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 our customers to use the power of the Wi-Fi, cloud, analytics and applications to transform how they serve their customers. Our 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 organization. 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, the Middle East, Australia 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 reported in the consolidated financial statements and accompanying notes. Those estimates and assumptions include, among others, the selling price 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.

Changes in Accounting Policy

In the first quarter of 2016, the Company voluntarily changed its accounting policy for sales commissions related to products, which include hardware and software revenue, and software subscription and services, which include post-contract support ("PCS") and Software-as-a-Service (“SaaS”) contracts. The Company changed its accounting policy from recording an expense when incurred to deferral of the sales commissions in proportion to the consideration allocated to each element in the arrangement and amortization in, or over, the same period the revenue is recognized for each of the elements in the arrangement (i.e., upon delivery for the product deliverables and over the non-cancellable term of the contract for the PCS and SaaS deliverables).

The Company believes the deferral method described above is preferable primarily because the direct incremental sales commission charges are so closely related to obtaining the revenue from the non-cancellable contracts that they should be deferred and charged to expense over the same period that the related revenue is recognized. Deferred commission amounts are recoverable through the future revenue streams (including up-front payments) under the non-cancellable arrangements.

Short-term deferred commissions are included in prepaid expenses and other current assets, while long-term deferred commissions are included in other assets in the accompanying consolidated balance sheets. The amortization of deferred commissions is included in sales and marketing expense in the accompanying consolidated statements of operations.

The accompanying consolidated financial statements and related notes have been adjusted to reflect the impacts of this change with the associated deferred tax impacts retrospectively for all prior periods presented. Under the as-previously reported basis, there were no book/tax basis differences related to commission expense. Under the as-adjusted basis, the deferred commission asset creates a deferred tax liability related to commission expense. Creating this deferred tax liability reduces the valuation allowance on the deferred tax assets by the same amount. The increase in the deferred tax liability is fully offset by the reduction in the deferred tax asset valuation allowance and has no net impact to income tax provision in the consolidated statements of operations.

The cumulative effect of the change on accumulated deficit was $4.8 million as of January 1, 2015. The following tables present the effects of the retrospective application of the voluntary change in accounting principle for sales commissions related to non-cancellable product, PCS, and SaaS contracts for the current periods and the corresponding preceding periods presented (in thousands, except per share data):



Consolidated Balance Sheet (in thousands)

	December 31, 2016								December 31, 2015
	Computed under Prior Method			Impact of Commission Adjustment		As Reported			As Previously Reported			Impact of Commission Adjustment		As Adjusted
Prepaid expenses and other current assets	$	3,038		$	2,932	$	5,970		$	4,129		$	3,484	$	7,613
Total current assets	$	118,930		$	2,932	$	121,862		$	130,819		$	3,484	$	134,303
Other assets	$	1,985		$	3,115	$	5,100		$	426		$	3,254	$	3,680
Total assets	$	130,436		$	6,047	$	136,483		$	140,914		$	6,738	$	147,652
Accumulated deficit	$	(233,304	)	$	6,047	$	(227,257	)	$	(197,084	)	$	6,738	$	(190,346	)
Total stockholders' equity	$	22,641		$	6,047	$	28,688		$	34,193		$	6,738	$	40,931
Total liabilities and stockholders' equity	$	130,436		$	6,047	$	136,483		$	140,914		$	6,738	$	147,652



Consolidated Statements of Operations (in thousands, except share and per share amounts)

	Year Ended December 31, 2016
	Computed under Prior Method			Impact of Commission Adjustment			As Reported
Sales and marketing	$	80,307		$	691		$	80,998
Operating loss	$	(36,122	)	$	(691	)	$	(36,813	)
Net loss	$	(36,220	)	$	(691	)	$	(36,911	)
Net loss per share allocable to common stockholders, basic and diluted	$	(0.72	)	$	(0.01	)	$	(0.73	)
Weighted-average shares used in computing net loss per share allocable to common stockholders, basic and diluted	50,332,872			—			50,332,872



	Year Ended December 31, 2015
	As Previously Reported			Impact of Commission Adjustment			As Adjusted
Sales and marketing	$	83,066		$	(1,977	)	$	81,089
Operating loss	$	(45,027	)	$	1,977		$	(43,050	)
Net loss	$	(46,195	)	$	1,977		$	(44,218	)
Net loss per share allocable to common stockholders, basic and diluted	$	(0.98	)	$	0.05		$	(0.93	)
Weighted-average shares used in computing net loss per share allocable to common stockholders, basic and diluted	47,323,253			—			47,323,253



	Year Ended December 31, 2014
	As Previously Reported			Impact of Commission Adjustment			As Adjusted
Sales and marketing	$	72,364		$	(1,518	)	$	70,846
Operating loss	$	(28,563	)	$	1,518		$	(27,045	)
Net loss	$	(30,555	)	$	1,518		$	(29,037	)
Net loss per share allocable to common stockholders, basic and diluted	$	(0.85	)	$	0.05		$	(0.80	)
Weighted-average shares used in computing net loss per share allocable to common stockholders, basic and diluted	36,097,405			—			36,097,405



Consolidated Statements of Comprehensive Loss (in thousands)

	Year Ended December 31, 2016
	Computed under Prior Method			Impact of Commission Adjustment			As Reported
Net loss	$	(36,220	)	$	(691	)	$	(36,911	)
Comprehensive loss	$	(36,190	)	$	(691	)	$	(36,881	)

	Year Ended December 31, 2015
	As Previously Reported			Impact of Commission Adjustment			As Adjusted
Net loss	$	(46,195	)	$	1,977		$	(44,218	)
Comprehensive loss	$	(46,256	)	$	1,977		$	(44,279	)

	Year Ended December 31, 2014
	As Previously Reported			Impact of Commission Adjustment			As Adjusted
Net loss	$	(30,555	)	$	1,518		$	(29,037	)
Comprehensive loss	$	(30,555	)	$	1,518		$	(29,037	)



Consolidated Statements of Cash Flows (in thousands)

	Year Ended December 31, 2016
	Computed under Prior Method			Impact of Commission Adjustment			As Reported
Net loss	$	(36,220	)	$	(691	)	$	(36,911	)
Prepaid expenses and other current assets	$	1,529		$	552		$	2,081
Other assets	$	(59	)	$	139		$	80
Net cash used in operating activities	$	(14,554	)	$	—		$	(14,554	)



	Year Ended December 31, 2015
	As Previously Reported			Impact of Commission Adjustment			As Adjusted
Net loss	$	(46,195	)	$	1,977		$	(44,218	)
Prepaid expenses and other current assets	$	(1,275	)	$	(1,210	)	$	(2,485	)
Other assets	$	(257	)	$	(767	)	$	(1,024	)
Net cash used in operating activities	$	(4,957	)	$	—		$	(4,957	)



	Year Ended December 31, 2014
	As Previously Reported			Impact of Commission Adjustment			As Adjusted
Net loss	$	(30,555	)	$	1,518		$	(29,037	)
Prepaid expenses and other current assets	$	(733	)	$	(522	)	$	(1,255	)
Other assets	$	(98	)	$	(996	)	$	(1,094	)
Net cash used in operating activities	$	(8,748	)	$	—		$	(8,748	)

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.

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 amount on deposit at any time with money market funds may exceed the insured limits provided on such funds.

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.

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) and from an individual entity (VAD B) greater than 10% of total consolidated revenue were as follows:



	Year Ended December 31,
	2016		2015		2014
VAD A	14.9	%	13.8	%	13.6	%
VAD B	12.2	%	*		*

* Less than 10%

The percentages of receivables from VAD A and individual entities (VAD B, VAD C and VAD D) greater than 10% of total consolidated accounts receivable were as follows:



	As of December 31,
	2016		2015
VAD A	22.4	%	18.5	%
VAD B	14.4	%	*
VAD C	*		11.2	%
VAD D	15.3	%	*

* Less than 10%

Fair Value Measurements

The Company’s financial instruments consist of cash and cash equivalents, short-term investments, accounts receivable, accounts payable, accrued liabilities and short-term debt. Accounts receivable, accounts payable and accrued liabilities are stated at their carrying value, which approximates fair value due to the short time to the expected receipt or payment. The carrying amount of the Company’s short-term debt approximates its fair value as the stated interest rate approximates market rates currently available to the Company. As of December 31, 2016, the Company has not elected the fair value option for any financial assets and liabilities for which such an election would have been permitted.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist of cash on hand and highly liquid investments in money market funds, including overnight investments. Due to the short-term nature and liquidity of these financial instruments, the carrying value of these assets approximates fair value.

Short-Term Investments

The Company classifies all its investments as available-for-sale at the time of purchase since it is management's intent that these investments be available for current operations, and as such, includes these investments as short-term investments on its balance sheets. These investments consist of investments with original maturities longer than three months, including commercial paper, investment-grade corporate and government debt securities with Moody's and S&P ratings of A-/A3 or better. Short-term investments classified as available-for-sale are recorded at fair market value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders' equity. Realized gains and losses are recorded in the consolidated statements of operations. The investments are adjusted for amortization of premiums and discounts to maturity and such amortization is included in interest income (expense), net. The Company periodically assesses whether its investments with unrealized loss positions are other than temporarily impaired. Other-than-temporary impairment charges exists when the entity has the intent to sell the security, it will more likely than not be required to sell the security before anticipated recovery or it does not expect to recover the entire amortized cost basis of the security. Other-than-temporary impairments are determined based on the specific identification method and are reported in the consolidated statements of operations.

Allowance for Doubtful Accounts

Accounts receivable are recorded at invoiced amounts, net of allowances for doubtful accounts. The Company evaluates the collectability of its accounts receivable based on known collection risks and historical experience. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations (e.g., bankruptcy filings or substantial downgrading of credit ratings), the Company records a specific reserve for bad debts against amounts due to reduce the net recognized receivable to the amount the Company reasonably believes will be collected. For all other customers, the Company records reserves for bad debts based on the length of time the receivables are past due and the Company’s historical experience of collections and write-offs. If circumstances change, such as higher-than-expected defaults or an unexpected material adverse change in a major customer’s ability to meet its financial obligations, the Company may reduce the estimate of the recoverability of the amounts due, potentially by a significant amount.

Amounts recorded in the consolidated statements of operations relating to allowance for doubtful accounts were immaterial for the years ended December 31, 2016, 2015, and 2014, respectively.

Inventory

Inventory consists of hardware products and related component parts and is stated at the lower of cost, which approximates actual cost computed on a first-in, first-out basis, or market value. The Company evaluates inventory for excess and obsolete products, based on management’s assessment of future demand and market conditions, and technological obsolescence of its products. Inventory write-downs, once established, are not reversed as they establish a new cost basis for the inventory. Inventory write-downs are included as a component of cost of product revenue in the accompanying consolidated statements of operations. For the years ended December 31, 2016, 2015 and 2014, the provisions for excess and obsolete inventories were $1.7 million, $0.7 million and $0.3 million, respectively. The Company uses contract manufacturers to provide manufacturing services for its products.

Software Development Costs

The costs to develop the Company’s perpetual license software offerings have not been capitalized because the Company’s current software development process is essentially completed concurrent with the establishment of technological feasibility. As such, all related software development costs are expensed as incurred and included in research and development expenses in the consolidated statements of operations.

Research and development costs incurred during the preliminary project stage related to the Company’s cloud-managed networking platform are expensed as incurred. Capitalization begins when the preliminary project stage is complete, management with the relevant authority authorizes and commits to the funding of the software project, and it is probable the project will be completed. Capitalization ceases when the project is substantially complete and ready for its intended purpose. The Company amortizes the capitalized costs on a straight-line basis over the estimated useful life, generally three to five years.

For the years ended December 31, 2015 and 2014, $1.8 million, and $5.2 million software development costs were capitalized, respectively. The capitalized software development costs include $0.3 million and $0.4 million capitalized stock-based compensation expense for fiscal 2015 and 2014. There were no software developments costs that were capitalized for the year ended December 31, 2016.

In April 2015, the Company completed and launched its next generation cloud services platform, and began to amortize the capitalized software development costs to cost of software subscription and services on a straight-line basis over an estimated useful life of five years. Such internal-use software is included in the software category in property and equipment.

Property and Equipment, net

Property and equipment, including computer and other equipment, laboratory and research and development equipment, purchased software, internal-use software, office furniture and equipment, and construction in progress, are stated at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful lives of the assets or the remaining lease term. Depreciation on property and equipment ranges from two to seven years.

Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful lives of the assets or the remaining lease term. The amortization period for the leasehold improvements primarily ranges from two to seven years.

Goodwill

Goodwill represents the excess purchase consideration of an acquired entity over the fair value of the net tangible and intangible assets acquired.

The Company has determined that it operates as one reporting unit and performs its annual impairment test of goodwill during the fourth quarter of each fiscal year or whenever events or circumstances change that would indicate that goodwill might be impaired. Triggering events that may indicate impairment include, but are not limited to, a significant adverse change in the business climate, unanticipated competition, loss of key personnel, significant changes in the manner the Company uses the acquired assets or the strategy for the overall business, significant negative industry or economic trends or significant underperformance relative to historical operations or projected future results of operations.

In conducting the impairment test, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If the qualitative step is not passed, the Company performs a two-step impairment test whereby in the first step, the Company must compare the fair value of the reporting unit with its carrying amount. If the carrying amount exceeds its fair value, the Company performs the second step of the goodwill impairment test to determine the amount of impairment. The second step, measuring the impairment loss, compares the implied fair value of the goodwill with the carrying value of the goodwill. Any excess of the goodwill carrying value over the implied fair value is recognized as an impairment loss. No impairment of goodwill was identified during the years ended December 31, 2016, 2015 and 2014.

Impairment of Long-Lived Assets

The carrying amounts of long-lived assets, including property and equipment and intangible assets subject to depreciation and amortization, are periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable or that the useful life is shorter than the Company had originally estimated. Recoverability of these assets is measured by comparing the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate over their remaining lives. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. If the useful life is shorter than originally estimated, the Company amortizes the remaining carrying value over the new shorter useful life.

No impairment of any long-lived assets was identified for the years ended December 31, 2016, 2015 and 2014.

Revenue Recognition

The Company derives revenue from two sources: (i) product, which includes hardware and software revenue, and (ii) software subscription and services, which includes post-contract customer support, or PCS, and software delivered as a service, or SaaS. Revenue is recognized when all of the following criteria are met.

Persuasive Evidence of an Arrangement Exists. Evidence of an arrangement generally consists of a purchase order issued pursuant to the terms and conditions of a VAD and VAR reseller agreement or, in limited cases, an end-customer agreement.

Delivery or Performance has Occurred. The Company uses shipping and related documents and VAD sell-through reports from our VAD's with stocking rights to verify delivery or performance. We do not recognize product revenue until transfer of title and risk of loss, which generally is upon shipment to non-stocking VADs, VARs or end-customers.

The Sales Price is Fixed or Determinable. The Company assesses whether the sales price is fixed or determinable based on payment terms and whether the sales price is subject to refund or adjustment.

Collection is Reasonably Assured. The Company assesses probability of collection on a channel partner-by-channel partner basis. The Company subjects its channel partners to a credit review process that evaluates their financial condition and ability to pay for the Company’s products and services. If the Company concludes that collection is not reasonably assured, the Company does not recognize revenue until cash is received.

The Company’s product revenue consists of revenue from the sale of the Company’s hardware products (which each contain embedded software related to its proprietary operating system) and HiveManager network management software which is considered essential to the functionality of the Company’s hardware products. Therefore, the Company’s hardware appliances together with related HiveManager software are considered non-software elements and are not subject to the industry-specific software revenue recognition guidance.

The Company’s software subscription and services revenue consists of revenue from SaaS and PCS arrangements. SaaS arrangements with customers do not provide the right to take possession of the software at any time during the hosting period, have a defined contract term, and are recognized ratably over the contract term beginning on the provisioning date of the contract, which is typically one, three or five years. The Company has determined that hardware sold with SaaS arrangements has stand-alone value and therefore has concluded that the hardware represents a separate unit of accounting that is recognized as revenue upon shipment assuming all other revenue recognition criteria are met. PCS arrangements include software updates, access to technical support personnel, and expedited replacement of defective hardware products. Revenue for PCS services is recognized on a straight-line basis over the service contract term, which is typically one, three or five years.

The Company operates a multiple-tier channel distribution model that includes VADs, VARs, MSPs and direct sales to end-customers. For sales to VARs and end-customers, the Company recognizes product revenue upon transfer of title and risk of loss, which is generally upon shipment. It is the Company’s practice to identify an end-customer prior to shipment to a VAR. Substantially all of the Company’s sales outside of North America are made through VADs. Some VAD agreements currently allow them to stock of the Company’s products in their inventory and provide price protection or rebates and limited rights of return for stock rotation. The Company initially defers product revenue on sales made through these VADs and recognizes revenue upon sell-through as the VADs report to the Company. For VADs that do not have stocking rights, the Company recognizes revenue upon shipment, assuming all other revenue criteria have been met.

Most of the Company’s arrangements, other than stand-alone renewals of SaaS and PCS arrangements, are multiple-element arrangements with a combination of product and service (as defined above). The Company allocates arrangement consideration in multiple-element revenue arrangements at the inception of an arrangement to all deliverables based on the relative selling price method in accordance with the selling price hierarchy, which includes (i) vendor-specific objective evidence (VSOE) of selling price, if available; (ii) third-party evidence (TPE) of selling price, if VSOE is not available; and (iii) best estimate of selling price (BESP), if neither VSOE nor TPE is available.

VSOE. The Company determines VSOE based on its historical pricing and discounting practices for the specific products and services when sold separately. In determining VSOE, the Company requires that a substantial majority of the stand-alone selling prices fall within a reasonably narrow pricing range. The Company established VSOE for some of its sales of PCS for both VAD and VAR channels as the Company's pricing is sufficiently concentrated (based on an analysis of separate sales of PCS) to conclude that it can demonstrate VSOE of selling price of PCS.

TPE. When VSOE cannot be established for deliverables in multiple-element arrangements, the Company applies judgment with respect to whether it can establish a selling price based on TPE. TPE is determined based on competitor prices for interchangeable products or services when sold separately to similarly situated customers. However, because the Company’s products contain a significant element of proprietary technology and the Company’s solutions offer substantially different features and functionality, the comparable pricing of products with similar functionality typically cannot be obtained.

BESP. When the Company is unable to establish selling price using VSOE or TPE, the Company uses BESP in its allocation of arrangement consideration. The objective of BESP is to determine the price at which the Company would transact a sale if the product or service was sold regularly on a stand-alone basis. As the Company has not been able to establish VSOE or TPE for its products and some of its services, the Company determines BESP for the purposes of allocating the arrangement, primarily based on historical transaction pricing. Historical transactions are segregated based on the Company’s pricing model and go-to-market strategy, which include factors such as type of sales channel (VAR, VAD or end-customer), the geographies in which the Company’s products and services were sold (domestic or international) and offering type (product series, software subscriptions and level of support for PCS).

The Company makes certain estimates and maintains allowances for sales returns and other programs based on its historical experience. To date, these estimates have not been significant.

Shipping charges billed to channel partners are included in product revenue and the related shipping costs are included in cost of product revenue.

Deferred Costs of Goods Sold

When the Company’s products have been delivered, but the product revenue associated with the arrangement has been deferred as a result of not meeting the revenue recognition criteria (see “Revenue Recognition” above), the related product costs are also deferred.

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 Wi-Fi access points, branch routers and switches are generally covered by a limited lifetime warranty, and other hardware accessory products are generally covered for a period of one year.

Advertising Costs

Advertising costs are charged to sales and marketing expenses as incurred in the consolidated statements of operations. Advertising expense was immaterial for the fiscal years ended December 31, 2016, 2015 and 2014.

Research and Development Expenses

Research and development costs, other than capitalized software development costs, are charged to operations as incurred, which consist primarily of personnel costs (including compensation costs and stock-based compensation), outside services, expensed materials, depreciation and an allocation of overhead expenses (including facilities and information technology infrastructure costs).

Comprehensive Income (Loss)

Comprehensive income (loss) consists of all components of net income (loss) and all components of other comprehensive income (loss) within stockholders’ equity. The Company’s other comprehensive income (loss) includes unrealized gains and losses from its available-for-sale securities that are not considered other-than-temporarily impaired, net of taxes.

Stock-Based Compensation

The Company measures compensation expense for all stock-based awards based on the estimated fair values on the date of grant. The Company’s stock-based awards include stock options, restricted stock units (RSU) and purchase rights under the employee stock purchase plan (ESPP). The fair value of each RSU granted is determined using the fair value of the Company’s common stock on the date of the grant. The fair value of each stock option is estimated using the Black-Scholes option pricing model. The fair value of each stock purchase right 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 and put option estimated using the Black-Scholes pricing model. The Black-Scholes pricing model requires assumptions including the market value of the Company's common stock, expected term of the award, expected volatility of the price of the Company's common stock, risk-free interest rates, and expected dividend yield.

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.

Income Taxes

The Company accounts for income taxes under an asset and liability approach for deferred income taxes, which require recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been recognized in the consolidated financial statements, but have not been reflected in taxable income. Estimates and judgments occur in the calculation of certain tax liabilities and in the determination of the recoverability of certain deferred income tax assets, which arise from temporary differences and carryforwards. Deferred income tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. The Company regularly assesses the likelihood that deferred income tax assets will be realized based on historical levels of taxable income, projections for future taxable income, and tax planning strategies. To the extent that the Company believes any amounts are not more likely than not to be realized, the Company records a valuation allowance to reduce the deferred income tax assets. The Company regularly assesses the need for a valuation allowance on its deferred tax assets, and to the extent that the Company determines that an adjustment is needed, such adjustment will be recorded in the period that the determination is made.

The Company regularly reviews its tax positions and benefits to be realized. The Company recognizes tax liabilities based upon estimates of whether, and the extent to which, additional taxes will be due when such estimates are more likely than not to be sustained. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. The Company recognizes interest and penalties related to income tax matters as income tax expense in the accompanying consolidated statements of operations.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2014-09, Revenue from contracts with customers (Topic 606), which 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 preliminary plans to adopt these standards on a 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 financial statements.

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 ASU 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 the financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the lease accounting requirements in Topic 840. ASU 2016-02 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 specific 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 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 the financial statements.

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. This standard is effective beginning after December 15, 2016, with early adoption permitted. The Company is currently assessing the impact of the adoption of this standard, however it is not expected to have a material impact on the financial statements and disclosures.

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 anticipate that the adoption of this standard will have a material impact on the financial statements.