Toggle SGML Header (+)


Section 1: 10-Q (10-Q)

Document


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 March 31, 2019.

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  x
 
 
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 May 1, 2019 was 56,337,156.





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®,” “Aerohive Networks®,” “HiveManager®,” “HiveOS®,” "Aerohive A3™", Aerohive Atom AP30™,” “Aerohive Connect™,” “Aerohive Select™,” “HiveManager Connect™,” “HiveManager Select™,” and “HiveCare™” 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
(in thousands, except share and per share amounts)
 
March 31,
 
December 31,
 
2019
 
2018
 
(unaudited)
 
 
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
20,380

 
$
26,049

Short-term investments
61,218

 
66,052

Accounts receivable, net
18,804

 
16,185

Inventories
15,318

 
16,117

Prepaid expenses and other current assets
6,428

 
6,399

Total current assets
122,148

 
130,802

Property and equipment, net
5,328

 
5,947

Operating lease right-of-use assets
3,956

 

Goodwill
513

 
513

Other assets
4,287

 
4,255

Total assets
$
136,232

 
$
141,517

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
12,240

 
$
16,129

Accrued liabilities
7,390

 
8,937

Operating lease liabilities, current
927

 

Debt, current

 
20,000

Deferred revenue, current
39,681

 
38,786

Total current liabilities
60,238

 
83,852

Debt, non-current
20,000

 

Deferred revenue, non-current
39,327

 
38,475

Operating lease liabilities, non-current
3,086

 

Other liabilities
1,234

 
1,582

Total liabilities
123,885

 
123,909

Commitments and contingencies (Note 5)

 

Stockholders’ equity:
 
 
 
Preferred stock, par value of $0.001 per share - 25,000,000 shares authorized as of March 31, 2019 and December 31, 2018; no shares issued and outstanding as of March 31, 2019 and December 31, 2018

 

Common stock, par value of $0.001 per share - 500,000,000 shares authorized as of March 31, 2019 and December 31, 2018; 56,336,156 and 55,867,619 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively
56

 
56

Additional paid–in capital
297,273

 
293,910

Treasury stock - 2,469,978 shares as of March 31, 2019 and December 31, 2018, respectively
(10,584
)
 
(10,584
)
Accumulated other comprehensive income (loss)
14

 
(14
)
Accumulated deficit
(274,412
)
 
(265,760
)
Total stockholders’ equity
12,347

 
17,608

Total liabilities and stockholders’ equity
$
136,232

 
$
141,517

See notes to condensed consolidated financial statements.

2



AEROHIVE NETWORKS, INC.
Condensed Consolidated Statements of Operations
(unaudited, in thousands, except share and per share amounts)
 
Three Months Ended March 31,
 
2019
 
2018
Revenue:
 
 
 
Product
$
20,486

 
$
25,066

Subscription and support
12,531

 
10,701

Total revenue
33,017

 
35,767

Cost of revenue (1):
 
 
 
Product
8,997

 
8,671

Subscription and support
3,641

 
3,404

Total cost of revenue
12,638

 
12,075

Gross profit
20,379

 
23,692

Operating expenses:
 
 
 
Research and development (1)
8,763

 
9,279

Sales and marketing (1)
14,497

 
15,670

General and administrative (1)
6,011

 
5,954

Total operating expenses
29,271

 
30,903

Operating loss
(8,892
)
 
(7,211
)
Interest income
496

 
289

Interest expense
(207
)
 
(164
)
Other income (expense), net
3

 
(173
)
Loss before income taxes
(8,600
)
 
(7,259
)
Provision for income taxes
52

 
58

Net loss
$
(8,652
)
 
$
(7,317
)
Net loss per share, basic and diluted
$
(0.15
)
 
$
(0.13
)
Weighted-average shares used in computing net loss per share, basic and diluted
56,029,568

 
54,332,767

 
 
 
 
(1) Includes stock-based compensation as follows:
 
 
 
Cost of revenue
$
226

 
$
246

Research and development
1,086

 
1,046

Sales and marketing
926

 
997

General and administrative
1,347

 
1,382

Total stock-based compensation
$
3,585

 
$
3,671


See notes to condensed consolidated financial statements.  




3



AEROHIVE NETWORKS, INC.
Condensed Consolidated Statements of Comprehensive Loss
(unaudited, in thousands)
 
Three Months Ended March 31,
 
2019
 
2018
 
 
 
 
Net loss
$
(8,652
)
 
$
(7,317
)
Unrealized gain (loss) on available-for-sale investments, net of tax
28

 
(39
)
Comprehensive loss
$
(8,624
)
 
$
(7,356
)
See notes to condensed consolidated financial statements.  






4



AEROHIVE NETWORKS, INC.
Consolidated Statements of Stockholders’ Equity
(Unaudited, in thousands, except share data)
 
 
Three Months Ended March 31, 2019
 
 
Common Stock
 
Treasury Stock
 
Additional
paid-in
capital
 
Accumulated
deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Total
Stockholders’ Equity
 
 
    Shares
 
Amount
 
Amount
 
Balances at December 31, 2018
 
55,867,619

 
56

 
(10,584
)
 
293,910

 
(265,760
)
 
(14
)
 
17,608

Shares issued upon exercise of options and ESPP
 
12,495

 

 

 
21

 

 

 
21

Issuance of common stock upon vesting of RSUs
 
503,845

 

 

 

 

 

 

Shares repurchased for tax withholdings on vesting of RSUs
 
(47,803
)
 

 

 
(243
)
 

 

 
(243
)
Stock-based compensation
 

 

 

 
3,585

 

 

 
3,585

Unrealized gain (loss) on available for sale investments
 

 

 

 

 

 
28

 
28

Net loss
 

 

 

 

 
(8,652
)
 

 
(8,652
)
Balances at March 31, 2019
 
56,336,156

 
$
56

 
$
(10,584
)
 
$
297,273

 
$
(274,412
)
 
$
14

 
$
12,347

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months ended March 31, 2018
 
 
Common Stock
 
Treasury Stock
 
Additional
paid-in
capital
 
Accumulated
deficit
 
Accumulated Other Comprehensive Loss
 
Total
Stockholders’ Equity
 
 
    Shares
 
Amount
 
Amount
 
Balances at December 31, 2017
 
54,171,498

 
55

 
(6,216
)
 
278,528

 
(247,423
)
 
(30
)
 
24,914

Shares issued upon exercise of options and ESPP
 
11,386

 

 

 
27

 

 

 
27

Issuance of common stock upon vesting of RSUs
 
699,069

 

 

 

 

 

 

Shares repurchased for tax withholdings on vesting of RSUs
 
(256,029
)
 

 

 
(1,080
)
 

 

 
(1,080
)
Stock-based compensation
 

 

 

 
3,671

 

 

 
3,671

Unrealized gain (loss) on available for sale investments
 

 

 

 

 

 
(39
)
 
(39
)
Net loss
 

 

 

 

 
(7,317
)
 

 
(7,317
)
Balances at March 31, 2018
 
54,625,924

 
$
55

 
$
(6,216
)
 
$
281,146

 
$
(254,740
)
 
$
(69
)
 
$
20,176


See notes to condensed consolidated financial statements.  


5



AEROHIVE NETWORKS, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
 
Three Months Ended March 31,
 
2019
 
2018
Cash flows from operating activities
 
 
 
Net loss
$
(8,652
)
 
$
(7,317
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
763

 
708

Stock-based compensation
3,585

 
3,671

Other
(318
)
 
(116
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(2,619
)
 
(1,812
)
Inventories
799

 
(63
)
Prepaid expenses and other current assets
(189
)
 
191

Operating lease right-of-use assets and other assets
339

 
(109
)
Accounts payable
(3,743
)
 
(56
)
Accrued liabilities and other current liabilities
(1,819
)
 
(792
)
Operating lease liabilities, non-current and other liabilities
(181
)
 
12

Deferred revenue
1,747

 
838

Net cash used in operating activities
(10,288
)
 
(4,845
)
Cash flows from investing activities
 
 
 
Purchases of property and equipment
(290
)
 
(1,185
)
Maturities of short-term investments
30,800

 
22,950

Purchases of short-term investments
(25,620
)
 
(21,587
)
Net cash provided by investing activities
4,890

 
178

Cash flows from financing activities
 
 
 
Proceeds from employee stock option exercises and employee stock purchase plan
21

 
28

Payment for shares withheld for tax withholdings on vesting of restricted stock units
(243
)
 
(1,080
)
Payment on finance lease (capital lease prior to adoption of ASC 842)
(49
)
 
(46
)
Net cash used in financing activities
(271
)
 
(1,098
)
Net decrease in cash and cash equivalents
(5,669
)
 
(5,765
)
Cash and cash equivalents at beginning of period
26,049

 
27,249

Cash and cash equivalents at end of period
$
20,380

 
$
21,484

Supplemental disclosure of cash flow information
 
 
 
Income taxes paid
$
67

 
$
36

Interest paid
$
209

 
$
168

Supplemental disclosure of noncash investing and financing activities
 
 
 
Unpaid property and equipment purchases
$
76

 
$
196


See notes to condensed consolidated financial statements.

6



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 networking platform and product portfolio using cloud management, machine learning and artificial intelligence to simplify and secure the access network. 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 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. Our cloud-managed wireless, switching, routing and security technologies provide flexibility and scalability in the deployment, management and licensing of networks globally.
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 condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States ("GAAP"), which includes the accounts of Aerohive Networks, Inc. and its wholly owned subsidiaries. The Company has eliminated all intercompany accounts and transactions in consolidation.
There have been no material changes in the Company’s significant accounting policies, other than the adoption of accounting pronouncement noted below, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
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 condensed 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 condensed consolidated statements of operations. Foreign currency exchange gain (losses) has 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 February 2016, the Financial Accounting Standard Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-02, Leases (Topic 842), which supersedes the lease accounting requirements in Topic 840. On January 1, 2019, the Company adopted ASC 842 and the related subsequent accounting updates which require recognition of right-of-use ("ROU") assets and associated lease liabilities for most leases on the Company's consolidated balance sheets. The Company adopted the lease standard under the modified retrospective transition method which requires a cumulative-effect adjustment, if any, to the opening balance of retained earnings to be recognized on the date of adoption. There was no cumulative-effect adjustment

7



recorded to retained earnings on January 1, 2019. Under the modified retrospective transition method, the Company did not restate financial information reported in periods prior to 2019.
The Company elected the package of practical expedients permitted under the transition guidance, which allows the Company to carry forward its historical lease classification, its assessment on whether a contract is or contains a lease, and its indirect costs for any leases that exist prior to adoption of the new standard. The Company also elected to combine lease and non-lease components for all underlying classes of assets. For leases with a term of 12 months or less and with no purchase option the Company is reasonably certain to exercise, the Company elected the short-term lease exemption, which allows the Company not to recognize ROU assets or lease liabilities for qualifying leases existing at transition and new leases the Company may enter into in the future.
The primary impact from the adoption of ASC 842 was the recognition of the ROU assets and lease liabilities for operating leases of $4.3 million and $4.6 million, respectively, on January 1, 2019 which included reclassification of prepaid rent and deferred rent as a component of the ROU asset.

The adoption of this standard had no impact on the Company's condensed consolidated statements of operations and condensed consolidated statements of cash flows or debt-covenant compliance under its current agreements. See Note 5 Leases, Commitments and Contingencies for additional information.
Leases
The Company determines if an arrangement is a lease at inception. The Company evaluates the classification of leases at inception and as necessary at modification. The Company separately discloses operating lease ROU assets and liabilities on the Company's condensed consolidated balance sheets. Finance leases are included in property and equipment, accrued liabilities and other liabilities on the Company’s condensed consolidated balance sheets.
ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. The Company recognizes operating lease ROU assets and lease liabilities at commencement date based on the present value of lease payments over the lease term. When readily determinable, the Company uses the rate implicit in the lease to discount lease payments; however, when the rate is not readily determinable, the Company uses the incremental borrowing rate based on the information available at commencement date in determining the present value of future lease payments. The operating lease ROU asset also includes any lease payments made prior to lease commencement and excludes lease incentives. Variable lease payments are expensed as incurred and are not included within the ROU asset and lease liability calculation. Variable lease payments primarily include reimbursements of costs incurred by lessors for common area maintenance and utilities. The Company's lease terms are the non-cancelable period including any rent-free periods provided by the lessor and include options to extend or terminate the lease when it is reasonably certain that it will exercise that option. At lease inception, and in subsequent periods as necessary, the Company estimates the lease term based on its assessment of extension and termination options that are reasonably certain to be exercised. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
The Company does not separate non-lease components from lease components for all underlying classes of assets. In addition, the Company does not recognize ROU assets and lease liabilities for short-term leases, which have a lease term of twelve months. Lease expense for short-term leases is recognized on a straight-line basis over the lease term.
    
Recent Accounting Pronouncements
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 distributors, value-added resellers ("VARs"), managed service providers ("MSPs"), and original equipment manufacturers ("OEMs"). The Company’s accounts

8



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.
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 March 31,
 
 
2019
 
2018
Channel Partner A
 
40.1
%
 
35.1
%
Channel Partner B
 
17.7
%
 
17.2
%
 
The percentages of receivables from a consolidated group of entities (Channel Partner A and Channel Partner B) greater than 10% of total consolidated accounts receivable were as follows:
 
 
March 31,
 
December 31,
 
 
2019
 
2018
Channel Partner A
 
41.0
%
 
21.4
%
Channel Partner B
 
22.3
%
 
31.7
%
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 March 31, 2019 and December 31, 2018, 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 the Company values them based on quoted market prices in active markets. Level 2 assets include U.S. treasuries, corporate securities and commercial paper. The Company classifies these instruments within Level 2 of the fair value hierarchy because the Company values them based on pricing the Company obtains from an independent pricing service, which may use quoted market prices for identical or comparable instruments or model driven valuations using observable market data 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.

9



The components of the Company’s Level 1 and Level 2 assets were as follows:
 
March 31, 2019
 
Amortized Cost
 
Gross Unrealized Gain (Loss)
 
Estimated Fair Value
 
Cash equivalents
 
Short-term investments
 
(in thousands)
Level 1:
 
 
 
 
 
 
 
 
 
Money market funds
7,813

 

 
7,813

 
7,813

 

 
$
7,813

 
$

 
$
7,813

 
$
7,813

 
$

Level 2:
 
 
 
 
 
 
 
 
 
U.S. treasuries
15,238

 
4

 
15,242

 

 
15,242

Corporate securities
19,732

 
10

 
19,742

 

 
19,742

Commercial paper
28,223

 

 
28,223

 
1,989

 
26,234

 
$
63,193

 
$
14

 
$
63,207

 
$
1,989

 
$
61,218

Total
$
71,006

 
$
14

 
$
71,020

 
$
9,802

 
$
61,218


 
December 31, 2018
 
Amortized Cost
 
Gross Unrealized Gain (Loss)
 
Estimated Fair Value
 
Cash equivalents
 
Short-term investments
 
(in thousands)
Level 1:
 
 
 
 
 
 
 
 
 
Money market funds
8,482

 

 
8,482

 
8,482

 

 
$
8,482

 
$

 
$
8,482

 
$
8,482

 
$

Level 2:
 
 
 
 
 
 
 
 
 
U.S. treasuries
8,988

 
(2
)
 
8,986

 

 
8,986

Corporate securities
20,698

 
(12
)
 
20,686

 

 
20,686

Commercial paper
36,380

 

 
36,380

 

 
36,380

 
$
66,066

 
$
(14
)
 
$
66,052

 
$

 
$
66,052

Total
$
74,548

 
$
(14
)
 
$
74,534

 
$
8,482

 
$
66,052

All short-term investments the Company held as of March 31, 2019 and December 31, 2018 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 March 31, 2019 and December 31, 2018.  
3. CONSOLIDATED BALANCE SHEET COMPONENTS
Account Receivable Allowances
The allowance for rebates was approximately $3.5 million and $3.8 million as of March 31, 2019 and December 31, 2018, respectively. The allowance for sales return was approximately $0.3 million and $1.2 million as of March 31, 2019 and December 31, 2018, respectively. The allowance for doubtful accounts were immaterial as of March 31, 2019 and December 31, 2018.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:

10



 
 
 
March 31,
 
December 31,
 
 
 
2019
 
2018
 
 
 
(in thousands)
Deferred sales commissions, current portion
 
 
$
3,263

 
$
3,171

Prepaid expenses
 
 
2,173

 
2,478

Other
 
 
992

 
750

Total prepaid expenses and other current assets
 
 
$
6,428

 
$
6,399

Property and Equipment, Net
Property and equipment, net consists of the following:
 
 
 
 
March 31,
 
December 31,
 
 
Estimated Useful Lives
 
2019
 
2018
 
 
 
 
(in thousands)
Computer and other equipment
 
3 years
 
$
1,677

 
$
1,668

Manufacturing, research and development laboratory equipment
 
3 years
 
5,775

 
5,693

Software
 
2 to 5 years
 
9,470

 
9,462

Office furniture and equipment
 
3 to 7 years
 
2,078

 
2,052

Leasehold improvements
 
shorter of useful life or lease term
 
1,067

 
1,049

Property and equipment, gross
 
 
 
20,067

 
19,924

Less: Accumulated depreciation and amortization
 
 
 
(14,739
)
 
(13,977
)
Property and equipment, net
 
 
 
$
5,328

 
$
5,947

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 March 31, 2019 and 2018, respectively.
Office furniture and equipment classified under finance lease and capital lease prior to adoption of ASC 842 was $1.2 million at March 31, 2019 and December 31, 2018 respectively, and the related accumulated depreciation was $0.7 million and $0.7 million at March 31, 2019 and December 31, 2018, respectively. The amortization of finance lease right-of-use assets (depreciation expense prior to ASC 842) were not material for the three months ended March 31, 2019 and 2018.
Other Assets
Other assets consist of the following:
 
 
 
March 31,
 
December 31,
 
 
 
2019
 
2018
 
 
 
(in thousands)
Deferred sales commissions, non-current portion
 
 
$
3,130

 
$
3,085

Investment in privately held company
 
 
750

 
750

Other
 
 
407

 
420

Total other assets
 
 
$
4,287

 
$
4,255

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 months ended March 31, 2019 and 2018 are as follows:


11



 
Three Months Ended March 31,
 
2019
 
2018
 
(in thousands)
Beginning balance
$
6,256

 
$
6,019

Recognized
(1,519
)
 
(3,018
)
Additions
1,656

 
3,084

Total deferred sales commission
$
6,393

 
$
6,085

Current portion
$
3,263

 
$
3,100

Non-current portion
$
3,130

 
$
2,985

Of the $6.4 million total deferred commission balance as of March 31, 2019, 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. The Company reviews the carrying value of the investment quarterly for indicators of fair value changes when there are observable prices less any potential impairment. As of December 31, 2018, the Company noted the deterioration in the fair value of the investment and as such took an impairment charge of approximately $0.8 million. The Company determined that the fair value of the investment as of December 31, 2018 to be $0.8 million. The Company did not recognize a change in value or impairment for the three months ended March 31, 2019, 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:
 
 
 
March 31,
 
December 31,
 
 
 
2019
 
2018
 
 
 
(in thousands)
Accrued compensation
 
 
$
6,064

 
$
7,492

Accrued expenses and other liabilities
 
 
1,081

 
1,169

Warranty liability, current portion
 
 
245

 
276

Total accrued liabilities
 
 
$
7,390

 
$
8,937

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 months ended March 31, 2019 and 2018 are as follows:

12



 
Three Months Ended March 31,
 
2019
 
2018
 
(in thousands)
Beginning balance
$
77,261

 
$
67,040

Recognized
(12,531
)
 
(10,701
)
Additions
14,278

 
11,539

Total deferred revenue
$
79,008

 
$
67,878

Current portion
$
39,681

 
$
33,885

Non-current portion
$
39,327

 
$
33,993


Of the $79.0 million total deferred revenue balance as of March 31, 2019, the Company expects to recognize approximately 50% as revenue over the next 12 months and the remainder thereafter.
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 was $79.8 million as of March 31, 2019, of which the Company expects to recognize approximately 51% 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 March 31,
 
2019
 
2018
 
(in thousands)
Beginning balance
$
615

 
$
577

Charges to operations
217

 
126

Obligations fulfilled
(230
)
 
(153
)
Changes in existing warranty
(14
)
 
(4
)
Total product warranties
$
588

 
$
546

Current portion
$
245

 
$
217

Non-current portion
$
343

 
$
329

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 amended the Revolving Credit Facility to extend the maturity date by two years and reduce the minimum cash requirements. In January 2019, the Company further amended the Revolving Credit Facility to extend the maturity rate by two years through March 31, 2021 and to adjust the interest rate on the outstanding borrowings to be the lesser of (i) LIBOR rate plus 1.50% or (ii) prime rate minus 1.25%, or lesser of (i) LIBOR rate plus 1.75% or (ii) prime rate minus 1.00% depending on the provisions of the loan agreement. The weighted-average interest rate of the Revolving Credit Facility was 4.19% and 3.28% for the three months ended March 31, 2019 and 2018, respectively.

13



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 the existence of an event of default, interest on the obligations under the Revolving Credit Facility could be increased by 5.0%. As of March 31, 2019, the Company was in compliance with these covenants.
The Revolving Credit facility currently provides, among other things (i) a maturity date of March 31, 2021; and (ii) a revolving line up to $20.0 million, subject to certain conditions.
As of March 31, 2019$20.0 million remains outstanding under the Revolving Credit Facility, and the Company classifies this amount as a non-current liability in the condensed consolidated balance sheet.
5. LEASES, COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company currently leases its main office facility in Milpitas, California, which lease is set to expire in June 2023. In addition, the Company has entered into various lease agreements in other locations in United States and globally for datacenter, sales offices and research and development facilities that expire at various times through September 2022. Some of the Company's leases include options to renew or terminate the lease. The Company does not assume renewals or terminations in its determination of lease term unless the Company determines these to be reasonably certain at lease commencement. The Company's lease agreements do not contain any material value guarantees or material restrictive covenants. For operating leases, the Company recognizes lease expense on a straight-line basis over the respective lease term.
Information related to the Company's right-of-use assets and related lease liabilities for the three months ended March 31, 2019 are as follows:
 
Three Months Ended March 31, 2019
 
(in thousands)
Cash paid for operating lease liabilities
$
640

Right-of-use assets obtained in exchange for new operating lease obligations(1)
$
4,327

Weighted-average remaining lease term
4.0 years

Weighted-average discount rate
5.43
%
 
 
     (1) Represents the amount for operating leases existing on January 1, 2019. There were no new leases that commenced in the first quarter of 2019.



14



The maturities of the Company's operating lease liabilities as of March 31, 2019 are as follows:
 
Amount
Year Ending December 31,
(in thousands)
2019 (remaining nine months)
$
858

2020
1,124

2021
1,101

2022
948

2023
445

Total minimum lease payments
$
4,476

Less: amount representing interest
$
463

Total operating lease liabilities
$
4,013

Operating lease liabilities, current
$
927

Operating lease liabilities, non-current
$
3,086

Operating lease expense was $0.5 million for the three months ended March 31, 2019 and 2018, respectively. Short term lease expense for the three months ended March 31, 2019 was not material. The total variable lease expense was $0.2 million for the three months ended March 31, 2019. The Company has an additional operating lease for real estate of $0.5 million which has not commenced as of March 31, 2019 and, as such, have not been recognized on the Company's consolidated balance sheet. This operating lease will commence during the period ending June 30, 2019 and has a lease term of two years.

15



Finance Leases
The Company has certain office furniture and equipment that it classifies as a finance lease. The terms of the finance lease range from three years to seven years. The interest expense is immaterial in any particular period. The weighted average remaining term for finance lease is four years.
The maturities of the Company's finance leases as of March 31, 2019 are as follows:
 
Amount
Year Ending December 31,
(in thousands)
2019 (remaining nine months)
$
138

2020
182

2021
179

2022
162

2023
83

Total finance lease obligations
$
744

Finance lease liabilities, current
$
183

Finance lease liabilities, non-current
$
561

ASC 840 Disclosures
As of December 31, 2018, future minimum lease payments under non-cancelable operating leases and finance leases were as follows (amounts in thousands):
 
Operating Leases
Finance Leases
Year Ending December 31,
 
 
2019
$
1,562

$
176

2020
1,082

171

2021
1,071

169

2022
987

162

2023
445

83

Total
$
5,147

$
761

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 order, the Company is liable to the contract manufacturers for the cost of the related components they purchased under such orders.
As of March 31, 2019 and December 31, 2018, the Company had manufacturing commitments with contract manufacturers for inventory totaling approximately $5.2 million and $5.0 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 March 31, 2019, the Company's remaining purchase commitment under the addendum was $9.9 million.

16



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 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. In February 2019, the Court granted the defendants’ motion to dismiss the consolidated amended complaint, finding that the Complaint failed to state a claim against any defendant.  In March 2019, the lead plaintiff filed a second consolidated amended complaint (the “Complaint”).  Like the prior complaint, the Complaint 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.  Defendants have filed a further motion to dismiss the Complaint, which is currently scheduled to be heard by the Court in the second half of 2019.
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 has resolved this matter in return for a nominal payment.
In March 2019, Orostream, LLC, or Orostream, 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. 5,768,508 prior to such patent’s expiration. The Company is evaluating the possible application of these claims, if any, to its products.
A former employee in Korea has asserted claims that Company wrongfully terminated his employment. Following administrative proceedings in Korea, the Company has been ordered to reinstate the employee and pay certain past wages. The Company is appealing this matter to the civil law courts in Korea.
For the three months ended March 31, 2019, the liabilities incurred to settle the above matters were not material to the condensed consolidated financial statements.
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.       

17



Guarantees
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 March 31, 2019, the Company had the following reserved shares of common stock for future issuance:
 
March 31,
 
2019
Common stock reserved for future grant under the 2014 Equity Incentive Plan
11,880,866

Common stock reserved for future purchase under the 2014 Employee Stock Purchase Plan
1,811,460

Options and Restricted Stock Units issued and outstanding
7,603,830

Total reserved shares of common stock for future issuance
21,296,156

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 March 31, 2019 and 2018, respectively, the Company did not repurchase any shares. As of March 31, 2019, the Company had repurchased under this program a total of 2,469,978 shares of its common stock at a total price $10.6 million with an average purchase price $4.29 per share of the Company's common stock. Approximately $9.4 million remains available to the Company as of March 31, 2019 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 shares to employees, directors and consultants of the Company, and the employees and consultants of any parent or subsidiary of the Company.
In January 2019, the Company effected an increase of 2,793,380 shares reserved under the 2014 Plan. As of March 31, 2019, the Company had 11,880,866 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 March 31, 2019:

18



 
 
 
Shares Available for Grant
 
 
Balance, December 31, 2018
9,498,884

Authorized
2,793,380

Options granted

Options canceled
168,997

Awards granted
(812,752
)
Awards canceled
232,357

Balance, March 31, 2019
11,880,866

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, 2018
3,442,005

 
$
5.99

 
4.61
 
$
1,546

Options granted

 

 
 
 
 
Options exercised
(12,495
)
 
1.65

 
 
 
 
Options canceled
(168,997
)
 
7.75

 
 
 
 
Balance, March 31, 2019
3,260,513

 
$
5.92

 
4.56
 
$
2,534

Options exercisable, March 31, 2019
3,157,548

 
$
5.90

 
4.50
 
$
2,534

There were no options granted during the three months ended March 31, 2019 and 2018 respectively.
The aggregate intrinsic value of stock options exercised during the three months ended March 31, 2019 and 2018 was $0.04 million and $0.03 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 March 31, 2019 and 2018, 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.

19



The following is a summary of the Company’s RSU grant activity and related information for the three months ended March 31, 2019:
 
Restricted Stock Units Outstanding
 
Shares
 
Weighted-Average
Grant-Date
Fair Value Per Share
 
 
 
 
Balance, December 31, 2018
4,218,964

 
$
4.35

Awards granted
812,752

 
4.00

Awards vested
(503,845
)
 
4.99

Awards canceled
(184,554
)
 
4.49

Balance, March 31, 2019
4,343,317

 
$
4.20


The weighted-average grant-date fair value of RSUs the Company granted during the three months ended March 31, 2019 and 2018 was $4.00 and $4.30 per share, respectively. The aggregate grant-date fair value of RSUs the Company granted during the three months ended March 31, 2019 and 2018 was $3.3 million and $3.7 million, respectively. The aggregate fair value of shares vested as of the respective vesting dates during the three months ended March 31, 2019 and 2018 was $2.5 million and $1.3 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 March 31, 2019 and 2018, the Company withheld 47,803 and 256,029 shares of stock, respectively, for an aggregate value of $0.2 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.
The Company grants 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. The Company did not grant any performance-based restricted stock units (PBRSUs) during the three months ended March 31, 2019 and 2018, respectively. Of the PBRSU awards granted in prior years, 14,014 and 251,037 shares of PBRSU vested during the three months ended March 31, 2019 and 2018, respectively. The Company does not currently expect any additional PBRSU to vest during the remainder of the fiscal year 2019.
The Company also grants shares of RSUs as market-based restricted stock units (MBRSUs) to certain executives pursuant to the 2014 Plan. 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 estimates 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 Company records the total expense related to these MBRSUs on a graded-vesting method over the estimated term. The Company did not grant any MBRSU's during the three months ended March 31, 2019 and 2018, respectively. There were no MBRSU shares that vested during the three months ended March 31, 2019. 36,625 shares of MBRSU vested during the three months ended March 31, 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 2019, the Company effected an increase of 558,676 shares reserved under the ESPP. As of March 31, 2019, the Company had 1,811,460 total shares of common stock reserved and available for issuance under the ESPP.
Under the ESPP, the Company grants stock purchase rights to all eligible employees, currently covering a one-year offering period ending December 1, 2019, 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

20



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. The Company did not issue any shares under the ESPP during the three months ended March 31, 2019.
Determination of Fair Values
The Company used the following weighted-average assumptions to value employee stock purchase rights under the Black-Scholes model:
 
Three Months Ended March 31,
 
2019
 
2018
ESPP purchase rights:
 
 
 
Expected term (in years)
0.50 - 1.00
 
0.50 - 1.00
Expected volatility
37% - 46%
 
46% - 48%
Risk free interest rate
2.52% - 2.70%
 
1.45% - 1.62%
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 March 31,
 
2019
 
2018
 
(in thousands)
Cost of revenue
$
226

 
$
246

Research and development
1,086

 
1,046

Sales and marketing
926

 
997

General and administrative
1,347

 
1,382

Total stock-based compensation
$
3,585

 
$
3,671

The following table presents stock-based compensation expense by award-type:
 
Three Months Ended March 31,
 
2019
 
2018
 
(in thousands)
Stock Options
$
274

 
$
541

Restricted Stock Units
2,994

 
2,792

Employee Stock Purchase Plan
317

 
338

Total stock-based compensation
$
3,585

 
$
3,671

The stock-based compensation expense the Company recorded for RSU for the three months ended March 31, 2019 and 2018 includes the amount of stock-based compensation recorded for MBRSUs of approximately $0.2 million and $0.2 million, respectively, and for the three months ended March 31, 2018 includes the amount of stock-based compensation the Company recorded for PBRSUs of approximately $0.2 million. The stock-based compensation expense the Company recorded for PBRSU for the three months ended March 31, 2019 was not material.
As of March 31, 2019, unrecognized stock-based compensation related to outstanding stock options, RSUs (including PBRSUs and MBRSUs) and ESPP purchase rights, was $0.2 million, $14.1 million and $0.8 million, respectively, which the Company expects to recognize over weighted-average periods of 0.28 years, 1.85 years and 0.67 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:

21



 
Three Months Ended March 31,
  
2019
 
2018
 
(in thousands, except for share and per share data)
Numerator:
 
 
 
Net loss
$
(8,652
)
 
$
(7,317
)
Denominator:
 
 
 
Weighted-average shares used to compute net loss per share, basic and diluted
56,029,568

 
54,332,767

Net loss per share:
 
 
 
Basic and diluted
$
(0.15
)
 
$
(0.13
)
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 March 31,
 
2019
 
2018
Shares of common stock issuable under the Equity Incentive Plan
7,603,830

 
7,559,655

Employee Stock Purchase Plan
314,085

 
456,426

Total
7,917,915

 
8,016,081

9. INCOME TAXES
The Company's provision for income taxes was approximately $0.1 million, for the three months ended March 31, 2019 and 2018, respectively. The Company's provision for income taxes consisted primarily of state taxes and foreign income taxes.
For the three months ended March 31, 2019 and 2018, 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 March 31, 2019 and December 31, 2018, respectively.     
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 March 31,
 
2019
 
2018
 
(in thousands)
Americas
$
17,238

 
$
20,830

Europe, Middle East and Africa
12,758

 
11,900

Asia Pacific
3,021

 
3,037

Total revenues
$
33,017

 
$
35,767


22



     The Company has included within Americas in the above table revenue from sales in the United States of $15.6 million and $19.0 million, respectively, for the three months ended March 31, 2019 and 2018. Aside from the United States, no country comprised 10% or more of the Company's total revenue for each of the three months ended March 31, 2019 and 2018, respectively.
Property and equipment, net by location is summarized as follows:
 
March 31,
 
December 31,
 
2019
 
2018
 
(in thousands)
United States
$
4,013

 
$
4,514

People's Republic of China
1,135

 
1,269

Europe, Middle East and Africa
180

 
164

Total property and equipment, net
$
5,328

 
$
5,947


23



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 our revenue, operating results and gross margin accurately, including guidance we provide to our investors and investment analysts;
our ability to improve sales capabilities, efficiency and execution and better anticipate and manage our product mix in order to achieve our operating results, including guidance we provide to our investors and investment analysts;
our ability to continue to identify opportunities and secure new customers for our products which are necessary to achieve future revenue growth;
our ability to accurately estimate and predictably manage in a quarter shipments of products to our distributors, including in conjunction with our determination of guidance we provide to investors regarding our revenue, operating results and gross margin for the quarter;
our ability to maximize the economic opportunity of 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;
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 attract new end customers within the verticals and geographies in which we currently operate;
our ability to timely develop, deliver and transition to new product offerings and transition existing and new end customers to such offerings, including in conjunction with our Connect product offering and data analytics, while maintaining existing product revenue and our existing service-level commitments to end customers;
changes in consumer confidence and demand for our products, including internationally, due to disputes regarding trade and transfers of intellectual property, slowing global economic activity, changes to foreign currency exchange rates and other factors, including the decision of the United Kingdom to withdraw from the European Union;
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.

24



Overview
Our goal is to be a leading independent cloud networking company using cloud management, machine learning and artificial intelligence to simplify and secure the access network. Our cloud-managed wireless, switching, routing and security technologies provide flexibility and scalability in the deployment, management and licensing of networks globally. Our global cloud footprint provides network operations for 30,000+ customers and 10+ million daily users.
For the three months ended March 31, 2019, our revenue was $33.0 million, a decrease of $2.8 million, compared to $35.8 million for the three months ended March 31, 2018. In the three months ended March 31, 2019 and 2018, our net losses were $8.7 million and $7.3 million, respectively. We announced on April 15, 2019 preliminary revenue results of $33.0 million for our first quarter of fiscal year 2019, which was below the revenue outlook of $36 million to $38 million which we provided for the period in February 2019.
We primarily conduct business in three geographic regions: (1) the Americas, (2) Europe, the Middle East and Africa, or EMEA, and (3) Asia Pacific, or APAC. From a geographic perspective, in the three months ended March 31, 2019, compared to the three months ended March 31, 2018, our year-over-year revenue decreased by 17.2% in the Americas and increased by 7.2% in EMEA and remained relatively flat in APAC. Our revenue in EMEA was the highest revenue we have achieved in that region for any first quarter of prior fiscal years. For the three months ended March 31, 2019, we generated 52.2% of our total revenue from Americas, 38.6% from EMEA and 9.1% 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; improve our sales capabilities, efficiency and execution 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 branch routers and management software to allow us to deliver a unified wired and wireless network edge. In 2018, we released our family of products based on the developing 802.11ax standard. We continue to develop new functionality in our product offerings to take advantage of the changes to industry standards.
We believe we continue to have a market opportunity based on our ability to deliver unified Wi-Fi, switch and SD-WAN branch 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 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, the newest version of our network management application, 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, we call 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 "Local Cloud" instance. Under the Aerohive Connect program, customers may purchase a less complex, connectivity-oriented HiveManager solution at lower 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 an attractively priced cloud-managed hardware for connectivity-oriented deployments and will position 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's go-to-market and support capabilities through Dell sales teams, Dell channel partners, and Dell 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 Aerohive A3 cloud-managed NAC solution, and later in 2018 our Aerohive Atom AP30 pluggable access point and our family of enterprise-class access points based on the developing 802.11ax standard.

25



For the three months ended March 31, 2019, our K-12 education vertical comprised approximately 22% of our overall business, compared with 25% for the same period in fiscal year 2018. Historically, a substantial portion of our revenue has depended on the volatile education market, which has brought uncertainty to our results in particular quarters. We expect this uncertainty to continue into 2019 as well. The buying cycle for K-12 schools in the United States historically has driven strong sequential growth for us in the second quarter. We announced on April 15, 2019 that the value to us of Form 471 funding requests filed under the federal E-Rate program for Aerohive products and services increased by approximately 55 percent year-over-year to more than $37 million (as reported by E-Rate Profit Works). The final value of the orders for Aerohive products and services will exclude channel margins (which are included in the value of the 471 funding requests). We expect these funding requests to result in orders beginning in the second quarter, but which we primarily expect to receive over the second half of 2019. Though we expect a near-term benefit, the overall significance to our business in the future of the K-12 education vertical may decline as we expect the overall level of education spending to purchase our solutions is likely to be lower in future periods. 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. 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.


26



Results of Operations
The following table sets forth our results of operations for the periods presented, in dollars (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Revenue:
 
 
 
Product
$
20,486

 
$
25,066

Subscription and support
12,531

 
10,701

Total revenue
33,017

 
35,767

Cost of revenue(1):
 
 
 
Product
8,997

 
8,671

Subscription and support
3,641

 
3,404

Total cost of revenue
12,638

 
12,075

Gross profit
20,379

 
23,692

Operating expenses:
 
 
 
Research and development(1)
8,763

 
9,279

Sales and marketing(1)
14,497

 
15,670

General and administrative(1)
6,011

 
5,954

Operating loss
(8,892
)
 
(7,211
)
Interest income
496

 
289

Interest expense
(207
)
 
(164
)
Other expense, net
3

 
(173
)
Loss before income taxes
(8,600
)
 
(7,259
)
Income tax provision
52

 
58

Net loss
$
(8,652
)
 
$
(7,317
)
(1)Includes stock-based compensation as follows:    
 
Three Months Ended March 31,
 
2019
 
2018
 
(in thousands)
Cost of revenue
$
226

 
$
246

Research and development
1,086

 
1,046

Sales and marketing
926

 
997

General and administrative
1,347

 
1,382

Total stock-based compensation expense
$
3,585

 
$
3,671



27



The following table sets forth our results of operations for the periods presented, as a percentage of our total revenue:
 
Three Months Ended March 31,
 
2019
 
2018
Revenue:
 
 
 
Product
62
 %
 
70
 %
Subscription and support
38

 
30

Total revenue
100

 
100

Cost of revenue:
 
 
 
Product
27

 
24

Subscription and support
11

 
10

Total cost of revenue
38

 
34

Gross profit
62


66

Operating expenses:
 
 
 
Research and development
27

 
26

Sales and marketing
44

 
44

General and administrative
18

 
17

Operating loss
(27
)

(21
)
Interest income
2

 
1

Interest expense
(1
)
 

Other income (expense), net

 

Loss before income taxes
(26
)

(20
)
Income tax provision

 

Net loss
(26
)%

(20
)%

Revenue  

We derive revenue from the sales of our products and services, and we recognize revenue when we have identified the contract with the customer, identified the performance obligations in the contract, determined the transaction price, allocated the price to the performance obligations, and the performance obligations have been satisfied.
Our total revenue comprises the following:
Product Revenue.  We derive product revenue primarily from sales of our hardware products, which include wireless access points, SD-WAN branch routers, and switches, the majority of which are embedded with our proprietary operating system, HiveOS, and perpetual licenses for our unified network management system, HiveManager and other software applications, as well as related accessories. We recognize product revenue at the time of shipment, provided that all other revenue recognition criteria have been met.
Subscription and Support Revenue.  We derive subscription and support revenue primarily from sales of our software subscription and support offerings that we deliver over a specified term. These offerings primarily include post-contract customer support ("PCS") related to our perpetual software licenses and subscriptions to HiveManager and other software applications delivered as SaaS, including related customer support, and from subsequent renewals of those contracts. To benefit fully from potential contract renewals, we plan to continue to invest in systems to better track existing customer support commitments and renewal opportunities and provide offerings which continue to be attractive to our customers. Our PCS includes tiered maintenance and support services under renewable, fee-based maintenance and support contracts, which include technical support, bug fixes, access to priority hardware replacement services and unspecified upgrades on a when-and-if available basis. Our SaaS subscriptions include comparable maintenance and support services. The higher the percentage of our end-customers that purchase SaaS subscriptions, as opposed to HiveManager and perpetual licenses, the higher our subscription and support revenue will be as a percentage of our total revenue over time. We recognize subscription and support revenue ratably over the term of the contract, which is typically one, three or five years. As a result, our recognition of subscription and support revenue lags our recognition of related product revenue.

28



 
Three Months Ended March 31,
 
2019
 
2018
 
$ Change
 
% Change
 
(dollars in thousands)
Revenues:
 
 
 
 
 
 
 
Product
$
20,486

 
$
25,066

 
$
(4,580
)
 
(18
)%
Subscription and support
12,531

 
10,701

 
1,830

 
17
 %
Total revenue
$
33,017

 
$
35,767

 
$
(2,750
)
 
(8
)%
 
 
 
 
 
 
 
 
Percentage of revenues:
 
 
 
 
 
 
 
Product
62
%
 
70
%
 
 
 
 
Subscription and support
38
%
 
30
%
 
 
 
 
Total
100
%
 
100
%
 
 
 
 

 
Three Months Ended March 31,
 
2019
 
2018
 
$ Change
 
% Change
 
(dollars in thousands)
Revenue by geographic region:
 
 
 
 
 
 
Americas
$
17,238

 
$
20,830

 
$
(3,592
)
 
(17
)%
EMEA
12,758

 
11,900

 
858

 
7
 %
APAC
3,021

 
3,037

 
(16
)
 
(1
)%
Total revenue
$
33,017

 
$
35,767

 
$
(2,750
)
 
(8
)%
 
 
 
 
 
 
 
 
Percentage of revenue by geographic region:
 
 
 
 
Americas
52
%
 
58
%
 
 
 
 
EMEA
39
%
 
33
%
 
 
 
 
APAC
9
%
 
9
%
 
 
 
 
Total
100
%
 
100
%
 
 
 
 
Revenue decreased $2.8 million for the three months ended March 31, 2019, compared to the three months ended March 31, 2018, primarily due to a decrease in our product revenue partially offset by an increase in subscription and support revenue.
The decrease in our product revenue of $4.6 million for the three months ended March 31, 2019, compared to the same period in 2018, was primarily due to lower shipments, product mix shift from mid to lower-priced access points and a decrease in our license revenue as we transition our business to our subscription-based cloud-management platform.
The increase in our subscription and support revenue of $1.8 million for the three months ended March 31, 2019, compared to the same period in 2018, was primarily due to an increase in sales of our SaaS offerings, including our cloud-management platforms, and our recognition of deferred revenue in the period.
The Americas and EMEA accounted for the majority of our total revenue in the three months ended March 31, 2019 and March 31, 2018. The decrease in revenue in of $3.6 million in our Americas region for the three months ended March 31, 2019, compared to the same period in 2018, was primarily due to sales execution, primarily in the United States, and an unexpected shift in unit product mix from mid to lower-priced access points, also primarily in the United States.
Cost of Revenues
Our cost of revenue includes the following:
Cost of Product Revenue.  Our cost of product revenue primarily includes manufacturing costs of our products payable to third-party manufacturers. Our cost of product revenue also includes personnel costs, including stock-based compensation, shipping costs, third-party logistics costs, provisions for excess and obsolete inventory, warranty and replacement costs, the depreciation and amortization of testing and imaging equipment, inbound license fees, certain allocated facilities and information technology infrastructure costs, and other expenses associated with logistics and quality control.

29



Cost of Subscription and Support Revenue.  Our cost of subscription and support revenue primarily includes personnel costs, including stock-based compensation, certain allocated facilities information technology infrastructure costs, costs associated with our provision of PCS and SaaS activities and datacenter costs. Our cost of subscription and support revenue also includes amortization of capitalized costs related to HiveManager, our internally developed, cloud services platform, which we completed and launched in April 2015.

Three Months Ended March 31,

2019

2018

$ Change

% Change

(dollars in thousands)
Cost of revenues:







Product
$
8,997


$
8,671


$
326


4
%
Subscription and support
3,641


3,404


237


7
%
Total cost of revenues
$
12,638


$
12,075


$
563


5
%
Cost of revenue increased $0.6 million for the three months ended March 31, 2019, compared to the three months ended March 31, 2018, primarily due to an increase in cost of product revenue and an increase in cost of subscription and support revenue. We primarily attribute the increase in our cost of product revenue to changes in the mix of the products we sold in the period. We primarily relate the increase in our cost of subscription and support revenue to an increase in personnel and related costs and an increase in cost associated with opening of our regional data centers.
Gross Margin
Our gross margin or gross profit has been and will continue to be affected by a variety of factors, including product shipment volumes, average sales prices of our products, discounts we offer to our VAR, OEM and distributor partners, the mix of revenue between products and subscription and support services, and the mix of products we sold in the period, because our products have varying gross margins depending on the product offering and the lifecycle of the product. We expect our subscription and support gross margin to increase over the long term because we expect our subscription and support revenue to increase more quickly than our cost of subscription and support revenue. We expect our gross margin to be volatile and may decrease at any given time as we experience additional competitive pricing pressure, or mix shifts to lower-margin products. Further, we believe the pricing of our new Connect and Select offerings may dampen our product gross margin; however, we expect those offerings to generate improvements in our subscription and support gross margin as well as increase our deferred revenue over the period, both of which we expect will generate higher operating margins for our business.
 
Three Months Ended March 31,
 
2019
 
2018
 
Amount
 
GM
 
Amount
 
GM
 
(dollars in thousands)
Gross margin:
 
 
 
 
 
Product
$
11,489

 
56.1
%
 
$
16,395

 
65.4
%
Subscription and support
8,890

 
70.9
%
 
7,297

 
68.2
%
Total gross margin
$
20,379

 
61.7
%
 
$
23,692

 
66.2
%
Total gross margin decreased from 66.2% to 61.7% for the three months ended March 31, 2019 compared to the three months ended March 31, 2018, primarily due to lower gross margin in product revenue slightly offset by the increase in software and subscription margin.
Product gross margin decreased from 65.4% to 56.1% for the three months ended March 31, 2019, compared to the three months ended March 31, 2018, primarily related to the mix of products we sold during the period and our fixed cost over lower revenue. The decrease in our product gross margin was primarily due to the shift in product mix from mid to lower-priced access points and transition of our customers from perpetual licenses to multi-year subscriptions. Subscription and support gross margin increased from 68.2% to 70.9% for the three months ended March 31, 2019, compared to the three months ended March 31, 2018. The increase in our subscription and support gross margin was primarily due to higher growth in our subscription and support revenue than our related cost of delivering these subscription and support services.

30



Research and Development
Our research and development expenses consist primarily of personnel costs, including bonuses, stock-based compensation, recruiting fees and travel expenses for employees engaged in research, design and development activities. Research and development expenses also include costs for prototype-related expenses, product certification, consulting services, depreciation and certain allocated facilities and information technology infrastructure costs. We believe that continued investment in research and development is important to attaining our strategic objectives. Over time, we expect our research and development expenses to continue to increase in absolute dollars for the foreseeable future as we continue to invest in the development of our products and services, particularly due to increased headcount and cost of certification. Our research and development expenses may fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our research and development expenses.
 
Three Months Ended March 31,
 
2019
 
2018
 
$ Change
 
% Change
 
(dollars in thousands)
Research and development
$
8,763

 
$
9,279

 
$
(516
)
 
(6
)%
% of revenue
27
%
 
26
%
 
 
 
 

Research and development expense decreased $0.5 million for the three months ended March 31, 2019, compared to the three months ended March 31, 2018. The decrease was primarily due to a decrease of $0.7 million in personnel and related costs due to lower headcount offset by an increase of $0.2 million in other expenses primarily related to professional services and product certification costs.
    
Sales and Marketing
Our sales and marketing expenses consist primarily of personnel costs, including commission costs, stock-based compensation, recruiting fees and travel expenses for employees engaged in sales and marketing activities. Sales and marketing expenses also include the cost of trade shows, marketing and training programs, promotional materials, demonstration equipment, consulting services, depreciation and certain allocated facilities and information technology infrastructure costs. Over time, we expect our sales and marketing expenses to continue to increase in absolute dollars as we increase the size of our sales and marketing organization, expand into new markets and further develop our channel program. Our sales and marketing expenses may fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue, operating performance and the timing and extent of our sales and marketing expenses.
 
Three Months Ended March 31,
 
2019
 
2018
 
$ Change
 
% Change
 
(dollars in thousands)
Sales and marketing
$
14,497

 
$
15,670

 
$
(1,173
)
 
(7
)%
% of revenue
44
%
 
44
%
 
 
 
 

Sales and marketing expense decreased $1.2 million for the three months ended March 31, 2019, compared to the three months ended March 31, 2018. The decrease was primarily due to a decrease of $1.3 million in personnel and employee related costs due to lower headcount, a decrease of $0.2 million in sales and marketing expenses primarily due to lower spending for sales and marketing-related equipment and programs offset by $0.2 million increase in employee travel expenses, and a $0.1 million increase in professional services.    
General and Administrative
Our general and administrative expenses consist primarily of personnel costs, including bonuses, stock-based compensation and travel expenses for our executive, finance, human resources, legal and operations employees, as well as compensation for our board of directors. General and administrative expenses also include fees for outside consulting, legal, audit, investor relations, and accounting services and insurance, as well as depreciation and certain allocated facilities and information technology infrastructure costs. Over time, we expect our general and administrative expenses to continue to increase in absolute dollars due to the additional legal, accounting, insurance, investor relations, information technology and other costs that we will continue to incur as a public company, as well as other costs associated with growing our business. Our general and administrative expenses may fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our general and administrative expenses.

31



 
Three Months Ended March 31,
 
2019
 
2018
 
$ Change
 
% Change
 
(dollars in thousands)
General and administrative
$
6,011

 
$
5,954

 
$
57

 
1
%
% of revenue
18
%
 
17
%
 
 
 
 
General and administrative expense increased $0.1 million for the three months ended March 31, 2019, compared to the three months ended March 31, 2018. The increase was primarily related to an increase in professional services primarily related to compliance fees.
Interest Income
    
Our interest income primarily consists of interest earned on our cash and cash equivalent and short-term investments. We have invested our cash in money-market funds and other short-term, high quality investments. Historically, our interest income has not been material.
 
Three Months Ended March 31,
 
2019
 
2018
 
$ Change
 
% Change
 
(dollars in thousands)
Interest income
$
496

 
$
289

 
$
207

 
72
%
Interest income increased for the three months ended March 31, 2019, compared to the three months ended March 31, 2018 primarily due to income earned on our short-term investments due to increasing interest rates and additional cash invested in short-term investments.
Interest Expense

Our interest expense consists primarily of interest on our indebtedness.
 
Three Months Ended March 31,
 
2019
 
2018
 
$ Change
 
% Change
 
(dollars in thousands)
Interest expense
$
(207
)
 
$
(164
)
 
$
(43
)
 
26
%
The change in our interest expense was not significant.
Other Income (Expense), Net

Our other income (expense), net primarily consists of gains and losses from foreign currency exchange transactions.
 
Three Months Ended March 31,
 
2019
 
2018
 
$ Change
 
% Change
 
(dollars in thousands)
Other income (expense), net
$
3

 
$
(173
)
 
$
176

 
(102
)%
The change in our other income (expense), net primarily related to changes due to foreign currency fluctuations.
Provision for Income Taxes
Our provision for income taxes consists primarily of foreign tax expense due to our cost-plus agreements with our foreign entities, which guarantee these foreign entities a profit, and to a lesser extent federal and state income tax expense. We expect our provision for income taxes to increase in absolute dollars in future periods.
 
Three Months Ended March 31,
 
2019
 
2018
 
$ Change
 
% Change
 
(dollars in thousands)
Provision for income taxes
$
52

 
$
58

 
$
(6
)
 
(10
)%

32



The change in our provision for income taxes primarily related to foreign and state income taxes and was not significant. As of March 31, 2019 and March 31, 2018, respectively, we maintained a full valuation allowance against our domestic deferred tax assets, including net operating loss carryforwards and research and development and other tax credits.
Liquidity and Capital Resources
As of March 31, 2019, we had cash and cash equivalents of $20.4 million and short-term investments of $61.2 million. As of March 31, 2019, we held $79.1 million of our cash, cash equivalents and short-term investments within the United States.
In June 2012, we entered into the Revolving Credit Facility with Silicon Valley Bank, which matures on March 31, 2019. We have been using the amount drawn under the Revolving Credit Facility for working capital and general corporate purposes. As of March 31, 2019, we had $20.0 million of outstanding debt, under the Revolving Credit Facility, and we were in compliance with all covenants under our loan agreement. See Note 4 to the Condensed Consolidated Financial Statements included in this Form 10-Q for more information about our debt.
We believe that our existing cash and cash equivalents will be sufficient to meet our anticipated working capital and capital expenditure needs for at least the next 12 months. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of our spending to support our research and development efforts, the expansion of our sales and marketing activities, the introduction of new and enhanced product and service offerings, the costs to ensure access to adequate manufacturing capacity, and the level of market acceptance of our products. However, we may be required to raise additional funds in the future through public or private debt or equity financing to meet additional working capital requirements.
Cash Flows    
The following table summarizes our cash flows for the periods indicated:
 
Three Months Ended March 31,
 
2019
 
2018
 
(in thousands)
Net cash used in operating activities
$
(10,288
)
 
$
(4,845
)
Net cash provided by investing activities
4,890

 
178

Net cash used in financing activities
(271
)
 
(1,098
)
Net decrease in cash and cash equivalents
$
(5,669
)
 
$
(5,765
)
Operating Activities
Our largest uses of cash from operating activities are for employee-related expenditures and purchases of finished products from our contract manufacturers. Our primary source of cash flows from operating activities is cash receipts from our channel partners. Our cash flows from operating activities will continue to be affected principally by the extent to which we grow our total revenue and our operating expenses, primarily in our sales and marketing and research and development functions, in order to grow our business.
For the three months ended March 31, 2019, cash used in operating activities was $10.3 million as a result of our net loss of $8.7 million, partially offset by non-cash charges of $4.0 million and a net change of $5.7 million in our net operating assets and liabilities. Non-cash charges consisted primarily of stock-based compensation of $3.6 million, and depreciation and amortization expense of $0.8 million offset by other charges of $0.3 million. The net change in our net operating assets and liabilities was primarily due to a $2.6 million increase in accounts receivable primarily due to timing of shipments, a $3.7 million decrease in accounts payable, a $1.8 million decrease in accrued liabilities, a $0.2 million increase in prepaid expenses and a $0.2 million decrease in other liabilities, partially offset by a $1.7 million increase in deferred revenue, a $0.8 million decrease in cash used for inventory purchases and a $0.3 million decrease in other assets. Our days sales outstanding, or DSO, was 51 days as of March 31, 2019, which we calculate by dividing net accounts receivable at the end of the quarter by revenue recognized during the quarter, multiplied by the total days in the quarter. The increase in DSO to 51 days as compared to 49 days for the same period last year is primarily due to the timing of shipments in the period.
For the three months ended March 31, 2018, cash used in operating activities was $4.8 million as a result of our net loss of $7.3 million, partially offset by non-cash charges of $4.3 million and a net change of $1.8 million in our net operating assets and liabilities. Non-cash charges consisted primarily of stock-based compensation of $3.7 million and depreciation and amortization expense of $0.7 million. The net change in our net operating assets and liabilities was primarily due to a $1.8 million increase in accounts receivable primarily due to the timing of shipments, a $0.8 million decrease in accrued liabilities, a

33



$0.1 million increase in cash used for inventory purchases, a $0.1 million increase in other assets and a $0.1 million decrease in accounts payable, partially offset by a $0.2 million decrease in prepaid expenses and a $0.8 million increase in deferred revenue. Our DSO was 49 days as of March 31, 2018.
Investing Activities
Our investing activities have primarily consisted of purchases of property and equipment and purchases and sales or maturities of marketable securities.
For the three months ended March 31, 2019, cash provided by investing activities was $4.9 million, primarily attributable to maturities of marketable securities of $30.8 million offset by cash used for purchases of marketable securities of $25.6 million, and cash used for purchases of property and equipment of $0.3 million, relating primarily to purchases of lab equipment.
For the three months ended March 31, 2018, cash provided by investing activities was $0.2 million, primarily attributable to maturities of marketable securities of $23.0 million offset by cash used for purchases of marketable securities of $21.6 million, and cash used for purchases of property and equipment of $1.2 million, relating primarily to purchases of software.
Financing Activities
Our financing activities have primarily consisted of proceeds from our employees' exercises of stock options and proceeds from employee purchases under our stock purchase plan offset by and payments against our finance lease obligations.
For the three months ended March 31, 2019, cash used in financing activities was $0.3 million, primarily as a result of $0.2 million of cash used to satisfy our estimate of minimum employee tax withholding requirements on vesting of restricted stock units and $0.1 million cash used for payments against our finance lease obligations.
For the three months ended March 31, 2018, cash used in financing activities was $1.1 million, primarily as a result of $1.1 million of cash used to satisfy our estimate of minimum employee tax withholding requirements on vesting of restricted stock units.
Off-Balance Sheet Arrangements
Through March 31, 2019, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
Our exposure to market risk from changes in interest rates relates primarily to our cash, cash equivalents, short-term investments and our outstanding debt obligations. We had cash, cash equivalents and short-term investments of $81.6 million and $92.1 million as of March 31, 2019 and December 31, 2018, respectively. We held these amounts primarily in bank deposits, money market funds, certificates of deposit, commercial paper and bonds issued by corporate institutions and U.S. government agencies. Such interest-earning instruments carry a degree of interest rate risk. To date, fluctuations in our interest income have not been significant.
We have outstanding debt of $20.0 million as of March 31, 2019, consisting of our borrowing under our Revolving Credit Facility. The Revolving Credit Facility bears interest at a variable rate.
We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. We have not been exposed to material risks due to changes in interest rates. A hypothetical 10% change in interest rates during any of the periods we present in this report would not have had a material impact on our financial statements.
Foreign Currency Risk
We denominate all of our sales in U.S. dollars and, therefore, our revenues are not currently subject to significant foreign currency risk. However, when the exchange rate of the U.S. dollar to foreign currencies is strong, the price of our products outside the United States may become less competitive, reducing our sales or requiring us to lower pricing for our

34



products outside the United States in order to maintain sales and revenue performance. We denominate our operating expenses in the currencies of the countries in which our operations are located, including in EMEA and APAC, and may be subject to fluctuations due to changes in foreign currency exchange rates. Where the exchange rate is strong for local currencies relative to the U.S. dollar, our product and overall operating margins may be negatively impacted. However, to date, we have not used derivative financial instruments to mitigate our exposure to foreign currency exchange risks. A hypothetical 10% change in foreign currency exchange rates applicable to our business would not have a material impact on our condensed consolidated financial statements in any of the periods presented.
ITEM 4.    CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Management, with the participation of our chief executive officer and our chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well-designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2019, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable-assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS
The information set forth under the “Contingencies” subheading in Note 5 - Leases, Commitments and Contingencies of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by reference.
ITEM 1A.    RISK FACTORS
In evaluating Aerohive and our business, you should carefully consider the risks and uncertainties described below, together with all of the other information in this report, including our condensed consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. If any of the following or other risks occur, our business, financial condition, operating results, and prospects could be materially harmed. In that event, the price of our common stock could decline, and you could lose part or all of your investment.
Risks Related to Our Business
We have a history of losses and we may not achieve profitability in the future.
We manage our ongoing operating expenses in an effort to position us to achieve non-GAAP operating profitability at certain target levels of quarterly revenue, which we may announce publicly from time-to-time. We may subsequently take actions which could raise or lower the level of quarterly revenue we would need to achieve non-GAAP profitability in any period. Nonetheless, we have a history of losses. We have never achieved GAAP profitability on a quarterly or annual basis, and we cannot predict with certainty whether or when we might be profitable in the foreseeable future, even on a non-GAAP basis and even at these revenue levels. We experienced net losses on a GAAP basis of $38.2 million, $22.1 million, $18.3

35



million and $8.7 million