Edgar Filing: AEROHIVE NETWORKS, INC

Aerohive Q2 2014 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, 2014

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, 2014 was 45,711,945.

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TABLE OF CONTENTS



	PART I. FINANCIAL INFORMATION	Page
Item 1.	Condensed Consolidated Financial Statements	2
	Condensed Consolidated Balance Sheets	2
	Condensed Consolidated Statements of Operations and Comprehensive Loss	3
	Condensed Consolidated Statements of Cash Flows	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	33
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57
Item 3.	Defaults Upon Senior Securities	57
Item 4.	Mine Safety Disclosure	57
Item 5.	Other Information	58
Item 6.	Exhibits	59
	Signatures	59

The Aerohive Networks design logo and the marks “Aerohive^®,” “HiveManager^®” and “HiveOS^®” 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.

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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,
	2014			2013
ASSETS	(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents	$	103,913		$	35,023
Accounts receivable, net of allowance for doubtful accounts of $217 and $158 as of June 30, 2014 and December 31, 2013, respectively	23,651			17,578
Inventories	12,061			6,817
Prepaid expenses and other current assets	2,285			4,949
Deferred cost of goods sold	978			1,427
Total current assets	142,888			65,794
Property and equipment, net	5,805			3,281
Goodwill	513			513
Intangible assets, net	68			149
Other assets	166			120
Total assets	$	149,440		$	69,857
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable	$	16,548		$	10,802
Accrued liabilities	9,015			7,561
Debt, current portion	10,000			10,000
Deferred revenue, current portion	17,977			15,915
Total current liabilities	53,540			44,278
Debt, long-term portion	9,721			9,624
Convertible preferred stock warrant liability	—			3,903
Deferred revenue, non-current	19,483			14,655
Other liabilities	589			742
Total liabilities	83,333			73,202
Commitments and contingencies (Note 5)
Stockholders’ equity (deficit):
Convertible preferred stock, par value of $0.001 per share, issuable in Series A, B, C, D and E - zero and 29,536,358 shares authorized as of June 30, 2014 and December 31, 2013, respectively; zero and 27,861,009 shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively	—			28
Preferred stock, par value of $0.001 per share - 25,000,000 and zero shares authorized as of June 30, 2014 and December 31, 2013, respectively; no shares issued and outstanding as of June 30, 2014 and December 31, 2013	—			—
Common stock, par value of $0.001 per share - 500,000,000 and 52,800,000 shares authorized as of June 30, 2014 and December 31, 2013, respectively; 45,567,323 and 7,419,469 shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively	46			7
Additional paid–in capital	201,590			116,954
Accumulated deficit	(135,529		)	(120,334		)
Total stockholders’ equity (deficit)	66,107			(3,345		)
Total liabilities and stockholders’ equity (deficit)	$	149,440		$	69,857

See notes to condensed consolidated financial statements.

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AEROHIVE NETWORKS, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(unaudited, in thousands, except share and per share amounts)



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
Revenue:
Product	$	33,721		$	25,883		$	58,582		$	43,920
Software subscriptions and service	3,833			2,149			7,204			3,939
Total revenue	37,554			28,032			65,786			47,859
Cost of revenue:
Product	10,560			8,059			18,442			14,214
Software subscriptions and service	1,639			1,010			3,005			1,845
Total cost of revenue	12,199			9,069			21,447			16,059
Gross profit	25,355			18,963			44,339			31,800
Operating expenses:
Research and development	6,833			6,674			12,971			12,431
Sales and marketing	19,011			14,604			35,580			27,504
General and administrative	5,135			3,926			9,972			7,815
Total operating expenses	30,979			25,204			58,523			47,750
Operating loss	(5,624		)	(6,241		)	(14,184		)	(15,950		)
Interest income	8			3			9			7
Interest expense	(459		)	(101		)	(924		)	(201		)
Other income (expense), net	(58		)	(485		)	59			(868		)
Loss before income taxes	(6,133		)	(6,824		)	(15,040		)	(17,012		)
Income tax provision	(135		)	(155		)	(155		)	(285		)
Net loss and comprehensive loss	$	(6,268	)	$	(6,979	)	$	(15,195	)	$	(17,297	)
Net loss attributable to common stockholders	$	(6,268	)	$	(6,979	)	$	(15,195	)	$	(17,297	)
Net loss per share allocable to common stockholders, basic and diluted	$	(0.14	)	$	(1.03	)	$	(0.58	)	$	(2.64	)
Weighted-average shares used in computing net loss per share allocable to common stockholders, basic and diluted	44,751,354			6,745,094			26,295,717			6,552,278

See notes to condensed consolidated financial statements.

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AEROHIVE NETWORKS, INC.

Condensed Consolidated Statements of Cash Flows

(unaudited, in thousands)



	Six Months Ended
	June 30,
	2014			2013
Cash flows from operating activities
Net loss	$	(15,195	)	$	(17,297	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	1,019			669
Stock-based compensation	3,505			1,549
Amortization of debt discount and debt issuance cost	97			—
Remeasurement of convertible preferred stock warrant liability	(90		)	803
Changes in operating assets and liabilities:
Accounts receivable, net	(6,073		)	(6,573		)
Inventory	(5,244		)	1,319
Prepaid expenses and other current assets	(385		)	(320		)
Other assets	(73		)	12
Accounts payable	7,636			(552		)
Accrued liabilities	1,693			1,067
Other liabilities	(126		)	242
Deferred revenue	6,890			7,244
Net cash used in operating activities	(6,346		)	(11,837		)
Cash flows from investing activities
Purchases of property and equipment	(1,131		)	(963		)
Capitalized software development costs	(2,016		)	—
Net cash used in investing activities	(3,147		)	(963		)
Cash flows from financing activities
Proceeds from initial public offering, net of underwriting discounts	80,213			—
Payment of offering costs	(3,852		)	—
Net proceeds from issuance of convertible preferred stock	—			10,000
Proceeds from exercise of convertible preferred stock warrants	907			—
Proceeds from exercise of vested stock options	1,115			570
Proceeds from early exercise of stock options, net of repurchases	—			670
Net cash provided by financing activities	78,383			11,240
Net increase (decrease) in cash and cash equivalents	68,890			(1,560		)
Cash and cash equivalents at beginning of period	35,023			29,585
Cash and cash equivalents at end of period	$	103,913		$	28,025
Supplemental disclosure of cash flow information
Income taxes paid	$	215		$	35
Interest paid	$	627		$	201
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		$	—
Property and equipment purchased but not paid for	$	211		$	373
Unpaid capitalized software development costs	$	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	$	402		$	117
Series E issuance costs not yet paid	$	—		$	57
Offering costs for common stock not yet paid	$	155		$	103
Stock-based compensation in capitalized software development	$	105		$	—

See notes to condensed consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

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 applications giving end-customers a single, unified and contextual view of the entire network edge.

Initial Public Offering

On April 2, 2014, the Company consummated its initial public offering (“IPO”). As a result, the following transactions were recorded in the Company’s consolidated financial statements in April 2014:


•	on April 2, 2014, the Company issued 7,500,000 shares of common stock, at an offering price of $10.00 per share, and received net proceeds of approximately $69.8 million after deducting the underwriters’ discounts and commissions of $5.2 million;


•	the 28,227,528 outstanding shares of the Company’s convertible preferred stock automatically converted into 28,832,898 shares of common stock;


•	the convertible preferred stock warrant liability ($0.6 million carrying value) was reclassified to additional paid-in capital and the warrants to purchase 103,034 shares of convertible preferred stock became warrants to purchase 107,876 shares of common stock;


•	the Company reclassified $5.4 million deferred offering costs to additional paid-in capital;


•	the Company filed an amended and restated certificate of incorporation, which authorized 500,000,000 shares of common stock and 25,000,000 shares of preferred stock.


•	on April 30, 2014, the Company's underwriters exercised their overallotment option in full to purchase 1,125,000 additional shares of common stock at the offering price of $10.00 per share, resulting in incremental additional net proceeds to the Company of $10.5 million after deducting the underwriters’ discounts and commissions of $0.8 million.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on March 28, 2014 (the “Prospectus”).

Principals of Consolidation

The accompanying consolidated financial statements include 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, 2014 as compared to those described in the Company’s audited consolidated financial statements included in its Annual Report as filed in the Prospectus pursuant to Rule 424(b) under the Securities Act of 1933, for the fiscal year ended December 31, 2013.

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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 affect revenue recognition and deferred revenue; determination of fair value of stock-based awards; accounting for income taxes, including the valuation reserve on deferred tax assets and uncertain tax positions; 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.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (“FASB") issued Accounting Standards Update (“ASU") 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This update requires entities to disclose items reclassified out of accumulated other comprehensive income and into net income in a single location within the financial statements. The Company adopted ASU 2013-02 on January 1, 2014, and the adoption did not have a significant impact on the Company’s consolidated financial position or results of operations.

In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 updates guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, similar tax loss, or tax credit carryforward exists. The Company adopted ASU 2013-11 on January 1, 2014, and the adoption did not have a significant impact on the Company’s consolidated financial position or results of operations.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, The standard is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. The Company expects to adopt ASU 2014-09 on January 1, 2017, with early adoption prohibited. The Company is currently evaluating the financial impact of such adoption on the Company's consolidated 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 trade receivables. 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). Accounts receivable are unsecured and represent amounts due based on contractual obligations of the Company’s customers.

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) collectively totaling greater than 10% of total consolidated revenue were as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
VAD A	12.8	%	12.5	%	12.8	%	15.1	%

The percentages of receivables from VAD A greater than 10% of total consolidated accounts receivable were as follows:



	June 30,		December 31,
	2014		2013
VAD A	13.4	%	19.8	%

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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:



Level 1		Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities.
Level 2		Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3		Unobservable inputs are used when little or no market data is available.

The Company's financial instruments consist of Level 1 assets as of June 30, 2014 and Level 1 assets and Level 3 liabilities as of December 31, 2013. Level 1 assets include highly liquid money market funds that are included in cash and cash equivalents. Level 3 liabilities that the Company measured at fair value on a recurring basis consist solely of the Company's convertible preferred stock warrant liability, which was reclassified to additional paid-in capital upon completion of the IPO on April 2, 2014.

Financial assets and liabilities that the Company measured at fair value on a recurring basis by level within the fair value hierarchy, are as follows:



	June 30, 2014
	Level 1		Level 2		Level 3		Total
Financial Assets			(in thousands)
Money market funds	$	80,220	$	—	$	—	$	80,220



	December 31, 2013
	Level 1		Level 2		Level 3		Total
Financial Assets	(in thousands)
Money market funds	$	10,269	$	—	$	—	$	10,269
Financial Liability
Convertible preferred stock warrant liability	$	—	$	—	$	3,903	$	3,903

A summary of changes in the fair value of the Company’s Level 3 financial liability related to convertible preferred stock warrants for the six months ended June 30, 2014 and 2013 is as follows:



	Six Months Ended June 30,
	2014			2013
	(in thousands)
Fair value, beginning of period	$	3,903		$	3,352
Exercise of convertible preferred stock warrants	(3,202		)	—
Change in fair value of Level III liabilities, included in other income (expense), net	(90		)	803
Conversion of convertible preferred stock warrants to common stock warrants	$	(611	)	$	—
Fair value, end of period	$	—		$	4,155

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3. CONSOLIDATED BALANCE SHEET COMPONENTS

Inventory

Inventory consists of the following:



	June 30,		December 31,
	2014		2013
	(in thousands)
Components, including raw materials	$	284	$	263
Finished goods	11,777		6,554
Total inventory	$	12,061	$	6,817

Property and Equipment, net

Property and equipment, net consists of the following:



	June 30,			December 31,
	2014			2013
	(in thousands)
Computer and other equipment	$	1,674		$	1,528
Manufacturing, research and development laboratory equipment	3,413			2,823
Purchased software	1,466			1,001
Office furniture and equipment	663			563
Leasehold improvements	492			372
Construction in progress	2,421			366
Property and equipment, gross	10,129			6,653
Less: Accumulated depreciation and amortization	(4,324		)	(3,372		)
Property and equipment, net	$	5,805		$	3,281

Construction in progress primarily represents the capitalization of internal-use software development costs related to the Company’s cloud-managed software platform.

Depreciation and amortization expense was $0.5 million and $0.4 million for the three months ended June 30, 2014 and 2013, respectively, and was $1.0 million and $0.6 million for the six months ended June 30, 2014 and 2013, respectively.

Accrued Liabilities

Accrued liabilities consists of the following:



	June 30,		December 31,
	2014		2013
	(in thousands)
Accrued compensation	$	7,275	$	4,809
Accrued expenses and other liabilities	1,478		2,025
Warranty liability, current portion	187		249
Common stock subject to repurchase	75		478
Total accrued liabilities	$	9,015	$	7,561

Deferred Revenue

Deferred revenue consists of the following:

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	June 30,		December 31,
	2014		2013
	(in thousands)
Products	$	3,861	$	5,095
Software subscriptions and service	33,599		25,475
Total deferred revenue	37,460		30,570
Less: current portion of deferred revenue	17,977		15,915
Non-current portion of deferred revenue	$	19,483	$	14,655

Warranty Liability

The Company maintains a warranty accrual for estimated future warranty obligations based on unit volumes by hardware product family together with anticipated future warranty costs. The Company’s access points and branch routers are generally covered by a limited lifetime warranty, and other hardware products are generally covered for a period of one year. 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
	2014			2013			2014			2013
	(in thousands)
Beginning balance	$	710		$	718		$	923		$	707
Charges to operations	160			183			195			240
Utilization	(136		)	(30		)	(221		)	(76		)
Changes in estimates	(40		)	—			(203		)	—
Total product warranties	$	694		$	871		$	694		$	871
Current portion	$	187		$	239		$	187		$	239
Non-current portion	$	507		$	632		$	507		$	632

Changes in estimates reflect a combination of a reduction in expected warranty claims and a reduction in the related cost 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, other than intellectual property. The revolving credit facility bears 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, which remained outstanding as of June 30, 2014. In April 2014, the Company extended the maturity date of this revolving credit facility to June 29, 2015, when all outstanding amounts must be repaid.

In August 2013, the Company entered into a term loan credit facility with TriplePoint Capital LLC (the term loan credit facility) that allows the Company, subject to certain funding conditions including compliance with certain covenants and the absence of certain events or conditions that could be deemed to have a material adverse effect on our business, to borrow money under term loans in an aggregate principal amount of up to $20.0 million. The Company may request draws under the term loan credit facility through November 2014. The draw period is subject to extension.

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The term loan credit facility is collateralized by substantially all of the Company’s property, other than intellectual property. For each draw under the term loan credit facility, the Company may choose one of four options: (1) a 24-month, interest-only loan bearing interest at the greater of the prime rate or 3.25%, plus 6.5%, along with an end of term payment that will vary from 4.5% to 7.25% of the amount borrowed depending on the portion of the credit facility utilized; (2) a 48-month loan that is interest-only for 24 months and fully amortizes in 24 equal payments thereafter, and which bears interest at the greater of the prime rate or 3.25%, plus 7.5%, along with an end of term payment that will vary from 6.75% to 9.25% of the amount borrowed depending on the portion of the credit facility utilized; (3) a 36-month, interest-only loan bearing interest at the greater of the prime rate or 3.25%, plus 8.25%, along with an end of term payment that will vary from 8.5% to 10.25% of the amount borrowed depending on the portion of the credit facility utilized; or (4) a 48-month, interest-only loan bearing interest at the greater of the prime rate or 3.25%, plus 8.75%, along with an end of term payment that will vary from 10% to 12% of the amount borrowed depending on the portion of the credit facility utilized.

In December 2013, the Company borrowed $10.0 million under the term loan credit facility under two separate loans, which remained outstanding as of June 30, 2014. The first loan was for $7.5 million with a term of 48-months with interest only for 24 months and 24 equal payments thereafter to fully amortize the loan, plus an end of term payment of $0.5 million. The second loan was for $2.5 million for a term of 24 months interest only with the principal payable at the end of two years plus an end of term payment of $0.15 million. The stated interest rate for each loan was 10.75% and 9.75%, respectively, and was reduced to 10.25% and 9.25% due to the completion of the IPO in April 2014. The Company may repay these loans in whole at any time but is required to pay the end of term payment, plus an early repayment fee of 1% of the loan balance outstanding if repaid within twelve months. The Company may not re-borrow amounts paid early under the term loan facility.

The Company will use loans drawn under our revolving and term loan credit facilities for working capital and general corporate purposes. Both credit facilities contain 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. The Company’s revolving credit facility also requires the Company to maintain a liquidity ratio of not less than 1.25 to 1.00. Both credit facilities contain customary affirmative covenants, including requirements to, among other things, deliver audited financial statements. Both credit facilities contain 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. The Company’s revolving credit facility includes a default upon the occurrence of a material adverse change to the business. Upon an event of default, the lenders 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 facilities. During the existence of an event of default, interest on the obligations under the credit facilities could be increased by 5.0%. The Company was in compliance with all covenants under the agreement as of June 30, 2014.

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5. COMMITMENTS AND CONTINGENCIES

Lease Commitments

The Company leases its main office facilities in Sunnyvale, California under two lease arrangements. The first lease expires in November 2015 and the second lease expires in September 2016. The Company also leases office facilities in China and the United Kingdom, which expire in September 2016 and May 2017, respectively. Rent expense is recorded on a straight-line basis over the term of the leases. Future minimum lease payments by year under operating leases as of June 30, 2014 are as follows:



	Amount
Year ending December 31,	(in thousands)
2014 (remaining six months)	$	997
2015	1,900
2016	992
2017	47
Total	$	3,936

Rent expense was $0.5 million and $0.4 million for the three months ended June 30, 2014 and 2013, respectively, and was $1.0 million and $0.8 million for the six months ended June 30, 2014 and 2013.

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, 2014 and December 31, 2013, the Company had manufacturing commitments with contract manufacturers for inventory totaling approximately $7.4 million and $5.7 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 matters 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 in separate litigations with AirTight Networks and Linex Technologies, each of which alleges that the Company infringes certain patents.

AirTight Networks, or AirTight, has alleged 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 has been related to the Company’s initial action for declaratory judgment. Both of the related court actions are currently stayed based on pending re-examination, which the Company initiated with the U.S. Patent and Trademark Office, or PTO, regarding 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

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and ‘503 Patents. The claims subject to reexamination have been amended and allowed. This case is currently stayed pending the reexamination.

The Company intends to defend these two lawsuits vigorously.

Macronix Int’l Co., Ltd. and Macronix America, Inc., or Macronix, filed on June 27, 2014, a complaint in the United States International Trade Commission alleging that Spansion Inc. and Spansion LLC, or Spansion, and numerous customers of Spansion (including the Company) infringe four patents. Macronix is seeking cease-and-desist and exclusion orders as to products containing the allegedly infringing Spansion components. Spansion is defending the Company in this matter.

Given the early stage of these actions, 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 an impact on the Company’s financial position, results of operations or cash flows.

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

Reverse Stock Split

On March 13, 2014, the Company effected a 1-for-2.5 reverse stock split of its common stock and convertible preferred stock, as approved by its Board of Directors, or the Board. All information in this Quarterly Report on Form 10-Q relating to the number of shares, price per share and per share amounts have been adjusted to give effect to the 1-for-2.5 reverse stock split.

Convertible Preferred Stock

Upon the closing of the IPO on April 2, 2014, all of the Company's outstanding 28,227,528 shares of convertible preferred stock converted into an aggregate of 28,832,898 shares of its common stock on a 1:1.1228 basis for Series B convertible preferred stock, and on a 1:1 basis for Series A, Series C, Series D and Series E convertible preferred stock.

Common Stock and Preferred Stock Authorized

On April 2, 2014, the Company filed an amended and restated certificate of incorporation to increase the amount of common stock authorized for issuance to 500,000,000 shares at par value of $0.001 per share, and to increase the amount of preferred stock authorized for issuance to 25,000,000 shares with a $0.001 par value per share.

Common Stock reserved for Future Issuance

As of June 30, 2014 and December 31, 2013, the Company had reserved shares of common stock, on an as-if converted basis, for future issuance as follows:



	June 30,	December 31,
	2014	2013
Common stock reserved for future grants under the Equity Incentive Plan	4,323,252	75,321
Reserved under 2014 Employee Stock Purchase Plan	800,000	—
Options and Restricted Stock Units issued and outstanding	8,155,687	8,198,074
Common stock subject to repurchase	45,000	140,500
Conversion of convertible preferred stock	—	28,466,379
Warrants to purchase convertible preferred stock	—	477,050
Warrants to purchase common stock	107,876	—
Total reserved shares of common stock for future issuance	13,431,815	37,357,324

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Common Stock Warrants

Upon the closing of the Company’s IPO, all of the outstanding 103,034 shares of convertible preferred stock warrants automatically converted into an aggregate of 107,876 shares of common stock warrants on a 1:1.1228 basis for Series B convertible preferred stock warrants, and on a 1:1 basis for Series C and Series E convertible preferred stock warrants, as a result of which the related liability was reclassified to additional paid-in capital in stockholders’ equity (deficit).

As of June 30, 2014, 107,876 shares of common stock warrants remained outstanding and exercisable at various exercise prices of $2.768, $4.057 and $11.0315 per share. The common stock warrants expire between March 2015 and October 2019.

7. STOCK-BASED COMPENSATION

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.

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. As of June 30, 2014, the Company had 4,323,252 total shares of common stock reserved for issuance under the 2014 Plan. The number of shares of common stock reserved for issuance under the 2014 Plan may increase by up to 4,000,000 shares of common stock on the first day of each fiscal year beginning January 1, 2015 through January 1, 2024.

The following table summarizes the total number of shares available for grant under the 2014 Plan as of June 30, 2014:




	Shares Available for Grant

Balance, December 31, 2013	75,321
Authorized	4,800,000
Options granted	(594,462	)
Options canceled	318,888
Awards granted	(283,495	)
Awards canceled	7,000
Balance, June 30, 2014	4,323,252

Stock Options

The following table summarizes the information about outstanding stock option activity:

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	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, 2013	8,198,074		$	5.11	8.54	$	48,863
Authorized	—		—
Options granted	594,462		10.32
Options exercised	(594,456	)	1.87
Options canceled	(318,888	)	6.66
Balance, June 30, 2014	7,879,192		$	5.69	8.19	$	24,115
Options exercisable, June 30, 2014	2,688,612		$	2.64	7.02	$	15,023
Options vested and expected to vest, June 30, 2014	7,344,974		$	5.52	8.13	$	23,472

The weighted average grant date fair value of options granted was $4.99 and $4.46 per share for the three months ended June 30, 2014 and 2013, respectively, and $5.06 and $4.15 per share for the six months ended June 30, 2014 and 2013, respectively. The aggregate grant date fair value of the Company's stock options granted was $0.7 million and $2.8 million for the three months ended June 30, 2014 and 2013, respectively, and $3.0 million and $5.5 million for the six months ended June 30, 2014 and 2013, respectively.

The aggregate intrinsic value of stock options exercised was $0.7 million and $0.7 million for the three months ended June 30, 2014 and 2013, respectively, and $5.2 million and $3.9 million for the six months ended June 30, 2014 and 2013, respectively. The intrinsic value represents the excess of the estimated fair values of the Company’s common stock, prior to the IPO, or the closing stock price of the Company’s common stock, following the IPO, underlying these options at the dates of exercise over the exercise prices paid.

Restricted Stock Units

Restricted Stock Units (RSUs) are currently granted to certain employees, directors and consultants, and are subject to a time-based vesting condition, generally is one year, two years or four years. 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.

A summary of the Company’s RSU activity and related information for the six months ended June 30, 2014 is as follows:



	Shares		Weighted Average Grant Date Fair Value Per Share
Balance, December 31, 2013	—		$	—
Awards granted	283,495		8.94
Awards canceled	(7,000	)	$	8.90
Balance, June 30, 2014	276,495		$	8.94

The weighted average grant date fair value of RSUs granted was $8.94 per share and the aggregate grant date fair value of RSUs granted was $2.5 million, for the three and six months ended June 30, 2014. No RSUs were granted during the three and six months ended June 30, 2013.

Employee Stock Purchase Plan

On March 26, 2014, the Company's 2014 Employee Stock Purchase Plan (ESPP) became effective. The ESPP authorizes the issuance of shares of common stock pursuant to purchase rights granted to employees of the Company and its designated subsidiaries. As of June 30, 2014, the Company had 800,000 total shares of common stock reserved for issuance under the ESPP. The number of shares of common stock reserved for issuance may increase by up to 800,000 shares of common stock on the first day of each fiscal year beginning January 1, 2015 through January 1, 2034.

The ESPP is implemented by consecutive offering periods of approximately 6 months in duration. The Company may change the duration of offering periods provided that offering periods may not last more than 27 months. Except for the first

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offering period, offering periods commence on the first trading day on or after June 1 and December 1 each year. The first offering period commenced on March 28, 2014, the first trading day on or after the effective date of the Company’s registration statement for the IPO and is scheduled to end on December 1, 2014.

The price at which common stock is purchased under the ESPP is equal to 85% of the fair market value of the common stock on the first or last day of the offering period, whichever is lower. As the current offering period is March 28, 2014 through December 1, 2014, no shares were issued under the ESPP during the three and six months ended June 30, 2014 and 2013.

Determination of Fair Values

The Company measures compensation expense for all stock-based payment awards, including stock options, RSUs and stock purchase rights under the Company's ESPP, based on the estimated fair values on the date of grant. The fair value of each stock option granted is estimated using the Black-Scholes option pricing model. The fair value of RSU is determined using the fair value of the Company’s common stock on the date of the grant. The fair value of stock purchase rights under the Company's ESPP is calculated based on the closing price of the Company's stock on the date of grant and the value of a call option estimated using the Black-Scholes pricing model. Stock-based compensation is recognized on a straight-line basis over the requisite service period, net of estimated forfeitures. The forfeiture rate is based on an analysis of the Company’s actual historical forfeitures.

Weighted average assumptions for the Company's stock options granted in the three and six months ended June 30, 2014 and 2013 were as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Stock options:
Expected term (in years)	6.08		6.25		5.59		6.07
Expected volatility	48.00	%	56.78	%	49.01	%	56.36	%
Risk free interest rate	2.00	%	1.24	%	2.42	%	1.12	%
Dividend rate	—		—		—		—

Weighted average assumptions used to value employee stock purchase rights under the Black-Scholes model during the three and six months ended June 30, 2014 were as follows:



	Three and Six Months Ended June 30,
	2014		2013
ESPP purchase rights:
Expected term (in years)	0.68		—
Expected volatility	37.00	%	—
Risk free interest rate	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,
	2014		2013		2014		2013
	(in thousands)
Cost of revenue	$	73	$	11	$	118	$	20
Research and development	502		197		853		347
Sales and marketing	798		331		1,419		618
General and administrative	566		304		1,115		564
Total stock-based compensation	$	1,939	$	843	$	3,505	$	1,549

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

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	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
	(in thousands)
Stock Options	$	1,486	$	843	$	3,052	$	1,549
Restricted Stock Units	94		—		94		—
Employee Stock Purchase Plan	359		—		359		—
Total stock-based compensation	$	1,939	$	843	$	3,505	$	1,549

As of June 30, 2014, unrecognized stock-based compensation related to stock options, RSUs and ESPP purchase rights, net of estimated forfeitures, was $17.0 million, $2.1 million and $0.6 million, respectively, and is expected to be recognized over weighted-average periods of 2.85 years, 2.06 years and 0.42 years respectively. The capitalized stock-based compensation expense for the three and six months ended June 30, 2014 was $0.1 million and $0.1 million, respectively. There was no capitalized stock-based compensation expense for the three and six months ended June 30, 2013, respectively.

8. NET LOSS PER SHARE

Basic and diluted net loss per share of common stock allocable to common stockholders is calculated 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 stock was converted to common stock and are 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 due to that 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,
	2014			2013			2014			2013
	(in thousands, except for share and per share data)
Numerator:
Net loss	$	(6,268	)	$	(6,979	)	$	(15,195	)	$	(17,297	)
Denominator:
Weighted-average shares used to compute net loss per share, basic and diluted	44,751,354			6,745,094			26,295,717			6,552,278
Net income per share:
Basic and diluted	$	(0.14	)	$	(1.03	)	$	(0.58	)	$	(2.64	)

The following period-end outstanding common stock equivalents were excluded from the computation of diluted net loss per share of common stock allocable to common stockholders for the periods presented because including them would have been antidilutive:



	Three and Six Months Ended June 30,
	2014	2013
Shares of common stock issuable under the Equity Incentive Plan	8,155,687	6,717,729
Common stock subject to repurchase	45,000	172,078
Common stock issuable upon exercise of warrants	107,876	693,398
Employee Stock Purchase Plan	159,821	—
Convertible preferred stock	—	28,216,038
Total	8,468,384	35,799,243

9. INCOME TAXES

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The provision for income taxes for the three months ended June 30, 2014 and 2013 was approximately $0.14 million and $0.16 million, respectively, and was approximately $0.16 million and $0.29 million for the six months ended June 30, 2014 and 2013, respectively. The provision for income taxes consisted primarily of state taxes and foreign income taxes.

For the three and six months ended June 30, 2014 and 2013, the provision for income taxes differed from the statutory amount primarily due to maintaining a full valuation allowance against the U.S. net deferred assets, partially offset by foreign and state taxes.

The Company has intercompany services agreements with its subsidiaries located in the United Kingdom and China, which requires 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, 2014 and December 31, 2013, respectively.

10. SEGMENT INFORMATION

The Company’s chief operating decision maker (CODM) is its Chief Executive Officer. The Company’s CODM reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenue by geographic region for purposes of allocating resources and evaluating financial performance. Accordingly, the Company determined that it has one reporting segment and operating segment structure.

The following table represents the Company's revenue for the three and six months ended June 30, 2014 and 2013 based on the billing address of the respective VAR or the VAD to which the Company attributed such revenue:



	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
	(in thousands)
Total Americas	$	24,487	$	20,426	$	41,865	$	34,063
Total EMEA	8,996		6,068		17,004		10,445
Total APAC	4,071		1,538		6,917		3,351
Total revenues	$	37,554	$	28,032	$	65,786	$	47,859

Included within Total Americas in the above table is revenue from sales in the U.S. of $23.0 million and $18.8 million during the three months ended June 30, 2014 and 2013, respectively, and of $39.5 million and $31.0 million during the six months ended June 30, 2014 and 2013, respectively. Aside from the U.S., no country comprised 10% or more of the Company's total revenue for the three and six months ended June 30, 2014 and 2013.

Property and equipment, net by location is summarized as follows:



	June 30,		December 31,
	2014		2013
	(in thousands)
United States	$	4,400	$	2,424
People's Republic of China	1,301		776
United Kingdom	104		81
Total property and equipment, net	$	5,805	$	3,281

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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:


•	our ability to predict our revenue, operating results and gross margin accurately;


•	our ability to maintain an adequate rate of revenue growth and remain profitable;


•	the length and unpredictability of our sales cycles with service provider end-customers;


•	any potential loss of or reductions in orders from our larger customers;


•	the effects of increased competition in our market;


•	our ability to continue to enhance and broaden our product offering;


•	our ability to maintain, protect and enhance our brand;


•	our ability to effectively manage our growth;


•	our ability to maintain proper and effective internal controls;


•	the quality of our products and services;


•	our ability to continue to build and enhance relationships with channel partners;


•	the attraction and retention of qualified employees and key personnel;


•	our ability to sell our products and effectively expand internationally;


•	our ability to protect our intellectual property;


•	claims that we infringe intellectual property rights of others; 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

We have designed and developed a leading cloud-managed mobile networking platform that enables enterprises to deploy a mobile-centric network edge. The network edge is the point at which devices access the enterprise network. Managing the network edge is becoming more complex because of the proliferation of mobile devices and the ways in which such devices are used in business. 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. As the difficulty and complexity of managing the network edge expands, our platform offers cost-efficiency, scalability, reliability, manageability and ease-of-

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deployment and use. 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. 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 derive revenue by selling our hardware products and related software licenses or software subscriptions 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 subscriptions and service revenue consists of revenue from sales of our service offerings that are delivered 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 subscriptions and services to the licensees of our products and software subscriptions and services. We define end-customers as holding or having held licenses to our products and software subscriptions and services. When our end-customers purchase hardware products, they are generally required to purchase a software license for every hardware unit, 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, which 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 to either VARs, which then sell our products and services to our end-customers, or directly to 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. Our agreements with our VADs allow for stocking of our products in their inventory, and for certain of our VADs provide related price protection or rebates, as well as limited rights of return for stock rotation.

We have experienced rapid revenue growth in recent periods. During the three months ended June 30, 2014, our revenue increased by $9.5 million or 34% to $37.6 million from $28.0 million for the three months ended June 30, 2013. During the six months ended June 30, 2014, our revenue increased by $17.9 million or 37% to $65.8 million from $47.9 million for the six months ended June 30, 2013. The revenue growth reflects the increasing demand for our products and software subscriptions and service offerings. We experienced growth both in our domestic and international business. We primarily conduct business in three geographic regions: (1) Americas, (2) Europe, the Middle East and Africa ("EMEA"), and (3) Asia Pacific ("APAC"). Revenue generated from Americas, EMEA and APAC was 65%, 24% and 11% during the three months ended June 30, 2014, respectively, and was 64%, 25% and 11% during the six months ended June 30,2014, respectively.

We added over 1,600 new end-customers during the quarter, bringing our total end-customer count to more than 16,000 in over 40 countries as of June 30, 2014. 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 in the development of our innovative technologies and new product offerings to the marketplace, 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. We increased the number of our employees from 488 employees as of June 30, 2013 to 519 as of December 31, 2013 and to 557 as of June 30, 2014. 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 from which we may not realize any long-term benefit. As a result, we have never achieved profitability and we do not expect to be profitable for the foreseeable future. However, we believe that over the long

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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.

Opportunities and Challenges

We believe that the growth of our business and our future success depend upon many factors, including our ability to continue to develop innovative technologies and provide new product offerings to the marketplace; acquire new end-customers, both in the geographies in which we currently operate as well as in new geographies; and increase penetration within our existing end-customer base.

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 extended 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. During the quarter ended June, 30, 2014, we continued the expansion of our product portfolio with three new solutions targeted toward physical retailers, including Payment Card Industry (PCI) 3.0 compliance, Aerohive Social Login and integrated LTE Branch on Demand solutions.

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 access point and for the quarter ended June 30, 2014, we witnessed rapid adoption of this product (based on the increasing percentage of our product sold during the quarter). When we introduce such new product offerings, we must effectively manage the timing of such releases to minimize the disruption to our existing product offerings and revenue streams and 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. We will need to continue to react and respond to these changes through innovation in order for our business to succeed, and we will incur related research and development expenses as we do that.

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 previously announced new channel partnerships in both China and Japan to further our penetration in the APAC region. Additionally, 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 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 our quarter ended June 30, 2014 we saw progress in the retail vertical with wins and deployments, including a Mexican restaurant chain with over 1600 U.S locations, one of the China’s most popular chains of Ramen restaurants, a U.S based retailer specializing in imported home furnishings and decor, and a $10B European grocery/retail group. Beyond the retail vertical, we also saw wins in larger enterprise accounts with wins at a top 10 U.S. bank, one of the world's largest logistics companies, and a global auto manufacturer.

Our sales efforts take several quarters, and involve educating our potential end-customers 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. We continued to see this in our second quarter ended June 30, 2014.

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. Our opportunity to

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expand our end-customer relationships through such follow-on sales will increase as we 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 can significantly increase 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 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.

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 our network of channel partners to increase sales to existing end-customers, enable our channel partners to reach new end-customers and provide services and support effectively. All of these efforts will require us to continue to make significant sales and marketing investments.

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 Subscriptions and Service Revenue. Our software subscriptions and service revenue consists of revenue from sales of our software subscriptions and service 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 subscriptions and service revenue will be as a percentage of our total revenue. We recognize software subscriptions and service revenue ratably over the term of the contract, which is typically one, three or five years. As a result, our recognition of software subscriptions and service revenue lags our recognition of related product revenue.

Our business has historically experienced seasonality. As a result, our total revenue typically fluctuates from quarter to quarter, which often affects the comparability of our results between periods. Our total revenue has historically increased significantly in the second quarter compared to the first quarter, primarily due to the impact of increased seasonal demand by end-customers in the education vertical, which seasonal demand has historically carried over to our third quarter. Demand in the education vertical tends to be weakest in the fourth quarter. We also historically have seen an increase in end-of-year purchases by enterprise customers in our fourth quarter, which we believe is mainly due to a desire to complete purchases within their calendar-year budget cycle. While we believe that these seasonal trends have affected and will continue to affect our quarterly results, our rapid growth has largely masked these seasonal trends to date. We believe that our business may become more seasonal in the future. Historical patterns in our business may not be a reliable indicator of our future sales activity or performance.

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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 Subscriptions and Service Revenue. Our cost of software subscriptions and service 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 subscriptions and service 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 offered to our VAR and VAD partners, the mix of revenue between products and software subscriptions and service, 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 subscriptions and service gross margin has been lower than our product gross margin; however, we expect our software subscriptions and service gross margin to increase over the long term because we expect our software subscriptions and service revenue to increase more quickly than our cost of software subscriptions and service revenue. We expect our gross margin to increase modestly over the long term, but it may decrease over time in the event we experience additional competitive pricing pressure. 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 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. However, we expect our research and development expenses to decrease modestly as a percentage of our total revenue over the long term, although 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 period in which they are incurred. 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 and expand into new markets. However, we expect our sales and marketing expenses to decrease modestly as a percentage of our total revenue over the long term, although 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 and accounting service and insurance, as well as depreciation and certain allocated facilities and information technology infrastructure costs. We expect our general and administrative expenses to continue to increase in absolute dollars following the completion of the IPO due to the additional legal, accounting, insurance, investor relations and other costs that we will incur as a public company, as well as other costs associated with growing our business. However, we expect our general and administrative expenses to decrease modestly as a percentage of our total revenue over the long term,

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although 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 (Expense), Net

Prior to our IPO, other income (expense), net consisted primarily of the impact of fair value adjustments for our convertible preferred stock warrants. Upon completion of the IPO in April 2014, all convertible preferred stock warrants converted to common stock warrants and no longer require fair value remeasurement at each balance sheet date. Other income (expense), net also consists of gains and losses 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, 2014 and December 31, 2013, 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						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
Revenue:
Product	$	33,721		$	25,883		$	58,582		$	43,920
Software subscriptions and service	3,833			2,149			7,204			3,939
Total revenue	37,554			28,032			65,786			47,859
Cost of revenue:
Product	10,560			8,059			18,442			14,214
Software subscriptions and service	1,639			1,010			3,005			1,845
Total cost of revenue	12,199			9,069			21,447			16,059
Gross profit	25,355			18,963			44,339			31,800
Operating expenses:
Research and development	6,833			6,674			12,971			12,431
Sales and marketing	19,011			14,604			35,580			27,504
General and administrative	5,135			3,926			9,972			7,815
Operating loss	(5,624		)	(6,241		)	(14,184		)	(15,950		)
Interest income	8			3			9			7
Interest expense	(459		)	(101		)	(924		)	(201		)
Other income (expense), net	(58		)	(485		)	59			(868		)
Loss before income taxes	(6,133		)	(6,824		)	(15,040		)	(17,012		)
Income tax provision	(135		)	(155		)	(155		)	(285		)
Net loss and comprehensive loss	$	(6,268	)	$	(6,979	)	$	(15,195	)	$	(17,297	)

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



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
Revenue:
Product	90	%	92	%	89	%	92	%
Software subscriptions and service	10		8		11		8
Total revenue	100		100		100		100
Cost of revenue:
Product	28		29		28		30
Software subscriptions and service	4		3		5		4
Total cost of revenue	32		32		33		34
Gross profit	68		68		67		66
Operating expenses:
Research and development	18		24		20		26
Sales and marketing	51		52		54		57
General and administrative	14		14		15		16
Operating loss	(15	)	(22	)	(22	)	(33	)
Interest income	—		—		—		—
Interest expense	(1	)	—		(1	)	—
Other income (expense), net	—		(2	)	—		(2	)
Loss before income taxes	(16	)	(24	)	(23	)	(35	)
Income tax provision	—		(1	)	—		(1	)
Net loss and comprehensive loss	(17	)%	(25	)%	(23	)%	(36	)%

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Revenues



	Three Months Ended June 30,										Six Months Ended June 30,
	2014			2013			$ Change		% Change		2014			2013			$ Change		% Change
	(dollars in thousands)										(dollars in thousands)
Revenues:
Product	$	33,721		$	25,883		$	7,838	30	%	$	58,582		$	43,920		$	14,662	33	%
Software subscriptions and service	3,833			2,149			1,684		78	%	7,204			3,939			3,265		83	%
Total revenue	$	37,554		$	28,032		$	9,522	34	%	$	65,786		$	47,859		$	17,927	37	%

Percentage of revenues:
Product	90		%	92		%					89		%	92		%
Software subscriptions and service	10		%	8		%					11		%	8		%
Total	100		%	100		%					100		%	100		%



	Three Months Ended June 30,										Six Months Ended June 30,
	2014			2013			$ Change		% Change		2014			2013			$ Change		% Change
	(dollars in thousands)										(dollars in thousands)
Revenue by geographic region:
Americas	$	24,487		$	20,426		$	4,061	20	%	$	41,865		$	34,063		$	7,802	23	%
EMEA	8,996			6,068			2,928		48	%	17,004			10,445			6,559		63	%
APAC	4,071			1,538			2,533		165	%	6,917			3,351			3,566		106	%
Total revenue	$	37,554		$	28,032		$	9,522	34	%	$	65,786		$	47,859		$	17,927	37	%

Percentage of revenue by geographic region:
Americas	65		%	73		%					64		%	71		%
EMEA	24		%	22		%					25		%	22		%
APAC	11		%	5		%					11		%	7		%
Total	100		%	100		%					100		%	100		%

Total revenue increased $9.5 million, or 34%, during the three months ended June 30, 2014 compared to the comparable period in 2013, and increased $17.9 million, or 37%, during the six months ended June 30, 2014, compared to the comparable period in 2013, due to the increasing demand for our products and software subscriptions and service offerings.

The increase in product revenue was primarily the result of an aggregate increase in product unit shipments largely driven by sales of our intelligent access points and our unified network management system, HiveManager.

The increase in our software subscriptions and service revenue of $1.7 million and $3.3 million during the three and six months ended June 30, 2014, respectively, compared to the comparable period in 2013, was primarily driven by the increase in sales of PCS and SaaS in connection with increased sales of products and an increase in the number of our end-customers, and recognition of deferred revenue.

The Americas and EMEA accounted for the majority of the increase in our total revenue from period to period. Our total number of end-customers increased from over 10,000 as of June 30, 2013 to more than 16,000 as of June 30, 2014.

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Cost of Revenues, Gross Profit and Gross Margin



	Three Months Ended June 30,										Six Months Ended June 30,
	2014			2013			$ Change		% Change		2014			2013			$ Change		% Change
	(dollars in thousands)										(dollars in thousands)
Cost of revenues:
Product	$	10,560		$	8,059		$	2,501	31	%	$	18,442		$	14,214		$	4,228	30	%
Software subscriptions and service	1,639			1,010			629		62	%	3,005			1,845			1,160		63	%
Total cost of revenues	$	12,199		$	9,069		$	3,130	35	%	$	21,447		$	16,059		$	5,388	34	%

Gross margin:
Product	68.7		%	68.9		%					68.5		%	67.6		%
Software subscriptions and service	57.2		%	53.0		%					58.3		%	53.2		%
Total gross margin	67.5		%	67.6		%					67.4		%	66.4		%

We primarily attribute the increase in our cost of product revenue to an increase in sales of our products. We primarily relate the increase in our cost of software subscriptions and service revenue to an increase in service and support personnel headcount in the three and six months ended June 30, 2014 as compared to the same periods in 2013, and an increase in datacenter costs. Our service and support personnel headcount increased from 20 as of June 30, 2013 to 26 as of June 30, 2014.

Our gross margin was 67.5% and 67.6% for the three months ended June 30, 2014 and 2013, respectively, and 67.4% and 66.4% for the six months ended June 30, 2014 and 2013, respectively.

Our product gross margin remained relatively unchanged for the three months ended June 30, 2014 as compared to the same period in 2013, as our margin profile based on product mix during the respective periods remained similar, even with the recent introduction of our new AP230 802.11ac Gigabit Wi-Fi access point.

Our product gross margin increased for the six months ended June 30, 2014 as compared to the same period in 2013, due to improvement in the six months ended June 30, 2014 in our margin profile based on product mix and due to continued efficiencies in our product costs due to product design and supply chain management.

Our software subscriptions and service gross margin increased from 53.0% to 57.2% for the three months ended June 30, 2014 as compared to the same period in 2013, and increased from 53.2% to 58.3% for the six months ended June 30, 2014 as compared to the same period in 2013. Such increases were primarily due to higher growth in our software subscriptions and service revenue than our related cost of delivering these software subscriptions and services.

Research and Development



	Three Months Ended June 30,										Six Months Ended June 30,
	2014			2013			$ Change		% Change		2014			2013			$ Change		% Change
	(dollars in thousands)										(dollars in thousands)
Research and development	$	6,833		$	6,674		$	159	2	%	$	12,971		$	12,431		$	540	4	%
% of revenue	18		%	24		%					20		%	26		%

Research and development expenses increased in the three and six months ended June 30, 2014 as compared to the same period in 2013, primarily due to the increase in personnel and related allocated costs of facilities and information technology infrastructure were partially offset by the capitalized development costs for our SaaS offerings under development.

For the three and six months ended June 30, 2014 as compared to the same period in 2013, personnel and related costs increased $1.4 million and $2.6 million, including bonuses and stock-based compensation expense of $0.5 million and $0.8 million, respectively, as we increased our research and development headcount to support continued investment in our future product and service offerings. The increase in personnel and related costs was partially offset by $1.1 million and $2.0 million, respectively, of personnel and related costs, including bonuses and stock-based compensation capitalized for development of our SaaS offerings. The remaining increase was mainly due to higher costs related to prototype-related expenses and consulting services and certain allocated facilities and information technology infrastructure costs. Our research and development

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headcount increased from 210 as of June 30, 2013 to 213 as of June 30, 2014. 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,
	2014			2013			$ Change		% Change		2014			2013			$ Change		% Change
	(dollars in thousands)										(dollars in thousands)
Sales and marketing	$	19,011		$	14,604		$	4,407	30	%	$	35,580		$	27,504		$	8,076	29	%
% of revenue	51		%	52		%					54		%	57		%

Sales and marketing expenses increased for the three and six months ended June 30, 2014, as compared to the same period in 2013, primarily due to increases in personnel and related costs of $2.9 million and $5.3 million, respectively, including increased headcount, bonus expenses and higher commissions of $1.1 million and $1.7 million, respectively. Our sales and marketing expenses also increased due to higher marketing program expenses of $0.9 million and $1.5 million, respectively, and increase in our other sales and marketing related activities. Our sales and marketing headcount increased from 199 as of June 30, 2013 to 230 as of June 30, 2014. 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,
	2014			2013			$ Change		% Change		2014			2013			$ Change		% Change
	(dollars in thousands)										(dollars in thousands)
General and administrative	$	5,135		$	3,926		$	1,209	31	%	$	9,972		$	7,815		$	2,157	28	%
% of revenue	14		%	14		%					15		%	16		%

General and administrative expenses increased for the three and six months ended June 30, 2014, as compared to the same period in 2013, primarily due to increases in personnel and related costs of $0.9 million and $1.7 million, including bonuses and higher stock-based compensation, respectively. Our general and administrative headcount increased from 54 as of June 30, 2013 to 77 as of June 30, 2014. 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



	Three Months Ended June 30,											Six Months Ended June 30,
	2014			2013			$ Change			% Change		2014			2013			$ Change			% Change
	(dollars in thousands)											(dollars in thousands)
Interest expense	$	(459	)	$	(101	)	$	(358	)	354	%	$	(924	)	$	(201	)	$	(723	)	360	%

Interest expense consists of interests from our loan credit facilities. We primarily attribute the increase in our interest expense to the $10.0 million we borrowed from TriplePoint Capital LLC in December 2013 under our term loan credit facility.

Other Income (Expense), Net



	Three Months Ended June 30,										Six Months Ended June 30,
	2014			2013			$ Change		% Change		2014		2013			$ Change		% Change
	(dollars in thousands)										(dollars in thousands)
Other income (expense), net	$	(58	)	$	(485	)	$	427	(88	)%	$	59	$	(868	)	$	927	(107	)%

Our other income (expense), net, consists of fair value remeasurement of our convertible preferred stock warrants. Upon completion of the IPO in April 2014, all convertible preferred stock warrants became exercisable for shares of common stock and are no longer subject to fair value remeasurement, resulting in decrease of other expense.

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Liquidity and Capital Resources

Capital Resources

As of June 30, 2014, we had cash and c