10-Q 1 ssni-20140331x10q.htm 10-Q 18088cc378254c9

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014 

or

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: 001-35828

 

Silver Spring Networks, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

 

Delaware

43-1966972

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

555 Broadway Street

Redwood City, California 94063

(Address of principal executive offices) (Zip Code)

(650) 839-4000

(Registrant’s telephone number, including area code)

 

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      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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

 

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No    

 

As of May 2, 2014, there were approximately 48,280,669 shares of the Registrant’s Common Stock outstanding.

 

 

 

 

SILVER SPRING NETWORKS, INC.

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

 

 

Page

 

 

No. 

 

 

 

Note About Forward-Looking Statements    

 

PART I. FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements

 

 

Condensed Consolidated Balance Sheets

 

Condensed Consolidated Statements of Operations

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

 

Condensed Consolidated Statements of Cash Flows

 

Notes to Condensed Consolidated Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

35 

Item 4.

Controls and Procedures

35 

 

PART II. OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

37 

Item 1A.

Risk Factors

38 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

60 

Item 3.

Defaults upon Senior Securities

60 

Item 4.

Mine Safety Disclosures

60 

Item 5.

Other Information

60 

Item 6.

Exhibits

61 

Signatures  

 

62 

 

 

 

2

 


 

 

NOTE ABOUT FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q includes forward-looking statements. All statements, other than statements of historical fact, contained in this Quarterly Report on Form 10-Q, including statements regarding our revenue, non-GAAP revenue, backlog, and other aspects of our future results of operations, financial position and cash flows, our business strategy and plans and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “would,” “could,” “should,” “intend”, “expect” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part II, Item 1A “Risk Factors.    Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

 

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of these forward-looking statements after the date of this Quarterly Report on Form 10-Q or to conform these statements to actual results or revised expectations. 

 

3

 


 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements 

SILVER SPRING NETWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS 

(in thousands, except for par value)  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

2014

 

2013

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

78,492 

 

$

82,596 

Short-term investments

 

62,003 

 

 

63,256 

Accounts receivable

 

61,423 

 

 

69,724 

Inventory

 

4,859 

 

 

4,350 

Deferred cost of revenue

 

33,875 

 

 

37,460 

Prepaid expenses and other current assets

 

5,920 

 

 

4,758 

Total current assets

 

246,572 

 

 

262,144 

 

 

 

 

 

 

Property and equipment, net

 

12,526 

 

 

12,364 

Deferred cost of revenue, non-current

 

262,614 

 

 

238,663 

Deferred tax assets, non-current

 

1,202 

 

 

1,613 

Other long-term assets

 

1,505 

 

 

1,567 

Total assets

$

524,419 

 

$

516,351 

 

 

 

 

 

 

Total liabilities and stockholders’ deficit

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

$

28,455 

 

$

31,317 

Accrued liabilities

 

21,784 

 

 

21,282 

Deferred revenue

 

96,038 

 

 

111,293 

Current portion of capital lease obligations

 

1,604 

 

 

1,615 

Deferred tax liability

 

1,176 

 

 

1,176 

Total current liabilities

 

149,057 

 

 

166,683 

 

 

 

 

 

 

Deferred revenue, non-current

 

456,290 

 

 

413,360 

Other liabilities

 

16,161 

 

 

14,426 

 

 

 

 

 

 

Commitments and contingencies (Note 4)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

Preferred stock, $0.001 par value, 10,000 shares authorized and no shares issued or outstanding as of March 31, 2014 and December 31, 2013

 

 —

 

 

 —

Common stock and additional paid-in capital, $0.001 par value, 1,000,000 shares authorized; 48,194 and 47,384 shares issued and outstanding as of March 31, 2014 and December 31, 2013, respectively

 

547,916 

 

 

539,013 

Accumulated other comprehensive income

 

63 

 

 

130 

Accumulated deficit

 

(645,068)

 

 

(617,261)

Total stockholders’ deficit

 

(97,089)

 

 

(78,118)

Total liabilities and stockholders’ deficit

$

524,419 

 

$

516,351 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

4

 


 

 

 

SILVER SPRING NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 

(In thousands, except per share amounts, unaudited)  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

March 31,

 

2014

 

2013

Revenue:

 

 

 

 

 

Product revenue

$

28,227 

 

$

41,720 

Service revenue

 

16,002 

 

 

11,983 

Total revenue, net

 

44,229 

 

 

53,703 

Cost of revenue:

 

 

 

 

 

Product cost of revenue

 

17,915 

 

 

25,743 

Service cost of revenue

 

14,870 

 

 

17,826 

Total cost of revenue

 

32,785 

 

 

43,569 

Gross profit

 

11,444 

 

 

10,134 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Research and development

 

17,725 

 

 

25,119 

Sales and marketing

 

9,223 

 

 

10,453 

General and administrative

 

11,667 

 

 

14,136 

Total operating expenses

 

38,615 

 

 

49,708 

Operating loss

 

(27,171)

 

 

(39,574)

 

 

 

 

 

 

Other income (expense), net:

 

 

 

 

 

Interest income (expense), net

 

(37)

 

 

(1,052)

Conversion of promissory notes and remeasurement of warrants and derivatives

 

 —

 

 

(23,676)

Other income (expense), net

 

(37)

 

 

(24,728)

Loss before income taxes

 

(27,208)

 

 

(64,302)

Provision for income taxes

 

599 

 

 

64 

Net loss

$

(27,807)

 

$

(64,366)

 

 

 

 

 

 

Deemed dividend to convertible preferred stockholders

 

 —

 

 

(105,000)

Net loss attributable to common stockholders

$

(27,807)

 

$

(169,366)

 

 

 

 

 

 

Net loss per share

 

 

 

 

 

Basic and diluted

$

(0.58)

 

$

(16.18)

Weighted average shares used to compute net loss per share

 

 

 

 

 

Basic and diluted

 

47,693 

 

 

10,469 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

5

 


 

 

SILVER SPRING NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) 

(In thousands, unaudited

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

March 31,

 

2014

 

 

2013

Net loss

$

(27,807)

 

$

(64,366)

Other comprehensive income (loss):

 

 

 

 

 

Changes in foreign currency translation adjustment

 

 

 

47 

Net unrealized holding gain (loss) on available for sale investments

 

(75)

 

 

 —

Other comprehensive income (loss)

 

(67)

 

 

47 

Comprehensive loss

$

(27,874)

 

$

(64,319)

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

 

 

6

 


 

 

SILVER SPRING NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 

(In thousands, unaudited)  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

March 31,

 

2014

 

2013

Cash flows provided by (used in) operating activities:

 

 

 

 

 

Net loss

$

(27,807)

 

$

(64,366)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

1,466 

 

 

1,677 

Stock-based compensation

 

11,432 

 

 

26,668 

Conversion of promissory notes and remeasurement of warrants and derivatives

 

 —

 

 

23,676 

Other non-cash adjustments

 

630 

 

 

980 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

8,301 

 

 

6,539 

Inventory

 

(596)

 

 

(4,564)

Prepaid expenses and other current assets

 

(1,158)

 

 

(1,121)

Deferred cost of revenue

 

(20,366)

 

 

(15,410)

Other long-term assets

 

14 

 

 

2,322 

Accounts payable

 

(3,124)

 

 

(1,637)

Accrued liabilities

 

(1,908)

 

 

(1,887)

Customer deposits

 

107 

 

 

(241)

Deferred revenue

 

27,675 

 

 

20,121 

Other liabilities

 

2,074 

 

 

(1,670)

Net cash (used in) provided by operating activities

 

(3,260)

 

 

(8,913)

 

 

 

 

 

 

Cash flows provided by (used in) investing activities:

 

 

 

 

 

Proceeds from sales and maturities of short-term investments

 

18,466 

 

 

 —

Payment on purchases of short-term investments

 

(17,354)

 

 

 —

Acquisitions of property, plant and equipment

 

(1,742)

 

 

(1,323)

Net cash (used in) provided by investing activities

 

(630)

 

 

(1,323)

 

 

 

 

 

 

Cash flows provided by (used in) financing activities:

 

 

 

 

 

Payment upon termination of preferred stock warrants of a related party

 

 —

 

 

(12,000)

Proceeds from initial public offering, net of offering costs

 

 —

 

 

86,238 

Proceeds from private placement of common stock with a related party

 

 —

 

 

12,000 

Payments on capital lease obligations

 

(356)

 

 

(453)

Proceeds from issuance of common stock, net of repurchases

 

4,555 

 

 

14 

Taxes paid related to net share settlement of equity awards

 

(4,413)

 

 

(5,855)

Net cash (used in) provided by financing activities

 

(214)

 

 

79,944 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(4,104)

 

 

69,708 

 

 

 

 

 

 

Cash and cash equivalents—beginning of period

 

82,596 

 

 

72,646 

Cash and cash equivalents—end of period

$

78,492 

 

$

142,354 

 

 

 

 

 

 

Supplemental cash flow information—cash paid for taxes

$

98 

 

$

85 

Supplemental cash flow information—cash paid for interest

$

34 

 

$

104 

Non-cash investing and financing activities:

 

 

 

 

 

Conversion of convertible preferred stock into common stock

$

 —

 

$

270,725 

Fair value of common stock issued on conversion of convertible promissory notes

$

 —

 

$

79,441 

Deferred offering costs not yet paid

$

 —

 

$

1,941 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

 

7

 


 

SILVER SPRING NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)  

 

1. Description of Business and Summary of Significant Accounting Policies

We have over ten years of experience creating, building and successfully deploying large scale networks and solutions enabling the “internet of things” for critical infrastructure. The “internet of things” refers to a system where a diversity of physical devices has the capacity to communicate using internet technologies. Our first area of focus was in energy, creating a leading grid network by applying advanced networking technology and solutions to the power grid. We have recently broadened beyond the smart grid to networking other critical infrastructure such as street lights, enabling smarter and more efficient cities.

We provide a networking platform and solutions that enable utilities to transform the power grid infrastructure into the smart grid. The foundation of our technology is a standards-based and secure Internet Protocol, or IP, network. Our networking platform provides two-way communications between the utility back office and devices on the power grid. In addition to our networking platform, we offer a suite of solutions that run on top of our network and complementary services. Our solutions include advanced metering, distribution automation and demand-side management. Our service offerings include professional services to implement our products, managed services and software as a service, or SaaS, to assist utilities with managing the network and solutions, and ongoing customer support.

We believe our technology is particularly well suited for a range of other solutions across the broad category of “internet of things.” We are focused on critical infrastructure that requires similar networking performance as the current market we serve. Our first expansion beyond the power grid has been on city infrastructure, specifically networking street lights. We believe that by applying advanced networking technology, we can enable cities to achieve their goals for increasing energy and operating efficiency while improving quality of life. We expect to expand our offerings in this area as the market opportunity evolves.

Silver Spring Networks, Inc., headquartered in Redwood City, California, was founded in July 2002 and was incorporated in the State of Delaware on July 3, 2002 as Real Time Techcomm, Inc. On August 6, 2002, we changed our name to Silver Spring Networks, Inc.

Reverse Stock Split

Prior to our initial public offering (“IPO”) in March 2013, our Board of Directors and holders of the requisite number of outstanding shares of our capital stock approved an amendment to our restated certificate of incorporation to effect a 5-for-1 reverse stock split of our outstanding capital stock. The reverse stock split was effected on February 11, 2013 and did not result in an adjustment to par value. The reverse stock split is reflected in the accompanying condensed consolidated financial statements and related notes on a retroactive basis for all periods presented.

Accounting Principles and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2013.

The condensed consolidated balance sheet as of December 31, 2013, included herein, was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by GAAP.

8

 


 

SILVER SPRING NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)  

 

The condensed consolidated financial statements include the accounts of Silver Spring Networks, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.

The accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, comprehensive income (loss), and cash flows for the interim periods but are not necessarily indicative of the results of operations to be anticipated for the full year ending December 31, 2014.  

There have been no changes to our significant accounting policies described in the Annual Report on Form 10-K that have had a material impact on our condensed consolidated financial statements and related notes.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, contingent assets and liabilities, and revenue and expenses during the reporting period. Estimates are used for revenue and cost recognition, inventory valuation, warranty obligations, stock-based compensation, classification of current and non-current deferred revenue and deferred cost of revenue, income taxes and deferred income tax assets and associated valuation allowances. These estimates generally involve complex issues and require judgments, involve the analysis of historical and prediction of future trends, can require extended periods of time to resolve and are subject to change from period to period. Actual results may differ materially from management’s estimates.

 

Inventory

 

Inventory is stated at the lower of cost or market.  Inventory consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

2014

 

2013

Component parts

$

185 

 

$

690 

Finished goods

 

4,674 

 

 

3,660 

Inventory

$

4,859 

 

$

4,350 

 

Finished goods inventory included consigned inventory which totaled $2.9 million and $2.8 million as of March 31, 2014 and December 31, 2013, respectively.

Product Warranty

We provide warranties for substantially all of our products. Our standard warranty period extends from one to five years. We accrue for costs of standard warranty at the time of product shipment and record changes in estimates to warranty accruals when it is probable a liability has been incurred and the amount of loss can be reasonably estimated.

9

 


 

SILVER SPRING NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)  

 

Product warranty obligation is presented as follows on the condensed consolidated balance sheets (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

2014

 

2013

Current warranty obligation—classified in accrued liabilities

$

3,459 

 

$

2,985 

Non-current warranty obligation—classified in other liabilities

 

3,374 

 

 

3,104 

 

$

6,833 

 

$

6,089 

Product warranty activity was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

March 31,

 

2014

 

2013

Warranty obligation—beginning of period

$

6,089 

 

$

6,316 

Warranty expense for new warranties issued

 

224 

 

 

238 

Utilization of warranty obligation

 

(851)

 

 

(355)

Changes in estimates for pre-existing warranties

 

1,371 

 

 

(68)

Warranty obligation—end of period

$

6,833 

 

$

6,131 

During the three months ended March 31, 2014 and 2013, we revised our estimated warranty liability to reflect changes in cost estimates and, to a lesser extent, product field reliability experience and recorded an increase (reduction) of product warranty liability and product cost of revenue of $1.4 million and $(0.1) million, respectively.

At the time of product shipment, we estimate and accrue for the amount of standard warranty cost and record the amount as a cost of revenue. Determining the amount of warranty costs requires management to make estimates and judgments based on historical claims experience, industry benchmarks, test data and various other assumptions including estimated field failure rates that are believed to be reasonable under the circumstances. The amount of warranty costs accrued are net of warranty obligations to be fulfilled by our suppliers. The results of these judgments formed the basis for our estimate of the total charge to cover anticipated customer warranty, repair, return and replacement and other associated costs. Should actual product failure rates, claim levels, material usage or supplier warranties on parts used in our products differ from our original estimates, revisions to the estimated warranty liability could result in adjustments to our cost of revenue in future periods.

Certain of our standard product warranty obligations require us to reimburse a customer for installation and other related costs in the event that field reliability rates fall below contractually specified thresholds. We consider the probability that we will have to pay such incremental warranty costs based on the expected performance of a delivered product when we record new warranty obligations issued in a period as well as when we determine if any changes are required to our original estimates for pre-existing warranty obligations.

Our warranty obligations are affected by product failure rates, claims levels, material usage and supplier warranties on parts included in our products. Because our products are relatively new and we do not have the benefit of long-term experience observing the products’ performance in the field, it is possible that the estimates of a product’s lifespan and incidence of claims could vary from period to period.

In certain customer arrangements, we have provided extended warranties for periods of up to 15 years following the initial standard warranty period. We recognize revenue associated with extended warranties over the extended warranty period when the extended warranty period commences. Costs associated with providing extended warranties are expensed as incurred during the extended warranty period. As of March 31, 2014 and December 31, 2013, we had deferred revenue associated with extended warranty arrangements of $0.4 million and $0.2 million,

10

 


 

SILVER SPRING NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)  

 

respectively, included in other current liabilities, and $7.3 million and $7.1 million, respectively, included in other long-term liabilities on our condensed consolidated balance sheets.

 

Conversion of Convertible Promissory Notes and Embedded Derivatives

 

In connection with our IPO in March 2013, the conversion of the convertible notes and issuance of common stock were accounted for as debt extinguishments and accordingly, the convertible notes, unamortized debt issuance costs and bifurcated compound embedded derivatives were removed at their respective carrying amounts and the shares of common stock issued were measured at fair value based on the closing price on the date our IPO closed. As a result, we recorded a loss on debt extinguishments of $22.9 million in the three months ended March 31, 2013.

 

Accumulated Other Comprehensive Income (AOCI)

 

The components of AOCI, net of tax, were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign Currency

 

Unrealized Gains

 

 

 

 

Translation

 

(Losses) on Available

 

 

 

 

Adjustment

 

for Sale Securities

 

Total

Balance as of December 31, 2013

$

46 

 

$

84 

 

$

130 

Other comprehensive income (loss) before reclassification

 

 

 

(2)

 

 

Amounts reclassified from AOCI

 

 —

 

 

(73)

 

 

(73)

Other comprehensive income (loss)

 

 

 

(75)

 

 

(67)

Balance as of March 31, 2014

$

54 

 

$

 

$

63 

 

 

 

 

 

 

 

11

 


 

SILVER SPRING NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)  

 

 

2. Net income (loss) per share

In connection with our IPO, all of our outstanding convertible preferred stock converted into common stock. In addition, we recognized a deemed dividend of $105.0 million to common stockholders on the date of conversion.  Basic net loss per share applicable to common stockholders is computed by dividing the net loss applicable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share applicable to common stockholders is computed by giving effect to all potential shares of common stock, including stock options and restricted stock units, to the extent dilutive.

The following table sets forth the computation of basic and diluted net loss per share applicable to common stockholders (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

March 31,

 

2014

 

2013

Net loss

$

(27,807)

 

$

(64,366)

Deemed dividend to convertible preferred stockholders

 

 —

 

 

(105,000)

Net loss available to common stockholders

$

(27,807)

 

$

(169,366)

Weighted average common shares outstanding—basic and diluted

 

47,693 

 

 

10,469 

Basic and diluted loss per common share

$

(0.58)

 

$

(16.18)

The following potential common shares outstanding were excluded from the computation of diluted net loss per share because including them would have been anti-dilutive (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

2014

 

2013

Employee equity incentive plans

 

6,725 

 

 

6,492 

Warrants to purchase common stock

 

 —

 

 

71 

Total common stock equivalents

 

6,725 

 

 

6,563 

 

 

3. Financial Instruments

Cash, Cash Equivalents and Short-Term Investments

Cash equivalents consist of highly liquid investments with insignificant interest rate risk and original or remaining maturities at the time of purchase of three months or less, and consist primarily of money market funds and U.S. Government securities. Short-term investments consist of high investment grade securities with original or remaining maturities at the time of purchase of greater than three months, and are available for use in current operations. We classify all of our cash equivalents and short-term investments as available-for-sale and record at fair value. Unrealized gains and losses are included in accumulated other comprehensive income (loss), which is reflected as a separate component of stockholders’ deficit. Realized gains and losses are included in other income and expense, net. Determining whether a decline in fair value is other-than-temporary requires management judgment based on the specific facts and circumstances of each security. We evaluate our short-term investments for impairment each reporting period. Amounts are reclassified out of accumulated other comprehensive income (loss) into earnings using the specific identification method.

 

12

 


 

SILVER SPRING NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)  

 

Cash, cash equivalents and short-term investments consisted of the following as of March 31, 2014 and December 31, 2013 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2014

 

Amortized

 

Unrealized

 

Unrealized

 

Estimated

 

Cost 

 

Gains 

 

Losses 

 

Fair Value 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash

$

47,894 

 

$

 —

 

$

 —

 

$

47,894 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds

 

30,598 

 

 

 —

 

 

 —

 

 

30,598 

Total cash equivalents

 

30,598 

 

 

 —

 

 

 —

 

 

30,598 

Short-term fixed income securities:

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency obligations

 

40,856 

 

 

58 

 

 

(33)

 

 

40,881 

U.S. and foreign corporate debt securities

 

18,332 

 

 

42 

 

 

(6)

 

 

18,368 

Foreign governments and multi-national agency obligations

 

2,755 

 

 

 —

 

 

(1)

 

 

2,754 

Total short-term investments

 

61,943 

 

 

100 

 

 

(40)

 

 

62,003 

Total cash, cash equivalents and short-term investments

$

140,435 

 

$

100 

 

$

(40)

 

$

140,495 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2013

 

Amortized

 

Unrealized

 

Unrealized

 

Estimated

 

Cost 

 

Gains 

 

Losses 

 

Fair Value 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash

$

52,346 

 

$

 —

 

$

 —

 

$

52,346 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds

 

30,250 

 

 

 —

 

 

 —

 

 

30,250 

Total cash equivalents

 

30,250 

 

 

 —

 

 

 —

 

 

30,250 

Short-term fixed income securities:

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency obligations

 

41,991 

 

 

84 

 

 

(21)

 

 

42,054 

U.S. and foreign corporate debt securities

 

18,366 

 

 

76 

 

 

(1)

 

 

18,441 

Foreign governments and multi-national agency obligations

 

2,764 

 

 

 —

 

 

(3)

 

 

2,761 

Total short-term investments

 

63,121 

 

 

160 

 

 

(25)

 

 

63,256 

Total cash, cash equivalents and short-term investments

$

145,717 

 

$

160 

 

$

(25)

 

$

145,852 

As of March 31, 2014, approximately  37%, 36%, and 21% of our cash, cash equivalents, and short-term investments were held with three financial institutions.  As of December 31, 2013, approximately 41%, 34%, and 21% of our cash, cash equivalents, and short-term investments were held with three financial institutions.

13

 


 

SILVER SPRING NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)  

 

Contractual Maturities

The contractual maturities of cash equivalents and short-term investments consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2014

 

December 31, 2013

 

Amortized

 

Aggregate

 

Amortized

 

Aggregate

 

Cost Basis 

 

Fair Value 

 

Cost Basis 

 

Fair Value 

Due within one year

$

50,582 

 

$

50,591 

 

$

44,477 

 

$

44,474 

Due after 1 year through 3 years

 

41,959 

 

 

42,010 

 

 

48,894 

 

 

49,032 

Total cash equivalents & short-term investments

$

92,541 

 

$

92,601 

 

$

93,371 

 

$

93,506 

Fair Value Measurements

We measure certain financial assets at fair value on a recurring basis.

The measurements of fair value were established based on a fair value hierarchy that prioritizes the inputs. This hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. The guidance for fair value measurements requires that assets and liabilities carried at fair value be classified and disclosed in one of the following categories:

Level 1—Quoted (unadjusted) prices in active markets for identical assets or liabilities.

 

Level 2—Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

Level 3—Unobservable inputs in which there is little or no market data, which requires us to develop our own assumptions.

Level 1 measurements are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 measurements are obtained from readily available pricing sources for comparable instruments, identical instruments in less active markets, or models using market observable inputs. We did not have any transfers of financial instruments between valuation levels during the three months ended March 31, 2014 and the year ended December 31, 2013.  

14

 


 

SILVER SPRING NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)  

 

As of March 31, 2014, the fair value of these financial assets recorded at fair value on a recurring basis was determined using the following inputs (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement Using 

 

 

 

 

Quoted Prices in

 

 

 

 

 

 

 

 

Active Markets

 

Significant Other

 

Significant

 

 

 

 

for Identical

 

Observable

 

Unobservable

 

 

 

 

Instruments

 

Inputs

 

Inputs

 

 

 

 

(Level 1) 

 

(Level 2) 

 

(Level 3) 

 

Total 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

Money-market funds

$

30,598 

 

$

 —

 

$

 —

 

$

30,598 

Total cash equivalents

 

30,598 

 

 

 —

 

 

 —

 

 

30,598 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agency obligations

 

 —

 

 

40,881 

 

 

 —

 

 

40,881 

U.S. and foreign corporate debt securities

 

 —

 

 

18,368 

 

 

 —

 

 

18,368 

Foreign governments and multi-national agency obligations

 

 —

 

 

2,754 

 

 

 —

 

 

2,754 

Total short-term investments

 

 —

 

 

62,003 

 

 

 —

 

 

62,003 

Total assets measured at fair value

$

30,598 

 

$

62,003 

 

$

 —

 

$

92,601 

 

As of December 31, 2013, the fair value of these financial assets recorded at fair value on a recurring basis was determined using the following inputs (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement Using 

 

 

 

 

Quoted Prices in

 

 

 

 

 

 

 

 

Active Markets

 

Significant Other

 

Significant

 

 

 

 

for Identical

 

Observable

 

Unobservable

 

 

 

 

Instruments

 

Inputs

 

Inputs

 

 

 

 

(Level 1) 

 

(Level 2) 

 

(Level 3) 

 

Total 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

Money-market funds

$

30,250 

 

$

 —

 

$

 —

 

$

30,250 

Total cash equivalents

 

30,250 

 

 

 —

 

 

 —

 

 

30,250 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agency obligations

 

 —

 

 

42,054 

 

 

 —

 

 

42,054 

U.S. and foreign corporate debt securities

 

 —

 

 

18,441 

 

 

 —

 

 

18,441 

Foreign governments and multi-national agency obligations

 

 —

 

 

2,761 

 

 

 —

 

 

2,761 

Total short-term investments

 

 —

 

 

63,256 

 

 

 —

 

 

63,256 

Total assets measured at fair value

$

30,250 

 

$

63,256 

 

$

 —

 

$

93,506 

 

We periodically review our marketable debt securities for other-than-temporary impairment. We consider factors such as the duration, severity and the reason for the decline in value, the potential recovery period and our intent to sell. We also consider whether it is more likely than not that we will be required to (i) sell the debt securities before recovery of their amortized cost basis, and (ii) the amortized cost basis cannot be recovered as a result of credit losses. During the three months ended March 31, 2014, we did not recognize any other-than-temporary impairment loss.  The following table presents gross unrealized losses and fair values for those investments that were in an unrealized loss position, aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in thousands):

15

 


 

SILVER SPRING NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2014

 

As of December 31, 2013

 

Total (Less Than 12 Months)

 

Total (Less Than 12 Months)

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Value

 

Loss 

 

Value

 

Loss 

U.S. and foreign corporate debt securities

$

18,355 

 

$

(33)

 

$

4,247 

 

$

(1)

Foreign governments and multi-national agency obligations

 

1,414 

 

 

(6)

 

 

2,761 

 

 

(3)

U.S. government and agency obligations

 

2,754 

 

 

(1)

 

 

12,566 

 

 

(21)

Total

$

22,523 

 

$

(40)

 

$

19,574 

 

$

(25)

 

 

 

 

 

 

 

4. Commitments and contingencies

Operating and Capital Leases

The future minimum commitments under our operating and capital leases were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2014

 

Operating Leases

 

Capital Leases

2014

$

3,903 

 

$

1,294 

2015

 

5,404 

 

 

1,162 

2016

 

4,198 

 

 

112 

2017

 

455 

 

 

 —

2018

 

466 

 

 

 —

2019 and thereafter

 

1,290 

 

 

 —

Net minimum lease payments    

$

15,716 

 

 

2,568 

Less amount representing interest

 

 

 

 

(144)

Present value of net minimum capital lease payments

 

 

 

$

2,424 

Legal Contingencies

We were named in a lawsuit filed in September 2010 in the Superior Court of the State of California, San Mateo County (Edwards v. Silver Spring Networks). The lawsuit claims to be a “class action” on behalf of California consumers, and alleges that smart meters are defective and generate incorrect bills. We filed a motion to dismiss this case and, in September 2011, the San Mateo Superior Court granted our motion without leave to amend as to two of the plaintiffs’ causes of action and with leave to amend as to a third claim. In February 2012, the plaintiffs filed an amended complaint, to which we filed an answer denying the plaintiffs’ allegations in May 2012. In August 2012, the plaintiffs filed a second amended complaint, and in September 2012, we filed a demurrer to one of the two claims asserted in the second amended complaint, which was overruled by the court. In November 2012, the plaintiffs filed a motion for class certification. In April 2013, the court denied the class certification motion without prejudice, but allowed the plaintiffs to file a revised class certification motion, which the plaintiffs filed in June 2013. The court denied the revised class certification motion in December 2013.  We intend to continue vigorously defending against the action.

In June 2011, EON Corp. IP Holdings, LLC, a non-producing entity, or EON, filed suit in United States District Court for the Eastern District of Texas, Tyler Division against us and a number of smart grid providers. Other defendants include Landis+Gyr AG (acquired by Toshiba Corporation), Aclara Power-Line Systems Inc., Elster Solutions, LLC, Itron, Inc. and Trilliant Networks Inc. This lawsuit alleges infringement of United States Patent Nos. 5,388,101, 5,481,546, and 5,592,491 by certain networking technology and services that we and the other defendants provide. We filed amended answers, affirmative defenses and counterclaims in August 2012,

16

 


 

SILVER SPRING NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)  

 

September 2012, October 2012 and November 2012 denying the plaintiff’s allegations and asserting that plaintiff’s patents are invalid. The trial has been scheduled for June 2014. All of the other named defendants in the case have settled with EON. We believe that we have meritorious defenses to EON’s allegations and intend to continue vigorously defending against the action.

In September 2011, TransData, Inc., or TransData, filed suit in United States District Court for the Western District of Oklahoma, against Oklahoma Gas & Electric Company (“OG&E”), alleging infringement of United States Patent Nos. 6,181,294, 6,462,713, and 6,903,699 by certain wireless communication-enabled meters, including General Electric Company meters with our wireless modules.  We have agreed with General Electric Company to contribute to the indemnification and defense of OG&E in connection with the TransData suit. An early claim construction hearing was held regarding one claim term in February 2013, which the court ruled upon in June 2013. A hearing for the full claim construction was held in September 2013, on which the court issued an order in October 2013. We believe that OG&E has meritorious defenses to TransData’s allegations, and together with OG&E and General Electric Company intend to vigorously defend against the action.

In March 2013, Linex Technologies, Inc., a non-producing entity, or Linex, filed suit against us in United States District Court for the Southern District of Florida. The complaint alleges that certain of our networking technology infringes United States Patent Nos. 6,493,377 and 7,167,503. We filed an answer in May 2013. In January 2014, the court granted the plaintiff’s request for a stay of the matter, pending reexamination of the patents at issue by the U.S. Patent and Trademark Office. We believe that we have meritorious defenses to Linex’s allegations and intend to continue vigorously defending against the action.

During the year ended December 31, 2013, the Company recorded an immaterial charge related to certain legal proceedings described above. Other than for the matters that the Company has recognized in the consolidated financial statements, it has not recorded any amounts for contingent losses associated with the matters described above based on its belief that losses, while reasonably possible, are not probable. Unless otherwise stated, the Company is currently unable to predict the final outcome of these lawsuits and therefore cannot determine the likelihood of loss nor estimate a range of possible loss.

We are directly involved with various unresolved legal actions and claims, and are indirectly involved with proceedings by administrative bodies such as public utility commissions, arising in the ordinary course of business. We do not believe that any liability from any reasonably foreseeable disposition of such legal actions and claims, individually or in the aggregate, would have a material effect on our consolidated financial statements. There are many uncertainties associated with any litigation or claim, and we cannot be certain that these actions or other third-party claims will be resolved without costly litigation, fines and/or substantial settlement payments. If that occurs, our business, financial condition and results of operations could be materially and adversely affected. If information becomes available that causes us to determine that a loss in any of our pending litigation matters, claims or settlements is probable, and a reasonable estimate of the loss associated with such events can be made, we will record the estimated loss at that time.

Customer Performance and Other Commitments

Certain customer agreements require us to obtain letters of credit or surety bonds in support of our obligations under such arrangements. These letters of credit or surety bonds typically provide a guarantee to the customer for future performance, which usually covers the deployment phase of a contract and may on occasion cover the operations and maintenance phase of service contracts.  We have available a line of credit with a bank, which provides for advances and the issuance of letters of credit of up to $50 million.

During the ordinary course of business, we provide standby letters of credit or other guarantee instruments to third parties as required for certain transactions initiated either by us or ourselves.  These letters of credit or guarantee instruments are related to performance guarantees, facility leases and workers compensation insurance.  These letters of credit are subject to compliance with financial covenants and other customary conditions to borrowings. As of March 31, 2014 we were in compliance with the financial covenants in the credit agreement.  As

17

 


 

SILVER SPRING NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)  

 

of March 31, 2014 and December 31, 2013, we had a total of $5.8 million and $9.8 million, respectively, of standby letters of credit issued under the credit facility with a financial institution, of which $0.6 million (A$0.6 million) and $0.6 million (A$0.6 million), respectively, were denominated in Australian dollars. 

As of March 31, 2014, we had a $15.0 million unsecured surety bond. The surety bond provides a financial guarantee to support performance obligations under certain customer agreements. In the event any such letters of credit or surety bonds are called, we would be obligated to reimburse the issuer of the letter of credit or surety bond. We do not believe there will be any claims against currently outstanding letters of credit or surety bonds.

Our contracts with customers and meter manufacturers typically contain provisions that could result in payments or other liabilities related to late or improper delivery of products, services, installations or operations or failure to meet product or performance specifications or other product defects. Any payments made to customers pursuant to the terms of these provisions are recorded as reductions of deferred revenue.

 

Indemnification Commitments

Directors, Officers and Employees. In accordance with our bylaws and/or pursuant to indemnification agreements we have entered into with directors, officers and certain employees, we have indemnification obligations to our directors, officers and certain employees for claims brought against these persons arising out of certain events or occurrences while they are serving at our request in such a capacity. We maintain director and officer liability insurance coverage to reduce our exposure to such obligations, and payments made under indemnification agreements. To date, there have been no indemnification claims by these directors, officers and employees.

Customers and Meter Manufacturers. Our contracts with customers and meter manufacturers typically provide indemnification for claims filed by third parties alleging that our products and services sold to the customer or manufacturer infringe or misappropriate any patent, copyright, trademark or other intellectual property right. Refer to the discussion above under the heading “Legal Contingencies” for a description of certain matters involving our indemnification obligations.

In our customer contracts, we also typically provide an indemnification for third-party claims resulting from death, personal injury or property damage caused by the negligence or willful misconduct of our employees and agents in connection with the performance of certain contracts.

Under our customer and meter manufacturer indemnities, we typically agree to defend the customer or meter manufacturer, as the case may be, from such claims, and pay any resulting costs, damages and attorneys’ fees awarded against the indemnified party with respect to such claims, provided that (a) the indemnified party promptly notifies us in writing of the claim, (b) the indemnified party provides reasonable assistance to us at our expense, and (c) we have sole control of the defense and all related settlement negotiations.

Insurance. We maintain various insurance coverages, subject to policy limits and certain conditions, that enable us to recover a portion of amounts paid by us in connection with our obligation to indemnify our customers and meter manufacturers. However, because our maximum liability associated with such indemnification obligations generally is not stated explicitly in the related agreements, and further because many states prohibit limitations of liability for such indemnified claims, the maximum potential amount of future payments we could be required to make under these indemnification provisions could significantly exceed insurance policy limits.

 

Historically, payments made by us under these indemnification provisions have not had a material effect on our results of operations, financial position or cash flows.

 

 

18

 


 

SILVER SPRING NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)  

 

 

5. Stock-Based Compensation

 

Equity Incentive Plan and Employee Stock Purchase Plan

 

Our Board of Directors adopted the 2012 Equity Incentive Plan, or the 2012 Plan, which became effective on March 12, 2013 and serves as the successor to our 2003 Stock Option Plan, or the 2003 Plan. Pursuant to the 2012 Plan, 3,400,000 shares of our common stock were initially reserved for grant, plus (1) any shares that were reserved and available for issuance under the 2003 Plan at the time the 2012 Plan became effective, and (2) any shares that become available upon forfeiture or repurchase by us under the 2003 Plan and a stock option plan assumed in connection with a previous acquisition, will be reserved for issuance. Under the 2012 Plan, we may grant both incentive and non-statutory stock options, restricted stock and restricted stock units to employees, directors and service providers. We may grant options to purchase shares of common stock to employees, directors and service providers at prices not less than the fair market value at date of grant for both Incentive Stock Options, or ISOs, or Nonqualified Stock Options, or NQSOs. ISOs granted to a person who, at the time of the grant, owns more than 10% of the voting power of all classes of stock must be at no less than 110% of the fair market value and expire five years from the date of grant. All other options generally have a contractual term of 10 years. Options generally vest over four years. Restricted stock units, or RSUs, generally vest between two to four years. We have also granted to certain executive officers awards with performance and service-based conditions.  The potential shares to be awarded related to performance-based awards are derived from fiscal 2014 operating performance metrics which will be determined at the end of the year.  As of March 31, 2014 and December 31, 2013, there were 4.5 million and 2.5 million shares, respectively, of common stock reserved for future issuance under our stock plan.

 

Our Board of Directors adopted the 2012 Employee Stock Purchase Plan, or ESPP, which became effective on March 12, 2013, pursuant to which 400,000 shares of our common stock have been reserved for future issuance. Eligible employees can enroll and elect to contribute up to 15% of their compensation through payroll withholdings in each offering period, subject to certain limitations. Each offering period is six months in duration, with the exception of the initial offering period which commenced in March 2013 upon the date our IPO was declared effective and that ended on February 14, 2013.  The purchase price of the stock is the lower of 85% of the fair market value on (a) the first day of the offering period or (b) the purchase date.

19

 


 

SILVER SPRING NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)  

 

We recorded stock-based compensation expense as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

March 31,

 

2014

 

2013

Cost of revenue

$

2,692 

 

$

6,724 

Research and development

 

3,155 

 

 

9,544 

Sales and marketing

 

2,045 

 

 

3,346 

General and administrative

 

3,540 

 

 

7,054 

Stock-based compensation expense

$

11,432 

 

$

26,668 

The following table summarizes our stock option activity and related information for the three months ended March 31, 2014 (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options Outstanding

 

 

 

Weighted

 

Weighted

 

 

 

 

 

 

Average

 

Average

 

 

 

 

 

 

Exercise

 

Remaining

 

Aggregate

 

Number of

 

Price per

 

Contractual

 

Intrinsic

 

Shares 

 

Share 

 

Term (years) 

 

Value 

Balance at December 31, 2013

4,726 

 

$

11.18 

 

 

 

 

 

Options granted

26 

 

 

18.43 

 

 

 

 

 

Options exercised

(93)

 

 

4.99 

 

 

 

 

 

Options cancelled or expired

(32)

 

 

19.83 

 

 

 

 

 

Balance at March 31, 2014

4,627 

 

$

12.00 

 

6.20 

 

$

26,885 

As of March 31, 2014:

 

 

 

 

 

 

 

 

 

Options vested and expected to vest

4,556 

 

$

11.89 

 

6.15 

 

$

26,863 

Options exercisable

3,437 

 

$

9.84 

 

5.27 

 

$

26,352 

The following table summarizes our restricted stock unit activity and related information for the three months ended March 31, 2014 (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted Stock

 

Units Outstanding 

 

 

 

Weighted

 

 

 

Average Grant

 

Number of

 

Date Fair Value

 

Shares 

 

per Share 

Balance at December 31, 2013

2,759 

 

$

19.14 

Restricted stock units granted

268 

 

 

17.23 

Restricted stock units vested

(698)

 

 

17.64 

Restricted stock units cancelled

(53)

 

 

19.23 

Balance at March 31, 2014

2,276 

 

$

19.37 

In March 2013, as approved by our Board of Directors, we modified certain stock options held by employees and directors to purchase 1,752,895 shares of our common stock with an exercise price of $34.90 per share or greater to reduce the exercise price to $17.00 per share, the IPO price. There were no changes to vesting terms or conditions. We incurred an incremental charge to stock-based compensation of $0.3 million and $3.7 million for the three months ended March 31, 2014 and 2013, respectively, and expect to incur $1.0 million of incremental stock-based compensation related to the modification over a weighted average period of 1.0 years.

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SILVER SPRING NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)  

 

As of March 31, 2014, there was $46.1 million of total unrecognized compensation cost related to non-vested stock-based compensation arrangements, which is expected to be recognized over a weighted-average period of 2.1 years.

 

6. Income Taxes

Our provision for income taxes for the three months ended March 31, 2014 and March 31, 2013 reflects an effective tax rate of (2.2)% and (0.1)%, respectively, and primarily consists of foreign income and withholding taxes.   

 

7. Subsequent Events

 

On May 6, 2014, the Company entered into an agreement to acquire 100% of the outstanding shares of StreetLight.Vision, a société à responsabilité limitée incorporated under the laws of France, which provides street light control and management software. The purchase price is approximately $8.8 million in cash, and the transaction is expected to close in the second quarter of 2014.

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013. In addition, the following discussion contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Factors that could cause or contribute to these differences include those factors discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly the section entitled “Risk Factors.”

Overview

We have over ten years of experience creating, building and successfully deploying large scale networks and solutions enabling the “internet of things” for critical infrastructure. The “internet of things” refers to a system where a diversity of physical devices has the capacity to communicate using internet technologies. Our first area of focus was in energy, creating a leading smart grid network by applying advanced networking technology and solutions to the power grid. We have recently broadened beyond the smart grid to networking other critical infrastructure such as street lights, which enable smarter and more efficient cities.

For the smart grid, we provide a leading networking platform and solutions that enable utilities to transform the power grid infrastructure into the smart grid. The smart grid intelligently connects millions of devices that generate, control, monitor and consume power, providing timely information and control to both utilities and consumers. We believe that the application of networking technology to the power grid has the potential to transform the energy industry through better communication just as the application of networking technology to the computing industry enabled the Internet.

We believe the power grid is one of the most significant elements of contemporary industrial infrastructure that has yet to be extensively networked with modern technology. To address this challenge, we pioneered a fundamentally new approach to connect utilities with millions of devices on the power grid. We believe our technology will yield significant benefits to utilities, consumers and the environment, both in the near term and the future. These benefits include more efficient management of energy, improved grid reliability, capital and operational savings, integration with renewable-generation sources, consumer empowerment, and assistance in complying with evolving regulatory mandates through reduced carbon emissions. We believe networking the power grid will fundamentally transform the world’s relationship with energy.

We believe our technology is particularly well suited for a range of other solutions across the broad category of the “internet of things.” We are focused on critical infrastructure that requires similar networking performance as the current market we serve. Our first expansion beyond the power grid has been on city infrastructure, specifically networking street lights. We believe that by applying advanced networking technology, we can enable cities to achieve their goals for increasing energy and operating efficiency while improving quality of life. We expect to expand our offerings in this area as the market opportunity evolves.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (“JOBS Act”) enacted in April 2012. Under Section 107(b) of the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail our company of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
 

 

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Financial Overview

Revenue

We derive revenue from sales of products and services that enable customers to deploy our networking platform. For the three months ended March 31, 2014, product revenue represented 64% and service revenue represented 36% of our total revenue.

Our product revenue is derived from sales of hardware such as communications modules, access points, relays and bridges, and software. To date, in our typical customer deployments, we have sold our communications modules to third party device manufacturers and our other hardware and software products directly to our customers. However, when requested by our customers, we have sold third-party devices such as meters integrated with our communications modules directly to our customers.

Our service revenue includes fees for professional services, managed services and SaaS, and ongoing customer support.

To date, a substantial majority of our revenue is attributable to a limited number of customer deployments of our advanced metering solution. In the three months ended March 31, 2014, the deployments for Singapore Power, Progress Energy, and CHED represented 23%, 15%,  and 15% of our revenue, respectively.

Each of these total revenue percentages includes amounts related to the customers’ deployments that were invoiced directly to our third party device manufacturers, as well as direct revenue from our customers. We expect that a limited number of customers will continue to account for a substantial portion of our revenue in future periods although these customers have varied and are likely to vary from period to period.

Cost of Revenue and Gross Profit (Loss)

Product cost of revenue consists of contract manufacturing costs, including raw materials, component parts and associated freight, and normal yield loss in the period in which we recognize the related revenue. In addition, product cost of revenue includes compensation, benefits and stock-based compensation provided to our supply chain management personnel, and overhead and other direct costs, which are recognized in the period in which we recognize the related revenue. Further, we recognize certain costs, including logistics costs, manufacturing ramp-up costs, expenses for inventory obsolescence, warranty obligations, lower of cost or market adjustments to inventory, and amortization of intangibles, in the period in which they are incurred or can be reasonably estimated. We record a lower of cost or market adjustment in instances where the selling price of the products delivered or expected to be delivered is less than cost. We also include the cost of third-party devices in cost of revenue in instances when our customers contract with us directly for such devices. In accordance with our accounting policies, we recognize product cost of revenue in the periods we recognize the related revenue.

Service cost of revenue includes compensation and related costs for our service delivery, customer operations and customer support personnel, facilities and infrastructure cost and depreciation, and data center costs. In accordance with our accounting policies, we recognize service cost of revenue in the period in which it is incurred even though the associated service revenue may be required to be deferred.

Our gross profit (loss) varies from period to period based on the volume, average selling prices, and mix of products and services recognized as revenue, as well as product and service costs, expense for warranty obligations, and inventory write-downs. The timing of revenue recognition and related costs, which depends primarily on customer acceptance, can fluctuate significantly from period to period and have a material impact on our gross profit and gross margin results. 

Operating Expenses

Operating expenses consist of research and development, sales and marketing, and general and administrative expenses, as well as amortization of acquired intangibles. Personnel-related expense represents a

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significant component of our operating expenses. Our regular full-time employee headcount was 617 as of March 31, 2014.  

 

Research and Development

Research and development expense represents the largest component of our operating expenses and consists primarily of:

·

compensation, benefits and stock-based compensation provided to our hardware and software engineering personnel, as well as facility costs and other related overhead;

·

cost of prototypes and test equipment relating to the development of new products and the enhancement of existing products; and

·

fees for design, testing, consulting, legal and other related services.

We expense our research and development costs as they are incurred.

Sales and Marketing

Sales and marketing expense consists primarily of:

·

compensation, benefits, sales commissions and stock-based compensation provided to our sales, marketing and business development personnel, as well as facility costs and other related overhead;

·

marketing programs, including expenses associated with industry events, trade shows;  and

·

travel costs.

General and Administrative

General and administrative expense consists primarily of:

·

compensation, benefits and stock-based compensation provided to our executive, finance, legal, human resource and administrative personnel, as well as facility costs and other related overhead; and

·

fees paid for professional services, including legal, tax and accounting services.

Key Non-GAAP Financial Measures

We believe that our results of operations under GAAP, when considered in isolation, may only provide limited insight into the performance of our business in any given period. As a result, we manage our business, make planning decisions, evaluate our performance and allocate resources by assessing non-GAAP measures such as non-GAAP revenue, cost of non-GAAP revenue, gross profit on non-GAAP revenue, and adjusted EBITDA, in addition to other financial measures presented in accordance with GAAP. We believe that these non-GAAP measures offer valuable supplemental information regarding the performance of our business, and will help investors better understand the sales volumes, and gross margin and profitability trends, as well as the cash flow characteristics, of our business. These non-GAAP measures should not be considered in isolation from, are not a substitute for, and do not purport to be an alternative to revenue, cost of revenue, gross profit (loss), net income (loss) or any other performance measure derived in accordance with GAAP.

Non-GAAP revenue represents amounts invoiced for products for which ownership, typically evidenced by title and risk of loss, has transferred or services that have been provided to the customer, and for which payment is expected to be made in accordance with normal payment terms. Non-GAAP revenue excludes amounts for undelivered products, services to be performed in the future, and amounts paid or payable to customers. Non-GAAP revenue is initially recorded as deferred revenue and is recognized as revenue when all revenue recognition criteria have been met under our accounting policiesWe reconcile revenue to non-GAAP revenue by adding revenue to the change in deferred revenue in a given period.

To date, a substantial portion of our non-GAAP revenue is attributable to a limited number of customer deployments of our advanced metering solution. In the three months ended March 31, 2014,  the deployments for

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Baltimore Gas and Electric Company, Florida Power and Light Company, Commonwealth Edison Company, and Virginia Power and Electric Company represented 23%,  12%, 10%,  and 10% of our non-GAAP revenue, respectively.    

Each of these total non-GAAP revenue percentages includes amounts related to the customers’ deployments that were invoiced directly to our third party device manufacturers, as well as direct invoices to our customers.

Cost of Non-GAAP Revenue and Gross Profit on Non-GAAP Revenue

Cost of non-GAAP revenue represents the cost associated with products and services that have been delivered to the customer, excluding stock-based compensation and amortization of acquired intangibles. Cost of product shipments for which revenue is not recognized in the period incurred is recorded as deferred cost of revenue. Deferred cost of revenue is expensed in the statement of operations as cost of revenue when the corresponding revenue is recognized. Costs related to invoiced services are expensed in the period incurred. We reconcile cost of revenue to cost of non-GAAP revenue by adding cost of revenue to the change in deferred cost of revenue, less stock-based compensation and amortization of intangibles, included in cost of revenue in a given period.

Gross profit on non-GAAP revenue is the difference between non-GAAP revenue and cost of non-GAAP revenue.

 

Adjusted EBITDA is net income (loss) adjusted for changes in deferred revenue and deferred cost of revenue, other (income) expense, net, provision for income taxes, depreciation and amortization, stock-based compensation and certain other items management believes affect the comparability of operating results.

The non-GAAP financial measures set forth below for the three months ended March 31, 2014 and 2013 have been derived from our condensed consolidated financial statements. Reconciliations to the comparable GAAP measures are contained in the notes below.

 

 

 

 

 

 

 

 

Three Months Ended

 

March 31,

 

2014

 

2013

 

(unaudited, in thousands, 
except for percentages)

Non-GAAP revenue(1)

$

71,850 

 

$

73,771 

Cost of non-GAAP revenue(2)

 

50,302 

 

 

52,220 

Gross profit on non-GAAP revenue(3)

$

21,548 

 

$