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

☐	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.

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

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.

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.

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.

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.

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.

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

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

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

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

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

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

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		—		2,035
Short-term investments:
U.S. government and agency obligations		—		40,356		40,356
U.S. and foreign corporate debt securities		—		27,520		27,520
Total short-term investments		—		67,876		67,876
Total assets measured at fair value	$	2,035	$	67,876	$	69,911

As of September 30, 2017 and December 31, 2016, there were no liabilities that are measured and recorded at fair value on a recurring basis.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

As of September 30, 2017 and December 31, 2016, there were no assets and liabilities measured and recorded at fair value on a nonrecurring basis except for assets and liabilities valued on the date of acquisitions for businesses acquired.

Our intangible assets are measured at fair value on a nonrecurring basis, if impairment is indicated. During the three and nine months ended September 30, 2016, intangible assets were measured at fair value that resulted in the recording of an impairment charge of $2.2 million. We measured the fair value of these assets primarily using discounted cash flow projections. The discounted cash flow projections require estimates of expected revenue, gross margin and operating expenses associated with these assets. Intangible assets are classified as Level 3 assets due to the absence of quoted market prices. See Note 7, Goodwill and Intangibles Assets for further information.

Assets and Liabilities Not Measured at Fair Value

The carrying amounts of our accounts receivable, accounts payable, and other accrued liabilities approximate fair value due to their short maturities.

6. Business Acquisition

On January 16, 2015, we completed the acquisition of Detectent, Inc., or Detectent, a privately held corporation that provides customer intelligence solutions for utilities leveraging its data analytics platform, and paid $7.6 million in cash consideration. The acquisition of Detectent was accounted for under the acquisition method of accounting. We paid and held $4.0 million of deferred cash consideration, or contingent payments, in an escrow account, to be released over a two-year period subject to the retention of key employees of Detectent, or retention period. Contingent payments associated with future employment conditions were recorded as compensation expense over the retention period. We released $1.0 million from the escrow account in 2016, and released the remaining $3.0 million from the escrow account in February 2017, upon satisfaction of the retention terms of the acquisition agreement.

7. Goodwill and Intangible Assets

Goodwill:

As of September 30, 2017 and December 31, 2016, the gross amount of goodwill was $8.8 million.

We evaluate goodwill for impairment annually or more frequently when events or circumstances indicate that an impairment loss may have occurred in accordance with ASC Topic 350, Intangibles-Goodwill and Other. We operate in one reportable segment,

SILVER SPRING NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

and we are organized as one reporting unit. We performed our annual impairment tests as of August 1, 2017 and 2016 at the reporting unit level, with no goodwill impairments indicated. There were no events or circumstances which triggered additional impairment reviews for the periods presented.

Intangible Assets:

The following table summarizes the gross carrying amount and accumulated amortization for the intangible assets resulting from acquisitions (in thousands):

		As of September 30, 2017								As of December 31, 2016
	Useful Lives (in years)	Gross Carrying Amount		Accumulated Amortization		Impairment		Net Book Value		Gross Carrying Amount		Accumulated Amortization		Impairment		Net Book Value
Purchased technology	4-6 years	$	4,865	$	2,938	$	882	$	1,045	$	4,865	$	2,701	$	882	$	1,282
Customer relationships	4-7 years		3,640		1,834		1,322		484		3,640		1,554		1,322		764
Trade name	6 years		369		242		—		127		369		182		—		187
Total		$	8,874	$	5,014	$	2,204	$	1,656	$	8,874	$	4,437	$	2,204	$	2,233

Intangible assets subject to amortization are amortized over their useful lives as shown in the table above.

No impairment charges related to intangible assets were identified and recorded for the three and nine months ended September 30, 2017. During the three months ended September 30, 2016, we determined that there were indicators of impairment for intangible assets acquired as part of our acquisition of Streetlight.Vision SAS, primarily due to a change of our monetization plans including a business model shift from on-time, lower-margin, third-party product shipments to higher-margin recurring managed services and software-as-a-service, or SaaS billings. As a result, we recorded an impairment charge of $2.2 million to operating expense in our condensed consolidated statements of operations for the three and nine months ended September 30, 2016.

The following table illustrates the amortization expense included in the condensed consolidated statements of operations for the three and nine months ended September 30, 2017 and 2016 (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
Amortization of purchased intangible assets:	2017		2016			2017		2016
Cost of revenue	$	78	$	79	$	237	$	443
Sales and marketing		105		106		315		521
General and administrative		9		8		25		25
Total	$	192	$	193	$	577	$	989

The estimated future amortization expense of purchased intangible assets with definite lives for the next five years is as follows (in thousands):

Year Ended December 31,	Amount
Remainder of 2017	$	193
2018		738
2019		378
2020		335
2021		12
2022 and thereafter		—
	$	1,656

8. Stock-Based Compensation

Equity Incentive Plan and Employee Stock Purchase Plan

As of September 30, 2017 and December 31, 2016, there were 7.0 million and 5.9 million shares, respectively, of common stock reserved for future grants under our ESPP and 2012 Equity Incentive Plan.

SILVER SPRING NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Performance Stock Units

In May 2017, we granted to our Chief Executive Officer, or CEO, Chief Financial Officer, or CFO, and other executive officers PSUs to receive up to an aggregate number of 0.2 million shares of our common stock, subject to the achievement of certain performance targets set by the Compensation Committee and such individual’s continued service to us as a director, officer, employee or consultant. The PSUs will become earned and eligible to vest when the performance condition is met. The earned PSUs, if any, will vest in equal annual installments over three years from the date of grant. The aggregate grant-date fair value of these PSUs is approximately $2.3 million based on the closing price of our common stock on the grant date, which will be recognized over the requisite service period using the accelerated attribution method.

Stock Option Activities

The following table summarizes our stock option activity and related information for the nine months ended September 30, 2017 (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, 2016		4,008		$	12.22
Options granted		65			10.95
Options exercised		(543	)		1.77
Options cancelled or expired		(339	)		16.70
Balance at September 30, 2017		3,191		$	13.50		5.48	$	10,689
As of September 30, 2017
Options vested and expected to vest		3,191		$	13.50		5.48	$	10,689
Options exercisable		2,542		$	13.63		4.77	$	8,585

The aggregate intrinsic value disclosed above represents the total intrinsic value (the difference between the fair value of our common stock as of September 30, 2017 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2017. This amount is subject to change based on changes to the fair value of our common stock.

Restricted Stock Units Activities

The following table summarizes our restricted stock units activity and related information for the nine months ended September 30, 2017 (in thousands, except per share data):

	Restricted Stock Units Outstanding
						Weighted
				Weighted		Average
				Average Grant		Remaining		Aggregate
	Number of			Date Fair Value		Contractual		Intrinsic
	Shares			per Share		Term (years)		Value
Balance at December 31, 2016		3,531		$	11.55
Restricted stock units granted		2,485			11.08
Restricted stock units vested		(1,557	)		12.97
Restricted stock units cancelled		(389	)		12.85
Performance stock units granted		234			9.91
Performance stock units cancelled		(100	)		7.42
Balance at September 30, 2017		4,204		$	10.67		1.36	$	67,970

SILVER SPRING NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Stock-based Compensation

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016			2017		2016
Cost of revenue	$	2,034	$	2,082	$	5,761	$	4,799
Research and development		2,344		2,593		6,536		6,859
Sales and marketing		703		943		1,866		2,500
General and administrative		2,488		2,280		7,095		7,681
Stock-based compensation expense	$	7,569	$	7,898	$	21,258	$	21,839

Stock-based compensation related to our corporate bonus incentive plan was $2.5 million and $3.0 million for the three months ended September 30, 2017 and 2016, respectively. Stock-based compensation related to our corporate bonus incentive plan was $7.1 million and $7.0 million for the nine months ended September 30, 2017 and 2016, respectively. We recorded these amounts under accrued and other liabilities in our condensed consolidated balance sheets.

The following table presents unrecognized compensation cost to be recognized over a weighted-average period related to unvested stock options, ESPP, RSUs and PSUs as of September 30, 2017 (in thousands, except year data):

			Weighted
	Unrecognized		Average
	Compensation		Period
	Cost		(Years)
Stock options	$	4,306		2.2
ESPP	$	551		0.4
RSUs and PSUs	$	32,891		2.8

9. Income Taxes

The provision for income taxes reported for the three and nine months ended September 30, 2017 is based on our projected annual effective tax rate for 2017, and includes certain immaterial discrete items recorded during the periods. Our income tax benefit and provision for the three months ended September 30, 2017 and 2016 reflects an effective tax rate of 3.0% and (8.1)%, respectively. Our income tax benefit and provision for the nine months ended September 30, 2017 and 2016 reflects an effective tax rate of 1.8% and (38.8)%, respectively. Our income tax benefit for the three and nine months ended September 30, 2017 primarily comprised of foreign tax benefits associated with our foreign subsidiaries. We have not reported a provision for federal taxes in our condensed consolidated financial statements since we project a taxable loss in the United States for 2017. Our income tax expense for the three and nine months ended September 30, 2016 consisted primarily of income taxes from state and foreign jurisdictions, and the write off of $0.5 million deferred tax charge associated with the impairment of intangible assets.

10. Segment Information

We operate in one reportable segment and we are organized as one reporting unit. Our chief operating decision makers are our CEO and CFO, who review consolidated operating results to make decisions about allocating resources and assessing performance for the entire company. Revenue by geography is based on the billing address of the customer. The following table presents revenue by geographic region (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016			2017		2016
Revenue:
United States	$	42,767	$	43,381	$	347,055	$	207,142
Australia		3,926		27,892		6,918		31,861
All Other		875		2,913		5,430		5,755
Total	$	47,568	$	74,186	$	359,403	$	244,758

SILVER SPRING NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Substantially all of our long-lived assets are located in the United States.

11. Balance Sheet Details

Inventory

Inventory consisted of the following (in thousands):

	As of September 30,		As of December 31,
	2017		2016
Component parts	$	264	$	221
Finished goods		5,800		7,819
Inventory	$	6,064		8,040

Inventory included consigned inventory of $1.7 million and $1.4 million as of September 30, 2017 and December 31, 2016, respectively.

Accrued and Other Liabilities

Accrued and other liabilities consisted of the following (in thousands):

	As of September 30,		As of December 31,
	2017		2016
Accrued payroll and related expenses	$	15,781	$	23,506
Accrued operating expenses		1,951		4,771
Warranty obligations, current		3,848		4,569
Sales, property and income taxes		901		1,589
Other deferred revenue		14,632		9,292
Customer deposits		308		266
Other		177		153
Accrued and other liabilities	$	37,598	$	44,146

Other Liabilities

Other liabilities consisted of the following (in thousands):

	As of September 30,		As of December 31,
	2017		2016
Warranty obligations, non-current	$	1,510	$	1,518
Other deferred revenue		11,355		9,573
Deferred rent, non-current		12,051		10,801
Other		490		432
Other liabilities	$	25,406	$	22,324

SILVER SPRING NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Product Warranty

Product warranty activity is as follows (in thousands):

	Nine Months Ended September 30,
	2017
Warranty obligation—beginning of period	$	6,087
Warranty expense for new warranties issued		673
Utilization of warranty obligation		(1,674	)
Changes in estimates for pre-existing warranties		272
Warranty obligation—end of period	$	5,358

Accumulated Other Comprehensive Loss (AOCI), Net of Tax

The components of accumulated other comprehensive loss, net of tax, for the nine months ended September 30, 2017 are as follows (in thousands):

				Unrealized Gains
	Foreign Currency			(Losses) on Available
	Adjustment			for Sale Securities			Total
Balance as of December 31, 2016	$	(1,737	)	$	(376	)	$	(2,113	)
Other comprehensive (loss) income before reclassification		(24	)		84			60
Amounts reclassified from AOCI		—			—			—
Other comprehensive (loss) income		(24	)		84			60
Balance as of September 30, 2017	$	(1,761	)	$	(292	)	$	(2,053	)

12. Commitments and contingencies

Operating and Capital Leases

Our primary operating lease commitment as of September 30, 2017, related to our headquarters in San Jose, California, requires monthly lease payments through September 2026.

We recognize rent expense on a straight-line basis over the lease period. Where leases contain escalation clauses, rent abatements, or concessions, such as rent holidays and landlord or tenant incentives or allowances, we apply them in the determination of straight-line rent expense over the lease term. Rent expense for all facility leases was $2.0 million and $1.8 million for the three months ended September 30, 2017 and 2016, respectively, and $6.0 million and $6.1 million for the nine months ended September 30, 2017 and 2016, respectively.

As of September 30, 2017, the future minimum commitments under our operating leases were as follows (in thousands):

	Operating
	Leases
Remainder of 2017	$	2,229
2018		8,929
2019		7,726
2020		7,161
2021		7,228
2022 and thereafter		33,905
Net minimum lease payments	$	67,178

SILVER SPRING NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Legal Contingencies

Linex Patent Litigation. 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. Linex alleged 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 United States Patent and Trademark Office, or USPTO. In September 2014, Linex amended certain patent claims and canceled certain other patent claims based upon the USPTO’s completed reexaminations, and in October 2014, the court lifted the stay of the matter. In January 2015, Linex filed an amended complaint to incorporate facts related to the completed reexaminations, and we filed an answer responding to the complaint and raising additional defenses. In June 2015, the court stayed the action pending the USPTO’s completion of further ex parte reexaminations of the patents at issue. In July 2017, the USPTO issued a reexamination certificate with all of the claims cancelled for the ‘377 patent. We believe that we have meritorious defenses to Linex’s allegations and intend to continue vigorously defending against the action.

Acoustic Technology Patent Litigation. In July 2016, Acoustic Technology, Inc. or ATI, a non-producing entity, filed suit in United States District Court for the Eastern District of Texas, Marshall Division against us. The lawsuit alleges infringement of United States Patent Nos. 5,986,574, and 6,509,841 by certain meters and networking technology and services that we provide. The patents will expire in late 2017 and early 2018. We filed a motion to dismiss, as well as a motion to transfer the matter to the Northern District of California, in September 2016. The motion to transfer was granted in March 2017. Also in March 2017, we filed several petitions for inter partes review with the USPTO, requesting the USPTO to find certain claims of the ATI Patents to be unpatentable. In July 2017, the court stayed the suit pending review of the petitions for inter partes review by the USPTO. In September 2017, the USPTO instituted trial on all three of the inter partes review petitions we filed, on all requested grounds. In October 2017, the court ordered that the stay of the litigation be maintained. The court also ordered the parties to participate in mediation, to be concluded by April 2018. We believe that we have meritorious defenses to ATI’s allegations and intend to vigorously defend ourselves.

Weatherproof Wireless Patent Litigation. In October 2017, Weatherproof Wireless, LLC, a non-producing entity, filed suit in Federal District Court in Delaware against us. The lawsuit alleges infringement of United States Patent No. 7,522,876 by certain networking technology that we provide. We are in the process of analyzing the complaint, but believe that we have meritorious defenses to Weatherproof’s allegations and intend to vigorously defend ourselves.

In addition to the matters described above, from time to time we may be subject to other legal proceedings and claims in the ordinary course of business. We have received, and may in the future continue to receive, claims from third parties asserting infringement of their intellectual property rights. We may, from time to time, also be subject to various legal or government claims, disputes, or investigations. Such matters may include, but not be limited to, claims, disputes, or investigations related to warranty, refund, breach of contract, employment, intellectual property, government regulation, compliance or other matters. Future litigation may be necessary to defend ourselves and our customers by determining the scope, enforceability and validity of third-party rights or to establish our rights. There can be no assurance with respect to the outcome of any current or future litigation brought against us or pursuant to which we have indemnification obligations and the outcome could have a material adverse impact on our business, operating results and financial condition.

As of September 30, 2017, we have not recorded any amounts for contingent losses associated with the matters described above based on our belief that losses, while reasonably possible, are not probable. Unless otherwise stated, we are 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.

SILVER SPRING NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.

As of September 30, 2017 and December 31, 2016, we had a total of $15.8 million and $17.2 million, respectively, of standby letters of credit issued under a credit facility with a financial institution. As of September 30, 2017 and December 31, 2016, $0.5 million (AUD $0.6 million) and $4.6 million (AUD $6.1 million) of these standby letters of credit were denominated in Australian dollars, respectively, and $3.3 million (AED 12.4 million) and $4.5 million (AED 16.4 million) of these standby letters of credit were denominated in United Arab Emirates Dirham, respectively. In accordance with the terms of our credit facility, fluctuations in the exchange rate will increase or decrease the amount available to us under the credit facility.

On December 18, 2015, we entered into a senior secured credit facilities credit agreement, or Credit Facility, with Silicon Valley Bank and HSBC, with an original maturity of December 18, 2017. The Credit Facility provides a revolving loan facility in an aggregate amount not to exceed $75.0 million, with an available letter of credit sub-facility in the aggregate amount of $75.0 million and an available swingline sub-facility in the aggregate amount of $5.0 million. As of September 30, 2017, there were no borrowings outstanding under the Credit Facility; however, this line of credit is backing $15.8 million of letters of credit, leaving $59.2 million of available capacity for cash borrowings or additional letters of credit or swingline loan, subject to compliance with financial covenants and other customary conditions to borrowings, which varies at each period end. As of September 30, 2017, we were in compliance with the financial covenants in the credit agreement. In November 2017, we extended the maturity of the Credit Facility to June 18, 2018.

As of September 30, 2017, we had a total of $16.8 million in unsecured surety bonds. The surety bonds provide 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 letters of credit or surety bonds. We do not believe there will be any claims against currently outstanding letters of credit or surety bonds.

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 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 a director and officer liability insurance coverage to reduce our exposure to such obligations, and payments made under these agreements. To date, there have been no indemnification claims by these directors, officers and employees.

Customers and Third-Party Device Manufacturers. Refer to the discussion above under the heading Legal Contingencies for a description of our indemnification obligations.

Our contracts with customers and third-party device 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.

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 third-party device manufacturer indemnities, we typically agree to defend the utility customer or third-party device 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.

SILVER SPRING NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Insurance. We maintain various insurance coverages, subject to policy limits, that enable us to recover a portion of any amounts paid by us in connection with our obligation to indemnify our customers and third-party device 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.

13. Restructuring

2017 Restructuring Plan

On March 10, 2017, we approved a restructuring plan, or the 2017 Restructuring Plan, designed to drive progress towards our long-term business model and to better align investments to our growth and key businesses, such as continued global expansion, Starfish, and other smart city and IoT initiatives.

The following table summarizes restructuring charges included in our condensed consolidated statements of operations (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016			2017		2016
Severance	$	35	$	—	$	1,289	$	—
Total restructuring	$	35	$	—	$	1,289	$	—

SILVER SPRING NETWORKS INC 10-Q