss
$
(2,433
)
 
$
(5,056
)
 
$
(12,582
)
 
$
(17,991
)
Denominator:
 
 
 
 
 
 
 
Weighted-average shares used to compute net loss per share, basic and diluted
55,381,268

 
53,683,727

 
54,851,435

 
53,070,863

Net loss per share:
 
 
 
 
 
 
 
Basic and diluted
$
(0.04
)
 
$
(0.09
)
 
$
(0.23
)
 
$
(0.34
)
The Company excluded the following period-end outstanding common stock equivalents from its computation of diluted net loss per share for the periods presented because including them would have been antidilutive:
 
As of September 30,
 
2018
 
2017
Shares of common stock issuable under the Equity Incentive Plan
8,550,265

 
9,254,272

Employee Stock Purchase Plan
414,881

 
431,153

Total
8,965,146

 
9,685,425

9. INCOME TAXES
The Company's provision for income taxes was approximately $0.1 million and $0.1 million, respectively, for the three months ended September 30, 2018 and 2017, and was approximately $0.2 million and $0.4 million, respectively, for the nine months ended September 30, 2018 and 2017. The Company's provision for income taxes consisted primarily of state taxes and foreign income taxes.

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For the three and nine months ended September 30, 2018 and 2017, the Company's provision for income taxes differed from the statutory amount primarily due to the Company's maintaining a full valuation allowance against the U.S. net deferred tax assets, partially offset by foreign and state taxes.
The Company has intercompany services agreements with its subsidiaries located in the United Kingdom, the Netherlands, New Zealand, Australia, Canada and China, which require payment for services rendered by these subsidiaries at an arm’s-length transaction price. The foreign tax expense represents foreign income tax payable by these subsidiaries on profit generated on intercompany services agreements.
The Company's realization of deferred tax assets depends on future taxable income, the existence and timing of which is uncertain. Based on the Company’s history of losses, management has determined it cannot conclude that it is more likely than not that the deferred tax assets will be realized and, accordingly, management has placed a full valuation allowance against its domestic deferred tax assets, including net operating loss carryforwards and research and development and other tax credits, as of September 30, 2018 and December 31, 2017, respectively.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code including, but not limited to: (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one‑time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized; (6) creating the base erosion anti‑abuse tax (“BEAT”), a new minimum tax; (7) creating a new limitation on deductible interest expense; and (8) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.
The Company has not completed its accounting assessment for the effects of the Tax Act; however, based on its initial assessment, the Company has determined that the Tax Act did not have a material effect on its consolidated financial statements for the three and nine months ended September 30, 2018
10. SEGMENT INFORMATION
The Company’s chief operating decision maker (CODM) is its Chief Executive Officer. The Company derives its revenue primarily from sales of products and subscription and support services. The Company’s CODM reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. Accordingly, the Company determined that it operates as one reportable and operating segment.
The following table represents the Company's revenue based on the billing address of the respective channel partners:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
(As Adjusted)
 
 
 
(As Adjusted)
 
(in thousands)
Americas
$
26,561

 
$
24,074

 
$
70,792

 
$
77,351

Europe, Middle East and Africa
11,001

 
11,456

 
35,568

 
31,981

Asia Pacific
2,990

 
3,771

 
10,434

 
8,499

Total revenues
$
40,552

 
$
39,301

 
$
116,794

 
$
117,831

     The Company has included within Americas in the above table revenue from sales in the United States of $24.6 million and $22.4 million, respectively, for the three months ended September 30, 2018 and 2017, and $65.4 million and $71.8 million, respectively, for the nine months ended September 30, 2018 and 2017. Aside from the United States, no country comprised 10% or more of the Company's total revenue for each of the three months ended September 30, 2018 and 2017, respectively.

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Property and equipment, net by location is summarized as follows:  
 
September 30,
 
December 31,
 
2018
 
2017
 
(in thousands)
United States
$
5,048

 
$
5,323

People's Republic of China
1,302

 
875

United Kingdom
179

 
183

Total property and equipment, net
$
6,529

 
$
6,381


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ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. This discussion and analysis contains forward-looking statements reflecting our current expectations and involves risks and uncertainties. We intend to identify forward-looking statements when we use the words “believe,” “will,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “could,” “potentially” and similar expressions that convey uncertainty of future events or outcomes. Our actual results and the timing of events may differ materially from those we discuss in our forward-looking statements as a result of various factors, including those we discuss below and those we discuss in the section entitled "Risk Factors" included in this Quarterly Report on Form 10-Q.
These forward-looking statements include, but are not limited to, statements concerning the following:
our ability to predict and provide accurate guidance to investors regarding our revenue, operating results and gross margin;
our ability to timely develop, deliver and transition to new product offerings and pricing strategies, effectively introduce such offerings and strategies to the market, and transition existing and new end-customers to such offerings and strategies, while maintaining existing revenue and margins and our existing service level commitments to end-customers;
our ability to continue to secure orders from larger customers and any potential loss of or reductions in orders from such larger customers;
our ability to maximize sales to our education vertical, including in conjunction with opportunities from the U.S. Federal Communications Commission’s E-Rate program and the timing and uncertainty of the availability of such funding, the level of available funding and the decisions by end-customers to purchase our products using such funding;
the length and seasonal unpredictability of our sales cycles, including with service provider end-customers;
the effects of increased competition in and consolidation of our market and our ability to compete with larger competitors with greater financial, technical and other resources;
our ability to develop and sustain efficiency and effectiveness within our sales organization and channel operations;
our ability to attract new end-customers within the verticals and geographies in which we currently operate;
changes in global consumer confidence and demand for our products internationally, due to changes to foreign currency exchange rates and other factors;
our ability to continue to build and enhance relationships with channel partners and to derive revenue from our investments in those partnerships, particularly with our strategic partners;
our ability to protect our intellectual property and our exposure to third party claims that we or our customers or channel partners infringe their intellectual property; and
other risk factors included under the section titled “Risk Factors.”    
These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described in “Risk Factors” included in Part II, Item 1A and elsewhere in this report. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances we discuss in this report may not occur, and our actual results could differ materially and adversely from those we anticipate or imply in the forward-looking statements. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, we caution you not to place undue reliance on such forward-looking statements.
Overview
Our goal is to be a leading independent cloud networking company by simplifying and transforming the connected experience through information, applications and insights. We have designed and developed a leading cloud-managed

27



networking platform that enables enterprises to deploy and manage a mobile-centric network edge. Our platform builds on the foundation of our Wi-Fi and wired network infrastructure. Our platform also connects and stores valuable data about the network and network users that can enable better IT and business applications. Customers around the world, from Fortune 500 businesses to small schools, have chosen our products.
For the three months ended September 30, 2018, our revenue was $40.6 million, an increase of $1.3 million, compared to $39.3 million for the three months ended September 30, 2017. For the nine months ended September 30, 2018 and 2017, our revenue was $116.8 million and $117.8 million, respectively. In the three months ended September 30, 2018 and 2017, our net losses were $2.4 million and $5.1 million, respectively, and for the nine months ended September 30, 2018 and 2017, our net losses were $12.6 million and $18.0 million, respectively.
We primarily conduct business in three geographic regions: (1) Americas, (2) Europe, the Middle East and Africa, or EMEA, and (3) Asia Pacific, or APAC. From a geographic perspective, in the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, our year-over-year revenue decreased by 8.5% in the Americas and increased by 11.2% in EMEA and 22.8% in APAC. For the nine months ended September 30, 2018, we generated 60.6% of our total revenue from Americas, 30.5% from EMEA and 8.9% from APAC.
We believe that the growth of our business and our future success depends upon many factors, including our ability to continue to develop innovative technologies and timely provide new product offerings to the marketplace; increase our sales capabilities and develop our channel partner program; acquire new end customers, expand our end-customer base and increase penetration within our existing end-customer base (including through new product offerings); and demonstrate revenue growth to our investors and financial analysts while also demonstrating that we can achieve profitability on an acceptable timeline and predictably maintain profitability thereafter.
We operate in the highly competitive wired and wireless network access products market, which is characterized by rapid technological innovation. We will need to continue to innovate in order to achieve market adoption of our products and services. We have continued the expansion of our product portfolio with the release of new Wi-Fi access points, access switches, SD-WAN routers and management software to allow us to deliver a unified wired and wireless network edge.
In the wireless market, we have seen almost all customer demand shift to the 802.11ac standard, which uses new radio hardware to deliver substantially higher wireless performance. In 2016, we continued the push towards higher performance with the release of our 802.11ac "Wave 2" access points. We also continue to develop new functionality in our product offerings to take advantage of the changes to industry standards, including continued evolution of "Wave 2" and our release in 2018 of our family of products based on the emerging 802.11ax standard.
We believe we have a unique market opportunity based on our ability to deliver unified Wi-Fi, switch and SD-WAN router solutions operating on a single, unified management platform, with subscription-based SaaS solutions and data analytics, at a low entry and operating cost, and the ability to tailor and expand based on each user's needs. We have developed a cloud-based services platform to provide network management and support additional value-added applications. HiveManager (which we formerly called HiveManager NG), the newest version of our network management application, HiveManager Classic, provides a single management interface that customers use to configure network policies, monitor and troubleshoot performance, manage access and security, and run reports on network operations. We will continue to sell and support the legacy version of HiveManager Classic. However, our focus is to continue to transition our business to HiveManager and make our cloud-services platform and applications available to customers in either a subscription-based public cloud, on-premises private cloud deployment or virtual "private cloud" instance. Under the Aerohive Connect program, customers may purchase a less complex, connectivity-oriented HiveManager solution at attractive entry-point pricing. Aerohive Connect customers can expand their Connect deployment, as needed, and can add subscriptions or licenses to upgrade to our full-featured Select offering and premium support services. Our Aerohive Connect and Select offerings are available across our entire portfolio of access points and switches. We believe that separating our product line into these two offerings delivers compellingly priced cloud-managed hardware for connectivity-oriented deployments and enables us to capture more subscription and software license revenue from those customers who require a more-advanced feature set and support. In November 2017, we announced that we had entered an OEM agreement with Dell EMC to deliver Aerohive's Wi-Fi access point hardware and HiveManager cloud services platform. The agreement includes joint sales, marketing, support services and logistic investments, and combines Aerohive's technology with Dell EMC's go-to-market and support capabilities through Dell EMC sales teams, Dell EMC channel partners, and Dell EMC services offerings. We also announced later in 2017 our SD-WAN solution for highly distributed commercial enterprises, retail chains and long-term healthcare providers which, when combined with our existing SD-LAN offering, enables organizations to simplify branch deployments with a unified cloud-managed Wi-Fi, switching, and SD-WAN VPN routing solution. In early 2018, we announced our A3 secure access management and authentication product, our Aerohive Atom AP30 pluggable access point and our family of enterprise-class 802.11ax-capable access points. We also

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announced in June 2018, a global partnership with Juniper Networks, whereby Juniper can sell our cloud-managed Wi-Fi solution, including our family of .11ax access points and HiveManager cloud platform.
Our business is seasonally driven by annual budget cycles in the enterprise and spending seasonality in the education vertical. The buying cycle for K-12 schools in the United States historically has driven strong sequential growth for us in the second quarter. We expect this seasonality to continue through 2018 and into 2019 as well, though the overall significance to our business of the K-12 education vertical to decline as we further expand our business in the enterprise and other verticals.
A substantial portion of our revenue has, historically, depended on the volatile education market, which has brought uncertainty to our results in particular quarters. For this reason, a priority for our business continues to be to expand and diversify our offerings and revenue opportunities into other verticals, with particular focus on enterprise customers. For the nine months ended September 30, 2018, our K-12 education vertical comprised approximately 33% of our overall business, compared with 40% for the same period in fiscal year 2017. We also intend to increase our focus and continue to invest significant resources in developing our innovative technologies and new product offerings, acquiring new end customers in new and existing geographies, increasing penetration within our existing end customer base and extending the reach of our channel partnerships.
In November 2017, we announced that we had changed our sales leadership, following which we, uncovered underlying sales execution issues which became fully apparent in the last month of the fourth quarter. We have taken actions to replace underperforming sales team members, and we expect to continue to invest in our organization and our channel and strategic partnerships to meet the needs of our customers and to pursue opportunities in new and existing markets. In particular, we are continuing to invest in our sales efficiency and expand and improve our channel program. As such, we will continue to incur expenses in the near term, due to our continuing investments to grow our business, including internationally, in advance of and in preparation for, our expected increase in sales and expansion of our customer base. We believe that over the long term, we will be able to leverage these investments in the form of a higher revenue growth rate compared to the growth rate of our operating expenses.


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Results of Operations
The following table sets forth our results of operations for the periods presented, in dollars (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenue:
 
 
(As Adjusted)
 
 
 
(As Adjusted)
Product
$
28,817

 
$
29,162

 
$
83,151

 
$
88,234

Subscription and support
11,735

 
10,139

 
33,643

 
29,597

Total revenue
40,552

 
39,301

 
116,794

 
117,831

Cost of revenue(1):
 
 
 
 
 
 
 
Product
10,595

 
9,880

 
29,645

 
29,165

Subscription and support
3,344

 
3,244

 
10,131

 
9,573

Total cost of revenue
13,939

 
13,124

 
39,776

 
38,738

Gross profit
26,613

 
26,177

 
77,018

 
79,093

Operating expenses:
 
 
 
 
 
 
 
Research and development(1)
8,529

 
9,260

 
26,389

 
28,032

Sales and marketing(1)
15,449

 
16,153

 
46,850

 
51,001

General and administrative(1)
5,243

 
5,700

 
16,469

 
17,486

Operating loss
(2,608
)
 
(4,936
)
 
(12,690
)
 
(17,426
)
Interest income
437

 
180

 
1,063

 
484

Interest expense
(196
)
 
(135
)
 
(543
)
 
(412
)
Other expense, net
(6
)
 
(90
)
 
(210
)
 
(268
)
Loss before income taxes
(2,373
)
 
(4,981
)
 
(12,380
)
 
(17,622
)
Income tax provision
60

 
75

 
202

 
369

Net loss
$
(2,433
)
 
$
(5,056
)
 
$
(12,582
)
 
$
(17,991
)
(1)Includes stock-based compensation as follows:    
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Cost of revenue
$
170

 
$
313

 
$
672

 
$
860

Research and development
1,094

 
1,329

 
3,108

 
3,082

Sales and marketing
1,152

 
1,566

 
3,259

 
4,361

General and administrative
1,415

 
1,756

 
4,047

 
4,658

Total stock-based compensation expense
$
3,831

 
$
4,964

 
$
11,086

 
$
12,961



30



The following table sets forth our results of operations for the periods presented, as a percentage of our total revenue:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenue:
 
 
(As Adjusted)
 
 
 
(As Adjusted)
Product
71
 %
 
74
 %