Aerohive Q2FY2015 10-Q


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, 2015

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)
 

330 Gibraltar Drive
Sunnyvale, California 94089
(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. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer   ¨
 
Accelerated filer   ¨
Non-accelerated filer   x (Do not check if a smaller reporting company)
 
Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
The number of shares of the registrant's common stock, par value $0.001, outstanding as of August 5, 2015 was 47,693,166.





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

The Aerohive Networks design logo and the marks “Aerohive®,” “HiveManager®,” “HiveOS®” 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,
 
2015
 
2014
ASSETS
(Unaudited)
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
85,365

 
$
98,044

Accounts receivable, net of allowance for doubtful accounts of $108 and $106 as of June 30, 2015 and December 31, 2014, respectively
20,783

 
24,695

Inventory
11,942

 
8,360

Prepaid expenses and other current assets
3,903

 
2,610

Deferred cost of goods sold
772

 
1,001

Total current assets
122,765

 
134,710

Property and equipment, net
10,075

 
8,862

Goodwill
513

 
513

Other assets
311

 
169

Total assets
$
133,664

 
$
144,254

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
12,001

 
$
10,154

Accrued liabilities
8,992

 
9,181

Debt, current
—

 
12,451

Deferred revenue, current
23,978

 
22,014

Total current liabilities
44,971

 
53,800

Debt, non-current
20,000

 
7,301

Deferred revenue, non-current
27,003

 
24,141

Other liabilities
738

 
857

Total liabilities
92,712

 
86,099

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, 2015 and December 31, 2014, respectively; no shares issued and outstanding as of June 30, 2015 and December 31, 2014
—

 
—

Common stock, par value of $0.001 per share - 500,000,000 shares authorized as of June 30, 2015 and December 31, 2014, respectively; 47,585,043 and 46,028,908 shares issued and outstanding as of June 30, 2015 and December 31, 2014, respectively
48

 
46

Additional paid–in capital
219,288

 
208,998

Accumulated deficit
(178,384
)
 
(150,889
)
Total stockholders’ equity
40,952

 
58,155

Total liabilities and stockholders’ equity
$
133,664

 
$
144,254

See notes to condensed consolidated financial statements.



AEROHIVE NETWORKS, INC.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(unaudited, in thousands, except share and per share amounts)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenue:
 
 
 
 
 
 
 
Product
$
30,751

 
$
33,721

 
$
51,231

 
$
58,582

Software subscription and services
6,085

 
3,833

 
11,422

 
7,204

Total revenue
36,836

 
37,554

 
62,653

 
65,786

Cost of revenue:
 
 
 
 
 
 
 
Product
9,619

 
10,560

 
16,427

 
18,442

Software subscription and services
2,526

 
1,639

 
4,354

 
3,005

Total cost of revenue
12,145

 
12,199

 
20,781

 
21,447

Gross profit
24,691

 
25,355

 
41,872

 
44,339

Operating expenses:
 
 
 
 
 
 
 
Research and development
8,883

 
6,833

 
16,393

 
12,971

Sales and marketing
20,804

 
19,011

 
39,574

 
35,580

General and administrative
6,206

 
5,135

 
12,453

 
9,972

Total operating expenses
35,893

 
30,979

 
68,420

 
58,523

Operating loss
(11,202
)
 
(5,624
)
 
(26,548
)
 
(14,184
)
Interest income
19

 
8

 
33

 
9

Interest expense
(173
)
 
(459
)
 
(927
)
 
(924
)
Other income
19

 
(58
)
 
154

 
59

Loss before income taxes
(11,337
)
 
(6,133
)
 
(27,288
)
 
(15,040
)
Income tax provision
(99
)
 
(135
)
 
(207
)
 
(155
)
Net loss and comprehensive loss
$
(11,436
)
 
$
(6,268
)
 
$
(27,495
)
 
$
(15,195
)
Net loss attributable to common stockholders
$
(11,436
)
 
$
(6,268
)
 
$
(27,495
)
 
$
(15,195
)
Net loss per share allocable to common stockholders, basic and diluted
$
(0.24
)
 
$
(0.14
)
 
$
(0.59
)
 
$
(0.58
)
Weighted-average shares used in computing net loss per share allocable to common stockholders, basic and diluted
46,888,236

 
44,751,354

 
46,595,172

 
26,295,717

See notes to condensed consolidated financial statements.  


3


AEROHIVE NETWORKS, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
 
Six Months Ended June 30,
 
2015
 
2014
Cash flows from operating activities
 
 
 
Net loss
$
(27,495
)
 
$
(15,195
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
1,602

 
1,019

Stock-based compensation
8,186

 
3,505

Amortization and write-off of debt discount and debt issuance cost
296

 
97

Remeasurement of convertible preferred stock warrant liability
—

 
(90
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
3,912

 
(6,073
)
Inventories
(3,582
)
 
(5,244
)
Prepaid expenses and other current assets
(1,064
)
 
(385
)
Other assets
(142
)
 
(73
)
Accounts payable
1,791

 
7,636

Accrued liabilities
189

 
1,693

Other liabilities
(119
)
 
(126
)
Deferred revenue
4,826

 
6,890

Net cash used in operating activities
(11,600
)
 
(6,346
)
Cash flows from investing activities
 
 
 
Purchases of property and equipment
(936
)
 
(1,131
)
Capitalized software development costs
(1,913
)
 
(2,016
)
Net cash used in investing activities
(2,849
)
 
(3,147
)
Cash flows from financing activities
 
 
 
Proceeds from initial public offering, net of underwriting discounts
—

 
80,213

Payments of offering costs
—

 
(3,852
)
Proceeds from exercise of convertible preferred stock warrants
—

 
907

Proceeds from exercise of stock options
866

 
1,115

Proceeds from employee stock purchase plan
2,271

 
—

Payments for shares repurchased for tax withholdings on vesting of restricted stock units
(1,367
)
 
—

Proceeds from issuance of debt
10,000

 
—

Repayments of debt
(10,000
)
 
—

Net cash provided by financing activities
1,770

 
78,383

Net increase (decrease) in cash and cash equivalents
(12,679
)
 
68,890

Cash and cash equivalents at beginning of period
98,044

 
35,023

Cash and cash equivalents at end of period
$
85,365

 
$
103,913

Supplemental disclosure of cash flow information
 
 
 
Income taxes paid
$
356

 
$
215

Interest paid
$
704

 
$
627

Supplemental disclosure of noncash investing and financing activities
 
 
 
Conversion of convertible preferred stock warrants to common stock warrants upon IPO
$
—

 
$
611

Cashless exercise of warrants
$
—

 
$
30

Unpaid property and equipment purchased
$
368

 
$
211

Unpaid capitalized software development costs
$
94

 
$
164

Reclassification of the convertible preferred stock warrant liability to additional paid-in capital on the exercise of the convertible preferred stock warrants
$
—

 
$
3,172

Vesting of early exercised stock options
$
30

 
$
402

Offering costs for common stock not yet paid
$
—

 
$
155

Stock-based compensation in capitalized software development costs
$
257

 
$
105

See notes to condensed consolidated financial statements.

4


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-managed mobile networking platform that enables enterprises to deploy a mobile-centric network edge. The point at which devices access the enterprise network is commonly referred to as the network edge. The Company’s hardware products include intelligent access points, routers and switches. These products are managed by the Company’s cloud services platform, which delivers cloud-managed network management and mobility and data applications giving end-customers a single, unified and contextual view of the entire network edge. The Company has offices in North America, Europe, the Middle East and Asia Pacific and employs staff around the world.
Initial Public Offering
In April 2014, the Company completed its initial public offering (the “IPO”), in which the Company issued 8,625,000 shares of the Company's common stock, inclusive of 1,125,000 shares of common stock sold upon the exercise in full of the overallotment option by the underwriters, at an offering price of $10.00 per share. The Company received proceeds of $80.2 million after deducting the underwriters’ discounts and commissions of $6.0 million. Upon completion of the IPO, the Company reclassified $5.4 million deferred offering costs to additional paid-in capital.
In connection with the IPO, 28,227,528 outstanding shares of the Company’s convertible preferred stock automatically converted into 28,832,898 shares of common stock, and the warrants to purchase 103,034 shares of convertible preferred stock became warrants to purchase 107,876 shares of common stock.
Basis of Presentation and Consolidation
The Company prepared the accompanying consolidated financial statements in accordance with generally accepted accounting principles in the United States ("GAAP"), which includes the accounts of Aerohive Networks, Inc. and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Summary of Significant Accounting Policies
There have been no material changes to the significant accounting policies during the six months ended June 30, 2015 as compared to those described in the Company's audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on March 17, 2015.
Use of Estimates
The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Those estimates and assumptions include, among others, the selling price of products, software and support services; determination of fair value of common stock and stock-based awards; inventory valuations; accounting for income taxes, including the valuation allowance on deferred tax assets and uncertain tax positions; 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 future events and their effects cannot be determined 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. Transactions denominated in currencies other than the functional currency are remeasured at the average exchange rate in effect during the period. At the end of each reporting period, the Company’s subsidiaries’ monetary assets and liabilities are remeasured to the U.S. dollar using exchange rates in effect at the end of the reporting period. Non-monetary assets and liabilities are remeasured at historical exchange rates. Gains and losses related to remeasurement are recorded in other income (expense), net in the consolidated statements of operations. Foreign currency exchange losses have not been significant in any period presented. To date, the Company has not undertaken any hedging transactions related to foreign currency exposure.

5


Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which provides guidance for revenue recognition. This ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets. The guidance in this ASU supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. On July 9, 2015, the FASB decided to delay the effective date of this standard by one year to December 15, 2017. The standard will be effective for the Company on January 1, 2018. The Company is evaluating the financial impact of such adoption, if any, on the Company's consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The standard explicitly requires management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. The Company expects to adopt ASU 2014-15 on January 1, 2017, with early adoption permitted. The Company will evaluate the impact of the new standard, if any, upon adoption but does not expect it to have a significant impact.
In April 2015, the FASB issued ASU 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. The new standard provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company is evaluating the impact, if any, of adopting this new accounting guidance on its financial statements.
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 and accounts receivable. Cash equivalents are maintained in money market funds. The money market funds may exceed the insured limits provided on them.
The Company sells its products primarily to channel partners, which include value-added resellers (VARs) and value-added distributors (VADs). 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 been within management’s expectations. 
Significant customers are those that represent more than 10% of the Company’s total revenue or gross accounts receivable balance at each respective balance sheet date. The Company has entered into separate agreements with certain individual VADs that are part of a consolidated group of entities which collectively constitutes greater than 10% of the Company’s total revenue or gross accounts receivable balance for certain periods, as presented in the tables below.
The percentages of revenue from a consolidated group of entities (VAD A) greater than 10% of total consolidated revenue were as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
VAD A
 
12.2
%
 
12.8
%
 
16.2
%
 
12.8
%
 
The percentages of receivables from VAD A greater than 10% of total consolidated accounts receivable were as follows:
 
 
June 30,
 
December 31,
 
 
2015
 
2014
VAD A
 
17.0
%
 
18.8
%
2. FAIR VALUE DISCLOSURE
The Company records its financial assets and liabilities at fair value. The inputs used in the valuation methodologies in measuring fair value are defined in the fair value hierarchy as follows:

6


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.
As of June 30, 2015 and December 31, 2014, the Company's financial instruments only consisted of highly liquid money market funds that were classified as Level 1 assets, and which were included in cash and cash equivalents.
Financial assets that the Company measured at fair value on a recurring basis by level within the fair value hierarchy, are as follows:
 
June 30, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets
 
 
(in thousands)
 
 
Money market funds
$
80,272

 
$
—

 
$
—

 
$
80,272

 
 
December 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets
(in thousands)
Money market funds
$
80,240

 
$
—

 
$
—

 
$
80,240


3. CONSOLIDATED BALANCE SHEET COMPONENTS
Inventory
Inventory consists of the following:
 
June 30,
 
December 31,
 
2015
 
2014
 
(in thousands)
Components, including raw materials
$
42

 
$
63

Finished goods
11,900

 
8,297

Total inventory
$
11,942

 
$
8,360

Property and Equipment, net
Property and equipment, net consists of the following:
 
 
 
 
June 30,
 
December 31,
 
 
Estimated Useful Lives
 
2015
 
2014
 
 
 
 
(in thousands)
Computer and other equipment
 
3 years
 
$
1,895

 
$
1,822

Manufacturing, research and development laboratory equipment
 
3 years
 
4,105

 
3,741

Software
 
2 to 5 years
 
9,043

 
1,882

Office furniture and equipment
 
3 years
 
1,059

 
761

Leasehold improvements
 
2 to 5 years
 
599

 
532

Construction in progress
 
 
 
—

 
5,459

Property and equipment, gross
 
 
 
16,701

 
14,197

Less: Accumulated depreciation and amortization
 
 
 
(6,626
)
 
(5,335
)
Property and equipment, net
 
 
 
$
10,075

 
$
8,862

Construction in progress primarily represents the capitalization of development costs incurred by the Company during the application development stage of the Company’s cloud services platform. In April 2015, the Company completed and

7


launched the next generation of its cloud services platform, and began to amortize these capitalized costs on a straight-line basis over an estimated useful life of the software of 5 years. As of June 30, 2015, such internal-use software is included in the software category.
Depreciation and amortization expense was $1.0 million and $0.5 million for the three months ended June 30, 2015 and 2014, respectively, and $1.6 million and $1.0 million for the six months ended June 30, 2015 and 2014, respectively.
Accrued Liabilities
Accrued liabilities consist of the following:
 
June 30,
 
December 31,
 
2015
 
2014
 
(in thousands)
Accrued compensation
$
7,224

 
$
7,090

Accrued expenses and other liabilities
1,264

 
1,806

Warranty liability, current portion
504

 
285

Total accrued liabilities
$
8,992

 
$
9,181

Deferred Revenue
Deferred revenue consists of the following:
 
June 30,
 
December 31,
 
2015
 
2014
 
(in thousands)
Products
$
3,153

 
$
3,886

Software subscription and services
47,828

 
42,269

Total deferred revenue
50,981

 
46,155

Less: current portion of deferred revenue
23,978

 
22,014

Non-current portion of deferred revenue
$
27,003

 
$
24,141

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,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Beginning balance
$
832

 
$
710

 
$
891

 
$
923

Charges to operations
411

 
160

 
528

 
195

Obligations fulfilled
(167
)
 
(136
)
 
(320
)
 
(221
)
Changes in existing warranty
(30
)
 
(40
)
 
(53
)
 
(203
)
Total product warranties
$
1,046

 
$
694

 
$
1,046

 
$
694

Current portion
$
504

 
$
187

 
$
504

 
$
187

Non-current portion
$
542

 
$
507

 
$
542

 
$
507

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) for a principal amount of up to $10.0 million, with a sublimit of $3.0 million for borrowings guaranteed by the Export-Import Bank of the United States. The revolving credit facility is collateralized by substantially all of the Company’s property,

8


other than intellectual property. Prior to March 31, 2015, the revolving credit facility bore monthly interest at a floating rate equal to the greater of (i) 4.00% or (ii) prime rate plus 0.75%. In June 2012, the Company drew $10.0 million under this credit facility.
On March 31, 2015, the Company amended its revolving credit facility with Silicon Valley Bank. The amendment, among other things, (i) extended the line maturity date to March 31, 2017 from June 29, 2015; (ii) removed the $3.0 million sublimit for borrowings guaranteed by the Export-Import Bank of the United States; and (iii) increased the revolving line up to $20.0 million, subject to certain conditions. The amended credit facility bears interest at a floating rate equal to the lesser of (i) LIBOR rate plus 2.25% or (ii) prime rate minus 0.5%. On March 31, 2015, the Company drew down the additional $10.0 million under this credit facility. As of June 30, 2015, $20.0 million under the revolving credit facility was outstanding.
The revolving credit facility contains customary negative covenants which limit the Company’s ability to, among other things, incur additional indebtedness, grant liens, make investments, repurchase stock, pay dividends, transfer assets and merge or consolidate, as well as requiring the Company to maintain a minimum adjusted quick ratio of 1.25 to 1.00 as of the last day of each month. 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, 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 credit facility. During the existence of an event of default, interest on the obligations under the credit facility could be increased by 5.0%. As of June 30, 2015 and December 31, 2014, the Company was in compliance with these covenants.
The Company will use loans drawn under the revolving credit facility for working capital and general corporate purposes.
In August 2013, the Company entered into a term loan credit facility with TriplePoint Capital LLC (the term loan credit facility) that allowed the Company, subject to certain funding conditions including compliance with certain covenants and the absence of certain events or conditions that could have been deemed to have a material adverse effect on the Company's business, to borrow money under term loans in an aggregate principal amount of up to $20.0 million. In December 2013, the Company borrowed $10.0 million under the term loan credit facility under two separate loans. The stated interest rate for each loan was 10.75% and 9.75%, respectively, and was reduced to 10.25% and 9.25%, respectively, due to the completion of the IPO in 2014. In the first quarter 2015, the Company elected to voluntarily repay in full all of its outstanding obligations under the term loan credit facility, along with an end-of-term payment of $0.3 million, and terminated the facility.
5. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases its main office facility in Sunnyvale, California, which leases expire in September 2016. In addition, the Company leases office space for its subsidiaries in the United Kingdom, the Netherlands and China under non-cancelable operating leases that expire at various times through May 2017. The Company has also entered into various lease agreements in other locations in the United States and globally to support its sales and research and development functions. The Company recognizes rent expense on a straight-line basis over the lease period. Future minimum lease payments by year under operating leases as of June 30, 2015 are as follows:
 
Amount
Year ending December 31,
(in thousands)
2015 (remaining six months)
$
1,161

2016
1,934

2017
106

Total
$
3,201

Rent expense was $0.6 million and $0.5 million for the three months ended June 30, 2015 and 2014, respectively, and was $1.3 million and $1.0 million for the six months ended June 30, 2015 and 2014, respectively.

9


Manufacturing Commitments
The Company subcontracts with manufacturing companies to manufacture its hardware products. The contract manufacturers procure components based on non-cancellable orders placed by the Company. 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 purchased under such orders.
As of June 30, 2015 and December 31, 2014, the Company had manufacturing commitments with contract manufacturers for inventory totaling approximately $9.0 million and $8.0 million, respectively.
Contingencies
The Company may be subject to legal proceedings and litigation arising in the ordinary course of business. 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 to periodically 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. Significant judgment is required 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 outcome of any proceeding is not determinable in advance. Until the final resolution of any such matter for which the Company may be required to accrue, there may be an exposure to loss in excess of the amount accrued and such excess amount could be significant.
The Company is currently engaged in the following separate litigations which allege that the Company’s products infringe certain patents.
•
AirTight Networks, or AirTight, alleges that the Company’s products infringe U.S. Patent #7,339,914, or the ‘914 Patent. On January 23, 2013, in light of AirTight’s allegations, the Company filed in the U.S. District Court, Northern District of California, a Complaint for Declaratory Judgment against AirTight asserting that the Company’s products do not infringe the ‘914 Patent and that the ‘914 Patent is, in any case, invalid and not enforceable. AirTight filed a separate action asserting infringement of the ‘914 Patent by some or all of the Company’s products, which was then related to the Company’s initial action for declaratory judgment. The related cases are currently stayed pending resolution of petitions which the Company filed with the U.S. Patent and Trademark Office, or PTO, to initiate a reexamination of the ‘914 Patent. All claims are currently rejected and Airtight has appealed the final rejection of all claims of the ‘914 Patent.
•
Linex Technologies, or Linex, filed on March 19, 2013 a Complaint in the U.S. District Court, Southern District of Florida, asserting that some or all of the Company’s products infringe U.S. Patents #6,493,377, or the ‘377 Patent, and #7,167,503, or the ’503 Patent. The Company filed an answer and counterclaims for declaratory judgment against Linex asserting that the Company’s products do not infringe the ‘377 and ‘503 Patents, and that the ‘377 and ‘503 Patents are, in any case, invalid and not enforceable. The Company separately filed with the PTO petitions to initiate reexamination of the ‘377 and ‘503 Patents, which the PTO has granted. This case is currently stayed pending the reexaminations. An office action has issued rejecting all claims of both patents. All claims are currently rejected and Linex has appealed the rejection of all claims of the ‘377 and ‘503 Patents.
•
Wetro LAN LLC filed in February 2015 a complaint in the U.S. District Court, Eastern District of Texas asserting that certain of the Company’s branch router products infringe U.S. Patent #6,795,918. The Company filed an answer, denying the patent infringement allegations and raising several affirmative defenses, including invalidity.
•
JSDQ Mesh Technologies LLC filed in June 2015 a complaint in the U.S. District Court, District of Delaware, asserting that certain of the Company’s products which utilize a so-called wireless mesh transmission feature infringe United States Patent Nos. 7,286,828, 7,916,648, RE43,675 and RE44,607. The complaint also named one of the Company’s customers as a co-defendant.
In June 2015, a class action complaint was filed in the Superior Court of the State of California, County of San Mateo, against the Company and certain of its current and former officers and directors. This action was subsequently related to two follow-on complaints and is captioned Hunter v. Aerohive Networks, Inc., et al., Case No. 534070 (filed June 2, 2015), Mahajan v. Aerohive Networks, Inc., et al., Case No. 534294 (filed June 17, 2015), and Silverberg v. Aerohive Networks, Inc., et al., Case No. 534505 (filed July 2, 2015). The complaints allege that the Registration Statement which the Company filed with the Securities and Exchange Commission on Form S-1 in connection with its initial public offering in March 2014 contained false and/or misleading statements or omissions. The actions also name as defendants the investment firms who underwrote the Company’s initial public offering.

10


The complaints allege that the Registration Statement failed to disclose, among other things, product deficiencies, poor sales, and a decline in sales-related personnel. The complaints additionally allege that the Company improperly recognized revenue, including by booking certain sales with rights of return. The complaints, which have been consolidated, bring claims under the federal securities laws and seek unspecified compensatory damages and other relief. The Company is advancing certain defense costs with respect to individual defendants, including the underwriting investment firms, under written indemnification agreements.
The Company intends to defend these lawsuits vigorously.
The Company 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.
In April 2015, the Company resolved the pending action brought by Charles C. Freeny III, Bryan E. Freeny, and James P. Freeny, filed on November 24, 2014 and pending in the U.S. District Court, Eastern District of Texas.  The action asserted that the Company’s dual band wireless networking products infringe U.S. Patent #7,110,744.  The amount of the Company’s settlement payment was not material.
Guarantees
The Company has entered into agreements with some of 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 repair any infringement, replace product with a non-infringing equivalent-in-function product, or refund the customers the total product price. Other guarantees or indemnification arrangements 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 guarantees and indemnification arrangements 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, 2015 and December 31, 2014, the Company had reserved shares of common stock, on an as-if-converted basis, for future issuance as follows:
 
June 30,
 
December 31,
 
2015
 
2014
Common stock reserved for future grants under the Equity Incentive Plan
4,842,823

 
2,259,230

Reserved under 2014 Employee Stock Purchase Plan
2,478,572

 
800,000

Options and Restricted Stock Units issued and outstanding
11,513,177

 
9,776,124

Common stock subject to repurchase
9,000

 
27,000

Warrants to purchase common stock
73,883

 
107,876

Total reserved shares of common stock for future issuance
18,917,455

 
12,970,230

Common Stock Warrants
As of June 30, 2015, 73,883 shares of common stock subject to warrants remained outstanding and exercisable at exercise prices of $4.057 and $2.768 per share. The common stock warrants expire in March 2016.
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's 2006 Global Share Plan (2006 Plan) was terminated and all reserved but unissued shares under the 2006 Plan were added to the 2014 Plan and all shares underlying stock awards granted under the 2006 Plan that otherwise would return to the 2006 Plan instead were rolled into the 2014 Plan. As of March 27, 2014, the Company may not grant additional awards under the 2006 Plan, but the 2006 Plan will continue to govern outstanding awards previously granted under it.

11


The 2014 Plan provides for the grant of incentive stock options within the meaning of Section 422 of the Internal Revenue Code (ISO), only to employees of the Company or any parent or subsidiary of the Company, and for the grant of nonstatutory stock options (NSO), 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 May 2015, the Company’s stockholders approved increasing by 3,000,000 the number of shares reserved under the 2014 Plan. As of June 30, 2015, the Company had 4,842,823 total shares of common stock reserved and available for grant under the 2014 Plan. On the first day of each fiscal year beginning January 1, 2016 through January 1, 2024, the number of shares of common stock reserved for issuance under the 2014 Plan may increase by an amount equal to the lesser of (i) 4,000,000 shares, (ii) 5% of the Company’s outstanding shares on the last day of the immediately preceding fiscal year, or (iii) such number of shares determined by the Board.
The following table summarizes the total number of shares available for grant under the 2014 Plan as of June 30, 2015:
 
 
 
Shares Available for Grant
 
 
Balance, December 31, 2014
2,259,230

Authorized
5,306,812

Options granted
(1,374,063
)
Options canceled
716,357

Awards granted
(2,581,250
)
Awards canceled
515,737

Balance, June 30, 2015
4,842,823

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, 2014
6,837,893

 
$
5.71

 
7.39
 
$
8,004

Options granted
1,374,063

 
7.15

 
 
 
 
Options exercised
(475,452
)
 
1.85

 
 
 
 
Options canceled
(716,357
)
 
7.58

 
 
 
 
Balance, June 30, 2015
7,020,147

 
$
6.06

 
7.33
 
$
12,333

Options exercisable, June 30, 2015
3,202,465

 
$
4.10

 
5.87
 
$
10,476

Options vested and expected to vest, June 30, 2015
6,839,292

 
$
5.99

 
7.32
 
$
12,243

For the three and six months ended June 30, 2015, the weighted average grant date fair value of options granted was $3.57 per share, and the aggregate grant date fair value of the Company's stock options granted was $4.9 million. For the three and six months ended June 30, 2014, the weighted average grant date fair value of options granted was $4.99 and $5.06 per share, respectively, and the aggregate grant date fair value of the Company's stock options granted was $0.7 million and $3.0 million, respectively.
The aggregate intrinsic value of stock options exercised was $0.8 million and $1.7 million for the three and six months ended June 30, 2015, respectively, and was $0.7 million and $5.2 million, for the three and six months ended June 30, 2014, respectively. The intrinsic value represents the difference between option exercise prices and (i) the estimated fair values of the Company’s common stock, prior to the IPO, (ii) or the closing stock price of the Company’s common stock, following the IPO.
Restricted Stock Units

12


The Company currently grants Restricted Stock Units (RSUs) to certain employees and directors. The RSUs typically vest over a period of time, generally one year, two years or four 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.
The following is a summary of the Company’s RSU activity and related information for the six months ended June 30, 2015:
 
Restricted Stock Units Outstanding
 
Shares
 
Weighted Average
Grant Date
Fair Value Per Share
 
 
 
 
Balance, December 31, 2014
2,938,231

 
$
7.03

Awards granted
2,581,250

 
6.62

Awards vested
(741,708
)
 
$
7.31

Awards canceled
(284,743
)
 
$
7.24

Balance, June 30, 2015
4,493,030

 
$
6.92


The aggregate grant date fair value of RSUs granted was $16.2 million and $17.2 million for the three and six months ended June 30, 2015, respectively, and was $2.5 million for the three and six months ended June 30, 2014. The total fair value of shares vested for the three and six months ended June 30, 2015 was $3.1 million and $4.5 million, respectively. No RSUs vested during the three and six months ended June 30, 2014.
The number of RSUs vested includes shares that the Company withheld on behalf of employees to satisfy the minimum statutory tax withholding requirements. During the three and six months ended June 30, 2015, the Company withheld 116,342 and 230,994 shares of stock, respectively, for an aggregate value of $0.8 million and $1.4 million, respectively, from employees upon the vesting of their RSUs to satisfy the minimum statutory tax withholding requirement. Such shares were returned to the Company’s 2014 Equity Incentive Plan and are available under the plan terms for future issuance.
2014 Employee Stock Purchase Plan
The current 2014 Employee Stock Purchase Plan (ESPP) is a ten-year plan, effective in March 2014. The ESPP authorizes the issuance of shares of common stock pursuant to purchase rights granted to employees of the Company and its designated subsidiaries. In May 2015, the Company’s stockholders approved increasing by 2,000,000 the number of shares reserved under the ESPP. As of June 30, 2015, the Company had 2,478,572 total shares of common stock reserved for issuance under the ESPP. Under the ESPP, on the first day of each of fiscal years 2016 and 2017, the number of shares of common stock reserved and available for issuance may increase in an amount equal to the lesser of (i) 1,000,000 Shares, (ii) 2.0% of the Company’s outstanding shares on the first day of the applicable fiscal year, or (iii) such number of shares determined by the Board. Beginning fiscal year 2018 through fiscal year 2023, the number of shares of common stock reserved for issuance may increase in an amount equal to the lesser of (i) 1,000,000 shares, (ii) 1.0% of the Company’s outstanding shares on the first day of the applicable fiscal year, or (iii) such number of shares determined by the Board.
Under the ESPP, the Company can currently grant stock purchase rights to all eligible employees during a two-year offering period with purchase dates at the end of each interim six-month purchase period. Shares are purchased 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 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, the reference price for purposes of determining the purchase price of shares for subsequent purchase periods in the applicable offering period will be reset 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. On June 1, 2015, 552,109 shares of common stock were purchased under the ESPP at a purchase price of $4.11 per share.
Determination of Fair Values

13


Weighted average assumptions for the Company's stock options granted in the three and six months ended June 30, 2015 and 2014 were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Stock options:
 
 
 
 
 
 
 
Expected term (in years)
6.02

 
6.08

 
6.02

 
5.59

Expected volatility
51.41
%
 
48.00
%
 
51.41
%
 
49.01
%
Risk free interest rate
1.74
%
 
2.00
%
 
1.74
%
 
2.42
%
Dividend rate
—

 
—

 
—
%
 
—

The fair value of the purchase right for the ESPP is estimated on the date of grant using the Black-Scholes model with the following weighted average assumptions:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
ESPP purchase rights:
 
 
 
 
 
 
 
Expected term (in years)
0.50 - 1.50
 
0.68

 
0.50 - 1.50
 
0.68

Expected volatility
41.0% - 55.3%
 
37.00
%
 
41.0% - 55.3%
 
37.00
%
Risk free interest rate
0.07% - 0.45%
 
0.08
%
 
0.07% - 0.45%
 
0.08
%
Dividend rate
—
 
—

 
—
 
—

Stock-based Compensation Expense
The total stock-based compensation the Company recognized for stock-based awards in the consolidated statements of operations is as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Cost of revenue
$
217

 
$
73

 
$
382

 
$
118

Research and development
1,001

 
502

 
1,987

 
853

Sales and marketing
1,727

 
798

 
3,224

 
1,419

General and administrative
1,419

 
566

 
2,593

 
1,115

Total stock-based compensation
$
4,364

 
$
1,939

 
$
8,186

 
$
3,505

The following table presents stock-based compensation expense by award-type:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Stock Options
$
988

 
$
1,486

 
$
2,136

 
$
3,052

Restricted Stock Units
2,794

 
94

 
5,139

 
94

Employee Stock Purchase Plan
582

 
359

 
911

 
359

Total stock-based compensation
$
4,364

 
$
1,939

 
$
8,186

 
$
3,505

As of June 30, 2015, unrecognized stock-based compensation related to outstanding stock options, RSUs and ESPP purchase rights, net of estimated forfeitures, was $13.8 million, $28.3 million and $3.3 million, respectively, which the Company expects to recognize over weighted-average periods of 2.80 years, 2.84 years and 1.42 years, respectively. The Company capitalized $0.3 million stock-based compensation expense, for the six months ended June 30, 2015, and $0.1 million and $0.1 million stock-based compensation expense, for the three and six months ended June 30, 2014, respectively, to internal-use cloud services platform.
8. NET LOSS PER SHARE

14


The Company calculates basic and diluted net loss per share of common stock allocable to common stockholders by dividing the net loss allocable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net loss per share of common stock is the same as basic net loss per share of common stock, since the effects of potentially dilutive securities are antidilutive. Upon completion of the IPO on April 2, 2014, all outstanding convertible preferred stocks were converted to common stock and were included in the weighted average number of common shares used to compute net loss per share from the conversion date. 
For the period prior to the conversion of convertible preferred stock, the Company calculated the net loss per share in conformity with the two-class method as all series of convertible preferred stock were considered participating securities because they were entitled to receive noncumulative dividends prior and in preference to any dividends on shares of common stock. Due to the Company’s net losses during that period, there was no impact on the earnings per share calculation in applying the two-class method since the participating securities have no legal requirement to share in any losses.
The following table presents the computation of basic and diluted net loss per share allocable to common stockholders:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
  
2015
 
2014
 
2015
 
2014
 
(in thousands, except for share and per share data)
Numerator:
 
 
 
 
 
 
 
Net loss
$
(11,436
)
 
$
(6,268
)
 
$
(27,495
)
 
$
(15,195
)
Denominator:
 
 
 
 
 
 
 
Weighted-average shares used to compute net loss per share, basic and diluted
46,888,236

 
44,751,354

 
46,595,172

 
26,295,717

Net loss per share:
 
 
 
 
 
 
 
Basic and diluted
$
(0.24
)
 
$
(0.14
)
 
$
(0.59
)
 
$
(0.58
)
The following period-end outstanding common stock equivalents were excluded from the computation of diluted net loss per share for the periods presented because including them would have been antidilutive:
 
As of June 30,
 
2015
 
2014
Shares of common stock issuable under the 2014 Equity Incentive Plan
11,513,177

 
8,155,687

Common stock subject to repurchase
9,000

 
45,000

Common stock issuable upon exercise of warrants
73,883

 
107,876

Employee Stock Purchase Plan
94,094

 
159,821

Total
11,690,154

 
8,468,384

9. INCOME TAXES
The provision for income taxes was approximately $0.1 million and $0.1 million, respectively, for the three months ended June 30, 2015 and 2014, and was $0.2 million and $0.2 million, respectively, for the six months ended June 30, 2015 and 2014. The provision for income taxes consisted primarily of state taxes and foreign income taxes.
For the three and six months ended June 30, 2015 and 2014, the provisions for income taxes differed from the statutory amount primarily due to 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, New Zealand 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.
Realization of deferred tax assets is dependent 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 has placed a full valuation allowance on the net deferred tax assets. The Company maintained a full valuation allowance against its deferred tax assets as of June 30, 2015 and December 31, 2014, respectively.

15


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 hardware products and software subscription and 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 VAR or the VAD:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Americas
$
24,818

 
$
24,487

 
$
38,911

 
$
41,865

Europe, Middle East and Africa
9,170

 
8,996

 
18,296

 
17,004

Asia Pacific
2,848

 
4,071

 
5,446

 
6,917

Total revenues
$
36,836

 
$
37,554

 
$
62,653

 
$
65,786

     Included within Americas in the above table is revenue from sales in the United States of $23.8 million and $23.0 million, respectively, during the three months ended June 30, 2015 and 2014, and $37.0 million and $39.5 million, respectively, during the six months ended June 30, 2015 and 2014. Aside from the United States, no other country comprised 10% or more of the Company's total revenue for the three and six months ended June 30, 2015 and 2014, respectively.
Property and equipment, net by location is summarized as follows:  
 
June 30,
 
December 31,
 
2015
 
2014
 
(in thousands)
United States
$
8,769

 
$
7,519

People's Republic of China
1,125

 
1,246

United Kingdom
181

 
97

Total property and equipment, net
$
10,075

 
$
8,862

11. SUBSEQUENT EVENT
Chrimar Systems, Inc. filed in July 2015 a complaint in the U.S. District Court, Eastern District of Texas, asserting that certain of the Company’s products which utilize Power over Ethernet (PoE) functionality infringe United States Patent Nos. 8,155,012, 8,942,107, 8,902,760 and 9,019,838. The complainant has since also named one of the Company’s customers as a co-defendant. The Company is evaluating the allegations and its possible obligations to the Company’s customer under written indemnification commitments.
ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and the other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements reflecting our current expectations and involves risks and uncertainties. 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 are intended to identify forward-looking statements. The following discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our actual results and the timing of events may differ materially from those discussed in our forward-looking statements as a result of various factors, including those discussed below and those discussed in the section entitled “Risk Factors” included in this Quarterly Report on Form 10-Q. The following discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include, but are not limited to, statements concerning the following:

16


•
our ability to predict our revenue, operating results and gross margin accurately;
•
the transition of newly hired management-level employees and their ability to improve our sales execution processes;
•
our ability to maintain an adequate rate of revenue growth and achieve and maintain profitability;
•
our ability to timely develop, deliver and transition to new product offerings while maintaining our service level commitments to end-customers;
•
any potential loss of or reductions in orders from our larger customers;
•
our ability to achieve growth in key verticals, including the educational sector ;
•
our ability to maximize the economic opportunity of the U.S. Federal Communications Commission’s (“FCC”) E-Rate program and the timing of the availability of funding and decisions by end-customers to purchase our products using such funding;
•
the length and unpredictability of our sales cycles with service provider end-customers;
•
the effects of increased competition in our market and our ability to compete with larger competitors with greater financial, technical and other resources;
•
our ability to continue to enhance and broaden our product offering and bring new products to market;
•
our ability to maintain, protect and enhance our brand;
•
our ability to attract new end-customers within the verticals and geographies we currently operate in and those that we target;
•
our ability to predict economic, political and business conditions in the markets in which we operate;
•
our ability to maintain effective internal controls;
•
the quality of our products and services;
•
our ability to continue to build and enhance relationships with channel partners and particularly with our strategic partners, including Dell;
•
our ability to attract, hire, train and retain qualified employees and key personnel, particularly in sales and engineering;
•
our ability to maximize our sales execution process and effectively ramp sales in underdeveloped territories;
•
our ability to sell our products and effectively expand internationally;
•
claims from shareholders that we have violated the securities laws and claims that we infringe intellectual property rights of others, the expense to defend such claims and the uncertainty such claims create for us, including with respect to intellectual property claims, our ability to continue to sell and support our products;
•
our ability to effectively manage our growth;
•
the effects of fluctuations in currency exchange rates;
•
our ability to protect our 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 our management 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 discussed in this report may not occur, and actual results could differ materially and adversely from those anticipated or implied 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, readers are cautioned not to place undue reliance on such forward-looking statements.
Overview

17


We have designed and developed a leading cloud-managed mobile networking platform that enables enterprises to deploy a mobile-centric network edge. Managing the network edge is becoming more complex because of the proliferation of mobile devices and the ways in which businesses use such devices. Increasingly, employees and clients are using Wi-Fi-enabled smartphones, tablets, laptops and other mobile devices instead of desktop computers for mission-critical business applications. The number and types of users continue to increase, as do the breadth of applications that users need to access on their mobile devices. As the difficulty and complexity of managing the network edge expands, our platform offers simplicity, scalability, and security. Additionally, our platform gives end-customers context-based visibility and policy enforcement, providing a high level of intelligence to the network. Our hardware products include intelligent access points, routers and switches. We continue to develop and bring to market new hardware products in response to evolving customer needs and new technology standards, such as 802.11ac. These products are managed by our cloud services platform, which delivers cloud-based network management and mobility applications giving end-customers a single, unified and contextual view of the entire network edge. We continue to invest in our cloud platform, including our next generation version of the platform, HiveManager NG, which we released during our second quarter of our fiscal year 2015 that includes an updated user interface, more scalable cloud operations infrastructure, and greater access to the data collected by our devices.
We derive revenue by selling our hardware products and related software licenses or software subscription and services, which together comprise our cloud-managed networking platform. Our product revenue consists of revenue from sales of our hardware products, which includes wireless access points, branch routers and switches, all of which are embedded with our proprietary operating system, HiveOS, and perpetual licenses of our unified network management system, HiveManager, and other software applications, as well as related accessories. Our software subscription and services revenue consists of revenue from sales of our service offerings that we deliver over a specified term. These offerings primarily include post-contract customer support, or PCS, related to our perpetual software licenses and subscriptions to HiveManager and other software applications delivered as a service, or SaaS, including related customer support.
We sell our products and software subscription and services through our channel partners to our end-customers, who hold the licenses of our products and our software subscription and services. We define end-customers as holding or having held licenses to our products and software subscription and services. When our end-customers purchase hardware products, they are generally required to purchase for every hardware unit, a license of our unified management system, either as a perpetual license with PCS or as a SaaS license with a one-, three- or five-year term. Both our PCS and SaaS offerings include updates and upgrades of our software applications and our HiveOS operating system that is embedded in our hardware.
We maintain a field sales force that works to develop sales with our channel partners, who include value-added distributors, or VADs, and value-added resellers, or VARs. Our channel partners purchase our products and services from us at a discount to our list prices and then resell them to our end-customers. Substantially all of our sales within North America are made through VARs. Under this model, we sell our products and services to our VARs, which in turn sell our products and services to our end-customers. We sell to VARs upon identification of a specified end-customer. All of our sales outside of North America, as well as a portion of our sales within North America, are made through VADs. Under this model, we sell our products and services to our VADs, which in turn sell our products and services directly to end-customers or to VARs, which then sell our products and services to our end-customers. We typically sell to VADs upon identification of a specified end-customer. In some cases, however, our VADs purchase inventory from us for stocking and subsequently receive an order from an end-customer. For certain VADs, our agreements allow for stocking of our products in their inventory and provide related price protection or rebates as well as limited rights of return for stock rotation. We also sell through managed service providers, who incorporate our products, customer support and SaaS offerings into their services and support as an integrated offering. In these instances, we view the managed service provider as our end-customer.
Due to annual budget cycles in the enterprise and spending seasonality in the education vertical, we generally experience a seasonal sequential decrease in our product revenue in our first fiscal quarter. In the fiscal first quarter ended March 31, 2015, we continued to experience this seasonal trend, where our revenue decreased sequentially by $10.4 million, or 29%, from $36.2 million for the three months ended December 31, 2014, and by $2.4 million, or 9%, from $28.2 million for the three months ended March 31, 2014. However, in addition to our normal seasonality, this sequential decrease in revenue was also due to a pause in demand in our U.S education business due to the various aspects and timing of the Federal E-Rate program. In addition, we experienced an operational challenge late in the first quarter of 2015 with our third party logistics provider and were not able to ship and take revenue in the quarter on all of the orders received and processed. Lastly, we continued to experience lower sales execution in our less-developed sales territories.
Beginning in our fourth quarter of fiscal 2014, we also began to see a significant change in purchasing behavior by our end-customers in the education vertical specifically due to the additional tranches of incremental funding announced by the FCC in December 2014 and January 2015. We believe this additional funding is leading more schools to be eligible for the E-Rate program, making plans to seek E-Rate funding more widespread than it has been in the past.

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E-Rate is the commonly used name for the Schools and Libraries Program of the Universal Service Fund, which is administered by the Universal Service Administrative Company (USAC) under the direction of the Federal Communications Commission (FCC). The program provides discounts to assist schools and libraries in the United States to obtain affordable telecommunications and Internet access.
Since any purchases made by schools before April 1, 2015 were not be eligible for E-Rate funding, and direct E-Rate funding will not be made available before July 1, 2015, we believe that our end-customers in the education vertical have continued to defer purchases in order to better position themselves for this E-Rate funding; specifically, end-customers who would have placed purchases in early 2015 instead are continuing to defer purchases until the second half of 2015. In addition, we expect that certain end customers in the education vertical could decide further to delay deploying their networks, which could defer their purchasing decisions into 2016 as well. Given our exposure to the education vertical in the U.S., we believe that this deferral of education spending has had and will continue to have an additional impact on our historical seasonality.
Education continued to be a key driver of our business in our second fiscal quarter ended June 30, 2015. Our education business was greater in the quarter than we expected, and improved from our first fiscal quarter. However, U.S. K-12 spending was less robust than in prior years, and overall K-12 represented 40% of our business during the three months ended June 30, 2015, as compared to 50% of our business in the same period in 2014. We also had good performance during our second fiscal quarter ended June 30, 2015 in our health care, retail and distributed enterprise verticals, announcing deployments with one of the Top 5 largest providers of long term care in the U.S. and one of the largest Continuing Care Retirement Communities in the country. In retail, a Fortune 500 industrial supply company selected our solution to provide Wi-Fi to over 600 warehouse stores. Additionally, in distributed enterprise, a multinational pharmaceutical company chose in our second quarter to deploy our products in certain locations across Europe and in the U.S.
We primarily conduct business in three geographic regions: (1) Americas, (2) Europe, the Middle East and Africa ("EMEA"), and (3) Asia Pacific ("APAC"). From a geographic perspective, year-over-year revenue for the fiscal quarter ended June 30, 2015 increased by 1% in the Americas and 2% in EMEA, but decreased by 30% in APAC. For the three months ended June 30, 2015, 67% of our total revenue was generated from Americas, 25% from EMEA and 8% from APAC.
We added over 1,400 new end-customers during the quarter, bringing our total end-customer count to approximate 22,000 in over 40 countries as of June 30, 2015. Our end-customers totaled more than 20,000, 19,000, 17,000 and 16,000, for our fiscal quarters ended March 31, 2015, and December 31, September 30, and June 30, 2014, respectively. Our end-customers represent a broad range of industry verticals, including K-12 and higher education, healthcare, retail and distributed enterprises.
We outsource the manufacturing of all of our products to contract manufacturers. We currently outsource the warehousing and delivery of our products to a third-party logistics provider for worldwide fulfillment. We perform quality assurance and testing at our third-party logistics provider facilities in Fremont, California.
We intend to continue to invest significant resources in the development of our innovative technologies and new product offerings, acquire new end-customers in new and existing geographies, and increase penetration within our existing end-customer base. We expect to continue growing our organization to meet the needs of our customers and to pursue opportunities in new and existing markets. In particular, we are investing to increase our sales capacity as well as our channel program. We increased the number of our employees from 557 employees as of June 30, 2014 to 569 as of December 31, 2014 and to 589 as of June 30, 2015. However, we continue to experience employee attrition, particularly in our sales, marketing and engineering functions, and attracting, ramping, training and retaining qualified personnel and developing sales channels will continue to require significant effort over multiple quarters. For example, we announced in February 2015, the departure of our Senior Vice President, Worldwide Field Operations, and that we had undertaken a search for his replacement. In April, 2015, we announced that Tom Wilburn had joined our company in this position. We expect further turn-over in our sales organization as we transition to new leadership. Instability in our sales function will continue to impact our ability to reliably forecast revenue from quarter to quarter and to achieve operating results consistent with those forecasts. In addition, we also announced in April 2015 a new relationship with Dell Inc., whereby Dell will become a reseller of Aerohive’s Wi-Fi and cloud service and that the two companies expect to work together to execute their shared vision of cloud-managed IT to provide simplified and streamlined operations, configuration, monitoring and troubleshooting for customers’ networks. To support this new relationship, we will need to identify and invest in additional and dedicated resources and, potentially, new product, service and support offerings, which could divert existing resources from our current business. Also, there is no assurance that this relationship, or others we may pursue, will identify significant or new market opportunities or growth incremental to our existing business.
Due to our continuing investments to grow our business, including internationally, in advance of and in preparation for, our expected increase in sales and expansion of our customer base, we are continuing to incur expenses in the near term. As a result, we do not expect to be profitable for the foreseeable future and our use of cash over this period could also be greater and

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extend over a longer period as we make investments in areas of our operations, such as sales, marketing and research and product and channel partner development, which we feel may promote growth and profitability over the long term. We believe that over the long term, we will be able to leverage these investments in the form of a higher revenue growth rate compared to the growth rate of our operating expenses.
However, we may not in fact realize any long-term benefit from these investments.
Opportunities and Challenges
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; stabilize and improve performance of our sales function, in particular in our less developed territories; increase our sales capacity and develop our channel partner program; acquire new end-customers, both in the geographies in which we currently operate as well as in new geographies; and expand our end-customer base and increase penetration within our existing end-customer base (including through new product offerings).
We operate in the highly competitive wired and wireless network access products market. This market continues to evolve and is characterized by rapid technological innovation. We will need to continue to innovate in order to continue to achieve market adoption of our products and services. We also continue to invest to extend our product offering to include a family of Ethernet switches to complement our wireless offering and allow us to deliver a unified wired and wireless network edge. We have continued the expansion of our product portfolio, announcing during the quarter ended September, 30, 2014, that we enabled our enterprise Wi-Fi solution to support iBeacon and AltBeacon technology and that we released a secure enterprise Wi-Fi branch router with embedded LTE.
In addition, our market is currently in the midst of an evolution in related wireless technology standards and protocols. For example, wireless standards for our market currently are transitioning from 802.11n to the new 802.11ac standard, which uses new radio hardware to deliver substantially higher wireless performance. As these standards were being developed and finalized, we performed hardware and software development, both internally and with our original design manufacturers, or ODMs, to incorporate these standards into our product offerings. We also continue to develop new functionality in our product offerings to take advantage of the changes that these industry standards incorporated. For example, in April 2014, we announced the AP230, an 802.11ac Gigabit Wi-Fi 3 x 3 access point. We announced the AP1130, an 802.11ac access point for outdoor applications in December 2014. In April 2015, we announced the AP130, an 801.11ac Gigabit Wi-Fi 2 x 2 access point. For the quarter ended June 30, 2015, we continued to see rapid adoption of 802.11ac products (based on the increasing percentage of 802.11ac products sold during the quarter). Overall, our 802.11ac solutions accounted for 74% of our access point unit volume shipments during the quarter ended June 30, 2015, as compared with 63% for the quarter ended March 31, 2015, and 34% for the quarter ended June 30, 2014. In order to maintain a competitive position in this market, we are developing our next-generation “Wave 2” 802.11ac access points to extend our portfolio and address higher-performance use cases. We currently expect our initial Wave 2 products to be available in early 2016 versus late 2015 as previously indicated, which we currently believe will meet potential customer demand for these products (including demand in our important education vertical); however, this schedule may lag availability of comparable products our competitors have announced.
We have developed a cloud services platform to provide network management and support additional value-added applications. HiveManager, 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. Our cloud services platform allows us to deliver vertical applications, such as our TeacherView classroom management application for K-12 education; guest access, such as our ID Manager application for providing temporary secure network access; and integration to partners' solutions. We are currently introducing HiveManager NG, which we announced in April 2015, as a new version of our cloud services platform that includes an updated user interface, greater operational capacity to support large deployments, and longer data retention. Our strategy is to make our cloud services platform and applications available to customers in either a subscription public cloud or on-premises private cloud deployment.
When we introduce new product offerings, such as the release of the new version of our cloud services or new hardware platforms, we must effectively manage the timing of such releases to minimize the disruption to our existing product offerings and revenue streams. We must manage the orderly transition of our end-customers to these new products and services to reduce the amount of inventory for products that may become obsolete or slow moving due to our new product introductions and to limit the disruption to our end-customers’ ordering practices and the pricing environment for our legacy products and services. In addition, we also must monitor the performance of these products and provide additional support as they are adopted and first used in the field and performance issues are identified. We will need to continue to react and respond to these changes through innovation and improved execution in order for our business to succeed. We will incur related research and development and support expenses as we do that.

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We intend to target new end-customers within the industry verticals and geographies in which we currently operate, as well as through expansion into new verticals and geographies. For example, we have partnered with software application providers to tailor our product offerings for specific verticals such as retail, and we intend to continue to pursue such opportunities in other applicable industry verticals. In November of 2014 and January of 2015 we announced continued development of our “personalized engagement platform” for retailers, which includes a combination of Aerohive products and products developed and sold by our technology partners. In March 2015, we announced a new iOS application for guest and Bring Your Own Device (BYOD) management and enhanced security services. In addition, our ability to successfully expand our end-customer base in new industry verticals and geographies of new end-customers is critical to creating a larger and more diverse end-customer base to which we can offer our current and future products and services. In the quarter ended September 30, 2014 we announced that we had been named to the Verizon Partner Program and in our quarter ended December 31, 2014 we announced that we will donate the Wi-Fi infrastructure, including 802.11ac wireless access point switches and cloud-based management, to support a $100 million contribution to be made by Apple Corporation to the ConnectED to deploy Apple iPads, MacBooks and Apple TVs to an identified list of 114 schools.
In April 2015, we announced that Dell Inc. would be a reseller or our product solution, and that we and Dell expected to work together to execute a shared vision of cloud-managed IT products and solutions. We have begun to accept orders under this relationship, and to make investments to develop this relationship as part of our channel strategy. We also announced in April a redesigned program to support our top-performing channel partners.
Our sales efforts take several quarters, and involve educating our potential end-customers and channel partners about the applications and benefits of our products, including the technical capabilities of our products. Sales to the education vertical are an important sales channel for us and can involve an extended sales cycle. In addition, sales to our enterprise customers may involve an extended sales cycle and often initial purchases are small. We attempt to manage these sales cycles through continued diversification of our end-customer base by industry vertical and related purchasing seasonality, deployment maturity and visibility, and the ratio of business from new and existing end-customers. Given the buying cycle for K-12 schools in our education vertical, the second quarter is usually the strongest for our education vertical, which historically has driven our strong sequential growth in the second quarter. The sequential expansion of our operating performance from the first quarter to the second quarter has historically been very large, which can present execution and delivery challenges in subsequent quarters. In addition, we typically see continued growth in our revenue to carry over from our second quarter to our third quarter. However, in our third quarter ended September 30, 2014, our sales results were below our expectations, resulting in lower revenue attainment for the quarter. This was primarily due to lack of sales execution in our less developed sales territories, where the progress we saw in our seasonally strong second quarter did not carry through to the end of the third quarter, in part due to execution issues in some of these territories. Due to annual budget cycles in the enterprise and spending seasonality in the education vertical, we generally experience a seasonal sequential decrease in our product revenue in our first fiscal quarter. In the fiscal first quarter ended March 31, 2015, we continued to experience this seasonal trend. However, in addition to our normal seasonality, we also have seen end-customers in the education vertical continue to defer purchases to the second half of 2015, which we expected they would have placed earlier 2015. In addition, we expect that certain customers could further delay their decisions to deploy their networks, which could defer their purchasing decisions into 2016 as well. The sales results for our first fiscal quarter 2015 were below expectations, primarily due to due to a pause in demand in U.S education business due to the various aspects and timing of the Federal E-Rate program. In addition, we experienced an operational challenge late in the first quarter 2015 with our third-party logistics provider and were not able to ship and take revenue in the quarter on all of the orders received and processed. Lastly, we continued to experience lower sales execution in our less-developed sales territories. Continued employee turn-over, particularly in our sales organization in North America but also elsewhere, and lower sales execution in our less-developed sales territories, could continue to impact our ability reliably to forecast revenue from quarter to quarter and to achieve operating results consistent with those forecasts.
After the initial sale to a new end-customer, we focus on expanding our relationship with the end-customer. In order for us to continue to grow our total revenue, our end-customers must make additional purchases of our products and services. Additional sales to our existing end-customer base can take the form of incremental sales of products and services, either to complete deployments already started or to deploy additional products into other areas of their business. We expect our opportunity to expand our end-customer relationships through such follow-on sales to increase if we will continue to be able to add new end-customers, broaden our product portfolio and enhance product performance and functionality. Follow-on sales lead to increased revenue over the lifecycle of an end-customer relationship and thereby significantly increasing our return on our sales and marketing investments.
Our growth strategy also contemplates increased sales and marketing investments internationally. Newly hired sales and marketing personnel require several months to establish new relationships and become productive. In addition, sales teams in international regions will attempt to sell into industry verticals and to end-customers that may not be familiar with our products and services. All of these factors will affect sales productivity. We attempt to manage our overall sales productivity through the

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timing of the introduction of new territories or the splitting of existing territories, the number and timing of new vertical penetration and the allocation of related headcount and go-to-market resources. As we witnessed lower-than-expected revenue in third quarter of fiscal 2014, we realized we needed to increase our overall sales capacity and address current gaps in certain territories to enable future growth. We believe our mature regions have established a repeatable sales and channel model that we can use and build upon as a template to grow our business. We intend to replicate this model in our less mature territories through a combination of hiring additional sales people, ramping our newly hired sales people to increase productivity, and continuing to develop our channel. We announced in February 25, 2015, the departure of our Senior Vice President, Worldwide Field Operations, and that we were undertaking a search for his replacement, as part of a reorganization of our sales function. In April 2015, we announced that Tom Wilburn had joined our company in this position. We continue actively to work to improve on all of these fronts, but hiring and ramping sales people and developing channels take time, so we expect this will continue to be a multi-quarter effort.
Lastly, we expect to continue to derive the majority of our sales through our channel partners. Our channel partners will play a significant role in our future growth as they identify new end-customers and expand our sales to existing end-customers. We plan to continue to invest in and better utilize and scale our network of channel partners in parallel with our sales capacity to increase sales to existing end-customers, enable our channel partners to reach new end-customers and provide services and support effectively. In April 2015, we announced a new relationship with Dell, whereby Dell will become a reseller of our Wi-Fi and cloud services, and that the companies expect to work together to execute their shared vision of cloud-managed IT to provide simplified and streamlined operations, configuration, monitoring and troubleshooting for customer networks. To support this new relationship, as well as others we may pursue, we will need to identify and invest in additional and dedicated resources and, potentially, new product, service and support offerings, which could distract management’s attention and divert existing resources from our current business. Also, there is no assurance that this relationship, or others we may pursue, will identify significant or new market opportunities or growth incremental to our existing business.
All of these efforts will require us to continue to make significant sales and marketing investments. Additionally, we will increasingly focus our resources and management attention on those channel partners best able to help us meet our growth expectations. Even so, the total number of our channel partners may nonetheless decrease over time.
Key Components of Our Results of Operations and Financial Condition
Revenue
We generate revenue from the sales of our products and services, and recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured.
Our total revenue comprises the following:
Product Revenue.    Our product revenue consists of revenue from sales of our hardware products, which include wireless access points, branch routers, and switches, all of which are embedded with our proprietary operating system, HiveOS, and perpetual licenses of 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. For our VAD arrangements in which our VADs stock inventory, we recognize revenue when our VADs have shipped the products to our end-customers (or to VARs that have identified end-customers), provided that all other revenue recognition criteria have been met.
Software Subscription and Services Revenue.   Our software subscription and services revenue consists of revenue from sales of our software subscription and services offerings that we deliver over a specified term. These offerings primarily include 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. 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 service 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 PCS, the higher our software subscription and services revenue will be as a percentage of our total revenue. We recognize software subscription and services revenue ratably over the term of the contract, which is typically one, three or five years. As a result, our recognition of software subscription and services revenue lags our recognition of related product revenue.

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Cost of Revenue
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.
Cost of Software Subscription and Services Revenue.   Our cost of software subscription and services revenue primarily includes personnel costs, including stock-based compensation, certain allocated facilities information technology infrastructure costs and costs associated with our provision of PCS and SaaS. Our cost of software subscription and services revenue also includes datacenter costs.
Gross Profit
Our 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 and VAD partners, the mix of revenue between products and software subscription and services, and the mix of hardware products sold, because our hardware products have varying gross margins depending on the product offering and the lifecycle of the product. Historically, our software subscription and services gross margin has been lower than our product gross margin; however, we expect our software subscription and services gross margin to increase over the long term because we expect our software subscription and services revenue to increase more quickly than our cost of software subscription and services revenue. We expect our gross margin to increase modestly over the long term, but it may decrease in any given time in the event we experience additional competitive pricing pressure. For example, competitors such as Cisco Systems and Hewlett Packard (who recently acquired Aruba Networks) have significantly greater financial resources and could determine to gain a competitive advantage over us by aggressively lowering prices. We also expect that our gross margin will fluctuate from period to period depending on the factors described above.
Operating Expenses
Our operating expenses include the following:
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. 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. 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.
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. Commission expenses in any given period are based on completed contracts, which may not result in revenue in the same period in which we incur the expense. Sales and marketing expenses also include the cost of trade shows, marketing programs, promotional materials, demonstration equipment, consulting services, depreciation and certain allocated facilities and information technology infrastructure costs. 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 and the timing and extent of our sales and marketing expenses.
  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. General and administrative expenses also include fees for outside consulting, legal, audit, investor relations, and accounting service and insurance, as well as depreciation and certain allocated facilities and information technology infrastructure costs. As a public company we also have experienced increased litigation, relating both to intellectual property claims of others as well as securities claims brought by certain of our stockholders. Defending these claims, including under indemnity commitments we have made to third parties, has imposed new costs on us. We expect our general and administrative expenses to continue to increase in absolute dollars due to the additional legal,

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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.
Interest Expense
Our interest expense consists primarily of interest on our indebtedness. See Note 4 of our condensed consolidated financial statements included elsewhere in this Form 10-Q for more information about our debt.
Other Income
Other income primarily consists of gains from foreign currency exchange transactions.
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 foreign entities a profit, and to a lesser extent federal and state income tax expense. As of June 30, 2015 and December 31, 2014, 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. We expect our provision for income taxes to increase in absolute dollars in future periods.

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Results of Operations
The following table sets forth our results of operations for the periods presented in dollars (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenue:
 
 
 
 
 
 
 
Product
$
30,751

 
$
33,721

 
$
51,231

 
$
58,582

Software subscription and services
6,085

 
3,833

 
11,422

 
7,204

Total revenue
36,836

 
37,554

 
62,653

 
65,786

Cost of revenue(1):
 
 
 
 
 
 
 
Product
9,619

 
10,560

 
16,427

 
18,442

Software subscription and services
2,526

 
1,639

 
4,354

 
3,005

Total cost of revenue
12,145

 
12,199

 
20,781

 
21,447

Gross profit
24,691

 
25,355

 
41,872

 
44,339

Operating expenses:
 
 
 
 
 
 
 
Research and development(1)
8,883

 
6,833

 
16,393

 
12,971

Sales and marketing(1)
20,804

 
19,011

 
39,574

 
35,580

General and administrative(1)
6,206

 
5,135

 
12,453

 
9,972

Operating loss
(11,202
)
 
(5,624
)
 
(26,548
)
 
(14,184
)
Interest income
19

 
8

 
33

 
9

Interest expense
(173
)
 
(459
)
 
(927
)
 
(924
)
Other income
19

 
(58
)
 
154

 
59

Loss before income taxes
(11,337
)
 
(6,133
)
 
(27,288
)
 
(15,040
)
Income tax provision
(99
)
 
(135
)
 
(207
)
 
(155
)
Net loss and comprehensive loss
$
(11,436
)
 
$
(6,268
)
 
$
(27,495
)
 
$
(15,195
)
(1)Includes stock-based compensation as follows:    
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Cost of revenue
$
217

 
$
73

 
$
382

 
$
118

Research and development
1,001

 
502

 
1,987

 
853

Sales and marketing
1,727

 
798

 
3,224

 
1,419

General and administrative
1,419

 
566

 
2,593

 
1,115

Total stock-based compensation expense
$
4,364

 
$
1,939

 
$
8,186

 
$
3,505

The following table sets forth our results of operations for the periods presented as a percentage of our total revenue:

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Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenue:
 
 
 
 
 
 
 
Product
83
 %
 
90
 %
 
82
 %
 
89
 %
Software subscription and services
17

 
10

 
18

 
11

Total revenue
100

 
100

 
100

 
100

Cost of revenue:
 
 
 
 
 
 
 
Product
26

 
28

 
26

 
28

Software subscription and services
7

 
4

 
7

 
5

Total cost of revenue
33

 
32

 
33

 
33

Gross profit
67

 
68

 
67


67

Operating expenses:
 
 
 
 
 
 
 
Research and development
25

 
19

 
27

 
20

Sales and marketing
56

 
51

 
63

 
54

General and administrative
17

 
14

 
20

 
15

Operating loss
(31
)
 
(16
)
 
(43
)

(22
)
Interest income
—

 
—

 
—


—

Interest expense
—

 
(1
)
 
(1
)
 
(1
)
Other income
—

 
—

 
—

 
—

Loss before income taxes
(31
)
 
(17
)
 
(44
)

(23
)
Income tax provision
—

 
—

 
—

 
—

Net loss and comprehensive loss
(31
)%
 
(17
)%
 
(44
)%

(23
)%

26


Revenues  
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
$ Change
 
% Change
 
2015
 
2014
 
$ Change
 
% Change
 
(dollars in thousands)
 
(dollars in thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Product
$
30,751

 
$
33,721

 
$
(2,970
)
 
(9
)%
 
$
51,231

 
$
58,582

 
$
(7,351
)
 
(13
)%
Software subscription and services
6,085

 
3,833

 
2,252

 
59
 %
 
11,422

 
7,204

 
4,218

 
59
 %
Total revenue
$
36,836

 
$
37,554

 
$
(718
)
 
(2
)%
 
$
62,653

 
$
65,786

 
$
(3,133
)
 
(5
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Percentage of revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Product
83
%
 
90
%
 
 
 
 
 
82
%
 
89
%
 
 
 
 
Software subscription and services
17
%
 
10
%
 
 
 
 
 
18
%
 
11
%
 
 
 
 
Total
100
%
 
100
%
 
 
 
 
 
100
%
 
100
%
 
 
 
 

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
$ Change
 
% Change
 
2015
 
2014
 
$ Change
 
% Change
 
(dollars in thousands)
 
(dollars in thousands)
Revenue by geographic region:
 
 
 
 
 
 
Americas
$
24,818

 
$
24,487

 
$
331

 
1
 %
 
$
38,911

 
$
41,865

 
$
(2,954
)
 
(7
)%
EMEA
9,170

 
8,996

 
174

 
2
 %
 
18,296

 
17,004

 
1,292

 
8
 %
APAC
2,848

 
4,071

 
(1,223
)
 
(30
)%
 
5,446

 
6,917

 
(1,471
)
 
(21
)%
Total revenue
$
36,836

 
$
37,554

 
$
(718
)
 
(2
)%
 
$
62,653

 
$
65,786

 
$
(3,133
)
 
(5
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Percentage of revenue by geographic region:
 
 
 
 
Americas
67
%
 
65
%
 
 
 
 
 
62
%
 
63
%
 
 
 
 
EMEA
25
%
 
24
%
 
 
 
 
 
29
%
 
26
%
 
 
 
 
APAC
8
%
 
11
%
 
 
 
 
 
9
%
 
11
%
 
 
 
 
Total
100
%
 
100
%
 
 
 
 
 
100
%
 
100
%
 
 
 
 
Revenue decreased $0.7 million, or 2% for the three months ended June 30, 2015 as compared to the three months ended June 30, 2014, and decreased $3.1 million, or 5% for the six months ended June 30, 2015 as compared to the six months ended June 30, 2014, primarily due to lower product unit shipments, partially offset by the increasing demand for our software subscription and services offerings. The decrease in revenue for the six months ended June 30, 2015 compared with the year-ago period was also primarily due to lower demand in U.S education business due to the various aspects and timing of the Federal E-Rate program.
Product revenue decreased $3.0 million for the three months ended June 30, 2015, compared to the comparable period in 2014, and decreased $7.4 million for the six months ended June 30, 2015, compared to the comparable period in 2014, primarily due to the decrease in shipments of product units, mostly our access points.
Software subscription and services revenue increased $2.3 million for the three months ended June 30, 2015, compared to the comparable period in 2014, and increased $4.2 million for the six months ended June 30, 2015, compared to the comparable period in 2014, primarily driven by the increase in sales of SaaS in connection with an increased number of our end-customers, and recognition of deferred revenue, partially offset by a slight decrease in sales of PCS due to decrease in product unit shipments.
For the three months ended June 30, 2015, as compared to the comparable period in 2014, the Americas and EMEA revenues remained flat, and APAC revenue decreased $1.2 million. For the six months ended June 30, 2015, as compared to the comparable period in 2014, the Americas revenue decreased $3.0 million, due to lower U.S. education business due to the

27


various aspects and timing of the Federal E-Rate program, partially offset by an increase of $1.3 million in EMEA due to increased demand for our products in this region.
Cost of Revenues and Gross Margin
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
$ Change
 
% Change
 
2015
 
2014
 
$ Change
 
% Change
 
(dollars in thousands)
 
(dollars in thousands)
Cost of revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Product
$
9,619

 
$
10,560

 
$
(941
)
 
(9
)%
 
$
16,427

 
$
18,442

 
$
(2,015
)
 
(11
)%
Software subscription and services
2,526

 
1,639

 
887

 
54
 %
 
4,354

 
3,005

 
1,349

 
45
 %
Total cost of revenues
$
12,145

 
$
12,199

 
$
(54
)
 
—
 %
 
$
20,781

 
$
21,447

 
$
(666
)
 
(3
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross margin:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Product
68.7
%
 
68.7
%
 
 
 
 
 
67.9
%
 
68.5
%
 
 
 
 
Software subscription and services
58.5
%
 
57.2
%
 
 
 
 
 
61.9
%
 
58.3
%
 
 
 
 
Total gross margin
67.0
%
 
67.5
%
 
 
 
 
 
66.8
%
 
67.4
%
 
 
 
 
Cost of revenue remained flat for the three months ended June 30, 2015, as compared to June 30, 2014, and decreased $0.7 million, or 3%, for the six months ended June 30, 2015 as compared to June 30, 2014.
Cost of product revenue decreased $0.9 million and $2.0 million, respectively, for the three and six months ended June 30, 2015 as compared to the comparable period in 2014, primarily due to the decrease in sales of our products. 
Cost of software subscription and services increased $0.9 million or 54%, for the three months ended June 30, 2015, compared to the comparable period in 2014, and increased $1.3 million or 45%, for the six months ended June 30, 2015, compared to the comparable period in 2014, primarily due to the commencement of our amortization of the costs for our cloud services platform in the second quarter of fiscal 2015, and an increase in cloud operation resources as well as headcount. Our cloud operations and support headcount increased from 26 as of June 30, 2014 to 31 as of June 30, 2015.
Our gross margin was 67.0% and 67.5% for the three months ended June 30, 2015 and 2014, respectively, and was 66.8% and 67.4% for the six months ended June 30, 2015 and 2014, respectively. The decrease of gross margin was primarily driven by an increase in software subscription and services revenue as a percentage of total revenue, which has a lower gross margin than product gross margin.
Our product gross margin for the three months ended June 30, 2015 compared to the comparable period in 2014 remained flat, and decreased for the six months ended June 2015 compared to the comparable period in 2014, primarily due to product mix as the majority of our product shipments transitioned to .11ac products. In addition, our product gross margin was impacted by higher discounts provided in our international markets to offset the strength of the U.S. dollar. These decreases were partially offset by the continued improvement in our product design and supply chain management as well as efficiencies in the manufacturing costs.
For the three and six months ended June 30, 2015 compared to the comparable period in 2014, the increase in our software subscription and services gross margin was primarily due to higher growth in our software subscription and services revenue than our related cost of delivering these software subscription and services, partially offset by the commencement of our cloud services platform amortization in the second quarter of fiscal 2015.
Research and Development
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
$ Change
 
% Change
 
2015
 
2014
 
$ Change
 
% Change
 
(dollars in thousands)
 
(dollars in thousands)
Research and development
$
8,883

 
$
6,833

 
$
2,050

 
30
%
 
$
16,393

 
$
12,971

 
$
3,422

 
26
%
% of revenue
25
%
 
19
%
 
 
 
 
 
27
%
 
20
%
 
 
 
 


28


Research and development expenses increased $2.1 million, for the three months ended June 30, 2015 as compared to the comparable period in 2014, primarily due to an increase of $0.8 million personnel and related costs, including stock-based compensation expense of $0.5 million, driven by our increased research and development headcount to support continued investment in our future product and service offerings, and a $1.0 million higher capitalized personnel and related costs, including wages, bonuses and stock-based compensation, for development of our cloud services platform in the second quarter of fiscal 2014.
Research and development expenses increased $3.4 million, for the six months ended June 30, 2015 as compared to the comparable period in 2014, primarily due to an increase of $2.2 million personnel and related costs, including stock-based compensation expense of $1.3 million, driven by our increased research and development headcount to support continued investment in our future product and service offerings, and a $0.5 million higher capitalized personnel and related costs, including wages, bonuses and stock-based compensation, for development of our cloud services platform in the first half of fiscal 2014. In April 2015, we completed and launched such cloud services platform and began to amortize the capitalized development costs as part of the cost of software subscription and services, over an estimated useful life of 5 years.
The remaining increase in our research and development expenses for the three and six months ended June 30, 2015 as compared to the comparable period in 2014 was mainly due to higher costs related to product certifications, depreciation expenses and certain allocated facilities. Our research and development headcount increased from 213 as of June 30, 2014 to 224 as of June 30, 2015. We expect our research and development costs to continue to increase in absolute dollars, as we continue to invest in developing new products and new versions of our existing products.
Sales and Marketing
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
$ Change
 
% Change
 
2015
 
2014
 
$ Change
 
% Change
 
(dollars in thousands)
 
(dollars in thousands)
Sales and marketing
$
20,804

 
$
19,011

 
$
1,793

 
9
%
 
$
39,574

 
$
35,580

 
$
3,994

 
11
%
% of revenue
56
%
 
51
%
 
 
 
 
 
63
%
 
54
%
 
 
 
 
For the three months ended June 30, 2015 as compared to the comparable period in 2014, the increase in our sales and marketing expenses was primarily due to increases in personnel and related costs of $1.2 million, including stock-based compensation expense of $0.9 million and other employee related costs, as well as higher marketing program expenses.
For the six months ended June 30, 2015 as compared to the comparable period in 2014, the increase in our sales and marketing expenses was primarily due to increases in personnel and related costs of $3.6 million, including stock-based compensation expense of $1.8 million, headcount and other employee related costs. Our sales and marketing headcount increased from 230 as of June 30, 2014 to 237 as of June 30, 2015. We expect that sales and marketing expenses will continue to increase in absolute dollars as we continue to add sales personnel and continue marketing programs.
General and Administrative
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
$ Change
 
% Change
 
2015
 
2014
 
$ Change
 
% Change
 
(dollars in thousands)
 
(dollars in thousands)
General and administrative
$
6,206

 
$
5,135

 
$
1,071

 
21
%
 
$
12,453

 
$
9,972

 
$
2,481

 
25
%
% of revenue
17
%
 
14
%
 
 
 
 
 
20
%
 
15
%
 
 
 
 
For the three months ended June 30, 2015 as compared to the comparable period in 2014, the increase in our general and administrative expenses was primarily due to increases in personnel and related costs of $1.0 million, primarily stock-based compensation.
For the six months ended June 30, 2015 as compared to the comparable period in 2014, the increase in our general and administrative expenses was primarily due to increases in personnel and related costs of $2.2 million, primarily stock-based compensation expense of $1.5 million. Our general and administrative headcount increased from 77 as of June 30, 2014 to 84 as of June 30, 2015. We expect that general and administrative expenses will continue to increase in absolute dollars due primarily to costs associated with being a public company and to support the growth in our business.
Interest Expense

29


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
$ Change
 
% Change
 
2015
 
2014
 
$ Change
 
% Change
 
(dollars in thousands)
 
(dollars in thousands)
Interest expense
$
(173
)
 
$
(459
)
 
$
286

 
(62
)%
 
$