10-Q 1 ssni-10q_20170930.htm 10-Q ssni-10q_20170930.htm

                                                                                

UNITED STATES 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 September 30, 2017

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)

230 W. Tasman Drive

San Jose, California 95134

(Address of principal executive offices) (Zip Code)

(669) 770-4000

(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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

  

Accelerated filer

 

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark whether the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act 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 shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of November 1, 2017, there were approximately 54,142,118 shares of the registrant’s Common Stock outstanding.

 

1


TABLE OF CONTENTS

 

 

 

Page

 

 

 

Note About Forward-Looking Statements

3

 

PART I. FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements

4

 

Condensed Consolidated Balance Sheets

4

 

Condensed Consolidated Statements of Operations

5

 

Condensed Consolidated Statements of Comprehensive Loss

6

 

Condensed Consolidated Statements of Cash Flows

7

 

Notes to Condensed Consolidated Financial Statements

8

Item 2.

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

23

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

41

Item 4.

Controls and Procedures

41

 

PART II. OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

43

Item 1A.

Risk Factors

44

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

66

Item 3.

Defaults upon Senior Securities

66

Item 4.

Mine Safety Disclosures

66

Item 5.

Other Information

66

Item 6.

Exhibits

67

Signatures

 

68

 

 

 


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 the Agreement and Plan of Merger, dated September 17, 2017, by and among us, Itron, Inc. and Ivory Merger Sub, Inc., a wholly-owned subsidiary of Itron, Inc., pursuant to which and subject to the conditions thereof we will become a wholly-owned subsidiary of Itron, Inc. (the “Merger”), the anticipated timing and benefits of the Merger, our revenue, billings, backlog, and other aspects of our future results of operations, financial position and cash flows, expected timing, size and benefits of our restructuring plan, the costs and cash expenditures associated with the restructuring plan, 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)

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

58,865

 

 

$

50,383

 

Short-term investments

 

 

67,349

 

 

 

67,876

 

Accounts receivable

 

 

49,988

 

 

 

44,770

 

Inventory

 

 

6,064

 

 

 

8,040

 

Deferred cost of revenue

 

 

72,459

 

 

 

194,769

 

Prepaid expenses and other current assets

 

 

12,984

 

 

 

12,536

 

Total current assets

 

 

267,709

 

 

 

378,374

 

Property and equipment, net

 

 

26,395

 

 

 

28,986

 

Goodwill and intangible assets

 

 

10,428

 

 

 

11,005

 

Deferred cost of revenue, non-current

 

 

8,980

 

 

 

26,639

 

Deferred tax assets, non-current

 

 

525

 

 

 

481

 

Other long-term assets

 

 

2,483

 

 

 

1,643

 

Total assets

 

$

316,520

 

 

$

447,128

 

Liabilities and stockholders’ deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

36,960

 

 

$

26,785

 

Deferred revenue

 

 

208,060

 

 

 

292,260

 

Accrued and other liabilities

 

 

37,598

 

 

 

44,146

 

Total current liabilities

 

 

282,618

 

 

 

363,191

 

Deferred revenue, non-current

 

 

47,451

 

 

 

93,149

 

Other liabilities

 

 

25,406

 

 

 

22,324

 

Total liabilities

 

 

355,475

 

 

 

478,664

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

 

 

Common stock and additional paid-in capital, $0.001 par value; 1,000,000 shares

         authorized; 54,127 and 52,185 shares issued and outstanding as of

         September 30, 2017 and December 31, 2016, respectively

 

 

641,187

 

 

 

618,651

 

Accumulated other comprehensive loss

 

 

(2,053

)

 

 

(2,113

)

Accumulated deficit

 

 

(678,089

)

 

 

(648,074

)

Total stockholders’ deficit

 

 

(38,955

)

 

 

(31,536

)

Total liabilities and stockholders’ deficit

 

$

316,520

 

 

$

447,128

 

 

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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

 

2017

 

 

 

2016

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue

 

$

26,612

 

 

$

50,463

 

 

$

267,853

 

 

$

153,232

 

Services revenue

 

 

20,956

 

 

 

23,723

 

 

 

91,550

 

 

 

91,526

 

Total revenue

 

 

47,568

 

 

 

74,186

 

 

 

359,403

 

 

 

244,758

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product cost of revenue

 

 

15,885

 

 

 

29,249

 

 

 

218,403

 

 

 

86,668

 

Services cost of revenue

 

 

17,878

 

 

 

16,695

 

 

 

53,744

 

 

 

48,308

 

Total cost of revenue

 

 

33,763

 

 

 

45,944

 

 

 

272,147

 

 

 

134,976

 

Gross profit

 

 

13,805

 

 

 

28,242

 

 

 

87,256

 

 

 

109,782

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

15,971

 

 

 

18,165

 

 

 

51,884

 

 

 

51,583

 

Sales and marketing

 

 

8,752

 

 

 

10,425

 

 

 

26,748

 

 

 

28,597

 

General and administrative

 

 

15,828

 

 

 

11,667

 

 

 

38,975

 

 

 

33,752

 

Impairment of intangible assets

 

 

 

 

 

2,204

 

 

 

 

 

 

2,204

 

Restructuring

 

 

35

 

 

 

 

 

 

1,289

 

 

 

39

 

Total operating expenses

 

 

40,586

 

 

 

42,461

 

 

 

118,896

 

 

 

116,175

 

Operating loss

 

 

(26,781

)

 

 

(14,219

)

 

 

(31,640

)

 

 

(6,393

)

Other income, net

 

 

761

 

 

 

113

 

 

 

1,313

 

 

 

887

 

Loss before income taxes

 

 

(26,020

)

 

 

(14,106

)

 

 

(30,327

)

 

 

(5,506

)

Benefit (provision) for income taxes

 

 

793

 

 

 

(1,143

)

 

 

555

 

 

 

(2,136

)

Net loss

 

$

(25,227

)

 

$

(15,249

)

 

$

(29,772

)

 

$

(7,642

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.47

)

 

$

(0.29

)

 

$

(0.56

)

 

$

(0.15

)

Diluted

 

$

(0.47

)

 

$

(0.29

)

 

$

(0.56

)

 

$

(0.15

)

Weighted average shares used to compute net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

53,829

 

 

 

51,743

 

 

 

53,260

 

 

 

51,244

 

Diluted

 

 

53,829

 

 

 

51,743

 

 

 

53,260

 

 

 

51,244

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

5


SILVER SPRING NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands, unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

 

2017

 

 

 

2016

 

Net loss

 

$

(25,227

)

 

$

(15,249

)

 

$

(29,772

)

 

$

(7,642

)

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in foreign currency translation

   (net of tax effect of $0 and $0)

 

 

(92

)

 

 

(42

)

 

 

(24

)

 

 

(241

)

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

   (net of tax effect of $0 and $0)

 

 

48

 

 

 

(120

)

 

 

84

 

 

 

124

 

Other comprehensive (loss) income

 

 

(44

)

 

 

(162

)

 

 

60

 

 

 

(117

)

Comprehensive loss

 

$

(25,271

)

 

$

(15,411

)

 

$

(29,712

)

 

$

(7,759

)

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

6


SILVER SPRING NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(29,772

)

 

$

(7,642

)

Adjustments to reconcile net loss to net cash provided by operating

   activities:

 

 

 

 

 

 

 

 

Deferred taxes

 

 

(45

)

 

 

94

 

Impairment of intangible assets

 

 

 

 

 

2,204

 

Depreciation and amortization

 

 

6,666

 

 

 

6,332

 

Stock-based compensation

 

 

21,258

 

 

 

21,839

 

Other non-cash adjustments

 

 

269

 

 

 

772

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(5,241

)

 

 

2,826

 

Inventory

 

 

1,980

 

 

 

(750

)

Prepaid expenses and other current assets

 

 

(5,161

)

 

 

2,957

 

Landlord incentives related to lease

 

 

883

 

 

 

6,788

 

Deferred cost of revenue

 

 

140,122

 

 

 

17,595

 

Accounts payable

 

 

10,019

 

 

 

(8,908

)

Customer deposits

 

 

42

 

 

 

1,031

 

Deferred revenue

 

 

(130,167

)

 

 

(28,061

)

Accrued and other liabilities

 

 

1,187

 

 

 

(4,400

)

Net cash provided by operating activities

 

 

12,040

 

 

 

12,677

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Proceeds from sales of available-for-sale investments

 

 

6,548

 

 

 

39,217

 

Proceeds from maturities of available-for-sale investments

 

 

5,200

 

 

 

10,970

 

Purchases of available-for-sale investments

 

 

(11,382

)

 

 

(56,355

)

Purchases of property and equipment

 

 

(2,491

)

 

 

(23,369

)

Net cash used for investing activities

 

 

(2,125

)

 

 

(29,537

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Payments on capital lease obligations

 

 

 

 

 

(285

)

Proceeds from issuance of common stock

 

 

5,484

 

 

 

4,238

 

Taxes paid related to net share settlement of equity awards

 

 

(7,040

)

 

 

(4,169

)

Net cash used for financing activities

 

 

(1,556

)

 

 

(216

)

Effect of exchange rate changes on cash and cash equivalents

 

 

123

 

 

 

(140

)

Net increase (decrease) in cash and cash equivalents

 

 

8,482

 

 

 

(17,216

)

Cash and cash equivalents—beginning of period

 

 

50,383

 

 

 

65,264

 

Cash and cash equivalents—end of period

 

$

58,865

 

 

$

48,048

 

Supplemental cash flow information—cash paid for income taxes

 

$

501

 

 

$

4,740

 

Non-cash investing activities:

 

 

 

 

 

 

 

 

Unpaid purchases of property and equipment

 

$

2,033

 

 

$

1,134

 

 

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 Basis of Presentation

Description of Business

Silver Spring Networks, Inc. (the “Company”, “we”, “us” and “our”) has more than a decade of experience creating, building and successfully deploying large scale networks and solutions enabling the Internet of Things, or IoT, for critical infrastructure. The IoT refers to a system where a diversity of physical devices have 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 broadened our focus beyond the smart grid to other utility networks including gas and water, and other critical infrastructure such as street lights, enabling smarter and more efficient cities. Longer term, we look to expand our reach into an even broader range of IoT markets by working with our customers, partners and developers to open their networks to third parties and support a wider range of devices, applications and solutions.

Proposed Transaction with Itron, Inc.

On September 17, 2017, we entered in an Agreement and Plan of Merger (the “Merger Agreement”) with Itron, Inc. (“Itron”) and Ivory Merger Sub, Inc., a wholly-owned subsidiary of Itron (“Merger Sub”), pursuant to which Itron has agreed to acquire all of the outstanding shares of our common stock for $16.25 per share in cash, and we would become a wholly-owned subsidiary of Itron (the “Merger”) if the Merger is completed. We expect the Merger to be completed in late 2017 or early 2018, subject to certain conditions, including, among others, receipt of customary regulatory approvals and approval by our stockholders. We incurred transaction-related costs of approximately $3.3 million during the three months ended September 30, 2017 in connection with the Merger and expect to incur additional costs related to the Merger in subsequent quarters.

For additional information related to the Merger and the Merger Agreement, please refer to our Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on September 18, 2017 and the Preliminary Proxy Statement on Schedule 14A filed with the SEC on November 2, 2017. The foregoing description of the Merger Agreement is qualified in its entirety by reference to the full text of the Merger Agreement included as Exhibit 2.1 to our Current Report on Form 8-K filed September 18, 2017. Upon completion of the Merger, shares of our common stock will cease trading on the New York Stock Exchange.

Other than $3.3 million of transaction expenses associated with the proposed Merger, which were primarily recorded to general and administrative expense in the accompanying Condensed Consolidated Statement of Operations, for the three and nine months ended September 30, 2017, the terms of the Merger Agreement did not impact the Company’s Condensed Consolidated Financial Statements.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, for interim financial information as well as the instructions to Form 10-Q and applicable rules and regulations of the SEC. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, including normal recurring accruals, considered necessary for a fair presentation have been included. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017, or any future period. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors,” “Quantitative and Qualitative Disclosures About Market Risk,” and the Consolidated Financial Statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016. The preparation of unaudited condensed consolidated financial statements necessarily requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the condensed consolidated balance sheet dates and the reported amounts of revenues and expenses for the periods presented. Actual results could differ materially from those estimates under different assumptions or conditions. As a result, the quarterly results may not be indicative of the full year results.

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.

 

2. Significant Accounting Policies and Estimates

There have been no material changes to our significant accounting policies described in Note 1, Description of Business, Basis of Presentation and Significant Accounting Policies, in Part II, Item 8. Consolidated Financial Statements and Supplementary Data, of our Annual Report on Form 10-K for the year ended December 31, 2016 that have had a material impact on our condensed

8


SILVER SPRING NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

consolidated financial statements and related notes, except for our adoption of Accounting Standards Update, or ASU, No. 2016-09, Improvements to Employee Share-Based Payment Accounting, discussed below.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee 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 for annual reporting periods beginning after December 15, 2016.  We adopted this new standard on January 1, 2017, which had the following impact on us:

 

Income tax accounting – The recognition of previously unrecognized excess tax benefits using the modified retrospective method, which requires a cumulative-effect adjustment to accumulated deficit for previously unrecognized excess tax benefits. The only jurisdiction in which we had previously unrecognized excess tax benefits was in the United States. Since we maintain a full valuation allowance against our U.S. deferred tax assets, no adjustment to our accumulated deficit to reflect the recognition of excess tax benefits from prior years was required upon adoption of this new standard. The effects of recognizing these historical excess tax benefits increased our gross deferred tax assets by $9.1 million for federal and by $0.5 million for state, which were fully offset by the full valuation allowance against our U.S. deferred tax assets. As such, the adoption did not result in any change to our net U.S. deferred tax asset position. Tax benefits previously recorded in additional paid-in capital prior to the adoption of the guidance will remain in additional paid-in capital consistent with the guidance.

 

Cash flow presentation of excess tax benefits – This standard also requires excess tax benefits to be classified as an operating activity, consistent with other income tax cash flows, and may be applied either on a prospective transition or a retrospective transition method.  We applied this standard using the prospective transition method, which had no impact to our condensed consolidated statement of cash flows for the nine months ended September 30, 2017.

 

Forfeitures – This standard enabled us to make an election to change from estimating forfeitures to accounting for forfeitures when they occur.  We adopted this change on a modified retrospective basis which resulted in us recording a cumulative effect change that increased our accumulated deficit by $0.2 million and increased our additional paid-in capital by the same amount.

Recently Issued Accounting Pronouncements

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The adoption of ASU 2017-09 will become effective for annual periods beginning after December 15, 2017. We are currently evaluating the effect that this new guidance will have on us but do not expect this adoption will have a material impact on our consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which is intended to simplify the testing for goodwill impairment by eliminating the second step of the two-step impairment test to measure the amount of an impairment loss. This guidance is effective for our annual and interim reporting periods beginning after December 15, 2019. Early adoption is permitted.  We are currently evaluating the effect that this new guidance will have on our consolidated financial statements and related disclosures.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This standard requires that the amounts generally described as restricted cash and restricted cash equivalents would be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statement of cash flows. The guidance also requires certain disclosures to supplement the statement of cash flows. The guidance is effective for our annual and interim reporting periods beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the effect that this new guidance will have on our consolidated financial statements and related disclosures.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requires recognition of the income tax consequences of an intra-entity transfer of an asset other than inventory when

9


SILVER SPRING NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

the transfer occurs. This guidance is effective for our annual and interim reporting periods beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the effect that this new guidance will have on us but do not expect this adoption will have a material effect on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This standard requires lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to current lease accounting. The guidance also eliminates current real estate-specific provisions for all entities. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. All entities will classify leases to determine how to recognize lease-related revenue and expense. This guidance is effective for our fiscal years and interim reporting periods beginning after December 15, 2018. We are currently evaluating the effect that this new guidance will have on our consolidated financial statements and related disclosures.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 2014-09, which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. Under this new guidance, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The updated standard will replace most existing revenue recognition guidance under U.S. GAAP when it becomes effective and permits the use of either the full retrospective or cumulative effect transition method. In July 2015, the FASB decided to delay the effective date of ASU 2014-09 by one year. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. We will not early adopt the standard, and as such, the updated standard will be effective for us in the first quarter of 2018. We have selected to apply the modified retrospective method, and we are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.

We anticipate the new standard will have a material impact on our consolidated financial statements.  While we are continuing to assess all potential impacts of the standard, we currently believe the most significant impact relates to our accounting for contingency provisions, certain software and software-related elements, and costs to obtain or fulfill a contract as explained below:

 

Contingency provisions.   Contingency provisions currently limit the amount of the total arrangement consideration under multiple deliverable contracts that can be allocated to delivered and accepted products and services.  Under the new standard, these provisions are considered variable consideration for which a probability estimate can be made.  As a result, we will include in arrangement consideration the amounts expected rather than record deferred revenue for the full amount of the contingency until such provisions have lapsed. 

 

Software and software-related elements under ASC 985-605.  Under current GAAP, because we have not yet established Vendor-Specific Objective Evidence or VSOE for PCS or professional services, revenue for software and software-related elements under ASC 985-605 is recognized ratably over the longest service period.  The requirement to have VSOE for undelivered elements to enable the separation of revenue for the delivered software is eliminated under the new standard.  Accordingly, under the new standard we will be able to recognize as revenue a portion of the arrangement fee upon delivery of the software.

 

Costs to obtain or fulfill a contract.  We currently record sales commissions and costs of providing services in the period incurred.  Under ASC 606, such incremental costs are required to be capitalized, then amortized on a basis that is consistent with the recognition of the products and services transferred to the customer.  Therefore, we will be required to recognize an asset for such costs with the expense potentially recorded in a future period to match the transfer of products and services.

Due to the complexity of our contracts, the actual revenue recognition treatment required under the new standard for our arrangements may be dependent on contract-specific terms and may vary in some instances.

 

3. Net loss per share

Basic net income (loss) per share is computed by dividing the net income (loss) by the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) by the weighted-average number of shares of common stock and potentially dilutive securities outstanding during the period. Potentially dilutive securities consist of common shares issuable upon exercise of stock options, issuances of shares pursuant to the 2012

10


SILVER SPRING NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Employee Stock Purchase Plan, or ESPP, vesting of restricted stock units, or RSUs, and contingently issuable performance stock units, or PSUs. We include the common shares underlying PSUs in the calculation of diluted net income (loss) per share when they become contingently issuable and exclude such shares when they are not contingently issuable. Potentially dilutive securities are excluded from the computation of diluted net income (loss) per share if their effect would be anti-dilutive. As we incurred losses during the three and nine months ended September 30, 2017 and September 30, 2016, basic and diluted net loss per share were the same for these periods presented as the inclusion of all potential common shares outstanding would have been anti-dilutive.

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

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

 

2017

 

 

 

2016

 

Net loss

 

$

(25,227

)

 

$

(15,249

)

 

$

(29,772

)

 

$

(7,642

)

Net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.47

)

 

$

(0.29

)

 

$

(0.56

)

 

$

(0.15

)

Diluted

 

$

(0.47

)

 

$

(0.29

)

 

$

(0.56

)

 

$

(0.15

)

Weighted-average shares used to compute net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

53,829

 

 

 

51,743

 

 

 

53,260

 

 

 

51,244

 

Diluted

 

 

53,829

 

 

 

51,743

 

 

 

53,260

 

 

 

51,244

 

 

The following table sets forth the potentially dilutive securities excluded from the computation of diluted net loss per share because including them would have been anti-dilutive (in thousands):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

 

2017

 

 

 

2016

 

Employee equity awards

 

 

6,443

 

 

 

7,957

 

 

 

6,443

 

 

 

7,957

 

 

 

4. Cash, Cash Equivalents and Short-Term Investments

Cash, cash equivalents and short-term investments consisted of the following as of September 30, 2017 (in thousands):

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

56,830

 

 

$

 

 

$

 

 

$

56,830

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds

 

 

2,035

 

 

 

 

 

 

 

 

 

2,035

 

Total cash and cash equivalents

 

 

58,865

 

 

 

 

 

 

 

 

 

58,865

 

Short-term fixed income securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency obligations

 

 

41,114

 

 

 

 

 

 

(187

)

 

 

40,927

 

U.S. and foreign corporate debt securities

 

 

26,476

 

 

 

 

 

 

(54

)

 

 

26,422

 

Total short-term investments

 

 

67,590

 

 

 

 

 

 

(241

)

 

 

67,349

 

Total cash, cash equivalents and short-term investments

 

$

126,455

 

 

$

 

 

$

(241

)

 

$

126,214

 

 

11


SILVER SPRING NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Cash, cash equivalents and short-term investments consisted of the following as of December 31, 2016 (in thousands):

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

48,348

 

 

$

 

 

$

 

 

$

48,348

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds

 

 

2,035

 

 

 

 

 

 

 

 

 

2,035

 

Total cash and cash equivalents

 

 

50,383

 

 

 

 

 

 

 

 

 

50,383

 

Short-term fixed income securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency obligations

 

 

40,565

 

 

 

 

 

 

(209

)

 

 

40,356

 

U.S. and foreign corporate debt securities

 

 

27,636

 

 

 

 

 

 

(116

)

 

 

27,520

 

Total short-term investments

 

 

68,201

 

 

 

 

 

 

(325

)

 

 

67,876

 

Total cash, cash equivalents and short-term investments

 

$

118,584

 

 

$

 

 

$

(325

)

 

$

118,259

 

 

As of September 30, 2017, approximately 74% and 14% of our cash, cash equivalents and short-term investments were held with two financial institutions, respectively. As of December 31, 2016, approximately 83% and 9% of our cash, cash equivalents and short-term investments were held with two financial institutions, respectively.

As of September 30, 2017, $0.8 million of restricted cash was designated as a collateral for a bank guarantee issued by HSBC Bank USA, National Association, or HSBC, to support our performance obligation under an agreement with one customer. The guarantee will expire in July 2023 unless cancelled on an earlier date; accordingly, we recorded this amount in other long-term assets in our condensed consolidated balance sheets.

Contractual Maturities

The contractual maturities of cash equivalents and short-term investments were as follows (in thousands):  

 

 

 

As of September 30, 2017

 

 

As of December 31, 2016

 

 

 

Amortized

 

 

Aggregate

 

 

Amortized

 

 

Aggregate

 

 

 

Cost Basis

 

 

Fair Value

 

 

Cost Basis

 

 

Fair Value

 

Due within one year

 

$

44,459

 

 

$

44,393

 

 

$

19,017

 

 

$

18,988

 

Due from 1 year through 3 years

 

 

25,166

 

 

 

24,991

 

 

 

51,219

 

 

 

50,923

 

Total cash equivalents and short-term investments

 

$

69,625

 

 

$

69,384

 

 

$

70,236

 

 

$

69,911

 

 

The following table presents gross unrealized losses and fair values for investments in an unrealized loss position as of September 30, 2017 and December 31, 2016, aggregated by investment category (in thousands):  

 

 

 

 

As of September 30, 2017

 

 

As of December 31, 2016

 

 

 

Less than 12 Months

 

 

Greater than 12 Months

 

 

Total

 

 

Total (Less Than 12 Months)

 

 

 

Fair Value

 

 

Unrealized Loss

 

 

Fair Value

 

 

Unrealized Loss

 

 

Fair Value

 

 

Unrealized Loss

 

 

Fair Value

 

 

Unrealized Loss

 

U.S. and foreign corporate debt securities

 

$

14,459

 

 

$

(17

)

 

$

11,963

 

 

$

(37

)

 

$

26,422

 

 

$

(54

)

 

$

27,520

 

 

$

(116

)

U.S. government and agency obligations

 

 

15,530

 

 

 

(29

)

 

 

25,397

 

 

 

(158

)

 

 

40,927

 

 

 

(187

)

 

 

40,356

 

 

 

(209

)

Total

 

$

29,989

 

 

$

(46

)

 

$

37,360

 

 

$

(195

)

 

$

67,349

 

 

$

(241

)

 

$

67,876

 

 

$

(325

)

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. As of September 30, 2017 and 2016, we anticipated that we would recover the entire amortized cost basis of such available-for-sale debt securities and determined that no other-than-temporary impairments associated with credit losses were required to be recognized during the three and nine months ended September 30, 2017

12


SILVER SPRING NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

and 2016. It is not more likely than not that we will be required to sell the investments before recovery of their amortized cost bases. There were insignificant gross realized gains or losses from available-for-sale securities during the three and nine months ended September 30, 2017 and 2016.  

 

5. Fair Value Measurements

We determine the fair values of our financial instruments based on a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The classification of a financial asset or liability within the hierarchy is based upon the lowest level input that is significant to the fair value measurement. Under ASC Topic 820, Fair Value Measurement and Disclosures, the fair value hierarchy prioritizes the inputs into three levels that may be used to measure 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 prices (unadjusted) 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 nine months ended September 30, 2017 and the year ended December 31, 2016.

Assets Measured at Fair Value on a Recurring Basis

As of September 30, 2017, financial assets recorded at fair value on a recurring basis are summarized below (in thousands):

 

 

 

Fair Value Measurement Using

 

 

 

Quoted Prices in

 

 

Significant

 

 

 

 

 

 

 

Active Markets for

 

 

Other

 

 

 

 

 

 

 

Identical

 

 

Observable

 

 

 

 

 

 

 

Instruments

 

 

Inputs

 

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

Total

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds

 

$

2,035

 

 

$

 

 

$

2,035

 

Total cash equivalents

 

 

2,035

 

 

 

 

 

 

2,035

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agency obligations

 

 

 

 

 

40,927

 

 

 

40,927

 

U.S. and foreign corporate debt securities

 

 

 

 

 

26,422

 

 

 

26,422

 

Total short-term investments

 

 

 

 

 

67,349

 

 

 

67,349

 

Total assets measured at fair value

 

$

2,035

 

 

$

67,349

 

 

$

69,384

 

 

13


SILVER SPRING NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

As of December 31, 2016, financial assets recorded at fair value on a recurring basis are summarized below (in thousands):

 

 

 

Fair Value Measurement Using

 

 

 

Quoted Prices in

 

 

Significant

 

 

 

 

 

 

 

Active Markets for

 

 

Other

 

 

 

 

 

 

 

Identical

 

 

Observable

 

 

 

 

 

 

 

Instruments

 

 

Inputs

 

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

Total

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds

 

$

2,035

 

 

$

 

 

$

2,035

 

Total cash equivalents

 

 

2,035