Document


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

x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017

o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to        
Commission file number: 001-36355
Aerohive Networks, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
 
 
20-4524700
(State or other jurisdiction of
incorporation or organization)
 
 
 
(I.R.S. Employer
Identification Number)
 

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer   ¨
 
Accelerated filer   x
Non-accelerated filer   ¨ (Do not check if a smaller reporting company)
 
Smaller reporting company   ¨
 
 
Emerging growth company  x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
The number of shares of the registrant's common stock, par value $0.001, outstanding as of October 27, 2017, was 53,598,569.





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

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


1



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

AEROHIVE NETWORKS, INC.
Condensed Consolidated Balance Sheets
(unaudited, in thousands, except share and per share amounts)
 
September 30,
 
December 31,
 
2017
 
2016
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
33,949

 
$
34,346

Short-term investments
49,064

 
42,408

Accounts receivable, net of allowance for doubtful accounts of $21 and $61 as of September 30, 2017 and December 31, 2016, respectively
17,186

 
26,190

Inventories
13,206

 
12,629

Prepaid expenses and other current assets
7,864

 
6,289

Total current assets
121,269

 
121,862

Property and equipment, net
7,005

 
9,008

Goodwill
513

 
513

Other assets
5,362

 
5,100

Total assets
$
134,149

 
$
136,483

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
9,709

 
$
10,762

Accrued liabilities
8,976

 
9,300

Debt, current

 
20,000

Deferred revenue, current
36,761

 
31,727

Total current liabilities
55,446

 
71,789

Debt, non-current
20,000

 

Deferred revenue, non-current
35,732

 
34,177

Other liabilities
1,791

 
1,829

Total liabilities
112,969

 
107,795

Commitments and contingencies (Note 5)

 

Stockholders’ equity:
 
 
 
Preferred stock, par value of $0.001 per share - 25,000,000 shares authorized as of September 30, 2017 and December 31, 2016; no shares issued and outstanding as of September 30, 2017 and December 31, 2016

 

Common stock, par value of $0.001 per share - 500,000,000 shares authorized as of September 30, 2017 and December 31, 2016; 53,598,569 and 52,245,252 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively
55

 
52

Additional paid–in capital
273,287

 
258,063

Treasury stock - 1,161,243 and 364,627 shares as of September 30, 2017 and December 31, 2016, respectively
(5,169
)
 
(2,139
)
Accumulated other comprehensive loss
(9
)
 
(31
)
Accumulated deficit
(246,984
)
 
(227,257
)
Total stockholders’ equity
21,180

 
28,688

Total liabilities and stockholders’ equity
$
134,149

 
$
136,483

See notes to condensed consolidated financial statements.

2



AEROHIVE NETWORKS, INC.
Condensed Consolidated Statements of Operations
(unaudited, in thousands, except share and per share amounts)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenue:
 
 
 
 
 
 
 
Product
$
26,750

 
$
31,691

 
$
85,666

 
$
103,683

Subscription and support
10,318

 
8,678

 
30,053

 
24,445

Total revenue
37,068

 
40,369

 
115,719

 
128,128

Cost of revenue (1):
 
 
 
 
 
 
 
Product
9,408

 
10,070

 
28,760

 
32,922

Subscription and support
3,244

 
3,095

 
9,573

 
9,048

Total cost of revenue
12,652

 
13,165

 
38,333

 
41,970

Gross profit
24,416

 
27,204

 
77,386

 
86,158

Operating expenses:
 
 
 
 
 
 
 
Research and development (1)
9,260

 
10,685

 
28,032

 
31,457

Sales and marketing (1)
15,948

 
19,647

 
50,807

 
62,037

General and administrative (1)
5,700

 
6,515

 
17,486

 
22,135

Total operating expenses
30,908

 
36,847

 
96,325

 
115,629

Operating loss
(6,492
)
 
(9,643
)
 
(18,939
)
 
(29,471
)
Interest income
180

 
109

 
484

 
345

Interest expense
(135
)
 
(115
)
 
(412
)
 
(351
)
Other income (expense), net
(90
)
 
22

 
(268
)
 
128

Loss before income taxes
(6,537
)
 
(9,627
)
 
(19,135
)
 
(29,349
)
Provision for income taxes
75

 
85

 
369

 
298

Net loss
$
(6,612
)
 
$
(9,712
)
 
$
(19,504
)
 
$
(29,647
)
Net loss per share, basic and diluted
$
(0.12
)
 
$
(0.19
)
 
$
(0.37
)
 
$
(0.59
)
Weighted-average shares used in computing net loss per share, basic and diluted
53,683,727

 
50,818,710

 
53,070,863

 
49,920,630

 
 
 
 
 
 
 
 
(1) Includes stock-based compensation as follows:
 
 
 
 
 
 
 
Cost of revenue
$
313

 
$
431

 
$
860

 
$
1,024

Research and development
1,329

 
1,576

 
3,082

 
4,287

Sales and marketing
1,566

 
2,505

 
4,361

 
6,336

General and administrative
1,756

 
1,903

 
4,658

 
5,118

Total stock-based compensation
$
4,964

 
$
6,415

 
$
12,961

 
$
16,765

See notes to condensed consolidated financial statements.  




3



AEROHIVE NETWORKS, INC.
Condensed Consolidated Statements of Comprehensive Loss
(unaudited, in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Net loss
$
(6,612
)
 
$
(9,712
)
 
$
(19,504
)
 
$
(29,647
)
Unrealized gain (loss) on available-for-sale investments, net of tax
29

 
(18
)
 
22

 
63

Comprehensive loss
$
(6,583
)
 
$
(9,730
)
 
$
(19,482
)
 
$
(29,584
)
See notes to condensed consolidated financial statements.  




4



AEROHIVE NETWORKS, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
 
Nine Months Ended September 30,
 
2017
 
2016
Cash flows from operating activities
 
 
 
Net loss
$
(19,504
)
 
$
(29,647
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
2,371

 
2,665

Stock-based compensation
12,961

 
16,765

Other
(45
)
 
280

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
9,004

 
352

Inventories
(577
)
 
(4,916
)
Prepaid expenses and other current assets
(1,575
)
 
901

Other assets
(262
)
 
(93
)
Accounts payable
(911
)
 
(1,956
)
Accrued liabilities
(329
)
 
(1,239
)
Other liabilities
93

 
400

Deferred revenue
6,589

 
6,147

Net cash provided by (used in) operating activities
7,815

 
(10,341
)
Cash flows from investing activities
 
 
 
Purchases of property and equipment
(510
)
 
(1,737
)
Maturities of short-term investments
29,600

 
25,600

Purchases of short-term investments
(36,189
)
 
(14,488
)
Investment in privately held company

 
(1,500
)
Net cash provided by (used in) investing activities
(7,099
)
 
7,875

Cash flows from financing activities
 
 
 
Proceeds from exercise of vested stock options
723

 
815

Proceeds from employee stock purchase plan
2,390

 
2,890

Payment for shares withheld for tax withholdings on vesting of restricted stock units
(1,070
)
 
(941
)
Payment to repurchase common stock
(3,030
)
 
(2,139
)
Payment on capital lease obligations
(126
)
 

Net cash provided by (used in) financing activities
(1,113
)
 
625

Net decrease in cash and cash equivalents
(397
)
 
(1,841
)
Cash and cash equivalents at beginning of period
34,346

 
45,741

Cash and cash equivalents at end of period
$
33,949

 
$
43,900

Supplemental disclosure of cash flow information
 
 
 
Income taxes paid
$
295

 
$
535

Interest paid
$
424

 
$
364

Supplemental disclosure of noncash investing and financing activities
 
 
 
Unpaid property and equipment purchases
$
62

 
$
1,529

See notes to condensed consolidated financial statements.

5



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Aerohive Networks, Inc. was incorporated in Delaware on March 15, 2006, and, together with its subsidiaries (the "Company"), has designed and developed a leading cloud and enterprise Wi-Fi solution that enables the Company's customers to use the power of the Wi-Fi, cloud, analytics and applications to transform how they serve their customers. The Company's products include Wi-Fi access points, routers and switches required to build an edge-access network; a cloud services platform for centralized management; data collection and analytics; and applications that leverage the network to provide additional capabilities to the business and IT organizations. Together, these products, service platforms and applications create a simple, scalable, and secure solution to deliver a better-connected experience.
The Company has offices in North America, Europe and Asia Pacific and employs staff around the world.
Basis of Presentation and Consolidation
The Company prepared the accompanying consolidated financial statements in accordance with generally accepted accounting principles in the United States ("GAAP"), which includes the accounts of Aerohive Networks, Inc. and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
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 the Company reported in the consolidated financial statements and accompanying notes. Those estimates and assumptions include, among others, the best estimate of selling price ("BESP") of product, software and support services, determination of fair value of stock-based awards, inventory valuation, accounting for income taxes, including the valuation reserve on deferred tax assets and uncertain tax positions, allowance for sales reserves, allowance for doubtful accounts, and warranty costs. Management evaluates estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. As the Company, cannot determine future events and their effects with precision, actual results could differ from these estimates and assumptions, and those differences could be material to the consolidated financial statements.
Foreign Currency
The functional currency of the Company’s foreign subsidiaries is the U.S. dollar. The Company remeasures the transactions denominated in currencies other than the functional currency at the average exchange rate in effect during the period. At the end of each reporting period, the Company remeasures its subsidiaries’ monetary assets and liabilities to the U.S. dollar using exchange rates in effect at the end of the reporting period. The Company remeasures its non-monetary assets and liabilities at historical exchange rates. The Company records gains and losses related to remeasurement in other income(expense), net in the consolidated statements of operations. Foreign currency exchange losses have not been significant in any period presented and the Company has not undertaken any hedging transactions related to foreign currency exposure.
Recently Adopted Accounting Pronouncements
In July 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2015-11, Simplifying the Measurement of Inventory, which replaced the lower of cost or market test with the lower of cost or net realizable value test. The Company adopted this standard in the first quarter of fiscal year 2017, with January 1, 2017 being the effective date of adoption. The adoption of this standard had no impact on the Company's consolidated financial statements for the periods presented and any prior periods.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which is intended to simplify several aspects of the accounting for share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company adopted this standard in the first quarter of fiscal year 2017, with January 1, 2017 being the effective date of adoption. This standard eliminates the requirement to delay the recognition of excess tax benefits until they reduce current

6



taxes payable. Under this standard, previously unrecognized excess tax benefits shall be recognized on a modified retrospective basis. However, as of January 1, 2017, this had no impact on our accumulated deficit as the related U.S. deferred tax assets were fully offset by a valuation allowance. Additionally, the Company elected to account for forfeitures as they occur rather than estimate expected forfeitures using a modified retrospective transition method. Accordingly, the Company recorded a cumulative-effect adjustment of $0.2 million to accumulated deficit as of January 1, 2017. Further, ASU 2016-09 requires excess tax benefits to be presented as a component of operating cash flows rather than financing cash flows. We elected to adopt this requirement prospectively and accordingly, prior periods have not been adjusted. Excess tax benefits were not material for all periods presented. The adoption of this standard did not have a material impact on the condensed consolidated financial statements for the three and nine months ended September 30, 2017.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from contracts with customers (Topic 606), which supersedes the revenue recognition requirements in Revenue Recognition (Topic 605) and most industry-specific guidance. This standard requires entities to recognize revenue when they transfer promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14 deferring the effective date of this standard by one year to December 15, 2017, and, thus, the new standard will be effective for the Company on January 1, 2018. This standard may be adopted using either the full or modified retrospective methods. In April 2016 and May 2016, the FASB issued ASU 2016-10 and ASU 2016-12, respectively, which clarify guidance on identifying performance obligations, collectability criterion and noncash consideration. The Company preliminarily plans to adopt these standards on a full retrospective basis; however, the Company has not yet made a final decision on the adoption methodology and is currently in the process of determining the potential impact that these standards will have on the Company's consolidated financial statements. The Company has also identified and is in the process of implementing, appropriate changes to its business processes, systems and controls to support recognition and disclosure under the new standard. While the Company cannot reasonably estimate the expected financial statement impact at this time, the Company believes the adoption of this new standard will have the most material impact on the way the Company accounts for arrangements with its stocking value-added distributors, or VADs. The Company currently defers the recognition of revenue and the cost of revenue from sales to these stocking VADs until the VADs have sold the products to their customers (known as “sell-through” revenue recognition). Under the new standard, the Company expects to recognize all revenue on sales to distributors upon shipment and transfer of control (known as “sell-in” revenue recognition), rather than deferring recognition until VADs report that they have sold the products to their customers (known as “sell-through” revenue recognition), provided that all other revenue recognition criteria have been met. The Company continues to assess all potential impacts of this ASU. Accordingly, its preliminary conclusions may change.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which provides guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities.  This standard will be effective for the Company beginning in the first quarter of fiscal year 2019.  The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the lease accounting requirements in Topic 840. This standard requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee would recognize a straight-line total lease expense. The standard also requires qualitative and quantitative disclosures to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities, including the Company's significant judgments and changes in judgments. This standard is effective beginning in fiscal year 2019. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments, which provides guidance to decrease the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. The Company does not currently anticipate that the adoption of this standard will have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. An impairment charge will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The

7



standard is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. The Company plans to adopt this standard in 2021 when it becomes effective.
Concentrations of Credit Risk and Significant Customers
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments and accounts receivable. The Company maintains cash equivalents in money market funds. The Company maintains short-term investments in U.S. treasuries, corporate securities, agency securities and commercial paper.
The Company sells its products primarily to channel partners, which include value-added resellers, or VARs, value-added distributors, or VADs, and Managed Service Providers, or MSPs. The Company’s accounts receivable are typically unsecured and are derived from revenue earned from customers located in the Americas, Europe, the Middle East and Africa, and Asia Pacific. The Company performs ongoing credit evaluations to determine customer credit, but generally does not require collateral from its customers. The Company maintains reserves for estimated credit losses and these losses have historically been within management’s expectations. 
The Company has entered into separate agreements with certain individual 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 and VAD B) greater than 10% of total consolidated revenue were as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
VAD A
 
17.3
%
 
14.0
%
 
15.4
%
 
13.8
%
VAD B
 
36.9
%
 
19.2
%
 
24.6
%
 
11.0
%
 
The percentages of receivables from VAD A, VAD B and an individual entity VAD C greater than 10% of total consolidated accounts receivable were as follows:
 
 
September 30,
 
December 31,
 
 
2017
 
2016
VAD A
 
23.5
%
 
22.4
%
VAD B
 
27.5
%
 
14.4
%
VAD C
 
%
 
15.3
%
 
 
 
 
 
* Less than 10%
 
 
 
2. FAIR VALUE MEASUREMENTS
The Company records its financial assets and liabilities at fair value. The Company categorizes these assets and liabilities based upon the level of judgment associated with inputs used to measure the fair value. The categories are as follows:
Level 1
 
Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities.
Level 2
 
Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3
 
Unobservable inputs are used when little or no market data is available.
The Company classified its cash equivalents and short-term marketable investments within Level 1 and Level 2 in the fair value hierarchy as of September 30, 2017 and December 31, 2016, respectively. Level 1 assets include highly liquid money market funds that are included in cash equivalents. The Company classifies these instruments within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets. Level 2 assets include U.S. treasuries, corporate securities, agency securities and commercial paper. The Company classifies these instruments within Level 2 of the fair value hierarchy because they are valued based on pricing obtained from an independent pricing service, which may use quoted market prices for identical or comparable instruments or model driven valuations using observable market date or inputs corroborated by observable market data. The Company classifies these instruments as short-term investments unless their

8



maturities are three months or less when purchased, in which case the Company includes them in cash and cash equivalents. The Company uses inputs such as actual trade data, benchmark yields, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency, which the Company obtains from quoted market prices, independent pricing vendors, or other sources, to determine the ultimate fair value of these assets.
As of September 30, 2017, the Company held an investment in a privately held company, which the Company classified as a Level 3 investment in the fair value hierarchy (Note 3).
The components of the Company’s Level 1 and Level 2 assets are as follows:
 
September 30, 2017
 
Amortized Cost
 
Gross Unrealized Gain (Loss)
 
Estimated Fair Value
 
Cash equivalents
 
Short-term investments
 
(in thousands)
Level 1:
 
 
 
 
 
 
 
 
 
Money market funds
9,911

 

 
9,911

 
9,911

 

 
$
9,911

 
$

 
$
9,911

 
$
9,911

 
$

Level 2:
 
 
 
 
 
 
 
 
 
U.S. treasuries
29,974

 
(5
)
 
29,969

 
5,997

 
23,972

Corporate securities
11,151

 
(4
)
 
11,147

 

 
11,147

Commercial paper
13,945

 

 
13,945

 

 
13,945

 
$
55,070

 
$
(9
)
 
$
55,061

 
$
5,997

 
$
49,064

Total
$
64,981

 
$
(9
)
 
$
64,972

 
$
15,908

 
$
49,064


 
December 31, 2016
 
Amortized Cost
 
Gross Unrealized Gain (Loss)
 
Estimated Fair Value
 
Cash equivalents
 
Short-term investments
 
(in thousands)
Level 1:
 
 
 
 
 
 
 
 
 
Money market funds
25,244

 

 
25,244

 
25,244

 

 
$
25,244

 
$

 
$
25,244

 
$
25,244

 

Level 2:
 
 
 
 
 
 
 
 
 
U.S. treasuries
22,516

 
(19
)
 
22,497

 

 
22,497

Corporate securities
7,353

 
(12
)
 
7,341

 

 
7,341

Commercial paper
12,570

 

 
12,570

 

 
12,570

 
$
42,439

 
$
(31
)
 
$
42,408

 
$

 
42,408

Total
$
67,683

 
$
(31
)
 
$
67,652

 
$
25,244

 
$
42,408

All short-term investments the Company held as of September 30, 2017 and December 31, 2016, contractually mature within one year from these respective dates.
Unrealized gains and losses related to these investments are due to interest rate fluctuations as opposed to credit quality. In addition, the Company does not intend to sell, and it is not more likely than not that the Company would be required to sell, these investments before recovery of their cost basis. As a result, there was no other-than-temporary impairment for these investments as of September 30, 2017 and December 31, 2016.  
3. CONSOLIDATED BALANCE SHEET COMPONENTS
Prepaid expenses and other current assets
Prepaid expenses and other current assets consist of the following:

9



 
 
 
September 30,
 
December 31,
 
 
 
2017
 
2016
 
 
 
(in thousands)
Deferred sales commissions, current portion
 
 
$
3,489

 
2,932

Prepaid expenses
 
 
3,113

 
2,032

Other
 
 
1,262

 
1,325

Total prepaid expenses and other current assets
 
 
$
7,864

 
$
6,289

Property and Equipment, net
Property and equipment, net consists of the following:
 
 
 
 
September 30,
 
December 31,
 
 
Estimated Useful Lives
 
2017
 
2016
 
 
 
 
(in thousands)
Computer and other equipment
 
3 years
 
$
1,902

 
$
1,920

Manufacturing, research and development laboratory equipment
 
3 years
 
4,543

 
4,314

Software
 
2 to 5 years
 
8,217

 
8,217

Office furniture and equipment
 
3 to 7 years
 
2,065

 
2,070

Leasehold improvements
 
shorter of useful life or lease term
 
1,008

 
1,008

Construction in progress
 
 
 
78

 

Property and equipment, gross
 
 
 
17,813

 
17,529

Less: Accumulated depreciation and amortization
 
 
 
(10,808
)
 
(8,521
)
Property and equipment, net
 
 
 
$
7,005

 
$
9,008

The software category includes the capitalized internal-use software for the Company's cloud service platform. In April 2015, the Company completed and launched the next generation of its cloud services platform, and began to amortize these capitalized costs to cost of subscription and support revenue on a straight-line basis over an estimated useful life of the software of five years.
Depreciation and amortization expense was $0.7 million and $0.9 million for the three months ended September 30, 2017 and 2016, respectively, and $2.4 million and $2.7 million for the nine months ended September 30, 2017 and 2016, respectively.
Office furniture and equipment classified under capital lease was $1.2 million at September 30, 2017 and December 31, 2016 respectively, and the related accumulated depreciation was $0.4 million and $0.2 million at September 30, 2017 and December 31, 2016 respectively.
Other assets
Other assets consist of the following:
 
 
 
September 30,
 
December 31,
 
 
 
2017
 
2016
 
 
 
(in thousands)
Deferred sales commissions, non-current portion
 
 
$
3,332

 
$
3,115

Investment in privately held company
 
 
1,500

 
1,500

Other
 
 
530

 
485

Total other assets
 
 
$
5,362

 
$
5,100

In January 2016, the Company paid $1.5 million in cash to purchase a convertible note issued by a privately held company, which provides Wi-Fi application and analytics. In June 2017, the convertible note and accrued interest on the note converted into shares of preferred stock of the privately held company and the note was cancelled. The accrued interest on the note was immaterial for any period. The Company currently has no significant voting rights, investor rights or influence over the privately held company. Since the investment has no readily determinable market value, the Company has categorized it as a Level 3 asset in the fair value hierarchy. As of September 30, 2017, the investment is carried at the value of original principal

10



and the Company reviews such carried value quarterly for indicators of other-than-temporary impairment. The Company did not recognize an impairment for the three months ended September 30, 2017 and 2016, respectively, as there were no identified events or changes in circumstances that might have a significant adverse impact on the carrying values of the investment. Since the Company does not intend to liquidate this investment in the next 12 months, the Company has classified the investment as other assets on the condensed consolidated balance sheet.
Accrued Liabilities
Accrued liabilities consist of the following:
 
 
 
September 30,
 
December 31,
 
 
 
2017
 
2016
 
 
 
(in thousands)
Accrued compensation
 
 
$
7,423

 
$
7,230

Accrued expenses and other liabilities
 
 
1,073

 
1,445

Warranty liability, current portion
 
 
480

 
625

Total accrued liabilities
 
 
$
8,976

 
$
9,300

Deferred Revenue
Deferred revenue consists of the following:
 
September 30,
 
December 31,
 
2017
 
2016
 
(in thousands)
Products
$
4,207

 
$
1,220

Subscription and support
68,286

 
64,684

Total deferred revenue
72,493

 
65,904

Less: current portion of deferred revenue
36,761

 
31,727

Non-current portion of deferred revenue
$
35,732

 
$
34,177

Warranty Liability
The following table summarizes the activity related to the Company’s accrued liability for estimated future warranty:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Beginning balance
$
930

 
$
1,034

 
$
975

 
$
978

Charges to operations
141

 
142

 
492

 
515

Obligations fulfilled
(247
)
 
(124
)
 
(586
)
 
(331
)
Changes in existing warranty
(11
)
 
(53
)
 
(68
)
 
(163
)
Total product warranties
$
813

 
$
999

 
$
813

 
$
999

Current portion
$
480

 
$
660

 
$
480

 
$
660

Non-current portion
$
333

 
$
339

 
$
333

 
$
339

Changes in existing warranty reflect a combination of changes in expected warranty claims and changes in the related costs to service such claims.
4. DEBT
Financing Agreements
In June 2012, the Company entered into a revolving credit facility with Silicon Valley Bank (the "Revolving Credit Facility"). The Revolving Credit Facility is collateralized by substantially all of the Company’s property, other than intellectual property. Since January 1, 2016, the Revolving Credit Facility bears interest rate at the lesser of (i) LIBOR rate plus 1.75% or (ii) prime rate minus 1.0%. In March 2017, the Company further amended the Revolving Credit Facility to extend the maturity

11



date by two years and reduce the minimum cash requirements. The weighted-average interest rate of the Revolving Credit Facility was 3.09% and 2.35% for the three months ended September 30, 2017 and 2016, respectively, and 2.85% and 2.36% for the nine months ended September 30, 2017 and 2016, respectively.
The Revolving Credit Facility contains customary negative covenants which, unless waived by the bank, limit the Company’s ability to, among other things, incur additional indebtedness, grant liens, make investments, repurchase stock, pay dividends, transfer assets or engage in merger and acquisition activity, including merge or consolidate with a third party. The Revolving Credit Facility also requires the Company to maintain a minimum adjusted quick ratio of 1.25 to 1.00 and a minimum cash balance with the bank as of the last day of each month of $35.0 million and to demonstrate the absence of defined events of default in order to assure full access to the available borrowing. The Revolving Credit Facility also contains customary events of default, subject to customary cure periods for certain defaults, that include, among other things, non-payment defaults, covenant defaults, material judgment defaults, bankruptcy and insolvency defaults, cross-defaults to certain other material indebtedness, and defaults due to inaccuracy of representation and warranties. Upon an event of default, the lender may declare all or a portion of the outstanding obligations payable by the Company to be immediately due and payable and exercise other rights and remedies provided for under the Revolving Credit Facility. During the existence of an event of default, interest on the obligations under the Revolving Credit Facility could be increased by 5.0%. As of September 30, 2017, the Company was in compliance with these covenants.
The Revolving Credit facility currently provides, among other things, (i) a maturity date of March 31, 2019; and (ii) a revolving line up to $20.0 million, subject to certain conditions.
As of September 30, 2017$20.0 million remains outstanding under the Revolving Credit Facility, and is classified as non-current liabilities in the condensed consolidated balance sheet.
5. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company currently leases its main office facility in Milpitas, California, which lease is set to expire in June 2023. In addition, the Company leases office space for its subsidiaries in the United Kingdom, the Netherlands, Korea and China under non-cancelable operating leases that expire at various times through August 2021. The Company has also entered into various lease agreements in other locations in the United States and globally to support its sales and research and development functions.
The Company recognizes rent expense on a straight-line basis over the respective lease period. Future minimum lease payments by year under operating leases as of September 30, 2017 are as follows:
 
Amount
Year Ending December 31,
(in thousands)
2017 (remaining three months)
$
364

2018
1,809

2019
1,417

2020
1,084

2021
1,081

Thereafter
1,438

Total
$
7,193

Rent expense was $0.5 million and $0.5 million for the three months ended September 30, 2017 and 2016, respectively, and was $1.5 million and $1.9 million for the nine months ended September 30, 2017 and 2016, respectively.

12



Capital Lease Obligations
The Company has certain office furniture and equipment that are classified under capital leases. The terms of the capital leases range from three years to seven years. The interest expense is immaterial in any particular period. Future minimum lease payments by year under capital lease obligations as of September 30, 2017 are as follows:
 
Amount
Year Ending December 31,
(in thousands)
2017 (remaining three months)
$
47

2018
185

2019
176

2020
172

2021
169

Thereafter
245

Total
$
994

Less: current portion of capital lease obligations
185

Non-current portion of capital lease obligations
$
809

Manufacturing Commitments
The Company subcontracts with manufacturing companies to manufacture its hardware products. The contract manufacturers procure components based on non-cancelable orders the Company places with them. If the Company cancels all or part of an order, the Company is liable to the contract manufacturers for the cost of the related components they purchased under such orders.
As of September 30, 2017 and December 31, 2016, the Company had manufacturing commitments with contract manufacturers for inventory totaling approximately $5.4 million and $9.5 million, respectively.
Contingencies
The Company may be subject to legal proceedings and litigation arising from time to time. The Company will record a liability when it believes that it is both probable that a loss has been incurred and the amount can be reasonably estimated. The Company expects periodically to evaluate developments in its legal matters that could affect the amount of liability that it has previously accrued, if any, and make adjustments as appropriate. The Company exercises significant judgment to determine both likelihood of there being, and the estimated amount of, a loss related to such matters, and the Company’s judgment may be incorrect. The Company cannot reasonably determine in advance the outcome of any litigation proceeding. Until the final resolution of any such matter for which the Company may be required to accrue, the Company may have an exposure to loss in excess of the amount the Company has accrued, and such excess amount could be significant.
The Company is currently engaged in the following separate litigations which allege that the Company’s products infringe certain patents.
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 Nos. #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 U.S. Patent and Trademark Office, or the PTO, petitions to initiate reexamination of the ‘377 and ‘503 Patents, which petitions the PTO granted. In the PTO reexaminations, all claims under the ‘377 and '503 Patents have been rejected and Linex has appealed the final rejections of the claims. This case is currently stayed pending the reexaminations.
Chrimar Systems, or Chrimar, filed in July 2015 a complaint in the U.S. District Court, Eastern District of Texas, asserting that certain of the Company’s products which utilize Power over Ethernet ("POE") functionality infringe United States Patent Nos. 8,155,012, or the '012 Patent, 8,902,760, or the '760 Patent, 8,942,107, or the '107 Patent and 9,019,838, or the '838 Patent. A jury trial was conducted in January 2017, following which the court entered an order finding non-infringement as to the Company's products under all patents in suit. The court subsequently entered a final judgment as to non-infringement under the patents in suit, which neither party challenged or appealed prior to the

13



lapsing of the period for any such timely challenges or appeals. The Company separately filed with the PTO petitions to initiate reexamination of the '012 Patent and the '760 Patent, which petitions the PTO granted. The PTO has rejected all claims of the '012 Patent and is considering the Company's petition regarding the '760 Patent.
Mobile Telecommunications Technologies LLC, or Mobile, filed in May 2016 a complaint in the U.S. District Court, Eastern District of Texas, asserting that certain of the Company’s products which utilize MIMO systems or frequency structures and functionality infringe United States Patent Nos. 5,590,403, 5,659,891, and 5,915,210. The case was consolidated with several other cases involving the same patents and transferred to U.S. District Court, Delaware, for pretrial purposes.  
The Company is also currently engaged in separate litigation by a former employee, who has asserted claims that Company, in conjunction with his termination (a) discriminated against him on the basis of his race and national origin, (b) retaliated against him for complaints about discrimination, and (c) retaliated against him for complaints in connection with a vendor contract.  Aerohive has denied all liability.  The case is proceeding to binding arbitration, and the arbitration hearing is currently scheduled for November 2017. If the former employee prevails, he may be awarded his attorney fees and may recover punitive damages against the Company. The parties have agreed to participate in mediation prior to the arbitration.  If the case does not settle in mediation, Aerohive intends to defend itself vigorously at the arbitration.
The Company intends to defend these lawsuits vigorously, and is not able to predict or estimate any range of reasonably possible loss related to these lawsuits. If these matters have an adverse outcome, they may have a material impact on the Company’s financial position, results of operations or cash flows.       
Guarantees
The Company typically enters into agreements with its customers that contain indemnification provisions in the event of claims alleging that the Company’s products infringe the intellectual property rights of a third party. The Company has at its option and expense, the ability to resolve any infringement, replace product with a non-infringing product that is equivalent-in-function, or refund to the customers the total product price. These agreements also typically include guarantees of product and service performance. The Company has not recorded a liability related to these indemnification and guarantee provisions and the Company’s indemnification and guarantee provisions have not had any impact on the consolidated financial statements to date.
6. STOCKHOLDERS' EQUITY
Common Stock reserved for Future Issuance
As of September 30, 2017, the Company had the following reserved shares of common stock for future issuance:
 
September 30,
 
2017
Common stock reserved for future grant under the 2014 Equity Incentive Plan
7,473,429

Common stock reserved for future purchase under the 2014 Employee Stock Purchase Plan
2,012,431

Options and Restricted Stock Units issued and outstanding
9,254,272

Total reserved shares of common stock for future issuance
18,740,132

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

14



shares to employees, directors and consultants of the Company, and the employees and consultants of any parent or subsidiary of the Company.
In January 2017, the Company effected an increase of 2,612,263 shares reserved under the 2014 Plan. As of September 30, 2017, the Company had 7,473,429 total shares of common stock reserved and available for grant under the 2014 Plan.
The following table summarizes the total number of shares available for grant under the 2014 Plan as of September 30, 2017:
 
 
 
Shares Available for Grant
 
 
Balance, December 31, 2016
5,116,753

Authorized
2,612,263

Options granted

Options canceled
1,436,112

Awards granted
(3,287,665
)
Awards canceled
1,595,966

Balance, September 30, 2017
7,473,429

Stock Options
The following table summarizes the information about outstanding stock option activity:
 
Options Outstanding
 
Number of
Shares
Underlying
Outstanding
Options
 
Weighted
Average
Exercise 
Price
 
Weighted
Average
Remaining
Contractual Term
(Years)
 
Aggregate
Intrinsic
Value
 
 
 
 
 
 
 
(in thousands)
Balance, December 31, 2016
6,219,774

 
$
6.15

 
6.42
 
$
6,056

Options granted

 

 
 
 
 
Options exercised
(409,065
)
 
1.73

 
 
 
 
Options canceled
(1,436,112
)
 
7.74

 
 
 
 
Balance, September 30, 2017
4,374,597

 
$
6.04

 
6.07
 
$
2,732

Options exercisable, September 30, 2017
3,439,751

 
$
5.81

 
5.57
 
$
2,732

The weighted-average grant-date fair value of options granted during the three and nine months ended September 30, 2016 was $3.03 and $3.15 per share, respectively, and the aggregate grant-date fair value of the Company's stock options granted during the three and nine months ended September 30, 2016 was $0.1 million and $3.0 million, respectively. There were no options granted during the three and nine months ended September 30, 2017.
The aggregate intrinsic value of stock options exercised during the three months ended September 30, 2017 and 2016, was $0.03 million and $0.9 million, respectively, and during the nine months ended September 30, 2017 and 2016 was $1.2 million and $1.6 million, respectively. The intrinsic value for each share underlying an option represents the difference between the option exercise price per share and the closing stock price of a share of the Company’s common stock. The total grant-date fair value of the options vested during the three months ended September 30, 2017 and 2016 was $0.7 million and $1.4 million, respectively, and during the nine months ended September 30, 2017 and 2016 was $2.6 million and $5.9 million, respectively.
Restricted Stock Units
The Company currently grants Restricted Stock Units ("RSUs") to certain employees and directors. The RSUs typically vest over a period of time, generally one to three years, and are subject to the participant’s continuing service to the Company over that period. Until vested, RSUs do not have the voting and dividend participation rights of common stock and the shares underlying the awards are not considered issued and outstanding.

15



The following is a summary of the Company’s RSU activity and related information for the three months ended September 30, 2017:
 
Restricted Stock Units Outstanding
 
Shares
 
Weighted-Average
Grant-Date
Fair Value Per Share
 
 
 
 
Balance, December 31, 2016
4,365,670

 
$
6.23

Awards granted
3,287,665

 
4.96

Awards vested
(1,453,616
)
 
5.92

Awards canceled
(1,320,044
)
 
6.14

Balance, September 30, 2017
4,879,675

 
$
5.49


The weighted-average grant-date fair value of RSUs granted during the three months ended September 30, 2017 and 2016 was $4.66 and $6.09 per share, respectively, and during the nine months ended September 30, 2017 and 2016 was $4.96 and $6.23, respectively. The aggregate grant-date fair value of RSUs granted during the three months ended September 30, 2017 and 2016 was $0.4 million and $1.0 million, respectively, and during the nine months ended September 30, 2017 and 2016 was $16.3 million and $19.9 million, respectively. The aggregate fair value of shares vested as of the respective vesting dates during the three months ended September 30, 2017 and 2016 was $1.7 million and $4.1 million, respectively, and during the nine months ended September 30, 2017 and 2016 was $6.3 million and $10.0 million, respectively.
The number of RSUs vested during a particular period includes shares that the Company withheld during the period on behalf of certain employees to satisfy the minimum statutory tax withholding requirements, as determined by the Company. During the three months ended September 30, 2017 and 2016, the Company withheld 180,345 and 60,638 shares of stock, respectively, for an aggregate value of $0.6 million and $0.4 million, respectively. During the nine months ended September 30, 2017 and 2016, the Company withheld 275,922 and 156,186 shares of stock, respectively, for an aggregate value of $1.1 million and $0.9 million, respectively. The Company returned such withheld shares to the 2014 Plan, which were then available under the plan terms for future issuance.
The number of RSUs granted includes 378,644 shares of performance-based restricted stock units ("PBRSUs") that the Company granted to certain executives in the first quarter of fiscal year 2017 pursuant to the 2014 Plan. Each PBRSU represents the right to receive one share of the Company's common stock upon vesting, subject to the Company's achievement of certain performance conditions. At each reporting period, the Company assesses the probability of the number of these PBRSUs expected to vest based on its achievement of the performance condition.

The number of RSUs granted also includes 358,000 shares of market-based restricted stock units (MBRSUs) that the Company granted to certain executives in June 2017 pursuant to the 2014 Plan. Each MBRSU represents the right to receive one share of the Company's common stock upon vesting subject to the Company's achievement of certain stock price targets. The Company estimated the fair value of the MBRSUs using the Monte Carlo option-pricing model as of the date of grant as the MBRSUs contain both market and service conditions. The weighted-average grant-date fair value of these MBRSU's was $4.18 per share. The Company will record the total expense related to all of the MBRSUs on a graded-vesting method over the estimated term.    
2014 Employee Stock Purchase Plan
The 2014 Employee Stock Purchase Plan ("ESPP") is a ten-year plan, effective in March 2014. The ESPP authorizes the Company to issue shares of common stock pursuant to purchase rights it grants to its employees and those of its designated subsidiaries. In January 2017, the Company effected an increase of 1,000,000 shares reserved under the ESPP. As of September 30, 2017, the Company had 2,012,431 total shares of common stock reserved and available for issuance under the ESPP.
Under the ESPP, the Company grants stock purchase rights to all eligible employees, currently covering a one-year offering period ending December 1, 2017, with purchase dates at the end of each interim six-month purchase period. Employees purchase shares using employee payroll deductions at purchase prices equal to 85% of the lesser of the fair market value of the Company’s common stock at either the first day of each offering period or the date of purchase. The ESPP currently has a reset provision: If the closing price of the Company’s common stock on the last day of any purchase period during an offering period

16



is lower than the closing sales price on the first day of the related offering period, that offering period will terminate upon the purchase of shares for such purchase period and participants will be automatically re-enrolled in the immediately following offering period. As a result, the reference price for purposes of determining the purchase price of shares for subsequent purchase periods for all participants of the new offering period resets to such lower price. No participant may purchase more than $25,000 worth of common stock in any calendar year, or 5,000 shares of common stock in any six-month purchase period. For the nine months ended September 30, 2017 and 2016, the Company issued 563,174 and 646,278 shares under the ESPP plan, respectively. The Company did not issue any shares under the ESPP during the three months ended September 30, 2017 and 2016 respectively.
Stock Repurchase Program
In February 2016, the Company's board of directors authorized a stock repurchase program of up to $10.0 million, with stock purchases made from time to time in compliance with applicable securities laws in the open market or in privately negotiated transactions. The timing and amounts of any purchases will be based on market conditions and other factors including price, regulatory requirements and capital availability. The authorization does not require the purchase of any minimum number of shares, and the Company may suspend, modify or discontinue the program at any time without prior notice. In August 2017, our board of directors extended this program to June 30, 2018. During the nine months ended September 30, 2017, the Company repurchased a total of 796,616 shares of its common stock on the open market at a total cost of $3.0 million with an average price per share of $3.80. During the nine months ended September 30, 2016, the Company repurchased a total of 364,627 shares at a total cost of $2.1 million with an average price per share of $5.87.
As of September 30, 2017, we had repurchased under this program 1,161,243 shares of our common stock at a total price $5.2 million with an average purchase price $4.45 per share of our common stock. Approximately $4.8 million remains available as of September 30, 2017 for repurchases under this program.
Determination of Fair Values
Weighted-average assumptions for the Company's stock options granted were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Stock options:
 
 
 
 
 
 
 
Expected term (in years)
N/A
 
5.85

 
N/A
 
5.78

Expected volatility
N/A
 
53.18
%
 
N/A
 
55.09
%
Risk free interest rate
N/A
 
1.15
%
 
N/A
 
1.49
%
Weighted-average assumptions to value MBRSUs under the Monte Carlo model were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
MBRSUs:
 
 
 
 
 
 
 
Expected volatility
N/A
 
N/A
 
46
%
 
53
%
Risk free interest rate
N/A
 
N/A
 
1.45
%
 
1.07
%
Weighted-average assumptions to value employee stock purchase rights under the Black-Scholes model were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
ESPP purchase rights:
 
 
 
 
 
 
 
Expected term (in years)
0.50 - 1.00
 
0.50 - 2.00
 
0.50 - 1.00
 
0.50 - 2.00
Expected volatility
34% - 39%
 
35% - 55%
 
34% - 39%
 
35% - 55%
Risk free interest rate
0.60% - 1.07%
 
0.07% - 0.51%
 
0.60% - 1.07%
 
0.07% - 0.51%

17



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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Cost of revenue
$
313

 
$
431

 
$
860

 
$
1,024

Research and development
1,329

 
1,576

 
3,082

 
4,287

Sales and marketing
1,566

 
2,505

 
4,361

 
6,336

General and administrative
1,756

 
1,903

 
4,658

 
5,118

Total stock-based compensation
$
4,964

 
$
6,415

 
$
12,961

 
$
16,765

The following table presents stock-based compensation expense by award-type:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Stock Options
$
652

 
$
1,336

 
$
2,355

 
$
3,667

Restricted Stock Units
3,945

 
4,353

 
9,408

 
11,044

Employee Stock Purchase Plan
367

 
726

 
1,198

 
2,054

Total stock-based compensation
$
4,964

 
$
6,415

 
$
12,961

 
$
16,765

As of September 30, 2017, unrecognized stock-based compensation related to outstanding stock options, RSUs and ESPP purchase rights, was $3.1 million, $22.1 million and $0.3 million, respectively, which the Company expects to recognize over weighted-average periods of 1.61 years, 2.01 years and 0.17 years, respectively.
8. NET LOSS PER SHARE
The Company calculates basic and diluted net loss per share by dividing the net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is the same as basic net loss per share, since the effects of potentially dilutive securities are antidilutive.
The following table presents the computation of basic and diluted net loss per share:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
  
2017
 
2016
 
2017
 
2016
 
(in thousands, except for share and per share data)
Numerator:
 
 
 
 
 
 
 
Net loss
$
(6,612
)
 
$
(9,712
)
 
$
(19,504
)
 
$
(29,647
)
Denominator:
 
 
 
 
 
 
 
Weighted-average shares used to compute net loss per share, basic and diluted
53,683,727

 
50,818,710

 
53,070,863

 
49,920,630

Net loss per share:
 
 
 
 
 
 
 
Basic and diluted
$
(0.12
)
 
$
(0.19
)
 
$
(0.37
)
 
$
(0.59
)
The Company excluded the following period-end outstanding common stock equivalents from the computation of diluted net loss per share for the periods presented because including them would have been antidilutive:
 
As of September 30,
 
2017
 
2016
Shares of common stock issuable under the Equity Incentive Plan
9,254,272

 
11,557,330

Employee Stock Purchase Plan
431,153

 
392,029

Total
9,685,425

 
11,949,359


18



9. INCOME TAXES
The provision for income taxes was approximately $0.1 million and $0.1 million, respectively, for the three months ended September 30, 2017 and 2016 and was $0.4 million and $0.3 million, respectively, for the nine months ended September 30, 2017 and 2016. The provision for income taxes consisted primarily of state taxes and foreign income taxes.
For the three and nine months ended September 30, 2017 and 2016, the provision for income taxes differed from the statutory amount primarily due to the Company's maintaining a full valuation allowance against the U.S. net deferred tax assets, partially offset by foreign and state taxes.
The Company has intercompany services agreements with its subsidiaries located in the United Kingdom, the Netherlands, New Zealand, Australia, Canada and China, which require payment for services rendered by these subsidiaries at an arm’s-length transaction price. The foreign tax expense represents foreign income tax payable by these subsidiaries on profit generated on intercompany services agreements.
The Company's realization of deferred tax assets depends on future taxable income, the existence and timing of which is uncertain. Based on the Company’s history of losses, management has determined it cannot conclude that it is more likely than not that the deferred tax assets will be realized and, accordingly, management has placed a full valuation allowance against its domestic deferred tax assets, including net operating loss carryforwards and research and development and other tax credits, as of September 30, 2017 and December 31, 2016, respectively.
10. SEGMENT INFORMATION
The Company’s chief operating decision maker ("CODM") is its Chief Executive Officer. The Company derives its revenue primarily from sales of products and subscription and support services. The Company’s CODM reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. Accordingly, the Company determined that it operates as one reportable and operating segment.
The following table represents the Company's revenue based on the billing address of the respective channel partners:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Americas
$
22,613

 
$
25,732

 
$
75,672

 
$
78,777

Europe, Middle East and Africa
11,141

 
10,538

 
31,371

 
34,695

Asia Pacific
3,314

 
4,099

 
8,676

 
14,656

Total revenues
$
37,068

 
$
40,369

 
$
115,719

 
$
128,128

     Included within Americas in the above table is revenue from sales in the United States of $21.0 million and $24.0 million, respectively, for the three months ended September 30, 2017 and 2016, and $70.1 million and $74.2 million, respectively, for the nine months ended September 30, 2017 and 2016. Aside from the United States, no country comprised 10% or more of the Company's total revenue for each of the three months ended September 30, 2017 and 2016, respectively.
Property and equipment, net by location is summarized as follows:  
 
September 30,
 
December 31,
 
2017
 
2016
 
(in thousands)
United States
$
5,929

 
$
7,685

People's Republic of China
901

 
1,096

United Kingdom
175

 
227

Total property and equipment, net
$
7,005

 
$
9,008

11. SUBSEQUENT EVENTS
On November 1, 2017, we announced that our Board of Directors has increased to $20 million the purchase authority under our existing Share Repurchase Program. As of the date of this report, $14.8 million remains available for future

19



repurchases under the share repurchase program. We also announced the departure of Thomas Wilburn, who was our Senior Vice President, Worldwide Field Operations. There were no material severance costs associated with his departure. In addition, we announced that we had entered an OEM agreement with Dell EMC to deliver Aerohive's Wi-Fi access point hardware and HiveManager NG cloud services platform. The agreement includes joint sales, marketing, support services and logistic investments, and will combine Aerohive's technology with Dell EMC's go-to-market and support capabilities through Dell EMC sales teams, Dell EMC channel partners, and Dell EMC services offerings. There were no transactions under this OEM agreement for the period ended September 30, 2017.

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. This discussion and analysis contains forward-looking statements reflecting our current expectations and involves risks and uncertainties. We intend to identify forward-looking statements when we use the words “believe,” “will,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “could,” “potentially” and similar expressions that convey uncertainty of future events or outcomes. Our actual results and the timing of events may differ materially from those we discuss in our forward-looking statements as a result of various factors, including those we discuss below and those we discuss in the section entitled "Risk Factors" included in this Quarterly Report on Form 10-Q.
These forward-looking statements include, but are not limited to, statements concerning the following:
our ability to predict our revenue, operating results and gross margin accurately;
our ability to timely develop, deliver and transition to new product offerings and pricing strategies, and transition existing and new end-customers to such offerings and strategies, while maintaining existing revenue and margins and our existing service level commitments to end-customers;
our ability to continue to secure orders from larger customers and any potential loss of or reductions in orders from such larger customers;
our ability to maximize sales to our education vertical, including in conjunction with opportunities from the U.S. Federal Communications Commission’s E-Rate program and the timing and uncertainty of the availability of such funding, the level of available funding and the decisions by end-customers to purchase our products using such funding;
the length and seasonal unpredictability of our sales cycles, including with service provider end-customers;
the effects of increased competition in and consolidation of our market and our ability to compete with larger competitors with greater financial, technical and other resources;
our ability to continue to enhance and broaden our product and solutions offerings and bring new products, product functionality and solutions to market;
our ability to attract new end-customers within the verticals and geographies in which we currently operate;
changes in global consumer confidence and demand for our products internationally, due to changes to foreign currency exchange rates and other factors;
our ability to continue to build and enhance relationships with channel partners and to derive revenue from our investments in those partnerships, particularly with our strategic partners;
our ability to protect our intellectual property and our exposure to third party claims that we or our customers or channel partners infringe their intellectual property; and
other risk factors included under the section titled “Risk Factors.”    
These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described in “Risk Factors” included in Part II, Item 1A and elsewhere in this report. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances we discuss in this report may not occur, and our actual results could differ materially and adversely from those we anticipate or imply in the forward-looking

20



statements. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, we caution you not to place undue reliance on such forward-looking statements.
Overview
Our goal is to be the leading independent cloud networking company that simplifies and transforms the connected experience through information, applications and insights. We have designed and developed a leading cloud-managed, networking platform that enables enterprises to deploy and manage a mobile-centric network edge. Our platform builds on the foundation of our Wi-Fi and wired network infrastructure. Our platform also connects and stores valuable data about the network and the users of the network that can enable better IT and business applications. Customers around the world, from Fortune 500 businesses to small schools, have chosen our products.
For the three months ended September 30, 2017, our revenue was $37.1 million, a decline of $3.3 million, compared to $40.4 million for the three months ended September 30, 2016. For the nine months ended September 30, 2017 and 2016, our revenue was $115.7 million and $128.1 million, respectively. In the three months ended September 30, 2017 and 2016, our net losses were $6.6 million and $9.7 million, respectively, and for the nine months ended September 30, 2017 and 2016, our net losses were $19.5 million and $29.6 million, respectively. We have yet to achieve profitability in any quarter.
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 timely provide new product offerings to the marketplace; increase our sales capabilities and develop our channel partner program; acquire new end-customers; expand our end-customer base and increase penetration within our existing end-customer base (including through new product offerings); and demonstrate revenue growth to our investors and financial analysts while also demonstrate that we can achieve profitability on an acceptable timeline and predictably maintain profitability thereafter.
We operate in the highly competitive wired and wireless network access products market, which is characterized by rapid technological innovation. We will need to continue to innovate in order to achieve market adoption of our products and services. We have continued the expansion of our product portfolio with the release of new Wi-Fi access points, access switches and management software to allow us to deliver a unified wired and wireless network edge.
In the wireless market, we have seen almost all customer demand shift to the 802.11ac standard, which uses new radio hardware to deliver substantially higher wireless performance. In 2016, we continued the push towards higher performance with the release of our 802.11ac "Wave 2" access points. We continue to develop new functionality in our product offerings to take advantage of the changes to industry standards, including continued evolution of "Wave 2" and emerging work on the new 802.11ax standard.
We continue to believe we have a unique market opportunity based on our ability to deliver unified Wi-Fi, switch and router solutions operating on a single, unified management platform, with subscription-based SaaS solutions and data analytics, at a low entry and operating cost, and the ability to tailor and expand based on each user's needs. We have developed a cloud-based services platform to provide network management and support additional value-added applications. HiveManager NG, the newest version of our network management application, provides a single management interface that customers use to configure network policies, monitor and troubleshoot performance, manage access and security, and run reports on network operations. We will continue to sell and support the older version of HiveManager. However, our focus is to continue to transition our business to HiveManager NG and make our cloud-services platform and applications available to customers in either a subscription-based public cloud or on-premises private cloud deployment. We announced in January 2017, HiveManager Connect, a simplified version of HiveManager NG included as a part of our new Aerohive Connect product line. Under the Aerohive Connect program, customers may purchase a less complex, connectivity-oriented solution at attractive entry-point pricing. Aerohive Connect customers can expand their Connect deployment, as needed, and can add subscriptions or licenses to upgrade to our full-featured Select offering and premium support services. In May 2017, we announced that our Aerohive Connect and Select offerings are available across our entire portfolio of access points and switches. We believe that separating our product line into these two offerings delivers compellingly priced cloud-managed hardware for connectivity-oriented deployments and enables us to capture more subscription and software license revenue from those customers who require a more advanced feature set and support. In November 2017, we announced that we had entered an OEM agreement with Dell EMC to deliver Aerohive's Wi-Fi access point hardware and HiveManager NG cloud services platform. The agreement includes joint sales, marketing, support services and logistic investments, and will combine Aerohive's technology

21



with Dell EMC's go-to-market and support capabilities through Dell EMC sales teams, Dell EMC channel partners, and Dell EMC services offerings.
Our business is seasonal, with our product revenue typically decreasing in our first quarter but sequentially increasing from our fiscal first to second quarter. This has generally been due to annual budget cycles in the enterprise and spending seasonality in the education verticals. The buying cycle for K-12 schools in the United States historically has driven strong sequential growth for us in the second quarter, which we also see typically carry over from our second to our third quarter. We also historically have seen a sequential increase in revenue from our third to our fourth quarter due to end-of-year spending by enterprise customers.
The seasonal variations in demand for our products and services in the education vertical continue to make it more difficult for us to predict revenue from our education vertical during a particular period during the year. For example, on February 14, 2017, we announced our revenue results for our fourth quarter of fiscal year 2016, which was below the revenue outlook we had provided for the period in November 2016. Similarly, on November 1, 2017, we announced our revenue results for our third quarter of fiscal year 2017, which was below the revenue outlook we had provided for the period in August 2017.
We believe that the significantly slower pace of order volume in our education vertical in the third and fourth quarters of our fiscal year 2016, specifically due to slower pace of funding approvals under the federal E-Rate program, was one of the primary drivers of lower-than-expected order volume and revenue performance in our third quarter and our lowered revenue outlook for our fourth quarter. We also believe that we introduced our new HiveManager NG product to some of our larger and more complex customers before its feature set was able to fully address their requirements, which resulted in elongated sales cycles and reduced revenue opportunities, which specifically contributed to our lower revenue performance in the fourth quarter and our outlook for the first quarter of our fiscal year 2017. We believe that the lower-level of E-Rate funded transactions and lengthier sales cycle associated with our HiveManager NG offering continued to affect our revenue opportunities and operating results in 2017, including in our third quarter. In addition, the third quarter of our fiscal year 2017 was the first full quarter that our customers could choose between our Connect and Select offerings. The rate at which shipments of our Connect business convert to revenue differs significantly from shipments of our Select business. Further, it is difficult to estimate the percentage of our customers who will choose our subscription offerings versus our perpetual license offerings. We believe that our difficulty to predict the specific mix of Connect and Select shipments and the mix of subscription and perpetual license offerings, during the quarter also added uncertainty to our operating results for this quarter.
We realize that our revenue-dependence on the volatile education market may continue to bring uncertainty to our results. For this reason, a priority for our business continues to be to expand and diversify our offerings and revenue opportunities into other verticals, with particular focus on enterprise customers. We also intend to continue to invest significant resources in developing of our innovative technologies and new product offerings, acquiring new end-customers in new and existing geographies, and increasing penetration within our existing end-customer base.
We also expect to continue to invest in our organization and our channel and strategic partnerships to meet the needs of our customers and to pursue opportunities in new and existing markets. In particular, we are investing to increase our sales capacity as well as our channel program. As such, we will continue to incur expenses in the near term, due to our continuing investments to grow our business, including internationally, in advance of and in preparation for our expected increase in sales and expansion of our customer base. As a result, we may not be profitable for the foreseeable future and our use of cash over this period could also be greater and extend over a longer period as we make investments in areas of our operations, such as sales, marketing and research and product and channel partner development, which we feel may promote our growth and profitability over the long term. We believe that over the long term, we will be able to leverage these investments in the form of a higher revenue growth rate compared to the growth rate of our operating expenses.

22



Results of Operations
The following table sets forth our results of operations for the periods presented, in dollars (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenue:
 
 
 
 
 
 
 
Product
$
26,750

 
$
31,691

 
$
85,666

 
$
103,683

Subscription and support
10,318

 
8,678

 
30,053

 
24,445

Total revenue
37,068

 
40,369

 
115,719

 
128,128

Cost of revenue(1):
 
 
 
 
 
 
 
Product
9,408

 
10,070

 
28,760

 
32,922

Subscription and support
3,244

 
3,095

 
9,573

 
9,048

Total cost of revenue
12,652

 
13,165

 
38,333

 
41,970

Gross profit
24,416

 
27,204

 
77,386

 
86,158

Operating expenses:
 
 
 
 
 
 
 
Research and development(1)
9,260

 
10,685

 
28,032

 
31,457

Sales and marketing(1)
15,948

 
19,647

 
50,807

 
62,037

General and administrative(1)
5,700

 
6,515

 
17,486

 
22,135

Operating loss
(6,492
)
 
(9,643
)
 
(18,939
)
 
(29,471
)
Interest income
180

 
109

 
484

 
345

Interest expense
(135
)
 
(115
)
 
(412
)
 
(351
)
Other income (expense), net
(90
)
 
22

 
(268
)
 
128

Loss before income taxes
(6,537
)
 
(9,627
)
 
(19,135
)
 
(29,349
)
Income tax provision
75

 
85

 
369

 
298

Net loss
$
(6,612
)
 
$
(9,712
)
 
$
(19,504
)
 
$
(29,647
)
(1)Includes stock-based compensation as follows:    
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Cost of revenue
$
313

 
$
431

 
$
860

 
$
1,024

Research and development
1,329

 
1,576

 
3,082

 
4,287

Sales and marketing
1,566

 
2,505

 
4,361

 
6,336

General and administrative
1,756

 
1,903

 
4,658

 
5,118

Total stock-based compensation expense
$
4,964

 
$
6,415

 
$
12,961

 
$
16,765



23



The following table sets forth our results of operations for the periods presented, as a percentage of our total revenue:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenue:
 
 
 
 
 
 
 
Product
72
 %
 
79
 %
 
74
 %
 
81
 %
Subscription and support
28

 
21

 
26

 
19

Total revenue
100

 
100

 
100

 
100

Cost of revenue:
 
 
 
 
 
 
 
Product
25

 
25

 
25

 
26

Subscription and support
9

 
8

 
8

 
7

Total cost of revenue
34

 
33

 
33

 
33

Gross profit
66


67

 
67

 
67

Operating expenses:
 
 
 
 
 
 
 
Research and development
25

 
26

 
25

 
25

Sales and marketing
43

 
49

 
44

 
48

General and administrative
16

 
16

 
15

 
17

Operating loss
(18
)

(24
)
 
(17
)
 
(23
)
Interest income

 

 

 

Interest expense

 

 

 

Other income (expense), net

 

 

 

Loss before income taxes
(18
)

(24
)
 
(17
)
 
(23
)
Income tax provision

 

 

 

Net loss
(18
)%

(24
)%
 
(17
)%
 
(23
)%

Revenue  
We derive revenue from the sales of our products and services, and we recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured. We expect our revenue to vary from quarter to quarter based on seasonal and cyclical factors.
Our total revenue comprises the following:
Product Revenue.  We derive product revenue primarily 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 for our unified network management system, HiveManager, and other software applications, as well as related accessories. We recognize product revenue at the time of shipment, provided that all other revenue recognition criteria have been met. For our VAD arrangements where we permit our VADs to stock inventory, we recognize revenue when our VADs have shipped the products to our end-customers (or to VARs), provided that all other revenue recognition criteria have been met.
Subscription and Support Revenue.  We derive subscription and support revenue primarily from sales of our subscription and support offerings that we deliver over a specified term. These offerings primarily include post-contract customer support, or PCS, related to our perpetual software licenses and subscriptions to HiveManager and other software applications delivered as SaaS, including related customer support, and from subsequent renewals of those contracts. To benefit fully from potential contract renewals, we plan to continue to invest in systems to better track existing customer support commitments and renewal opportunities and provide offerings which continue to be attractive to our customers. Our PCS includes tiered maintenance and support services under renewable, fee-based maintenance and support contracts, which include technical support, bug fixes, access to priority hardware replacement services and unspecified upgrades on a when-and-if available basis. Our SaaS subscriptions include comparable maintenance and support services. The higher the percentage of our end-customers that purchase SaaS subscriptions, as opposed to HiveManager and PCS, the higher our subscription and support revenue will be as a percentage of our total revenue. We recognize subscription and support revenue ratably over the term of the

24



contract, which is typically one, three or five years. As a result, our recognition of subscription and support revenue lags our recognition of related product revenue.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
$ Change
 
% Change
 
2017
 
2016
 
$ Change
 
% Change
 
(dollars in thousands)
 
(dollars in thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Product
$
26,750

 
$
31,691

 
$
(4,941
)
 
(16
)%
 
$
85,666

 
$
103,683

 
$
(18,017
)
 
(17
)%
Subscription and support
10,318

 
8,678

 
1,640

 
19
 %
 
30,053

 
24,445

 
5,608

 
23
 %
Total revenue
$
37,068

 
$
40,369

 
$
(3,301
)
 
(8
)%
 
$
115,719

 
$
128,128

 
$
(12,409
)
 
(10
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Percentage of revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Product
72
%
 
79
%
 
 
 
 
 
74
%
 
81
%
 
 
 
 
Subscription and support
28
%
 
21
%
 
 
 
 
 
26
%
 
19
%
 
 
 
 
Total
100
%
 
100
%
 
 
 
 
 
100
%
 
100
%
 
 
 
 

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
$ Change
 
% Change
 
2017
 
2016
 
$ Change
 
% Change
 
(dollars in thousands)
 
(dollars in thousands)
Revenue by geographic region:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Americas
$
22,613

 
$
25,732

 
$
(3,119
)
 
(12
)%
 
$
75,672

 
$
78,777

 
$
(3,105
)
 
(4
)%
EMEA
11,141

 
10,538

 
603

 
6
 %
 
31,371

 
34,695

 
(3,324
)
 
(10
)%
APAC
3,314

 
4,099

 
(785
)
 
(19
)%
 
8,676

 
14,656

 
(5,980
)
 
(41
)%
Total revenue
$
37,068

 
$
40,369

 
$
(3,301
)
 
(8
)%
 
$
115,719

 
$
128,128

 
$
(12,409
)
 
(10
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Percentage of revenue by geographic region:
 
 
 
 
 
 
 
 
 
 
 
 
Americas
61
%
 
64
%
 
 
 
 
 
65
%
 
62
%
 
 
 
 
EMEA
30
%
 
26
%
 
 
 
 
 
27
%
 
27
%
 
 
 
 
APAC
9
%
 
10
%
 
 
 
 
 
8
%
 
11
%
 
 
 
 
Total
100
%
 
100
%
 
 
 
 
 
100
%
 
100
%
 
 
 
 

Revenue decreased $3.3 million for the three months ended September 30, 2017, compared to the three months ended September 30, 2016, and decreased $12.4 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, primarily due to a decrease in product revenue, partially offset by an increase in software and subscriptions revenue.
The decrease in our product revenue of $4.9 million and $18.0 million in the three and nine months ended September 30, 2017, respectively, compared to the same periods last year. The decrease in product revenue for the three months ended September 30, 2017 was primarily due to a decrease in list prices of our hardware products related to our Connect and Select offerings. The decrease in product revenue for the nine months ended September 30, 2017, was primarily due to lower unit shipments and a decrease in list prices of our hardware products related to our Connect and Select offerings.
The increase in our subscription and support revenue of $1.6 million and $5.6 million in the three and nine months ended September 30, 2017, respectively, compared to the same periods last year, was primarily due to an increase in sales of PCS and SaaS, including our HiveManager NG cloud-management platform, and our recognition of deferred revenue in the respective periods.
The Americas and EMEA accounted for the majority of our total revenue in the respective periods. The decrease in revenue in our APAC region for the three and nine months ended September 30, 2017 was primarily due to a decline in unit shipments in that region during the respective periods.
Cost of Revenues

25



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

Three Months Ended September 30,

Nine Months Ended September 30,

2017

2016

$ Change

% Change

2017

2016

$ Change

% Change

(dollars in thousands)

(dollars in thousands)
Cost of revenues:















Product
$
9,408


$
10,070


$
(662
)

(7
)%

$
28,760


$
32,922


$
(4,162
)

(13
)%
Subscription and support
3,244


3,095


149


5
 %

9,573


9,048


525


6
 %
Total cost of revenues
$
12,652


$
13,165


$
(513
)

(4
)%

$
38,333


$
41,970


$
(3,637
)

(9
)%
Cost of revenue decreased $0.5 million and $3.6 million for the three and nine months ended September 30, 2017, respectively, compared to the three and nine months ended September 30, 2016, respectively. We primarily attribute the decrease in our cost of product revenue for the three months ended September 30, 2017 to changes in the mix of the products we sold in the period. We primarily attribute the decrease in our cost of product revenue for the nine months ended September 30, 2017 to a decrease in unit shipments and changes in the mix of products we sold in the period. We primarily relate the increase in our cost of subscription and support revenue to an increase in software and services revenue and an increase in the cost of our cloud operations.
Gross Margin
Our gross margin or gross profit has been and will continue to be affected by a variety of factors, including product shipment volumes, average sales prices of our products, discounts we offer to our VAR and VAD partners, the mix of revenue between products and subscription and support services, and the mix of products we sold in the period, because our products have varying gross margins depending on the product offering and the lifecycle of the product. Historically, our subscription and support gross margin has been lower than our product gross margin; however, we expect our subscription and support gross margin to increase over the long term because we expect our subscription and support revenue to increase more quickly than our cost of subscription and support revenue. We expect our gross margin to be volatile and may decrease at any given time as we experience additional competitive pricing pressure. Further, we believe the pricing of our new Connect and Select offerings may dampen our product gross margin; however, we expect these offerings to generate improvements in our subscription and support gross margin as well as to increase our deferred revenue over the period.
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