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Section 1: 10-Q (10-Q)

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

x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.001 par value
HIVE
New York Stock Exchange
The number of shares of the registrant's common stock, par value $0.001, outstanding as of July 26, 2019 was 57,424,646.





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)
 
June 30,
 
December 31,
 
2019
 
2018
 
(unaudited)
 
 
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
36,379

 
$
26,049

Short-term investments
57,571

 
66,052

Accounts receivable, net
11,915

 
16,185

Inventories
14,303

 
16,117

Prepaid expenses and other current assets
6,763

 
6,399

Total current assets
126,931

 
130,802

Property and equipment, net
4,552

 
5,947

Operating lease right-of-use assets
4,066

 

Goodwill
513

 
513

Other assets
4,276

 
4,255

Total assets
$
140,338

 
$
141,517

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
14,061

 
$
16,129

Accrued liabilities
7,707

 
8,937

Operating lease liabilities, current
1,024

 

Debt, current

 
20,000

Deferred revenue, current
41,532

 
38,786

Total current liabilities
64,324

 
83,852

Debt, non-current
20,000

 

Deferred revenue, non-current
40,877

 
38,475

Operating lease liabilities, non-current
3,211

 

Other liabilities
1,179

 
1,582

Total liabilities
129,591

 
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 June 30, 2019 and December 31, 2018; no shares issued and outstanding as of June 30, 2019 and December 31, 2018

 

Common stock, par value of $0.001 per share - 500,000,000 shares authorized as of June 30, 2019 and December 31, 2018; 57,373,710 and 55,867,619 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively
57

 
56

Additional paid–in capital
301,722

 
293,910

Treasury stock - 2,469,978 shares as of June 30, 2019 and December 31, 2018, respectively
(10,584
)
 
(10,584
)
Accumulated other comprehensive income (loss)
46

 
(14
)
Accumulated deficit
(280,494
)
 
(265,760
)
Total stockholders’ equity
10,747

 
17,608

Total liabilities and stockholders’ equity
$
140,338

 
$
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 June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenue:
 
 
 
 
 
 
 
Product
$
24,746

 
$
29,268

 
$
45,232

 
$
54,334

Subscription and support
13,291

 
11,207

 
25,822

 
21,908

Total revenue
38,037

 
40,475

 
71,054

 
76,242

Cost of revenue (1):
 
 
 
 
 
 
 
Product
9,888

 
10,379

 
18,885

 
19,050

Subscription and support
3,719

 
3,383

 
7,360

 
6,787

Total cost of revenue
13,607

 
13,762

 
26,245

 
25,837

Gross profit
24,430

 
26,713

 
44,809

 
50,405

Operating expenses:
 
 
 
 
 
 
 
Research and development (1)
9,668

 
8,581

 
18,431

 
17,860

Sales and marketing (1)
13,170

 
15,731

 
27,667

 
31,401

General and administrative (1)
7,711

 
5,272

 
13,722

 
11,226

Total operating expenses
30,549

 
29,584

 
59,820

 
60,487

Operating loss
(6,119
)
 
(2,871
)
 
(15,011
)
 
(10,082
)
Interest income
475

 
337

 
971

 
626

Interest expense
(200
)
 
(183
)
 
(407
)
 
(347
)
Other income (expense), net
(80
)
 
(31
)
 
(77
)
 
(204
)
Loss before income taxes
(5,924
)
 
(2,748
)
 
(14,524
)
 
(10,007
)
Provision for income taxes
158

 
84

 
210

 
142

Net loss
$
(6,082
)
 
$
(2,832
)
 
$
(14,734
)
 
$
(10,149
)
Net loss per share, basic and diluted
$
(0.11
)
 
$
(0.05
)
 
$
(0.26
)
 
$
(0.19
)
Weighted-average shares used in computing net loss per share, basic and diluted
56,676,019

 
54,828,749

 
56,354,579

 
54,582,129

 
 
 
 
 
 
 
 
(1) Includes stock-based compensation as follows:
 
 
 
 
 
 
 
Cost of revenue
$
240

 
$
256

 
$
466

 
$
502

Research and development
867

 
968

 
1,953

 
2,014

Sales and marketing
913

 
1,110

 
1,839

 
2,107

General and administrative
1,133

 
1,250

 
2,480

 
2,632

Total stock-based compensation
$
3,153

 
$
3,584

 
$
6,738

 
$
7,255


See notes to condensed consolidated financial statements.  




3



AEROHIVE NETWORKS, INC.
Condensed Consolidated Statements of Comprehensive Loss
(unaudited, in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Net loss
$
(6,082
)
 
$
(2,832
)
 
$
(14,734
)
 
$
(10,149
)
Unrealized gain (loss) on available-for-sale investments, net of tax
32

 
25

 
60

 
(14
)
Comprehensive loss
$
(6,050
)
 
$
(2,807
)
 
$
(14,674
)
 
$
(10,163
)
See notes to condensed consolidated financial statements.  






4



AEROHIVE NETWORKS, INC.
Consolidated Statements of Stockholders’ Equity
(Unaudited, in thousands, except share data)
 
 
Six Months Ended June 30, 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

Shares issued upon exercise of options and ESPP
 
517,872

 

 

 
1,441

 

 

 
1,441

Issuance of common stock upon vesting of RSUs
 
562,045

 
1

 

 
(1
)
 

 

 

Shares repurchased for tax withholdings on vesting of RSUs
 
(42,363
)
 

 

 
(144
)
 

 

 
(144
)
Stock-based compensation
 

 

 

 
3,153

 

 

 
3,153

Unrealized gain (loss) on available for sale investments
 

 

 

 

 

 
32

 
32

Net loss
 

 

 

 

 
(6,082
)
 

 
(6,082
)
Balances at June 30, 2019
 
57,373,710

 
$
57

 
$
(10,584
)
 
$
301,722

 
$
(280,494
)
 
$
46

 
$
10,747



5



 
 
Six Months Ended June 30, 2018
 
 
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, 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

Shares issued upon exercise of options and ESPP
 
496,053

 

 

 
1,585

 

 

 
1,585

Issuance of common stock upon vesting of RSUs
 
588,215

 

 

 

 

 

 

Shares repurchased for tax withholdings on vesting of RSUs
 
(141,173
)
 

 

 
(593
)
 

 

 
(593
)
Repurchase of treasury stock
 
(248,961
)
 

 
(1,023
)
 

 

 

 
(1,023
)
Stock-based compensation
 

 

 

 
3,584

 

 

 
3,584

Unrealized gain (loss) on available for sale investments
 

 

 

 

 

 
25

 
25

Net loss
 

 

 

 

 
(2,832
)
 

 
(2,832
)
Balances at June 30, 2018
 
55,320,058

 
$
55

 
$
(7,239
)
 
$
285,722

 
$
(257,572
)
 
$
(44
)
 
$
20,922


See notes to condensed consolidated financial statements.  


6



AEROHIVE NETWORKS, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
 
Six Months Ended June 30,
 
2019
 
2018
Cash flows from operating activities
 
 
 
Net loss
$
(14,734
)
 
$
(10,149
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
1,492

 
1,493

Stock-based compensation
6,738

 
7,255

Other
(346
)
 
(274
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
4,270

 
475

Inventories
1,814

 
2,261

Prepaid expenses and other current assets
(524
)
 
(293
)
Operating lease right-of-use assets and other assets
754

 
(370
)
Accounts payable
(1,950
)
 
(105
)
Accrued liabilities and other current liabilities
(1,647
)
 
478

Operating lease liabilities, non-current and other liabilities
(335
)
 
12

Deferred revenue
5,148

 
4,267

Net cash provided by operating activities
680

 
5,050

Cash flows from investing activities
 
 
 
Purchases of property and equipment
(436
)
 
(1,439
)
Maturities of short-term investments
57,482

 
38,651

Purchases of short-term investments
(48,374
)
 
(33,360
)
Net cash provided by investing activities
8,672

 
3,852

Cash flows from financing activities
 
 
 
Proceeds from employee stock option exercises and employee stock purchase plan
1,462

 
1,612

Payment for shares withheld for tax withholdings on vesting of restricted stock units
(387
)
 
(1,673
)
Payment to repurchase common stock

 
(1,023
)
Payment on finance lease (capital lease prior to adoption of ASC 842)
(97
)
 
(94
)
Net cash provided by (used in) financing activities
978

 
(1,178
)
Net increase in cash and cash equivalents
10,330

 
7,724

Cash and cash equivalents at beginning of period
26,049

 
27,249

Cash and cash equivalents at end of period
$
36,379

 
$
34,973

Supplemental disclosure of cash flow information
 
 
 
Income taxes paid
$
129

 
$
47

Interest paid
$
347

 
$
355

Supplemental disclosure of noncash investing and financing activities
 
 
 
Unpaid property and equipment purchases
$
104

 
$
620


See notes to condensed consolidated financial statements.

7



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 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.
On June 26, 2019, the Company issued a press release announcing the execution of an Agreement and Plan of Merger (the “Merger Agreement”) with Extreme Networks, Inc., a Delaware corporation (“Extreme”), and Clover Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of Extreme (the “Purchaser”), pursuant to which the Purchaser commenced a tender offer (the “Offer”) as disclosed in the Tender Offer Statement on Schedule TO (together with the exhibits thereto, as amended, the “Schedule TO”), filed by the Purchaser and Extreme with the Securities and Exchange Commission (the “SEC”) on July 12, 2019, to acquire all of the outstanding shares of the Company’s common stock, par value $0.001 per share (the “Shares”), at a price of $4.45 per share in cash (the “Offer Price”), without interest and subject to any applicable withholding taxes, and the Company filed a Solicitation/Recommendation Statement on Schedule 14D-9 (together with the exhibits thereto, as amended, the “Schedule 14D-9”) with the SEC on July 12, 2019, each on the terms and subject to the conditions set forth in the Merger Agreement. The Offer and withdrawal rights will expire at midnight (New York City time) at the end of the day on August 8, 2019, subject to extension in certain circumstances as required or permitted by the Merger Agreement (as so extended, if applicable, the “Expiration Date”). As soon as practicable following the consummation of the Offer, and subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, the Purchaser will merge with and into the Company, with the Company surviving as a wholly-owned subsidiary of Extreme, pursuant to the provisions of Section 251(h) of the General Corporation Law of the State of Delaware, with no stockholder approval required to consummate the Merger (the “Merger”).
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.

8



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 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.

9



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, 2019, with early adoption permitted. The Company currently plans to adopt this standard in 2020 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 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 June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Channel Partner A
 
54.6
%
 
39.7
%
 
47.9
%
 
37.5
%
Channel Partner B
 
13.9
%
 
14.8
%
 
15.6
%
 
16.0
%
 
The percentages of receivables from a consolidated group of entities (Channel Partner A, Channel Partner B, Channel Partner C and Channel Partner D) greater than 10% of total consolidated accounts receivable were as follows:
 
 
June 30,
 
December 31,
 
 
2019
 
2018
Channel Partner A
 
*

 
21.4
%
Channel Partner B
 
25.8
%
 
31.7
%
Channel Partner C
 
15.4
%
 
*

Channel Partner D
 
10.5
%
 
*

 
 
 
 
 
* Less than 10%
 
 
 
 


10



2. FAIR VALUE MEASUREMENTS
The Company records its financial assets and liabilities at fair value. The Company categorizes these assets and liabilities based upon the level of judgment associated with inputs the Company uses to measure the fair value. The categories are as follows:
Level 1
 
Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities.
Level 2
 
Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3
 
Unobservable inputs are used when little or no market data is available.
The Company classified its cash equivalents and short-term marketable investments within Level 1 and Level 2 in the fair value hierarchy as of June 30, 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.
The components of the Company’s Level 1 and Level 2 assets were as follows:
 
June 30, 2019
 
Amortized Cost
 
Gross Unrealized Gain (Loss)
 
Estimated Fair Value
 
Cash equivalents
 
Short-term investments
 
(in thousands)
Level 1:
 
 
 
 
 
 
 
 
 
Money market funds
15,842

 

 
15,842

 
15,842

 

 
$
15,842

 
$

 
$
15,842

 
$
15,842

 
$

Level 2:
 
 
 
 
 
 
 
 
 
U.S. treasuries
19,776

 
14

 
19,790

 

 
19,790

Corporate securities
21,109

 
32

 
21,141

 

 
21,141

Commercial paper
16,640

 

 
16,640

 

 
16,640

 
$
57,525

 
$
46

 
$
57,571

 
$

 
$
57,571

Total
$
73,367

 
$
46

 
$
73,413

 
$
15,842

 
$
57,571


 
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


11



All short-term investments the Company held as of June 30, 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 June 30, 2019 and December 31, 2018.  
3. CONSOLIDATED BALANCE SHEET COMPONENTS
Account Receivable Allowances
The allowance for rebates was approximately $5.0 million and $3.8 million as of June 30, 2019 and December 31, 2018, respectively. The allowance for sales return was approximately $0.3 million and $1.2 million as of June 30, 2019 and December 31, 2018, respectively. The allowance for doubtful accounts was immaterial as of June 30, 2019 and December 31, 2018.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
 
 
 
June 30,
 
December 31,
 
 
 
2019
 
2018
 
 
 
(in thousands)
Deferred sales commissions, current portion
 
 
$
3,323

 
$
3,171

Prepaid expenses
 
 
2,669

 
2,478

Other
 
 
771

 
750

Total prepaid expenses and other current assets
 
 
$
6,763

 
$
6,399

Property and Equipment, Net
Property and equipment, net consists of the following:
 
 
 
 
June 30,
 
December 31,
 
 
Estimated Useful Lives
 
2019
 
2018
 
 
 
 
(in thousands)
Computer and other equipment
 
3 years
 
$
1,157

 
$
1,668

Manufacturing, research and development laboratory equipment
 
3 years
 
4,545

 
5,693

Software
 
2 to 5 years
 
9,452

 
9,462

Office furniture and equipment
 
3 to 7 years
 
1,968

 
2,052

Leasehold improvements
 
shorter of useful life or lease term
 
952

 
1,049

Property and equipment, gross
 
 
 
18,074

 
19,924

Less: Accumulated depreciation and amortization
 
 
 
(13,522
)
 
(13,977
)
Property and equipment, net
 
 
 
$
4,552

 
$
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 $0.7 million and $0.8 million for the three months ended June 30, 2019 and 2018, respectively, and $1.5 million for each of the six months ended June 30, 2019 and 2018, respectively.
Office furniture and equipment classified under finance leases (capital leases prior to adoption of ASC 842) was $1.1 million and $1.2 million at June 30, 2019 and December 31, 2018 respectively, and the related accumulated depreciation was $0.7 million and $0.7 million at June 30, 2019 and December 31, 2018, respectively. The amortization of finance lease right-of-use assets (depreciation expense prior to ASC 842) was not material for the three and six months ended June 30, 2019 and 2018.

12



Other Assets
Other assets consist of the following:
 
 
 
June 30,
 
December 31,
 
 
 
2019
 
2018
 
 
 
(in thousands)
Deferred sales commissions, non-current portion
 
 
$
3,153

 
$
3,085

Investment in privately held company
 
 
750

 
750

Other
 
 
373

 
420

Total other assets
 
 
$
4,276

 
$
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 and six months ended June 30, 2019 and 2018 are as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
 
(in thousands)
Beginning balance
$
6,393

 
$
6,085

 
$
6,256

 
$
6,019

Recognized
(1,367
)
 
(3,749
)
 
(2,886
)
 
(6,767
)
Additions
1,450

 
4,139

 
3,106

 
7,223

Total deferred sales commission
$
6,476

 
$
6,475

 
$
6,476

 
$
6,475

Current portion
$
3,323

 
$
3,279

 
$
3,323

 
$
3,279

Non-current portion
$
3,153

 
$
3,196

 
$
3,153

 
$
3,196

Of the $6.5 million total deferred commission balance as of June 30, 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 and six months ended June 30, 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.

13



Accrued Liabilities
Accrued liabilities consist of the following:
 
 
 
June 30,
 
December 31,
 
 
 
2019
 
2018
 
 
 
(in thousands)
Accrued compensation
 
 
$
6,199

 
$
7,492

Accrued expenses and other liabilities
 
 
1,280

 
1,169

Warranty liability, current portion
 
 
228

 
276

Total accrued liabilities
 
 
$
7,707

 
$
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 and six months ended June 30, 2019 and 2018 are as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
 
(in thousands)
Beginning balance
$
79,008

 
$
67,878

 
$
77,261

 
$
67,040

Recognized
(13,291
)
 
(11,207
)
 
(25,822
)
 
(21,908
)
Additions
16,692

 
14,636

 
30,970

 
26,175

Total deferred revenue
$
82,409

 
$
71,307

 
$
82,409

 
$
71,307

Current portion
$
41,532

 
$
35,393

 
$
41,532

 
$
35,393

Non-current portion
$
40,877

 
$
35,914

 
$
40,877

 
$
35,914


Of the $82.4 million total deferred revenue balance as of June 30, 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 $85.1 million as of June 30, 2019, of which the Company expects to recognize approximately 52% 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 June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
Beginning balance
$
588

 
$
546

 
$
615

 
$
577

Charges to operations
180

 
148

 
397

 
274

Obligations fulfilled
(201
)
 
(154
)
 
(431
)
 
(307
)
Changes in existing warranty
(3
)
 

 
(17
)
 
(4
)
Total product warranties
$
564

 
$
540

 
$
564

 
$
540

Current portion
$
228

 
$
214

 
$
228

 
$
214

Non-current portion
$
336

 
$
326

 
$
336

 
$
326


14



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 4.02% and 3.68% for the three months ended June 30, 2019 and 2018, respectively, and 4.10% and 3.48% for the six months ended June 30, 2019 and 2018.
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 June 30, 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 June 30, 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.

15



Information related to the Company's right-of-use assets and related lease liabilities for the three and six months ended June 30, 2019 are as follows:
 
Three Months Ended June 30, 2019
Six Months Ended June 30, 2019
 
(in thousands)
Cash paid for operating lease liabilities
$
414

$
1,054

Right-of-use assets obtained in exchange for new operating lease obligations(1)
$
514

$
4,841

 
 
 
 
As of June 30, 2019
Weighted-average remaining lease term
 
3.6 years

Weighted-average discount rate
 
5.41
%
 
 
 
     (1) Represents the $4.3 million for operating leases existing on January 1, 2019 and $0.5 million for operating leases that commenced in the second quarter of 2019.
The maturities of the Company's operating lease liabilities as of June 30, 2019 are as follows:
 
Amount
Year Ending December 31,
(in thousands)
2019 (remaining six months)
$
692

2020
1,392

2021
1,189

2022
948

2023
445

Total minimum lease payments
$
4,666

Less: amount representing interest
$
431

Total operating lease liabilities
$
4,235

Operating lease liabilities, current
$
1,024

Operating lease liabilities, non-current
$
3,211

Operating lease expense was $0.5 million for each of the three months ended June 30, 2019 and 2018, respectively, and was $1.0 million for each of the six months ended June 30, 2019 and 2018, respectively. Short term lease expense for the three and six months ended June 30, 2019 was not material. The total variable lease expense was $0.2 million and $0.4 million, respectively, for the three and six months ended June 30, 2019, respectively. The Company has an additional operating lease for real estate of $0.06 million which has not commenced as of June 30, 2019 and, as such, have not been recognized on the Company's consolidated balance sheet. This operating lease will commence during the period ending September 30, 2019 and has a lease term of two years.
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 3.8 years.

16



The maturities of the Company's finance leases as of June 30, 2019 are as follows:
 
Amount
Year Ending December 31,
(in thousands)
2019 (remaining six months)
$
89

2020
182

2021
180

2022
162

2023
83

Total finance lease obligations
$
696

Finance lease liabilities, current
$
180

Finance lease liabilities, non-current
$
516

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 June 30, 2019 and December 31, 2018, the Company had manufacturing commitments with contract manufacturers for inventory totaling approximately $5.1 million and $5.0 million, respectively.
Other Purchase Commitments
In August 2018, the Company amended an agreement with a third-party provider for the Company's use of certain cloud services. Under the non-cancelable amendment, the Company is committed to a minimum purchase of $11.7 million between September 2018 and August 2021. As of June 30, 2019, the Company's remaining purchase commitment under the amendment was $9.1 million.
Contingencies
The Company may be subject to legal proceedings and litigation arising from time to time. The Company will record a liability when it believes that it is both probable that a loss has been incurred and the amount can be reasonably estimated. The Company expects periodically to evaluate developments in its legal matters that could affect the amount of liability that it has previously accrued, if any, and make adjustments as appropriate. The Company exercises significant judgment to determine both likelihood of there being, and the estimated amount of, a loss related to such matters, and the Company’s judgment may be incorrect. The Company cannot reasonably determine in advance the outcome of any litigation proceeding. Until the final resolution of any such matter for which the Company may be required to accrue, the Company may have an exposure to loss in excess of the amount the Company has accrued, and such excess amount could be significant.

17



The Company is currently engaged in the following separate litigations:
In July 2019, five actions relating to the Merger were filed by purported Company shareholders against the Company and the Company’s board of directors. Two actions were filed in the United States District Court for the Northern District of California. These cases are titled Silverberg v. Aerohive Networks, Inc., et al., Case No. 3:19-cv-04089 (brought as a putative class action on behalf off all shareholders of the Company) and Naik v. Aerohive Networks, Inc., et al., Case No. 5:19-cv-04160. One action was filed in the United States District Court for the Southern District of New York, titled Shirley v. Aerohive Networks, Inc., et al., Case No. 1:19-cv-06742. Shirley v. Aerohive Networks, Inc., et al. also names as a defendant the Company's co-founder Changming Liu. Two actions were filed in the United States District Court for the District of Delaware. These cases are titled Plumley v. Aerohive Networks, Inc., et al., Case No. 1:19-cv-01322 (brought as a putative class action on behalf of all shareholders of the Company) and Smith v. Aerohive Networks, Inc., et al., Case No. 1:19-cv-01359. Plumley v. Aerohive Networks, Inc., et al. also names as defendants Extreme and the Purchaser. The complaints generally allege that the Schedule 14D-9 filed by the Company omits material information necessary for Company stockholders to make an informed decision regarding the Offer, and assert claims for violation of Sections 14 and 20(a) of the Securities Exchange Act of 1934. The complaints seek, among other things, to enjoin the Offer or, should it be consummated, to rescind it or award damages, as well as an award of the plaintiffs’ attorneys’ fees and costs in the actions.
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 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 has resolved this matter in return for a nominal payment.
In July 2019, Wireless Transport LLC, or Wireless, filed a complaint in the U.S. District Court, for the District of Delaware, asserting that certain of the Company’s SD-WAN products infringe United States Patent No. 6,563,813.  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 and six months ended June 30, 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.

18



The Company intends to defend these lawsuits vigorously, and is not able to predict or estimate any range of reasonably possible loss related to these lawsuits. If these matters have an adverse outcome, they may have a material impact on the Company’s financial position, results of operations or cash flows.       
Guarantees
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 June 30, 2019, the Company had the following shares of common stock reserved for future issuance:
 
June 30,
 
2019
Common stock reserved for future grant under the 2014 Equity Incentive Plan
9,672,918

Common stock reserved for future purchase under the 2014 Employee Stock Purchase Plan
1,327,504

Options and Restricted Stock Units issued and outstanding
9,258,180

Total reserved shares of common stock for future issuance
20,258,602

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 and six months ended June 30, 2019, respectively, the Company did not repurchase any shares. During the three and six months ended June 30, 2018, the Company repurchased a total of 248,961 shares of its common stock on the open market at a total cost of $1.0 million with an average price per share of $4.11. As of June 30, 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 June 30, 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

19



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 June 30, 2019, the Company had 9,672,918 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 June 30, 2019:
 
 
 
Shares Available for Grant
 
 
Balance, December 31, 2018
9,498,884

Authorized
2,793,380

Options granted

Options canceled
196,433

Awards granted
(3,604,888
)
Awards canceled
789,109

Balance, June 30, 2019
9,672,918

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
(46,411
)
 
1.37

 
 
 
 
Options canceled
(196,433
)
 
7.73

 
 
 
 
Balance, June 30, 2019
3,199,161

 
$
5.95

 
4.29
 
$
2,347

Options exercisable, June 30, 2019
3,180,097

 
$
5.95

 
4.28
 
$
2,347

There were no options granted during the three and six months ended June 30, 2019 and 2018 respectively.
The aggregate intrinsic value of stock options exercised during the three months ended June 30, 2019 and 2018 was $0.08 million and $0.01 million, respectively, and during the six months ended June 30, 2019 and 2018 was $0.1 million and $0.04 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 during the three months ended June 30, 2019 and 2018 was $0.3 million and $0.4 million, respectively, and during the six months ended June 30, 2019 and 2018 was $0.6 million and $1.0 million, 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.

20



The following is a summary of the Company’s RSU grant activity and related information for the three months ended June 30, 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
3,604,888

 
3.52

Awards vested
(1,065,890
)
 
4.87

Awards canceled
(698,943
)
 
4.53

Balance, June 30, 2019
6,059,019

 
$
3.74


The weighted-average grant-date fair value of RSUs the Company granted during the three months ended June 30, 2019 and 2018 was $3.38 and $4.12 per share respectively, and during the six months ended June 30, 2019 and 2018 was $3.52 and $4.14 per share, respectively. The aggregate grant-date fair value of RSUs the Company granted during the three months ended June 30, 2019 and 2018 was $9.4 million and $11.2 million, respectively, and during the six months ended June 30, 2019 was $12.7 million and $12.5 million, respectively. The aggregate fair value of shares vested as of the respective vesting dates during the three months ended June 30, 2019 and 2018 was $2.7 million and $2.6 million, respectively, and during the six months ended June 30, 2019 and 2018 was $5.2 million and $6.8 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 June 30, 2019 and 2018, the Company withheld 42,363 and 141,173 shares of stock, respectively, for an aggregate value of $0.1 million and $0.6 million, respectively. During the six months ended June 30, 2019 and 2018, the Company withheld 90,166 and 397,202 shares of stock, respectively, for an aggregate value of $0.4 million and $1.7 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 granted 60,000 shares of PBRSUs during the three and six months ended June 30, 2019. The Company did not grant any PBRSUs during the three and six months ended June 30, 2018. Of the PBRSU awards granted in prior years, 14,014 and 251,037 shares of PBRSU vested during the six months ended June 30, 2019 and 2018, respectively. The Company expects that the 60,000 shares of PBRSUs will 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. The Company granted 303,000 and 351,500 shares of MBRSUs to certain executives during the three months ended June 30, 2019 and 2018 respectively. 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. There were no MBRSU shares that vested during the three and six months ended June 30, 2019. 36,625 and 73,250 shares of MBRSU vested during the three and six months ended June 30, 2018, respectively.
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 June 30, 2019, the Company had 1,327,504 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

21



Company’s common stock at either the first day of each offering period or the date of purchase. The ESPP currently has a reset provision: If the closing price of the Company’s common stock on the last day of any purchase period during an offering period is lower than the closing sales price on the first day of the related offering period, that offering period will terminate upon the purchase of shares for such purchase period and participants will be automatically re-enrolled in the immediately following offering period. As a result, the reference price for purposes of determining the purchase price of shares for subsequent purchase periods for all participants of the new offering period resets to such lower price. No participant may purchase more than $25,000 worth of common stock in any calendar year, or 5,000 shares of common stock in any six-month purchase period. During the six months ended June 30, 2019 and 2018, the Company issued 489,956 and 493,914 shares respectively, under the ESPP.
Determination of Fair Values
The Company used the following weighted-average assumptions to value MBRSUs under the Monte Carlo model:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
MBRSUs:
 
 
 
 
 
 
 
Expected volatility
43
%
 
44
%
 
43
%
 
44
%
Risk free interest rate
1.79
%
 
2.61
%
 
1.79
%
 
2.61
%
The Company used the following weighted-average assumptions to value employee stock purchase rights under the Black-Scholes model:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
ESPP purchase rights:
 
 
 
 
 
 
 
Expected term (in years)
0.50 - 1.00
 
0.50 - 1.00
 
0.50 - 1.00
 
0.50 - 1.00
Expected volatility
37% - 46%
 
46% - 52%
 
37% - 46%
 
46% - 52%
Risk free interest rate
2.35% - 2.70%
 
1.45% - 2.10%
 
2.35% - 2.70%
 
1.45% - 2.10%
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 June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
Cost of revenue
$
240

 
$
256

 
$
466

 
$
502

Research and development
867

 
968

 
1,953

 
2,014

Sales and marketing
913

 
1,110

 
1,839

 
2,107

General and administrative
1,133

 
1,250

 
2,480

 
2,632

Total stock-based compensation
$
3,153

 
$
3,584

 
$
6,738

 
$
7,255

The following table presents stock-based compensation expense by award-type:
 
Three Months Ended June 30,
Six Months Ended June 30,
 
2019
 
2018
2019
 
2018
 
(in thousands)
 
 
 
Stock Options
$
208

 
$
480

$
482

 
$
1,021

Restricted Stock Units
2,750

 
2,573

5,744

 
5,365

Employee Stock Purchase Plan
195

 
531

512

 
869

Total stock-based compensation
$
3,153

 
$
3,584

$
6,738

 
$
7,255

The stock-based compensation expense the Company recorded for RSU for the three months ended June 30, 2019 and 2018 includes the amount of stock-based compensation recorded for MBRSUs of approximately $0.2 million and $0.2 million, respectively. The stock-based compensation expense the Company recorded for the six months ended June 30, 2019 and 2018

22



includes the amount of stock-based compensation recorded for MBRSUs of approximately $0.4 million and$0.4 million respectively and for the six months ended June 30, 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 PBRSUs for the three and six months ended June 30, 2019 was not material.
As of June 30, 2019, unrecognized stock-based compensation related to outstanding stock options, RSUs (including PBRSUs and MBRSUs) and ESPP purchase rights, was $0.04 million, $19.4 million and $0.8 million, respectively, which the Company expects to recognize over weighted-average periods of 0.27 years, 1.98 years and 0.42 years, respectively.
8. NET LOSS PER SHARE
The Company calculates basic and diluted net loss per share by dividing the net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is the same as basic net loss per share, since the effects of potentially dilutive securities are antidilutive.
The following table presents the Company's computation of basic and diluted net loss per share:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
  
2019
 
2018
 
2019
 
2018
 
(in thousands, except for share and per share data)
Numerator:
 
 
 
 
 
 
 
Net loss
$
(6,082
)
 
$
(2,832
)
 
$
(14,734
)
 
$
(10,149
)
Denominator:
 
 
 
 
 
 
 
Weighted-average shares used to compute net loss per share, basic and diluted
56,676,019

 
54,828,749

 
56,354,579

 
54,582,129

Net loss per share:
 
 
 
 
 
 
 
Basic and diluted
$
(0.11
)
 
$
(0.05
)
 
$
(0.26
)
 
$
(0.19
)
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 June 30,
 
2019
 
2018
Shares of common stock issuable under the Equity Incentive Plan
9,258,180

 
9,401,668

Employee Stock Purchase Plan
60,177

 
106,558

Total
9,318,357

 
9,508,226

9. INCOME TAXES
The Company's provision for income taxes was approximately $0.2 million and $0.1 million, respectively, for the three months ended June 30, 2019 and 2018, and was approximately $0.2 million and $0.1 million, respectively, for the six months ended June 30, 2019 and 2018, respectively. The Company's provision for income taxes consisted primarily of state taxes and foreign income taxes.
For the three and six months ended June 30, 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

23



domestic deferred tax assets, including net operating loss carryforwards and research and development and other tax credits, as of June 30, 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 June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
Americas
$
24,126

 
$
23,401

 
$
41,364

 
$
44,231

Europe, Middle East and Africa
11,305

 
12,667

 
24,063

 
24,567

Asia Pacific
2,606

 
4,407

 
5,627

 
7,444

Total revenues
$
38,037

 
$
40,475

 
$
71,054

 
$
76,242

     The Company has included within the Americas in the above table revenue from sales in the United States of $22.9 million and $21.9 million, respectively, for the three months ended June 30, 2019 and 2018, respectively, and $38.5 million and $40.8 million, for the six months ended June 30, 2019 and 2018, respectively. Aside from the United States, no country comprised 10% or more of the Company's total revenue for each of the three and six months ended June 30, 2019 and 2018, respectively.
Property and equipment, net by location is summarized as follows:
 
June 30,
 
December 31,
 
2019
 
2018
 
(in thousands)
United States
$
3,523

 
$
4,514

People's Republic of China
874

 
1,269

Europe, Middle East and Africa
155

 
164

Total property and equipment, net
$
4,552

 
$
5,947


24



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 conclude the contemplated acquisition by Extreme Networks, at the proposed consideration, and without undue delay or distraction to or erosion of our business, customer relations or operating performance;
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 costs associated with increased tariffs, 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

25



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.
Announced Transaction and Overview of Current Business

On June 26, 2019, we issued a press release announcing the execution of an Agreement and Plan of Merger (the "Merger Agreement") with Extreme Networks, Inc,, as Delaware corporation ("Extreme"), and Clover Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of Extreme (the "Purchaser"), pursuant to which the Purchaser commenced a tender offer (the “Offer”) as disclosed in the Tender Offer Statement on Schedule TO (together with the exhibits thereto, as amended, the “Schedule TO”), filed by the Purchaser and Extreme with the Securities and Exchange Commission (the “SEC”) on July 12, 2019, to acquire all of the outstanding shares of the Company’s common stock, par value $0.001 per share (the “Shares”), at a price of $4.45 per share in cash (the “Offer Price”), without interest and subject to any applicable withholding taxes, and we filed a Solicitation/Recommendation Statement on Schedule 14D-9 (together with the exhibits thereto, as amended, the “Schedule 14D-9”) with the SEC on July 12, 2019, each on the terms and subject to the conditions set forth in the Merger Agreement. The Offer and withdrawal rights will expire at midnight (New York City time) at the end of the day on August 8, 2019, subject to extension in certain circumstances as required or permitted by the Merger Agreement (as so extended, if applicable, the “Expiration Date”). As soon as practicable following the consummation of the Offer, and subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, the Purchaser will merge with and into the Company, with the Company surviving as a wholly-owned subsidiary of Extreme, pursuant to the provisions of Section 251(h) of the General Corporation Law of the State of Delaware, with no stockholder approval required to consummate the Merger (the “Merger”).

The Merger Agreement provides, among other things, that the Offer is conditioned upon (i) there being validly tendered in the Offer and not properly withdrawn prior to the Expiration Date, that number of Shares which, together with the number of Shares (if any) then owned by Extreme or any of its wholly-owned direct or indirect subsidiaries, including the Purchaser, represents at least a majority of the Shares then outstanding (determined in accordance with the Merger Agreement) and no less than a majority of the voting power of the shares of capital stock of the Company then outstanding (determined in accordance with the Merger Agreement) and entitled to vote upon the adoption of the Merger Agreement and approval of the Merger (excluding from the number of tendered Shares, but not from the number of outstanding Shares, Shares tendered pursuant to guaranteed delivery procedures (to the extent such procedures are permitted by the Purchaser) that have not yet been delivered in settlement or satisfaction of such guarantee) (collectively, the “Minimum Condition”), (ii) the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), and the German Act against Restraints of Competition, having expired or been terminated, and (iii) the satisfaction or waiver by the Purchaser of the other conditions the Offer, as set forth in the Merger Agreement. On July 16, 2019, the FTC granted early termination of the waiting period applicable to the Offer under the HSR Act. Accordingly, the condition of the Offer relating to the expiration or termination of the waiting period under the HSR Act has been satisfied.
For the three months ended June 30, 2019, our revenue was $38.0 million, a decrease of $2.4 million, compared to $40.5 million for the three months ended June 30, 2018. For the six months ended June 30, 2019 and 2018, our revenue was $71.1 million and $76.2 million, respectively. In the three months ended June 30, 2019 and 2018, our net losses were $6.1 million and $2.8 million, respectively, and for the six months ended June 30, 2019 and 2018, our net losses were $14.7 million and $10.1 million, respectively.
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 six months ended June 30, 2019, compared to the six months ended June 30, 2018, our year-over-year revenue decreased by 6.5% in the Americas and decreased by 2.1% in EMEA and decreased by 24.4% in APAC. For the six months ended June 30, 2019, we generated 58.2% of our total revenue from Americas, 33.9% from EMEA and 7.9% from APAC.
For the three months ended June 30, 2019, our K-12 education vertical comprised approximately 35% of our overall business, compared with 22% in the prior quarter and 33% for the same period in fiscal year 2018.

26



Results of Operations
The following table sets forth our results of operations for the periods presented, in dollars (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenue:
 
 
 
 
 
 
 
Product
$
24,746

 
$
29,268

 
$
45,232

 
$
54,334

Subscription and support
13,291

 
11,207

 
25,822

 
21,908

Total revenue
38,037

 
40,475

 
71,054

 
76,242

Cost of revenue(1):
 
 
 
 
 
 
 
Product
9,888

 
10,379

 
18,885

 
19,050

Subscription and support
3,719

 
3,383

 
7,360

 
6,787

Total cost of revenue
13,607

 
13,762

 
26,245

 
25,837

Gross profit
24,430

 
26,713

 
44,809

 
50,405

Operating expenses:
 
 
 
 
 
 
 
Research and development(1)
9,668

 
8,581

 
18,431

 
17,860

Sales and marketing(1)
13,170

 
15,731

 
27,667

 
31,401

General and administrative(1)
7,711

 
5,272

 
13,722

 
11,226

Operating loss
(6,119
)
 
(2,871
)
 
(15,011
)
 
(10,082
)
Interest income
475

 
337

 
971

 
626

Interest expense
(200
)
 
(183
)