SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March  31, 2015

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)

 

 

 

555 Broadway Street

Redwood City, California 94063

(Address of principal executive offices) (Zip Code)

(650) 839-4000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐ 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐ 

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

 

 

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

 

As of May 6, 2015, there were approximately 49,701,343 shares of the Registrant’s Common Stock outstanding.

 

 

 

 

SILVER SPRING NETWORKS, INC.

TABLE OF CONTENTS

 

 

 

 

 

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NOTE ABOUT FORWARD-LOOKING STATEMENTS

 

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

 

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

 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements 

SILVER SPRING NETWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS 

(in thousands, except for par value)  

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

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SILVER SPRING NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 

(In thousands, except per share amounts, unaudited)  

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

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SILVER SPRING NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands, unaudited) 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

 

 

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SILVER SPRING NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 

(In thousands, unaudited)  

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

 

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1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Silver Spring Networks, Inc. (the “Company”, “we”, “us” and “our”) have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information as well as the instructions to Form 10-Q and applicable rules and regulations of the U.S. Securities and Exchange Commission (“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 months ended March 31, 2015, are not necessarily indicative of the results that may be expected for the year ending December 31, 2015, 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, 2014. 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 Silver Spring Networks, Inc. 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 Notes to Consolidated Financial Statements in Item 8 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2014 that have had a material impact on our condensed consolidated financial statements and related notes, except as described below.  

Revenue Recognition

Through December 31, 2014, due to limited historical experience, for arrangements that contain customer-specific acceptance criteria, revenue has historically been recognized only after obtaining written acceptance for each service area.  We perform ongoing evaluation of the sufficiency of historical experience in determining the effect of customer-specific acceptance terms on timing of revenue recognition.  During the quarter ended March 31, 2015, following the completion of analyses of historical experience, we determined that we have sufficient objective evidence to conclude that (i) network solution testing conducted in prior deployments can be relied upon to demonstrate that products and services delivered for deployments of other customers will meet acceptance testing criteria, provided that such prior deployments have similar characteristics and substantially similar testing criteria, or (ii) in absence of such evidence from prior deployments, network solution testing in the initial service area for a specific customer deployment can be relied upon to demonstrate that products and services delivered for subsequent service areas within that same deployment will meet subsequent acceptance testing criteria, provided that such initial network solution testing is successfully completed, and the testing criteria in the initial service area are substantially similar to the agreed-upon testing criteria for the remaining service areas.

As a result of the above change in assessment of the impact of customer-specific acceptance criteria, revenue and cost of revenue recognized during the quarter ended March 31, 2015 in the Condensed Statements of Operations included revenue of $112.3 million and cost of revenue of $43.6 million, respectively, which otherwise would have been deferred before the change in such assessment, resulting in a $68.7 million increase to net income, $1.40 increase to basic net income per share, and $1.35 increase to diluted net income per share. Receipt of

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acceptance from the customers is no longer considered necessary as (i) substantially similar acceptance testing criteria have been met in similar deployments of other customers, or (ii) substantially similar acceptance testing criteria have been met in the initial service area within the customer’s deployment, and all other revenue recognition criteria were met.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance related to revenue from contracts with customers, which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. Under this 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 GAAP when it becomes effective and permits the use of either the full retrospective or cumulative effect transition method. Early adoption is not permitted. The updated standard will be effective for us in the first quarter of 2017. We have not yet selected a transition method and we are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.

 

3. Net income (loss) per share

Basic net income (loss) per share applicable to common stockholders is computed by dividing the net income (loss) applicable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share applicable to common stockholders is computed by giving effect to all potential shares of common stock, including stock options and restricted stock units, to the extent dilutive.

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

 

 

 

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

 

 

 

 

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4. Cash, Cash Equivalents, and Short-Term Investments

 

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

 

 

 

 

 

As of March 31, 2015, approximately 45% and 40% of our cash, cash equivalents, and short-term investments were held with two separate financial institutions.  As of December 31, 2014, approximately 46% and 42% of our cash, cash equivalents, and short-term investments were held with two separate financial institutions.

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Contractual Maturities

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

 

 

 

 

 

 

 The following table presents gross unrealized losses and fair values for those investments that were in an unrealized loss position as of March 31, 2015 and December 31, 2014, aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in thousands):

 

 

As of March 31, 2015 and December 31, 2014, there were no investments with unrealized losses for a period in excess of 12 months.

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 March 31, 2015, we anticipate that we will recover the entire amortized cost basis of such available-for-sale debt securities and has determined that no other-than-temporary impairments associated with credit losses were required to be recognized during the three months ended March 31, 2015 and 2014. There were no material gross realized gains or losses from available-for-sale securities during the three months ended March 31, 2015 and 2014.

 

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:

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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 three months ended March 31, 2015 and year ended December 31, 2014.

Assets Measured at Fair Value on a Recurring Basis

As of March 31, 2015, financial assets recorded at fair value on a recurring basis were determined using the following inputs (in thousands):

 

 

 

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

 

 

 

 

 

 

 

As of March 31, 2015 and December 31, 2014, there were no liabilities that were measured and recorded at fair value on a recurring basis.

As of March 31, 2015 and December 31, 2014, there were no assets and liabilities that are measured and recorded at fair value on a nonrecurring basis.

 

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 

 

Acquisition of Detectent

 

On January 16, 2015, we completed the acquisition of Detectent, Inc. (“Detectent”), a privately held corporation that provides customer intelligence solutions for utilities leveraging its data analytics platform, based in Escondido, California. Detectent’s SaaS, subscription, and software solutions help improve advanced metering infrastructure and utility grid operations, ensure revenue protection, and deliver enhanced customer engagement programs. In accordance with the Agreement and Plan of Merger dated as of January 6, 2015, by and among Silver Spring, Detectent and a wholly-owned subsidiary of Silver Spring, Detectent became our wholly-owned subsidiary. The total consideration was $11.6 million, including $7.6 million of cash paid on the acquisition date and $4.0 million of deferred cash consideration (“contingent payments”) to be paid over a two-year period subject to key employees’ retention (“retention period”). Contingent payments associated with future employment conditions will be recorded as compensation expense over the retention period. During the three months ended March 31, 2015, we recorded 0.4 million in compensation expense in the consolidated statement of operations with a corresponding liability included in the accrued liability in the consolidated balance sheets.

In accordance with ASC Topic 805, Business Combinations (“ASC 805”), the acquisition of Detectent was accounted for under the acquisition method of accounting. Under the acquisition method of accounting, the total purchase consideration, assets acquired and the liabilities assumed are measured at fair value as of the date of acquisition when control is obtained. The fair value of the consideration transferred and the assets acquired and liabilities assumed was determined by us and in doing so relied in part upon a third-party valuation report to measure the identifiable intangible assets acquired and obligations related to deferred revenue. The following table summarizes the fair value of total consideration transferred for the Detectent acquisition, the total fair value of net identifiable assets acquired and the resulting goodwill recorded (in thousands):

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Goodwill represents the excess of the purchase consideration over the fair value of the underlying net assets acquired and liabilities assumed. The goodwill arising from the Detectent acquisition is largely attributable to the synergies expected to be realized. None of the goodwill recorded as part of the Detectent acquisition will be deductible for income tax purposes.

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the acquisition date. The estimated fair value of the identifiable assets acquired and liabilities assumed in the acquisition is based on management’s best estimates. As we finalize certain valuation assumptions, the provisional measurements of certain assets and liabilities, which include accruals, deferred income taxes, and goodwill, are subject to change, and the final purchase price accounting could be different from the amounts presented herein.

 

Assets acquired and liabilities assumed as of January 16, 2015 (in thousands):

 

 

 

Developed technology relates to Detectent’s technology and knowhow which is currently generating revenue. Customer relationships relate to Detectent’s ability to sell existing, in-process and future versions of its products to its existing customers. Non-compete agreements represented the value of the non-compete and non-solicit agreements signed by key employees. Order backlog represents future revenue to be derived from confirmed orders. Developed technology and order backlog were valued using the relief from royalty method based on discounted cash flow (“DCF”). A discount rate of 18.6% was used to value developed technology and 20.1% to value order backlog. The customer relationships and non-compete agreements were valued using multi-period excess earnings method under the income approach based on DCF and using a discount rate of 20.1%. The discount rate used in the present value calculation was derived from a weighted average cost of capital analysis, adjusted to reflect additional benefits or risks related to each asset’s characteristics. The intangible assets are subject to amortization and we expect to amortize these intangible assets on a straight-line basis over their weighted average expected useful lives of approximately one to seven years.

Deferred tax assets and liabilities resulting from the acquisition of Detectent have been netted, where applicable. Following the Detectent acquisition, Detectent has become part of our U.S. tax group. Accordingly, the deferred tax liability of $0.9 million which was recognized in the purchase price accounting has been netted with our existing deferred tax assets. As a result, there was a $0.9 million reversal of the Company’s valuation allowance which was recorded as a tax benefit in the 2015 first quarter financial statements in accordance with ASC 805.

 

We recognized $0.7 million of acquisition-related costs that were expensed during the three months ended March 31, 2015. These costs are included primarily as part of general and administration costs in the consolidated statement of operations. Detectent’s financial results have been included in the condensed consolidated financial statements since the acquisition date. Total Detectent revenue represented less than 1% of the total revenue recognized during the period ended March 31, 2015.

 

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Acquisition of Streetlight.Vision

 

On May 23, 2014, we completed the acquisition of Streetlight.Vision (“SLV”), a company incorporated under the laws of France, which provides street light control and management software, and paid approximately $8.8 million in cash. In accordance with ASC 805, the acquisition of SLV was accounted for under the acquisition method of accounting and recorded a goodwill of $4.7 million at the time of acquisition. Certain closing balance sheet items in connection with the acquisition of SLV were finalized during the first quarter of 2015. As a result, the net assets acquired decreased by $0.1 million which was accounted for as measurement period adjustments with a corresponding adjustment to goodwill. 

 

 

7. Goodwill and Intangible Assets

Goodwill:

The following table presents goodwill and changes in the carrying amount of goodwill (in thousands):

 

 

 

During the three months ended March 31, 2015, we recorded goodwill of $4.8 million in connection with our acquisition of Detectent. During the year ended December 31, 2014, we recorded goodwill of $4.7 million in connection with our acquisition of SLV. In addition, we also adjusted goodwill by $0.1 million in connection with our acquisition of SLV as a measurement period adjustment during the year ended December 31, 2014 and three months ended March 31, 2015. Of the total goodwill, goodwill related to SLV is designated in a currency other than United States Dollars and is adjusted each reporting period for the change in foreign exchange rates between the balance sheet dates.

Intangible Assets:

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

 

 

 

 

Intangible assets subject to amortization are amortized over their useful lives as shown in the table above. During first quarter ended March 31, 2015, we recorded intangible assets of $3.8 million in connection with our acquisition of Detectent.

The following table illustrates the amortization expense included in the consolidated statements of operations for the three months ended March 31, 2015 (in thousand):

 

 

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

 

 

 

 

 

8. Stock-Based Compensation

 

Equity Incentive Plan

 

Our Board of Directors adopted the 2012 Equity Incentive Plan, or the 2012 Plan, which became effective on March 12, 2013 and serves as the successor to our 2003 Stock Option Plan, or the 2003 Plan. Pursuant to the 2012 Plan, 3,400,000 shares of our common stock were initially reserved for grant, plus (1) any shares that were reserved and available for issuance under the 2003 Plan at the time the 2012 Plan became effective, and (2) any shares that become available upon forfeiture or repurchase by us under the 2003 Plan and a stock option plan assumed in connection with a previous acquisition, will be reserved for issuance. In addition, the number of Shares available for grant and issuance shall be increased on January 1 of each calendar year during the term of the Plan by

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the lesser of (i) four percent (4%) of the number of Shares issued and outstanding on each December 31 immediately prior to the date of increase, or (ii) such number of Shares determined by the Board. Under the 2012 Plan, we may grant both incentive and non-statutory stock options, restricted stock and restricted stock units to employees, directors and service providers. We may grant options to purchase shares of common stock to employees, directors and service providers at prices not less than the fair market value at date of grant for both Incentive Stock Options, or ISOs, or Nonqualified Stock Options, or NQSOs. ISOs granted to a person who, at the time of the grant, owns more than 10% of the voting power of all classes of stock must be at no less than 110% of the fair market value and expire five years from the date of grant. All other options generally have a contractual term of 10 years. Options generally vest over four years. Restricted stock units, or RSUs, generally vest between two to four years. As of January 1, 2015 and 2014, the total shares reserved for issuance under the 2012 Plan were automatically increased by 1,962,491 and 1,895,371, respectively. 

 

Employee Stock Purchase Plan 

 

Our Board of Directors adopted the 2012 Employee Stock Purchase Plan, or ESPP, which became effective on March 12, 2013, pursuant to which 400,000 shares of our common stock have been reserved for future issuance. In addition, on each January 1 for the first ten calendar years after the first Offering Date, the aggregate number of shares of the Company’s Common Stock reserved for issuance under the Plan shall be increased automatically by the number of shares equal to 1% of the total number of outstanding shares of the Company Stock on the immediately preceding December 31 subject to restrictions defined in the ESPP. Eligible employees can enroll and elect to contribute up to 15% of their compensation through payroll withholdings in each offering period, subject to certain limitations. Each offering period is six months in duration. The purchase price of the stock is the lower of 85% of the fair market value on (a) the first day of the offering period or (b) the purchase date. As of January 1, 2015 and 2014, the total shares reserved for issuance under the ESPP were automatically increased by 490,622 and 473,843, respectively.

 

Performance Stock Award 

 

 

On February 10, 2015, we granted to our Chief Executive Officer, performance restricted stock units (“PSUs”) to acquire up to a maximum of 250,000 shares of our common stock to be earned based on the common stock price reaching certain share price targets over a period of three years subject to his continued services to the Company as a director, officer, employee or consultant. The PSUs become eligible to vest when the average closing price during the 45 consecutive trading days’ reaches the share price thresholds specified in the grant between the grant date and the 3-year anniversary. We determined the value of these RSUs using a Monte-Carlo simulation due to the path-dependency of the award. The fair value of the PSUs is determined to be $1.1 million which will be recognized over the requisite service period using the accelerated method.

As of March 31, 2015 and December 31, 2014, there were 6.4  million and 4.3 million shares, respectively, of common stock reserved for future grants under our 2012 Plan and 2012 Employee Stock Purchase Plan.

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

 

 

 

 

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Of the total stock-based compensation, we recorded $1.5 million and $2.7 million, respectively as stock-based compensation related to our corporate bonus incentive plan during the three months ended March 31, 2015 and 2014. As of March 31, 2015 and December 31, 2014, stock-based bonus of $3.4 million and $1.9 million, respectively, were recorded as accrued liabilities in the consolidated balance sheets in connection with our corporate bonus incentive plan.

The following table summarizes our stock option activity and related information for the three months ended March 31, 2015 (in thousands, except per share data):

 

 

 

The aggregate intrinsic value disclosed above represents the total intrinsic value (the difference between the fair value of our common stock as of March 31, 2015 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 March 31, 2015.  This amount is subject to change based on changes to the fair value of our common stock.

The following table summarizes our restricted stock unit activity and related information for the three months ended March 31, 2015 (in thousands, except per share data):

 

 

 

 

Valuation of Employee Stock-Based Compensation

We recognize compensation expense for stock-based awards based on their grant-date fair value on a straight-line basis over the service period for which such awards are expected to be outstanding. The fair value of stock options granted pursuant to our equity incentive plans is determined using the Black-Scholes-Merton option pricing model. The determination of fair value is affected by the estimates of our valuation, as well as assumptions regarding subjective and complex variables such as expected employee exercise and forfeiture behavior and our

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expected stock-price volatility over the expected term of the award. Generally, assumptions are based on historical information and judgment was required to determine if historical trends may be indicators of future outcomes. The fair value of each option grant is estimated on the date of grant.

We currently have no history or expectation of paying cash dividends on our common stock. The risk-free interest rate is based on the U.S. Treasury yield for a term consistent with the expected term of the awards in effect at the time of grant. The expected term represents the weighted-average period the stock options are expected to remain outstanding. The expected term is determined based on historical exercise behavior, post-vesting termination patterns, options outstanding and future expected exercise behavior. Until December 31, 2014, we estimated the volatility of our common stock at the date of grant using a combination of our own historical and implied volatility and based on the historical and implied volatility of the stock prices of a peer group of publicly-traded companies for a period equal to the expected life of our stock options. Effective January 1, 2015, we estimate the volatility of our common stock at the date of grant based on our own historical and implied volatility of the stock prices as we believe that we now have sufficient company specific data and provides a reasonable basis on which to base an estimate of expected volatility and we have no reason to believe that our future volatility will differ materially during the expected or contractual term, as applicable, from the volatility calculated from this past information.

As of March 31, 2015, there was $8.3 million and $17.1 million of total unrecognized compensation cost related to non-vested stock-based compensation arrangements related to options and RSUs, respectively, which are expected to be recognized over a weighted-average period of 2.9 and 2.1 years, respectively.  

 

9. Income Taxes

Our benefit for income taxes for the three months ended March 31, 2015 reflects an effective tax rate of (1.4%). Our provision for income taxes for the three months ended March 31, 2014 reflects an effective tax rate of (2.2%).  Our benefit for income taxes for the three months ended March 31, 2015 consists primarily of a net benefit of $0.9 million, which was due to the deferred income tax benefits related to the Detectent acquisition. Our provision for income taxes for the three months ended March 31, 2014 consisted primarily of foreign income and withholding taxes.  

 

10. Segment Information

We operate in one reportable segment. Our chief operating decision maker is our Chief Executive Officer, who reviews 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):

 

 

 

 

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11. Balance Sheet Details

Inventory

Inventory consisted of the following (in thousands):

 

 

 

 

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):  

 

 

Other Liabilities

Other liabilities consisted of the following (in thousands):  

 

 

Product Warranty

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

 

 

 

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Product warranty activity was as follows (in thousands):

 

 

 

Accumulated Other Comprehensive Loss (AOCL)

The components of accumulated other comprehensive loss, net of tax, were as follows (in thousands):

 

 

 

 

 

 

 

12. Restructuring

 

2014 Restructuring Plan

In September 2014, we initiated a restructuring plan (the “2014 Restructuring Plan”) to refocus our strategy, optimize our structure, and improve operational efficiencies. The 2014 Restructuring Plan included a worldwide workforce reduction. As a result, we recorded $1.8 million in severance costs as restructuring charges during third quarter 2014. We recorded $0.2 million in severance and other related costs as restructuring charges during first quarter 2015 under the 2014 Restructuring Plan.

In connection with the 2014 Restructuring Plan, we expect to record aggregate future charges of approximately $1.4 million to $1.9 million.  The remaining restructuring costs under the 2014 Restructuring Plan are expected to be incurred by the first half of 2015.

Accrued liabilities related to restructuring actions during three months ending March 31, 2015 consist of the following (in thousands):

 

 

 

 

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13. Commitments and contingencies

Operating and Capital Leases

Our primary operating lease commitment at March 31, 2015, related to our headquarters in Redwood City, California, requires monthly lease payments through April 2016. We recognize rent expense on a straight-line basis over the lease period. Rent expense for all facility leases was $1.2 million and $1.3 million for the three months ended March 31, 2015 and 2014, respectively.

 

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

 

 

Legal Contingencies

EON Patent Litigation.  In June 2011, EON Corp. IP Holdings, LLC, a non-producing entity, or EON, filed suit in United States District Court for the Eastern District of Texas, Tyler Division against us and a number of smart grid providers.  The lawsuit alleges infringement of United States Patent Nos. 5,388,101 (the “’101 Patent”), 5,481,546 (the “’546 Patent”), and 5,592,491 (the “’491 Patent,” and together with the ‘101 Patent and the ‘546 Patent, the “EON Patents”) by certain networking technology and services that we and the other defendants provide.  Other defendants included Landis+Gyr AG, Aclara Power-Line Systems Inc., Elster Solutions, LLC, Itron, Inc. and Trilliant Networks Inc., all of which settled with EON prior to trial. We filed answers, affirmative defenses and counterclaims denying the plaintiff’s allegations and asserting that the plaintiff’s patents are invalid.  A trial was held in June 2014.  After the trial, the jury determined that we had infringed certain, but not all, of the claims under the EON Patents, and returned a verdict against us in the amount of $18.8 million.  The court ruled there was insufficient evidence to support EON’s allegation of willful infringement and granted our motion to dismiss that claim.  In June 2014, we filed post-trial motions with the court seeking, among other things, judgment as a matter of law to set aside the jury verdict, or in the alternative, a new trial.  In its post-trial motions, EON sought pre-judgment interest and attorneys’ fees.  Following post-trial motions, the court reduced the damage award to approximately $13.0 million, and in December 2014, entered a final judgment in that amount plus approximately $1.5 million in pre-judgment interest.  The court subsequently revised the final judgment to include additional costs of about $0.2 million and entered an amended final judgment in December 2014.  All of the EON Patents have expired and therefore EON is not seeking, and EON may not recover, any additional sums as royalties for our sales of products going forward. 

In December 2014, we filed a notice of appeal with the U.S. Court of Appeals for the Federal Circuit in Washington, D.C.  In order to stay the execution of the final judgment pending the appeal, in December 2014 we filed a surety bond in the amount of $17.6 million, which includes an additional 20% of the final judgment for post-judgment interest and expenses expected to be incurred during the appeal process, in accordance with court rules.  The bond was issued by Zurich Insurance and is collateralized with a standby letter of credit in the amount of $13.0 million, the amount of the damage award, as described below in “Customer Performance and Other Commitments.”  Upon completion of the appeal process, both the surety bond and standby letter of credit will be released.  In January 2015, the District Court accepted the bond and entered the stay of execution of the judgment.  EON filed a notice of

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cross appeal in January 2015.  We filed our opening appellate brief in March 2015.  EON’s principal brief is due in May 2015. We expect the appeal process to take place during 2015 and perhaps into early 2016. 

We continue to believe that the evidence and the law do not support the jury’s findings of infringement, validity, and the award of damages, and intend to continue vigorously defending the action, including exercising all available appeals.  However, given the inherent uncertainty in predicting the ultimate outcome of the appeals process, we believe it is reasonably possible that a material loss of up to $14.7 million, the amount of the amended final judgment, may result from these proceedings.  In continuing to assess the impact of the jury verdict and the judgment on our financial statements, we will continue to evaluate the jury verdict, the court’s rulings on the post-trial motions and the likelihood of a successful appeal.

TransData/OG&E Patent Litigation.  In September 2011, TransData, Inc., or TransData, filed suit in United States District Court for the Western District of Oklahoma, against Oklahoma Gas & Electric Company (“OG&E”), alleging infringement of United States Patent Nos. 6,181,294, 6,462,713, and 6,903,699 by certain wireless communication-enabled meters, including General Electric Company (“GE”) meters with our wireless modules.  We have agreed with GE to contribute to pay the defense of OG&E in connection with the TransData suit. An early claim construction hearing was held regarding one claim term in February 2013, and a hearing for the full claim construction was held in September 2013, on which the court issued an order in October 2013.  In May 2014, GE filed reexamination requests on the TransData patents at issue with the U.S. Patent and Trademark Office (the “USPTO”).    In August and September 2014, GE also petitioned the USPTO for inter partes review of each patent.  In October 2014, OG&E filed a motion to stay the litigation pending the reexamination of the patents by the USPTO, which the court denied in January 2015. In March 2015, the USPTO issued decisions declining to institute the inter partes review.  Additionally, the USPTO has indicated that all claims for which reexamination was requested are allowable without amendment. Pre-trial proceedings in the matter are ongoing, and each side has filed pre-trial motions.  The court has not yet set any hearing date. We believe that OG&E has meritorious defenses to TransData’s allegations, and that OG&E will continue to vigorously defend itself.

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 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 reexamination, and we filed an answer responding to the complaint and raising additional defenses.  The trial has been scheduled for November 2015.  We believe that we have meritorious defenses to Linex’s allegations and intend to continue vigorously defending against the action.

We have not recorded any amounts for contingent losses associated with the matters described above based on its belief that losses, while reasonably possible, are not probable.  Unless otherwise stated, 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

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settlements is probable, and a reasonable estimate of the loss associated with such events can be made, we will record the estimated loss at that time. 

Customer Performance and Other Commitments

Certain customer agreements require us to obtain letters of credit or surety bonds in support of our obligations under such arrangements. These letters of credit or surety bonds typically provide a guarantee to the customer for future performance, which usually covers the deployment phase of a contract and may on occasion cover the operations and maintenance phase of service contracts.

As of March 31, 2015 and December 31, 2014, we had a total of $17.0 million, including $13.0 million related to EON Patent Litigation mentioned above, and $17.0 million, respectively, of standby letters of credit issued under the credit facility with a financial institution, of which $0.5 million (AUD$0.6 million) and $0.5 million (AUD$0.6 million), respectively, were denominated in Australian dollars. In accordance with the terms of our credit facility, increases or decreases in the exchange rate between the Australian dollar and the U.S. dollar will increase or decrease the amount available to us under the credit facility.

As of March 31, 2015, we had a $20.3 million unsecured surety bond. The surety bond provides a financial guarantee to support performance obligations under certain customer agreements. As of December 31, 2014, we had a $20.3 million unsecured surety bond. The surety bond provides a financial guarantee to support performance obligations under certain customer agreements. In the event any such letters of credit or surety bonds are called, we would be obligated to reimburse the issuer of the letter of credit or surety bond. We do not believe there will be any claims against currently outstanding letters of credit or surety bonds.

 

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.

Insurance.   We maintain various insurance coverage policies, 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.

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