ssni-10k_20161231.htm

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act: Yes ☐ No ☒

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 time period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. ☐

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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2016, the last business day of the registrant’s most recently completed second fiscal quarter, based on the closing price of $12.15 per share of the registrant’s common stock as reported by the New York Stock Exchange, was approximately $484.1 million.

The number of shares outstanding of the registrant’s Common Stock as of March 3, 2017 was 53,042,140 shares.

Information required in response to Part III of Form 10-K (Items 10, 11, 12, 13 and 14) is hereby incorporated by reference to portions of the registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held in 2017. The Proxy Statement will be filed by the Registrant with the Securities and Exchange Commission no later than 120 days after the end of the registrant’s fiscal year ended December 31, 2016.

Except where the context requires otherwise, in this Annual Report on Form 10-K, “Company,” “Silver Spring,” “we,” “us” and “our” refer to Silver Spring Networks, Inc. and its subsidiaries.

Silver Spring Networks, Silver Spring, the Silver Spring Networks logo, CustomerIQ, Detectent, Gen, GridScape, Milli, Operations Optimizer, Sensor IQ, SilverLink, Starfish, Streetlight.Vision, UtilOS and our other registered or common law trademarks, service marks, or trade names appearing in this Annual Report on Form 10-K are the property of Silver Spring Networks, Inc. or its affiliates. Other trademarks, service marks, or trade names appearing in this Annual Report on Form 10-K are the property of their respective owners.

This Annual Report on Form 10-K includes forward-looking statements. All statements, other than statements of historical fact, contained in this Annual Report on Form 10-K, including statements regarding our billings, backlog, revenue and other aspects of our future results of operations, financial position and cash flows, including our outlook for the first quarter and full year 2017, 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” and “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 I, 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 Annual Report on Form 10-K 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 Annual Report on Form 10-K or to conform these statements to actual results or revised expectations.

Silver Spring Networks, Inc. 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 has the capacity to communicate using internet technologies. Our first area of focus was in energy, creating a leading smart grid network platform 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, other critical infrastructure such as street lights, which enable smarter and more efficient cities, and additional industrial verticals which could benefit from our platform.

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

We believe the power grid is one of the most significant elements of contemporary industrial infrastructure that has yet to be extensively networked with modern technology. To address this challenge, we pioneered a fundamentally new approach to connect utilities with millions of devices on the power grid. We believe our technology has started to yield significant benefits to utilities, consumers and the environment, as the industry has started to realize the potential benefits of increased communication capabilities being deployed in the smart grid. These benefits include more efficient management of energy, improved grid reliability, capital and operational savings, integration with renewable-generation sources, consumer empowerment and assistance in complying with evolving regulatory mandates through reduced carbon emissions.

We intend to continue to innovate in order to advance our networking platform to support increased performance, a broader range of communications modules, including compact battery-operated solutions and advanced analytics capabilities. We believe this will enable a more powerful smart grid with support for more devices, applications and solutions. We believe these technological advances are also well-suited to provide intelligence to other devices within our core smart grid market, as well as adjacent markets for distribution systems to gas and water utilities.

Our SilverLink Networking Platform provides customers the ability to communicate with devices connected to the power grid. We originally designed and built our network from the ground up to enable customers to deploy large-scale networks for the power grid. The networking platform is comprised of our hardware such as access points and relays, our communications modules, our SilverLinkOS (formerly UtilOS) network operating software, and our GridScape management and security software. Key attributes of our networking platform include:

Standards-Based. Our networking platform is based on standard IP, which enables customers to deploy standards-based networking throughout their infrastructure and allows for interoperability with other standards-based devices. As a result, we believe customers can readily extend our networking platform to support a broad set of end-to-end solutions in a cost-effective and timely manner. Device choice also gives customers the ability to deploy best-in-class products.

High-Performance. Our networking platform delivers high-bandwidth, low-latency performance and traffic prioritization, which allows customers to run multiple solutions including those that require high throughput communications, such as distribution automation, while maintaining robust operating performance.

Scalable. Our networking platform can be deployed rapidly at scale to accommodate millions of devices, which we believe allows customers that deploy our networking platform to easily and cost effectively expand beyond the scope of their initial deployments. For example, customers can use the platform to manage their own assets, and in the future we believe customers could leverage the platform for revenue opportunities with third parties that wish to utilize smart grid networks to provide connections to a broad range of devices.

Extensible. Our communications modules are designed with ample processing power and memory to support future functionality. This design enables us, for example, to deliver software over the air, allowing us to augment the functionality of, and to deploy new solutions and applications to previously deployed hardware. As a result, we believe our customers can mitigate the risk of technology obsolescence.

Secure. Our networking platform incorporates an end-to-end, multi-layer security architecture and uses proven IP-based technologies and associated security techniques, which we believe allow customers to operate large-scale networks while minimizing security risk.

Broad Coverage. Our networking platform supports a variety of standard communications technologies providing customers with flexibility to select the technologies required to maximize network coverage in their service territories.

Reliable. Our networking platform is designed to be self-configuring and self-healing, allowing it to function reliably with minimal interruption and limited manual intervention.

Cost-Effective. Our architecture enables our customers to leverage a single network, rather than build multiple networks, when deploying multiple solutions. We believe this approach limits capital and operational expenditures and enhances our customers’ return on investment.

As we broaden our networking platform for use to other critical infrastructure, we are finding that customers also look for these networking attributes and performance. In January 2015, we announced our fifth generation networking platform, Gen5, and several new Gen5-based products, including the “Milli 5.” We believe our Gen5 platform and products are particularly well-suited to expand our opportunities both within the smart grid as well as the broader IoT.

The SilverLink Data Platform is aimed at helping our customers use the data generated by devices on the network in order to provide insights for decision-making. Leveraging our networking leadership and the distributed intelligence we have at the edge of the grid, our application enablement solution ingests, organizes, and visualizes data from multiple internal and external systems to offer near real-time processing. Our SensorIQ solution allows one to convert physical devices on the grid into multiple software-defined sensors. These sensors can then deliver information to any application, or app, at the frequency and at the granularity that makes sense for that app. In addition to our internally-developed apps, our solution enables customers and partners to develop their own apps that can be showcased in the Silver Spring application catalogue. Examples include using data on energy usage for better consumer engagement, using voltage data for improving grid reliability, and delivering faster response times to outages. We intend to continue to expand available apps and sensors and work with additional partners over time in an effort to deliver more value into our customer footprint and to grow our primarily recurring managed services and software-as-a-service, or SaaS, business.

In October 2015, we launched our next generation utility analytics solution, Operations Optimizer, as an expanded offering from our January 2015 acquisition of Detectent, Inc. Operations Optimizer is a powerful analytics solution that enables utilities and cities to improve operational efficiency and develop business processes and workflows by leveraging insights from a variety of external data sources. This solution features four modules, AMI Operations, Grid Operations, Revenue Assurance, and Customer Programs, which further expands the menu for our primarily recurring managed services and SaaS business.

We offer an array of solutions built upon our SilverLink Network and Data platforms, including advanced metering, distribution automation, demand-side management, street lights, and our wireless IPv6 network service for the IoT, Starfish.

Advanced metering allows utilities to automate a number of manual processes and improve operational efficiencies and customer service. Our advanced metering solution provides utilities with two-way communications from our communications module

integrated into a third-party meter to their back office, enabling utilities to remotely perform such functions as reading meter usage, capturing time-of-use consumption data, connecting and disconnecting service, and detecting power outages. We do not manufacture meters; instead, we partner with various meter manufacturers to provide a range of meter options for our utility customers. Our advanced metering software typically includes our Advanced Metering Manager, or AMM, software application and may include, at the option of our utility customers, our CustomerIQ and SensorIQ applications.

Distribution automation provides utilities with real-time visibility into the health of the grid, enabling better management and control of power distribution assets to improve grid reliability. Our distribution automation solution provides two-way communications from distribution devices along the power grid to the back office or substations, providing utilities with real-time information for grid monitoring and control. Our distribution automation solution comprises of bridges paired with third-party devices and our SensorIQ application, our Outage Detection System, or ODS, application, our GridScape application and our Operations Optimizer application. While utilities have been implementing distribution automation for many years, adding two-way communications over a common networking platform significantly improves their visibility into and control over the power grid. As a result, utilities gain the information needed to better contain and more quickly resolve outages, monitor power-quality metrics with greater granularity, and adjust voltage levels dynamically to reduce energy waste.

Demand-side management enables utilities to offer consumers a variety of programs and incentives to use energy more efficiently and reduce usage at times of peak demand. We offer three solutions to support demand-side management: Energy Efficiency helps reduce overall energy consumption, or base load; Demand Response helps reduce energy consumption when demand is highest, or peak load; and Electric Vehicle charging management allows utilities to optimize when to charge electric vehicles, minimizing costs to customers and the load burden on the grid.

Our energy efficiency solution leverages the two-way communications in and information gathered from our advanced metering solution to provide consumers with timely information about their energy usage via either our web-based portal, CustomerIQ, or a third-party in-home device, such as a thermostat. Utilities can also use our web-based portal to send their consumers personalized analysis of their energy usage trends and suggestions for how to reduce usage.

Demand response is an initiative in which utilities incentivize consumers to reduce energy use during times of peak demand to avoid the high cost of building additional generation or procuring energy to support this peak load. The adoption of advanced metering gives utilities a built-in two-way communications network they can leverage to directly offer demand response programs to all their consumers. With our technology, utilities can send messages to consumers in anticipation of a peak-load event, such as a hot summer day that is expected to drive up use of air conditioners, incentivizing them to limit use during peak hours. Utilities can leverage our technology to support both price-based and load control-based demand response programs.

The majority of consumers purchasing electric vehicles are also expected to purchase fast charging stations, referred to as Electric Vehicle Supply Equipment, or EVSEs. With the current power grid, utilities must supply power to charge an electric vehicle whenever it is plugged in. These 240-volt charging stations require considerable power, which can strain the power grid if consumers plug in their electric vehicles at the same time, for example at the end of the work day. With our technology, the utility can incentivize consumers to charge their electric vehicles during non-peak times, helping utilities manage this new demand.

Street lights are a critical element of city infrastructure and the public road system. A large portion of a city’s energy budget is consumed by street lighting and the cost to maintain, replace and manage street lights can be high. By integrating our communications module with a photocell or other control device, cities can retrofit existing lighting and convert it to a networked light. Another approach is to replace legacy lighting with LED lighting which includes an integrated communications module. Networking street lights lowers operating and maintenance costs, and enables better control, providing greater precision for turn-on and turn-off times

and variable brightness and enhances energy efficiency. Our May 2014 acquisition of Streetlight.Vision SAS, or SLV, added control and management software to broaden our smart city and street light offerings.

In December 2015, we announced Starfish, a wireless IPv6 network service for the IoT, which is intended to build upon our customers’ network footprint to enable commercial enterprises, cities, utilities and developers to access a reliable, secure and scalable IoT network service with service level agreements that meet their needs. We hope to meaningfully expand the opportunity of our horizontal communications platform from our core smart utility and smart city markets to a broader range of adjacent IoT markets. We focus our efforts to create a growing ecosystem of partners and developers to effect the deployment of a vast network footprint, enable communications capabilities to a wide range of devices, and a broad diversity of applications to ultimately connect a much larger number of full solutions to the emerging IoT space.

We offer a wide range of services related to the initial deployment and ongoing operation of our networking platform and solutions. Our services include professional services, managed services and SaaS, and customer support.

For the smart grid, we market our networking platform and solutions directly to utilities around the world. For smart city infrastructure, we may sell directly to a utility, a city or work through a third-party service provider. Silver Spring has over 53 customers as of December 31, 2016.

Leading utilities have selected our networking platform to be the foundation of the smart grid. Since inception through December 31, 2016, we have been awarded contracts to network almost 36.8 million Silver Spring-enabled devices that connect homes and businesses, and have delivered to more than 25.5 million. In addition, as of December 31, 2016, we are working with utilities representing over 26.0 million additional homes and businesses which are piloting or evaluating our networking platform, or deploying our technology in phases. Our customers are located in the United States, Canada, Australia, New Zealand, South America, Asia and Europe.

In 2016, the deployment for CPS Energy, or CPS, Commonwealth Edison Company, or ComEd, and AusNet Electricity Services Company, or AusNet, represented 29%, 28% and 12% of our revenue, respectively. In 2016, the deployment for ComEd, Florida Power & Light, or FP&L, and CPS represented 31%, 11%, and 10% of total billings, respectively.

Under our master purchase and service agreements, or MSAs, with CPS, ComEd and AusNet, we provide our advanced metering networking solution and software, as well as services related to the deployment and ongoing operation of the networking platform. The deployments for these customers are contemplated to occur over a period of time. As of December 31, 2016, the initial deployment for CPS was almost one-half complete, the initial deployment for ComEd was substantially complete and the initial deployment for AusNet was complete. Under each agreement, we will continue to provide application services to support the installed

network and meters. Each of the agreements contains negotiated provisions regarding ongoing services, delivery and customer acceptance, warranties, limitations of liability, source code escrow, and termination, among others.

Our objective is to provide the leading networking platform for critical infrastructure, so our platform ultimately becomes the industry standard. To achieve this objective, we intend to:

Exceed our Customers’ Expectations. We seek to differentiate ourselves from our competitors through superior product reliability, performance and service. We believe that this focus has strengthened our relationships with our existing utility customers.

Enlarge our Network Footprint. As our networking platform has been demonstrated at scale, we have succeeded in attracting additional utility customers. By expanding our footprint, we not only realize the revenue associated with the initial contract but also gain an opportunity to sell additional solutions and services to these customers in the future. As a result, we are focused on winning new deployments with the goal of becoming the networking platform of choice for leading utilities and cities worldwide.

Expand Internationally. Our goal is to be the leader in every market we enter. We believe the smart grid has become a priority for utilities worldwide, and the move to smarter cities has just begun. To address these opportunities, we plan to aggressively invest in our products, marketing efforts and delivery capabilities to enhance our ability to serve international markets including Australia, South America, Europe and Asia.

Broaden our Solutions and Services. We strive to broaden the scope and value of our solutions and services to maximize the benefit our customers receive from deploying our solutions. This expansion includes providing existing customers with additional solutions and services from our existing portfolio and developing new solutions to address our customers’ and the market’s evolving needs. These include developing new hardware and software solutions, many of which are delivered in our managed services and SaaS offering. By offering our solutions as a service, we believe we can create greater value for our customers and also for us. As a result, we intend to expand the number of managed services and SaaS solutions we offer.

Extend our Technology Leadership. We intend to continue to invest in research and development to further enhance our technology leadership. Since the deployment of our networking platform, we have been able to simultaneously reduce hardware production costs while materially enhancing its functionality. We have recently broadened beyond the energy sector to networking other critical infrastructure within cities, such as street lights, which enable smarter and more efficient cities.

We believe that by continuing to execute our strategy and connect more and more devices, we will experience a network effect that could establish our networking platform as the industry standard by providing more products and services to a growing number of installed customer endpoints.

Our order backlog represents future billings for open purchase orders and other firm commitments. As of December 31, 2016, our order backlog was approximately $159.2 million, of which $91.0 million is expected to be fulfilled in 2017. As of December 31, 2015, our order backlog was approximately $151.8 million.

Our total backlog represents future product and service billings that we expect to generate pursuant to contracts that we have entered into with our customers and third-party device manufacturers. Our total backlog includes our order backlog. As of December 31, 2016, our total backlog was approximately $1,165.8 million, and we expect to fulfill the majority of our total backlog over the next three years.

Our customer contracts are typically structured as MSAs under which the customer may place purchase orders over the course of a deployment. These deployments can extend for a number of years. Because our MSAs do not typically require a customer or third-party device partner to purchase a minimum amount of product or services, total backlog is an estimate based upon contractual terms, existing purchase orders and other available information regarding the amount and timing of expected future purchase orders to be placed by our customers and third-party device manufacturers, including non-binding forecasts. No assurance can be made that firm purchase orders will be placed under these MSAs in the amounts we estimate, within the time period we expect, or at all. Total backlog is subject to adjustments due to the long-term nature of our customer deployments. Adjustments can result from a variety of

factors, including changes in the nature or scope of customer deployments, the impact of contingency provisions related to future delivery or performance, customer cancellations, market conditions, delayed regulatory approvals, customer funding uncertainties, and customer defaults. Delays due to external market factors or delays in deployments and required regulatory approvals have in the past, and may in the future, cause us to extend the deployment schedule or make modifications under customer contracts. In addition, under the MSAs, our customers generally have the right to terminate for any reason, including for their sole convenience, a material breach or insolvency on our part, or their inability to obtain required regulatory approval. The occurrence of such adjustments and terminations could materially reduce the amount of, or delay the fulfillment of, our total and order backlog.

Our estimates of total backlog and order backlog to be fulfilled are forward-looking statements based on contractual terms and conditions, as well as our expectations as of the date of this Annual Report on Form 10-K. We believe our estimates were prepared on a reasonable basis, reflect the best currently available estimates and judgments, and reflect the assumptions and considerations on which we base our belief that we will fulfill delivery of product and performance of services and bill for such product and services. However, these estimates should not be relied upon as an indication of actual future billings or revenue, and you should not place undue reliance on these estimates. Any differences among these assumptions and our actual experiences may lead to financial results in future periods that differ significantly from our current estimates. See Part I, Item 1A. Risk Factors-- Amounts included in our total backlog and order backlog may not result in actual billings or revenue or translate into profits. Information regarding total backlog and order backlog is designed to summarize the financial terms of our agreements and is not intended to provide guidance on our future billings, revenue, operating results, profitability or cash flows.

Although we believe our networking platform is the core enabler of the smart grid and smart cities, other third-party products are critical to meeting the needs of our customers and unlocking the full value of our platform. Because our products are built using open standards, third-party vendors can integrate both new and existing devices with our platform, forming end-to-end offerings.

To meet the needs of the market, we have developed relationships with a large number of third parties who have optimized their products to integrate with our networking platform. This approach enables us to deliver end-to-end offerings that address the needs of our customers, offering best-in-class products with a diversity of supply options, while lowering technology risk and accelerating implementation times. We have built a broad ecosystem of technology partners and vendors along with third-party resellers to support the sales, integration, service and delivery of solutions to our customer base. The composition of our vendors varies between customer projects, depending on each project’s scope and requirements. Our hardware partners manufacture various devices including meters, capacitor bank controllers, smart thermostats and street lights. Our software partners provide various applications including meter data management, consumer information management, energy management, energy analytics and street light management.

We market and sell our products primarily through our direct sales force. In some cases, we may sell our products through third-party service providers or resellers. We continue to invest significantly in direct sales efforts and in increasing our brand awareness, as we expand internationally and broaden our product portfolio because we believe it is critical that we maintain a direct relationship with our existing and prospective customers. We currently have personnel in various locations across the United States, as well as in Australia, Brazil, France, Malaysia, the Philippines, Portugal, Singapore, Turkey and United Kingdom, and we plan to expand to other international locations.

We believe that our demonstrated experience of networking millions of critical infrastructure devices allows us to understand the unique needs of our customers and the markets in which they operate. Given the strategic impact of our networking platform on our customers, buying decisions typically involve top-level executives and large multi-functional teams across many organizational layers. For the smart grid, utilities generally undertake extensive budgeting, procurement, competitive bidding, technical and performance review, and regulatory approval processes that can take several years to complete for an advanced metering deployment. Distribution automation and demand side management can have shorter sales cycles given the capital required for the project may be covered within the utility’s existing capital budget. Municipal governments and other potential customers for our smart city products also typically conduct exhaustive evaluations of potential technologies and may be more inclined to purchase turn-key services from us or our partners for the implementation of their projects. Customers may conduct both lab testing and field pilot projects to verify the functionality of our products prior to awarding a contract for a larger deployment. We work closely with customers to develop measurable success criteria for these projects and often assist potential utility customers in the development of an internal business case to quantify the value proposition of our products and services. In addition to working with utilities or city governments directly, we sometimes work with systems integrators or agents, particularly when entering foreign markets where we may lack longer-term

relationships with local potential customers. In these instances, by working with the parties who do have these relationships, we hope to gain a foothold in new markets more quickly.

Generally, we submit a proposal proactively or in response to a formal request for proposal from a customer. Our sales are generally made pursuant to master equipment purchase, services and software license agreements, under which customers issue specific scopes of work.

While we target our sales efforts towards, and in most cases negotiate terms directly with, our customers, our customers generally contract with and procure some portion of our products through third-party vendors.

For example, for our advanced metering solution, our communications modules are integrated into meters manufactured by third parties, such as Aclara Technologies LLC, Toshiba Corporation and Secure Meters Limited. Substantially all of our communications modules sales are fulfilled in this manner, and we receive payment directly from these meter vendors. We believe that allowing our utility customers to purchase meters that have been integrated with our communications modules directly from multiple meter vendors creates a diversity of supply options and reduces their supply chain risk. We employ a similar approach with our street light solution, where fulfillment of our communications modules is often completed by our partners who manufacture lighting fixtures or control modules. Our remaining products and services are delivered and billed by us directly to our customers. Alternatively, we may resell third-party devices, such as meters or other IoT devices integrated with our communications modules, directly to our customers. Regardless of the method of fulfillment, we maintain a direct and ongoing relationship with our customers.

Our ability to compete depends in large part on our continuous commitment to research and development and our ability to continually invest in the advancement of our networking platform and solutions, including investing in our core network technologies, expanding the functionality of our current solutions, and developing new solutions and applications to address evolving customer needs. In addition, we intend to continue expanding the interoperability of our products with those of our partners and adapting our products for use in international markets. We are also focused on continually improving our hardware product design to further reduce manufacturing costs and cycle time. Our research and development expenses were $70.7 million, $61.3 million and $64.8 million during the years ended December 31, 2016, 2015 and 2014, respectively.

We outsource the manufacturing of our hardware to third-party contract manufacturers. This outsourced approach allows us to:

Our contract manufacturers provide us with a wide range of operational and manufacturing services, including material procurement, final assembly, quality control testing, warranty repair, and shipment to our utility customers and device integration partners. We currently have two primary manufacturing relationships, Flextronics International Ltd., or Flex, and Celestica Inc., or Celestica. Our hardware products are manufactured at our contract manufacturers’ facilities in the United States and Thailand. The finished communications modules are delivered directly to our meter, other devices and street light partners for integration into their products prior to being delivered to our customers. Other finished hardware products, such as our networking hardware and gas IMUs, are generally delivered directly to our customers.

Under the terms of our MSA with Flex, they manufacture our networking products (access points and relays) and gas modules, and deliver them directly to our end customers. Flex procures components on our behalf based on our purchase orders and forecasts. We have agreed-to product transformation pricing, no product exclusivity requirements, and standard provisions for handling excess and obsolete inventory. The agreement contains typical provisions regarding warranty, indemnity, and limitations of liability, each of which were negotiated during the contracting process.

Under the terms of our MSA with Celestica, they manufacture communications modules and deliver them to our partners for integration into meter, street lights or other devices, and also manufacture bridges and deliver them directly to end customers. Celestica procures components on our behalf based on our purchase orders and forecasts. We have agreed-to product transformation pricing, no product exclusivity requirements and standard provisions for handling excess and obsolete inventory. The agreement contains typical provisions regarding warranty, indemnity, and limitations of liability, each of which were negotiated during the contracting process.

Our contract manufacturers generally secure capacity and procure component inventory on our behalf based on our forecasts and existing product delivery obligations to customers. Our hardware products consist of commodity parts and certain custom components. Our components are generally available from multiple sources or suppliers. However, some components used in our products are purchased from sole, single source or geographically concentrated suppliers, such as Analog Devices, Microchip Technology Incorporated, Renesas Electronics America Inc. and STMicroelectronics, Inc. Additionally, our suppliers are not typically contractually obligated to supply us with components in minimum quantities or at predetermined prices over the long term. To protect against component shortages and to provide replacement parts for our service teams, we manage our supply chain with our meter partners and contract manufacturers to establish adequate quantities of key components. In addition, we may stock limited supplies of certain key components for our products. As part of our design review process, we also identify alternative or substitute parts for single-source components to further minimize risk. Nonetheless, in some situations, we face the risk of shortages due to reliance on a limited number of suppliers, commodity supply constraints, capacity constraints or price fluctuations related to raw materials.

Competition in our market is intense and involves rapidly changing technologies, evolving industry standards, frequent new product introductions, and changes in customer requirements. To maintain and improve our competitive position, we must keep pace with the evolving needs of our customers and continue to develop and introduce new solutions, applications and services in a timely and efficient manner.

We believe we compete effectively in the market as a result of a number of factors including the innovative nature of our technology, the breadth of our product offerings, field proven performance, competitive cost of ownership, our extensive relationships with third-party vendors and strong references from our existing customers.

Our competitors range from small to very large and established companies. These companies offer a variety of products and services related to the smart grid and smart cities and come from a number of industries, including traditional meter manufacturers, application developers, telecommunications vendors, street light providers, and other service providers.

We compete with traditional meter manufacturers that incorporate various communications technologies that provide some level of connectivity to the utility’s back office. Our key competitors in this segment include Aclara Incorporated, Honeywell International Inc., Itron Inc., Toshiba Corporation, Trilliant Holdings, Inc. and Xylem, Inc. Similarly, we compete with traditional providers of distribution automation equipment, such as Cisco Systems, Inc., General Electric Company, S&C Electric Company and Schweitzer Engineering Laboratories, Inc.

We also face competition from newer entrants that are providing specific narrowly focused products for the smart grid, including C3 IoT Inc., Grid Net Inc., Opower Inc. (which was acquired by Oracle Corporation), and Tendril Networks Inc. In smart lighting and smart cities, we compete against companies such as Echelon Corporation, Harvard Engineering PLC, Telensa Limited, Verizon Wireless, and proprietary offerings from lighting manufacturers, such as General Electric, Royal Philips Electronics, Schreder Group and others.

We expect to face additional competitors as we expand into the broader IoT from companies such as SIGFOX and Ingenu, as well as Semtech Corporation, which is working to build a broad IoT ecosystem within the cellular community through the LoRa Alliance, an open, non-profit association of members with a mission to enable the IoT.

Furthermore, other large companies such as Alcatel-Lucent S.A., AT&T Inc., Cisco Systems, Inc., Enel SpA, Électricité Réseau Distribution France, Fujitsu Limited, General Electric Company, International Business Machines Corporation, Siemens AG, Sprint Nextel Corporation, Vodafone Group Plc, Verizon Communications Inc. and others have announced plans to pursue business opportunities related to the smart grid, smart cities, and the broader IoT. As we look to expand into new international markets, we expect to face additional competitors that may be more established in specific geographies. We anticipate that in the future, additional competitors will emerge that offer a broad range of competing products and services related to the smart grid, smart cities, and the broader IoT, some of which may be competitive with our offerings.

These companies may have competitive advantages in the market, including strong brand recognition, long-standing customer relationships, established distribution networks, deep financial resources and broad product portfolios. In addition, some of our competitors may have larger patent portfolios than we have, which may provide them with a competitive advantage and may require us to engage in costly litigation to protect and defend our intellectual property rights.

To remain competitive, we may need to lower prices, invest more heavily in expanding our portfolio of solutions, improve the functionality or features of our solutions, or expand our partnerships with third parties. In addition, these third-party vendors may also be or may become competitors. We intend to continue to effectively manage these relationships and to cultivate relationships with new partners to maintain our competitive positioning.

We endeavor to offer the most competitive and highest-value solutions and services to the markets we serve. Maintaining our competitive positioning through understanding the requirements of our customers and markets is of paramount importance in growing our market opportunity and will remain a top priority for our entire organization.

We rely on a combination of patent, trademark, copyright, unfair competition and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish, maintain and protect our proprietary rights. As of December 31, 2016, we had 110 issued patents and 61 patent applications pending in the United States. In foreign jurisdictions, we have 171 patents granted and 68 patent applications pending, which are collectively based on 69 U.S. patent applications. Our patents expire at various times between 2017 and 2035. We also have registered and unregistered trademarks in the United States and several foreign jurisdictions. We generally require employees, consultants, utility customers, suppliers and partners to execute confidentiality agreements with us that restrict the disclosure of our intellectual property, and we generally require our employees and consultants to execute invention assignment agreements with us that protect our intellectual property rights.

As of December 31, 2016, we had a total of 702 regular full-time employees, including 66 employees located outside the United States. Our employees in Brazil are represented by a union in accordance with local statutory requirements, but none of our other employees are represented by a union or covered by a collective bargaining agreement. We have not experienced any work stoppages and we consider our relations with our employees to be good.

Michael Bell has served as our President, Chief Executive Officer and member of our Board of Directors since September 2015. From July 2010 until September 2015, Mr. Bell served in multiple Vice President/Corporate Vice President roles at Intel Corporation, a designer and manufacturer of advanced integrated digital technology platforms, including for the New Devices Group from June 2013 until April 2015, the Mobile and Communications Group from January 2012 until June 2013, and the Ultra Mobility Group from July 2010 until January 2012. Prior to joining Intel, Mr. Bell served as Senior Vice President, Product Development at Palm, Inc., a mobile products company, from December 2007 until July 2010. From September 2000 to December 2007, Mr. Bell was the Vice President, CPU Software at Apple Inc., a provider of personal computing devices and related software and peripherals. Mr. Bell holds a B.S. in Mechanical Engineering from the University of Pennsylvania.

Scott A. Lang has served as the Chairman of our Board of Directors since September 2004 and he has served as our Executive Chairman since September 2015. From September 2004 until September 2015, Mr. Lang served as our President and Chief Executive Officer. Prior to joining us, from 1988 to 2004, Mr. Lang worked at Perot Systems, a provider of information technology services and business solutions, most recently as Vice President of the Strategic Markets Group. Mr. Lang holds a B.S. in Business Administration from the University of Mississippi with a minor in Computer Science, and was a graduate of the Advanced Executive Program from The Kellogg School of Management at Northwestern University.

Richard S. Arnold, Jr. has served as our General Counsel and Secretary since February 2013. From February 2005 to February 2013, Mr. Arnold served in multiple roles at Hewlett-Packard Company, an information technology company, most recently as Vice President and Associate General Counsel from July 2009 until his departure. Prior to that, Mr. Arnold was an attorney at Wilson Sonsini Goodrich & Rosati from 1999 to 2005. Mr. Arnold holds a B.S. in Electrical Engineering from the United States Military Academy and a J.D./M.B.A. from Duke University.

Philippe M. Gaglione has served as our Executive Vice President, Research & Development since July 2016, after serving as our Executive Vice President, Internet of Things/Starfish Platform from March 2016 through July 2016. Prior to joining us, Mr. Gaglione held several positions at Intel Corporation, including as Vice President and Software General Manager, New Devices Group from August 2013 to February 2016, and Vice President and Android General Manager, Mobile Communication Group from August 2008 to August 2013. Prior to joining Intel, Mr. Gaglione was General Manager and head of research and development of the 3G business unit at Texas Instruments, Inc. from September 2004 to February 2008. Mr. Gaglione holds a M.S. in engineering from ESIGELEC, a graduate school of engineering in France.

Kenneth P. Gianella has served as our interim Chief Financial Officer since June 2016. Previously, he served as our Vice President, Finance and Treasury from December 2014 to June 2016, our Vice President, Finance and Administration from August 2014 to December 2014, and our Senior Director, Financial Planning and Analysis and Operations Finance from April 2009 to November 2012. From December 2012 to July 2014, Mr. Gianella served as the Vice President, Finance and Acting Chief Financial Officer at Sensity Systems Inc., a provider of an Internet of Things platform. Mr. Gianella has also held various roles at KLA-Tencor Corporation, Allegheny Energy, Inc. and Adelphia Business Solutions Inc. Mr. Gianella holds a B.S. in business administration from Duquesne University and an M.B.A. from the Joseph M. Katz Graduate School of Business, University of Pittsburgh.

Aysegul Ildeniz joined us as our Chief Operating Officer in July 2016. From December 1998 until July 2016, Ms. Ildeniz served in multiple roles at Intel Corporation, a designer and manufacturer of advanced integrated digital technology platforms, including as the Vice President and General Manager, Business Development and Strategy for the New Devices Group from January 2014 until July 2016, as the Regional Director for Middle East, Turkey and Africa from January 2004 until December 2013, and as the General

Manger for Turkey from November 2001 until December 2003. Ms. Ildeniz holds a B.A. in business administration from Bosphorus University and a M.A. in electronic communications arts from San Francisco State University.

Donald L. Reeves III joined us in February 2005 and has served in a number of executive-level engineering and product roles, most recently as our Chief Technology Officer since July 2016, and as Executive Vice President, Engineering and Managed Services from February 2013 to July 2016. From August 2003 to October 2004, Mr. Reeves served as Vice President, Engineering of Black Pearl, Inc., a provider of decision management software. From March 2001 to August 2003, he served as Vice President, Application Engineering of Commerce One, Inc., a provider of e-commerce solutions. Prior to Commerce One, Mr. Reeves managed the software development organizations at a pair of start-up companies, MyTurn.com, Inc. and GlobalPC Inc., providers of personal computers, from August 1998 to February 2001. From December 1990 to August 1998, Mr. Reeves held various engineering positions at Geoworks Corporation, a provider of operating systems, applications and wireless online services. Mr. Reeves holds a B.S. in Electrical Engineering and Computer Sciences from the University of California, Berkeley.

Theresa Stynes has served as our Chief Human Resources Officer since July 2014, after serving as our Director of Human Resources from August 2009 through June 2014. From September 2000 to August 2009, Ms. Stynes worked at Sun Microsystems as a Business Partner supporting various global organizations. From 1982 to 1997, Ms. Stynes held various roles at Bank of America, including Vice President/Human Resources and Assistant Vice President/Group Operations Manager. She holds a B.S. in Business Administration and an M.S. in Industrial/Organizational Psychology, both from San Francisco State University.

Raj Vaswani has served as our Co-Founder since July 2016, and previously served as our Chief Technology Officer since February 2006 and previously served as our Vice President, Product Development from November 2003 until February 2006. From April 2001 to December 2001 and again from January 2003 to October 2003, Mr. Vaswani was an Entrepreneur in Residence with Foundation Capital, LLC, a venture capital firm. He served as Vice President of Engineering at Epinions.com, a consumer-oriented website company from September 1999 to April 2001. From March 1996 to September 1999, Mr. Vaswani was Senior Scientist and Director of Engineering for the At Home Corporation. He holds a B.S. in Electrical Engineering and Computer Science from the University of California, Berkeley and an M.S. in Computer Science from the University of Washington.

Information about segment and geographic revenue is set forth in Notes 1 and 10 of our Notes to Consolidated Financial Statements included in Part II, Item 8. Consolidated Financial Statements and Supplementary Data of this Annual Report on Form 10‑K.

We were incorporated in the State of Delaware on July 3, 2002 as Real Time Techcomm, Inc. On August 6, 2002, we changed our name to Silver Spring Networks, Inc. Our principal executive offices are located at 230 W. Tasman Drive, San Jose, California 95134, and our telephone number is (669) 770-4000. Our website address is www.silverspringnet.com.

We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and information statements and amendments to reports filed or furnished pursuant to Sections 13(a), 14 and 15(d) of the Securities Exchange Act of 1934, as amended. The public may obtain these filings at the Securities and Exchange Commission or SEC’s Public Reference Room at 100 F Street, NE, Washington, District of Columbia 20549 or by calling the SEC at (800) SEC-0330. The SEC also maintains a website at http://www.sec.gov that contains reports, proxy and information statements and other information regarding us and other companies that file materials with the SEC electronically. Copies of our reports on Form 10-K, Form 10-Q and Form 8-K, may be obtained, free of charge, electronically through our internet website, http://ir.silverspringnet.com.

Our business is subject to many risks and uncertainties, which may affect our future performance. If any of the events or circumstances described below occurs, our business and financial performance could be harmed, our actual results could differ materially from our expectations and the market value of our stock could decline. The risks and uncertainties discussed below are not the only ones we face. There may be additional risks and uncertainties not currently known to us or that we currently do not believe are material that may harm our business and financial performance.

We have a prior history of operating losses and we may not sustain profitability on a quarterly or annual basis.

Prior to our year ended December 31, 2015, we incurred significant losses each year. We have an accumulated deficit of $648.1 million as of December 31, 2016. We experienced net losses of $21.6 million and $89.2 million for the years ended December 31, 2016 and 2014, respectively, and achieved profitability for the first time with net income of $80.0 million for the year ended December 31, 2015. Our ability to be profitable for 2017 and beyond will depend on our ability to continue to increase our revenue, and maintain proportional expense levels. We may not achieve profitability again in 2017 or future periods and may incur negative operating cash flow in future periods, as we expect to incur significant costs to sell our products and operating expenses in connection with the continued development and expansion of our business. Our expenses include research and development expenses, general and administrative expenses, selling and marketing expenses and customer service and support expenses. Some of these expenses relate to prospective customers that may never place any orders and products that may not be introduced or generate revenue until later periods, if at all. There can be no assurance that we will become profitable again on a quarterly or annual basis.

Our quarterly results are inherently unpredictable and subject to substantial fluctuations, and, as a result, we may fail to meet the expectations of securities analysts and investors, which could adversely affect the trading price of our common stock.

Our revenue, billings, margins and other operating results may vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control. Our revenue and billings have fluctuated in recent periods, and have in the past decreased on a quarterly basis and on an annual basis. There can be no assurances that our revenue and billings will increase, or will not continue to decrease on a quarterly or annual basis. We expect revenue, billings, margins and other operating results to fluctuate from period to period throughout 2017 and beyond. We also expect operating losses in certain future periods. See Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The factors that may affect the unpredictability of our quarterly results and cause our stock price to fluctuate include, but are not limited to:

As a result, we believe that quarter to quarter comparisons of operating results are not necessarily a good indication of what our future performance will be. In some future quarters our operating results may be below our expectations or the expectations of securities analysts or investors, in which case the price of our common stock may decline.

Sales cycles to our customers can be lengthy and unpredictable and require significant employee time and financial resources with no assurances that a prospective customer will select our products and services.

Sales cycles with our prospective customers, particularly to utilities, which are our primary set of prospective customers, tend to be long and unpredictable. Utilities generally have extensive budgeting, procurement, competitive bidding, technical and performance review, and regulatory approval processes that can take up to several years to complete. Utilities may choose, and many historically have often chosen, to follow industry trends rather than be early adopters of new products or services, which can extend the lead time for or prevent acceptance of more recently introduced products or services such as ours. In addition, in many instances, a utility may require one or more pilot programs to test new products and services before committing to a larger deployment. These pilot programs may be quite lengthy and further delay the sales cycle with no assurance that they will lead to a larger deployment or future sales. Furthermore, to the extent our products are required to be deployed with the products of others, such as meters, delays related to such third-party products will further lengthen the sales cycle.

This extended sales process requires us to dedicate significant time by our senior management, sales and marketing personnel and customer services personnel, and to use significant financial resources without any assurance of success or recovery of our related expenses. Similarly, we are likely to incur these significant operating expenses well ahead of recognizing the related revenue because our ability to recognize revenue is typically dependent on meeting contractual customer acceptance and other requirements.

The lengthy sales cycles of our products and services also make it difficult to forecast new customer deployments, as well as the volume and timing of orders, which in turn makes forecasting our future results of operations challenging. In the event that we publicly disclose any forecasts of our future results of operations or other performance metrics and those forecasts ultimately turn out to be inaccurate, the value of our common stock could significantly decline.

Our revenue is not predictable and recognition of a significant portion of it will be deferred into future periods.

Once a customer decides to move forward with a large-scale deployment of our products and services, the timing of and our ability to recognize related revenue will depend on several factors, some of which may not be under our control. These factors include shipment schedules that may be delayed or subject to modification, the rate at which our customers choose to deploy our solutions, customer acceptance of all or any part of our products and services, our contractual commitments to provide new or enhanced functionality at some point in the future, other contractual provisions such as liquidated damages, our manufacturers’ ability to provide an adequate supply of components, our customers’ requirement to obtain regulatory approval, and our ability to deliver quality products according to expected schedules. In light of these factors, the application of complex revenue recognition rules to our products and services has required us to defer, and in the future could continue to require us to defer, a significant amount of revenue until undetermined future periods. As of December 31, 2016, 2015 and 2014, we had $385.4 million, $401.8 million and $609.6 million in deferred revenue, respectively. It may be difficult to predict the amount of revenue that we will recognize in any given period, and amounts recognized may fluctuate significantly from one period to the next.

Amounts included in our total backlog and order backlog may not result in actual billings or revenue or translate into profits.

Our total backlog represents future product and services revenue and billings that we expect to generate pursuant to contracts that we have entered into with our customers and third-party device manufacturers. Order backlog represents future revenue and billings for open purchase orders and other firm commitments and is included in our total backlog. We anticipate that our total backlog and order backlog will fluctuate from period to period throughout 2017 and beyond.

We cannot guarantee that our total backlog or order backlog will result in actual billings or revenue in the originally anticipated period, or at all. In addition, the contracts reflected in our total backlog and order backlog may not generate margins equal to or better than our historical operating results. We have a short history of tracking total backlog and order backlog on a consistent basis as performance measures, and as a result, we do not have significant experience in determining the level of realization that we will actually achieve on our total backlog and order backlog. Our customer contracts are typically structured as master purchase and services agreements, or MSAs, under which the customer may place purchase orders over the course of a deployment. These

deployments can extend for a number of years. Because our MSAs do not typically require a customer to purchase a minimum amount of product or services, total backlog is an estimate based upon contractual terms, existing purchase orders and other available information regarding the amount and timing of expected future purchase orders to be placed by our customers, including non-binding forecasts. No assurance can be made that firm purchase orders will be placed under these MSAs in the amounts we estimate, within the time period we expect, or at all. Total backlog is subject to adjustments due to the long-term nature of our customer deployments. Adjustments can result from a variety of factors, including changes in the nature or scope of customer deployments, the impact of contingency provisions related to future delivery or performance, customer cancellations, market conditions, delayed regulatory approvals and customer defaults. Delays due to external market factors or delays in deployments and required regulatory approvals have in the past and may in the future cause us to extend the deployment schedule or make modifications under customer contracts. In addition, under our MSAs, our customers generally have the right to terminate the MSA for any reason, including for their sole convenience, a material breach or insolvency on our part or their inability to obtain required regulatory approval. The occurrence of such adjustments or terminations could materially reduce the amount of, or delay the fulfillment of, our total backlog and order backlog. If our total backlog or order backlog fails to materialize as expected, we could experience a material reduction in future billings, revenue, operating results or cash flow.

We are dependent on the utility industry, which has experienced volatility in capital spending. This volatility could cause our results of operations to vary significantly from period to period.

We derive a substantial portion of our revenue and billings from sales of products and services directly and indirectly to utilities. Similar to other industries, the utility industry has been affected by recent economic factors, including continued global economic uncertainty. Purchases of our products and services may be reduced or deferred as a result of many factors including economic downturns and uncertainty, slowdowns in new residential and commercial construction, a utility’s access to capital on acceptable terms, the timing and availability of government grants or incentives, utility specific financial circumstances, mergers and acquisitions, regulatory decisions, weather conditions, consumer opposition and fluctuating interest rates. Even with economic recovery, it may take time for our customers to establish new budgets and return to normal purchasing patterns. We cannot predict the recurrence of any economic slowdown or the strength or sustainability of the economic recovery, worldwide, in the United States or in our industry. We have experienced, and may in the future experience, variability in operating results on an annual and a quarterly basis as a result of these factors. Because a significant portion of our expenses is fixed in the short term or is incurred in advance of anticipated sales, we may not be able to decrease our expenses in a timely manner to offset any shortfall of sales. This could materially and adversely affect our operating results, financial condition and cash flows.

Substantially all of our current products depend on the availability and are subject to the regulation of radio spectrum in the United States and abroad.

Substantially all of our current products are designed to communicate wirelessly via radio frequencies and therefore depend on the availability of adequate radio spectrum in order to operate. While these products are designed to operate in a variety of different frequencies to allow us to adapt our solutions to local market conditions, or by using other technologies such as cellular, in the United States they are primarily designed to form a wireless RF mesh using the unlicensed 902-928 megahertz, or MHz, band. The 902-928 MHz band is available for a wide variety of uses and requires us to manage interference by other users who operate in accordance with the Federal Communications Commission, or FCC, rules. The unlicensed frequencies are also often the subject of proposals to the FCC requesting a change in the rules under which such frequencies may be used. In the past, the FCC has re-allocated spectrum for new or additional uses, and has adopted changes to the requirements for equipment using radio spectrum. It is possible that the FCC or the U.S. Congress could adopt additional changes, which may be incompatible with our current or future product offerings, as well as products currently installed in the field, or require them to be modified at significant, or even prohibitive, cost. If the unlicensed frequencies become unacceptably crowded, restrictive or subject to changed laws, regulations or rules governing their use, our business, financial condition and results of operations could be materially and adversely affected.

Our international growth and future success also depend on the availability of radio spectrum that is compatible with our products, and on our ability to develop products that use alternative communications technology as we continue to integrate our products with products from additional device partners. Certain international markets, such as Europe, use and may continue to use different spectrum bands than the United States, which has in the past and may continue to require us to make modifications to our products in order to operate within the designated spectrum. Additionally, we have in the past and may in the future seek rights and seek to certify our products for using a variety of spectrum in various international markets, however we may not be granted such rights or certifications in all countries. In many other countries, there may not be spectrum available or we may be required to obtain a license to operate in a frequency band that is not immediately compatible with our products. Licenses to appropriate spectrum in these countries may be unavailable or only available at unreasonably high prices. Similarly, in the event that we were only able to obtain a license in a different frequency band, the cost of modifying or redesigning our products to make them compatible with available spectrum could be significant or even cost-prohibitive. Alternatively, if we are not able to obtain available spectrum on financially advantageous terms, we may not be able to compete without investing in alternative communication technology. Moreover,

interference caused by others who do not comply with regulatory or statutory requirements could further limit the availability of spectrum that is compatible with our products. If limitations on the availability of spectrum or the cost of making necessary modifications or investments in new technology preclude us from selling our products in markets outside of the United States, our growth, prospects, financial condition and results of operations could be materially and adversely affected.

A limited number of our customers are responsible for a significant portion of our revenue, billings and cash flow. A decrease in sales to these customers or delays in customer deployments could have a material adverse effect on our operating results and financial condition.

A substantial majority of our revenue, billings and cash flow depends on relatively large sales to a limited number of customers. The combination of lengthy sales cycles, challenges in securing new customers and relatively large sales to a small number of customers increases the risk of quarterly fluctuations in our billings, revenue and operating results. See Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, for further information regarding customer concentration. Our MSAs do not impose purchase obligations on our customers until we have received a purchase order or agreed to a statement of work. Further, the MSAs are typically subject to termination for any reason, including for convenience following a specified notice period. We expect that a limited number of customers will continue to account for a substantial portion of our revenue and billings in future periods. Changes in the business requirements, vendor selection, or purchasing behavior of our customers could significantly decrease our sales. In addition, our MSAs are complex, often requiring close coordination with our customers over extended preparation and deployment periods and involving large-scale delivery of our products and services. From time to time we have experienced and may in the future experience challenges in satisfying our customers throughout these preparation and deployment periods regarding all aspects of our performance. Additionally, we have in the past received correspondence from customers claiming that there have been deficiencies in our timeliness and coordination regarding hardware, software and services for deployment, and requesting that we remedy the deficiencies noted. If we are unable to address customers’ concerns, we could be required to pay penalties, liquidated damages or other expenses, the customer could terminate our MSA and our reputation could be damaged. Additionally, delays in customer deployments have in the past, and could in the future, affect our results of operations. Any of these factors could materially and adversely affect our business, financial condition and results of operations.

Our marketing efforts depend significantly on our ability to receive positive references from our existing customers.

Our marketing efforts depend significantly on our ability to call on our current customers to provide positive references to new, potential customers. Given our limited number of customers, the loss or dissatisfaction of any customer could substantially harm our brand and reputation, inhibit the market acceptance of our products and services, and impair our ability to attract new customers and maintain existing customers. Any of these consequences could have a material adverse effect on our business, financial condition and results of operations.

The markets for our products and services, smart grid, smart city, and broader IoT technology in general, are still developing. If the markets develop less extensively or more slowly than we expect, our business could be harmed.

The markets for our products and services, smart grid, smart city and broader IoT technology in general, are still developing, and it is uncertain whether our products and services will achieve and sustain high levels of demand and market acceptance. Our near-term and long-term success will depend to a substantial extent on the willingness and ability of utilities to implement smart grid technology. Many utilities lack the financial resources and/or technical expertise required to evaluate, deploy and operate smart grid technology. Utilities’ activities are governed by regulatory agencies, including public utility commissions, which may not create a regulatory environment that is conducive to the implementation of smart grid technologies in a particular jurisdiction. Furthermore, some utilities may be reluctant or unwilling to adopt smart grid technology because they do not perceive the benefits or are unable to develop a business case to justify the up-front and ongoing expenditures. If utilities do not implement smart grid technology or do so in fewer numbers or more slowly than we expect, our business and operating results would be adversely affected. For example, in the past, the rate of smart grid adoption slowed due to uncertainty surrounding the timing and tax treatment of U.S. government stimulus funding, negative publicity and consumer opposition, and regulatory investigations. These uncertainties caused many potential customers that had been considering smart grid programs in the United States to further evaluate their smart grid initiatives and delay their procurement processes or extend their deployment schedules. Smart grid adoption in international markets has trailed adoption in the United States as international markets continue to explore the technology and define the benefits and regulatory requirements for the smart grid.

Our success in the smart grid market also depends on our ability to expand beyond advanced metering sales and sell additional products and services, such as distribution automation, demand-side management, and our data analytics platform. There can be no assurance that these products and services will be accepted by utilities or consumers. Similarly, our future success depends on our ability to expand our business beyond the smart grid into smart city infrastructure, such as with our street light solution, and into the broader IoT markets, such as with our Starfish network service. There can be no assurance that these or other smart city and broader

IoT products and services will be accepted by cities or other potential customers. Furthermore, our ability to expand our business into the broader IoT markets will depend on our ability to successfully target different prospective customers beyond utilities and cities, and these new prospective customers may have different challenges and requirements than our historical customer base. Other competing products and services for the smart grid, smart city and broader IoT markets may emerge and may be more successful.

Adverse publicity about, or consumer or political opposition to, the smart grid could inhibit the growth of the overall market.

The safety and security of the power grid, the accuracy and protection of the data collected by meters and transmitted via the smart grid, concerns about the safety of smart meters following recent meter-related fires, and concerns about the safety and perceived health risks of using radio frequency communications have been the focus of adverse publicity. For example, in Northern California, Pacific Gas and Electric Co.’s, or PG&E’s, full-scale deployment of our networking platform and advanced metering solution was subject to scrutiny following allegations of inaccurate bills generated by newly-installed “smart meters” and safety concerns about the levels of radio frequency electromagnetic fields emitted by the wireless communications technology used by the meters. As a result, the California State Senate created a special committee and the California Public Utilities Commission, or CPUC, and hired an independent investigator to review the installation and use of advanced metering products. Negative publicity and consumer opposition in California, Maine and elsewhere have caused other utilities or their regulators to respond by delaying or modifying planned smart grid initiatives, mandating that utilities allow their customers to opt out of smart metering programs, or calling for investigations and/or implementation of unfavorable regulations and legislation. Similarly, outside the United States, public concern over smart grid projects in places such as Victoria, Australia has resulted in increased government scrutiny. Additionally, testing commissioned by the CPUC and other organizations could, in the future, contain negative information regarding the accuracy and safety of smart grid solutions. Finally, smart grid projects by other companies may be, or could be viewed by the public as, unsuccessful. Any of the foregoing factors could directly impact our current or future deployments, as well as inhibit the growth of the overall smart grid market, either of which could cause our business to suffer.

Security breaches involving our products or services, publicized breaches in smart grid or smart city products and services offered by others, or the public perception of security risks or vulnerability created by the deployment of the smart grid or smart city in general, whether or not valid, could harm our business.

The security technologies we have integrated into our networking platform and solutions that are designed to detect unauthorized activity and prevent or minimize security breaches may not function as expected and there can be no assurance that our products and services, those of other companies with whose products our products and services are integrated or interact, or even the products of other smart grid and smart city solutions providers, will not be subject to significant real or perceived security breaches.

Our networking and analytics platforms allows utilities to collect, monitor, store, compile and analyze sensitive information related to consumers’ energy usage, as well as the performance of different parts of the power grid. As part of our data transfer and managed services and SaaS services, we may store and/or come into contact with sensitive consumer information and data when we perform operational, installation or maintenance functions for our customers. If, in handling this information, we, our partners or our customers fail to comply with privacy or security laws, we could face significant legal and financial exposure to claims of government agencies, customers and consumers whose privacy is compromised. Even the perception that we, our partners or our customers have improperly handled sensitive, confidential information could have a negative effect on our business. In addition, third parties may attempt to breach our security measures or inappropriately use or access our network services or the network hardware and software we have in the field through computer viruses, physical or electronic break-ins, and other means. If a breach is successful, sensitive information may be improperly obtained, manipulated or corrupted, and we may face legal and financial exposure. A breach could also lead to a loss of confidence in our products and services and our business could suffer.

Our current and anticipated future products and services allow authorized personnel to remotely control equipment at residential and commercial locations, at various points on the power grid, and at various points in a city’s critical infrastructure. For example, our software allows a utility to remotely connect and disconnect electricity at specific customer locations. If an unauthorized third-party were to breach our security measures and disrupt, gain access to or take control of any of our products or services, our business and reputation could be severely harmed.

Our products and services may also be integrated or interface with products and services sold by third parties, and rely on the security of those products and their secure transmission of proprietary data over the internet and cellular networks. Because we do not have control over the security measures implemented by third-parties in their products or in the transmission of data over the internet and cellular networks, we cannot ensure the complete integrity or security of such third-party products and transmissions.

Concerns about security, customer or consumer privacy may result in the adoption of state or federal legislation that restricts the implementation of smart grid and smart city technology or requires us to make modifications to our products, which could significantly limit the deployment of our technologies or result in significant expense to modify our products.

Any real or perceived security breach could seriously harm our reputation and result in significant legal and financial exposure, including increased remediation costs and security protection costs, inhibit market acceptance of our products and services, halt or delay the deployment by customers of our products and services, cause us to lose customers, harm our reputation, trigger unfavorable legislation and regulatory action, and inhibit the growth of the overall market for the smart grid and smart cities. Any of these risks could have a material adverse effect on our business, financial condition and results of operations.

If our products contain defects or otherwise fail to perform as expected, we could be liable for damages and incur unanticipated warranty, recall and other related expenses, our reputation could be damaged, we could lose market share and, as a result, our financial condition or results of operations could suffer.

Our products are complex and may contain defects or experience failures due to any number of issues in design, materials, deployment and/or use. If any of our products contain a defect, compatibility or interoperability issue or other error, we may have to devote significant time and resources to find and correct the issue. Such efforts could divert the attention of our management team and other relevant personnel from other important tasks. A product defect, product recall or a significant number of product returns could be expensive, damage our reputation and relationships with our customers and third-party vendors, result in property damage or physical injury or death, result in the loss of business to competitors, and result in litigation against us. Costs associated with field replacement labor, hardware replacement, re-integration with third-party products, handling charges, correcting defects, errors and bugs, or other issues could be significant and could materially harm our financial results. We have in the past experienced product defects due to faulty components supplied by third-parties, and recorded significant costs associated with warranty claims, write-offs of returned products and customer repair programs implemented as a result.

Estimated future product warranty claims are based on the expected number of field failures over the warranty commitment period, the term of the product warranty period, and the costs for repair, replacement and other associated costs. Our warranty obligations are affected by product failure rates, claims levels, material usage and product re-integration and handling costs. Because our products are relatively new and we do not yet have the benefit of long-term experience observing the products’ performance in the field, our estimates of a product’s lifespan and incidence of claims may be inaccurate. Should actual product failure rates, claims levels, material usage, product re-integration and handling costs, defects, errors, bugs or other issues differ from the original estimates, we could end up incurring materially higher warranty or recall expenses than we anticipate.

Our customer contracts typically contain provisions that could cause us to incur penalties, be liable for damages, and/or incur unanticipated expenses with respect to the functionality, deployment, operation and availability of our products and services, and that provide the customer with the right to terminate the contract for any reason.

In addition to the risk of unanticipated warranty or recall expenses, our customer contracts typically contain provisions that could cause us to incur penalties, be liable for damages, including liquidated damages, or incur other expenses, if we experience difficulties with respect to the functionality, deployment, operation and availability of our products and services. In the event of late deliveries, late or improper installations or operations, failure to meet product or performance specifications or other product defects, interruptions or delays in our managed services offerings, our customer contracts may expose us to penalties, significant damages and other liabilities. For example, we have in the past agreed to reimburse customers for their costs and incurred liquidated damages by failing to timely meet contractual milestones or other contractual requirements. In addition, our customer contracts are typically subject to termination for any reason, including for convenience following a specified notice period, our material breach or insolvency, or the failure to obtain required regulatory approval. If a customer terminates its customer contract for any reason, our estimates of total backlog and order backlog will be reduced. Reductions in total backlog and order backlog may have a negative effect on future revenue, billings, profitability and liquidity. In the event we were to incur contractual penalties, such as liquidated damages or other related costs that exceed our expectations, or our customers terminate their contracts with us, our business, financial condition and operating results could be materially and adversely affected.

Our success depends in part on our ability to integrate our technology into devices and our relationship with device manufacturers.

Our business depends on our ability to integrate our communications modules into devices manufactured by third-party vendors. For example, for our advanced metering solution, our communications modules are integrated into electricity meters that are manufactured by third parties such as Aclara Technologies LLC, Secure Meters Limited and Toshiba Corporation, among others. A similar structure is used in our street light solution, where fulfillment of our communications modules is often completed by our partners who manufacture lighting fixtures or control modules. In a typical deployment, our customer purchases integrated devices from one or more third-party device manufacturers after integration of our communications modules into the device. Accordingly, even if demand for our products is strong, we have in the past and may in the future be constrained by the production capacity and priorities of the device manufacturers. In addition, several of these device manufacturers offer competing products, partner with other providers or may otherwise choose not to integrate our communications modules with their devices. If for technical or any other reason we were to lose the ability to integrate our communications modules with devices manufactured by third parties, or if our

relationships with device manufacturers were to be terminated or renegotiated on unfavorable terms, our business, financial condition, and operating results could suffer. Further, there have been instances where devices with which our technology had been integrated experienced defects or had other problems that were unrelated to our technology. If this occurs in the future and the defects or problems are more significant or occur more frequently, our reputation could suffer and our business could be harmed.

From time to time, we have worked and expect to continue to work with third parties to pursue smart grid, smart city and broader IoT market opportunities. If we are unable to establish and maintain these relationships, or if our initiatives with these third parties are unsuccessful, our business may suffer.

For some of our existing and anticipated future products and services, we expect to maintain and may seek to establish relationships with third parties in order to take advantage of smart grid, smart city and broader IoT market opportunities. For example, we have designed our products to interface with in-home devices and data analytics products, and will need to work with third parties to successfully deploy these products. Before a customer is willing to move forward with a deployment of our products, they may require that we partner with third-party vendors and/or obtain a certification from these vendors that our products will function as intended when integrated with their products. In addition, third-party vendors may offer competing products, partner with other networking providers or otherwise choose not to partner with us. In the event that we are unable to establish or maintain new relationships on favorable terms, or at all, our ability to successfully sell our existing and anticipated future products and services could be jeopardized.

We may not be able to identify adequate strategic relationship opportunities, or form strategic relationships, in the future.

Strategic business relationships may be an important factor in the growth and success of our business. However, there are no assurances that we will be able to identify or secure suitable business relationship opportunities in the future and our competitors may capitalize on such opportunities before we do. Moreover, identifying such opportunities could demand substantial management time and resources and involves significant costs and uncertainties. If we are unable to successfully source and execute on strategic relationship opportunities in the future, our business and results of operations could be significantly harmed.

As we continue to expand our business and evolve our technology, we may face unexpected challenges in the adoption, deployment and operation of our technology.

The smart grid, smart city, and broader IoT markets are still expanding and involve rapidly changing technology, which requires us to continue to expand our business and evolve our technology. The current generation of our networking platform and solutions has only been developed in the last several years. We announced our next generation networking platform and solutions, Gen5, in January 2015, and announced Starfish, a wireless network service for the IoT, in December 2015. We expect each of these technologies to continue to evolve over time. We may face unexpected problems or challenges in connection with the introduction and deployment of our new Gen5 platform and solutions and Starfish, including in the adoption and acceptance by our existing and potential customers, for a variety of reasons such as:

If Gen5, Starfish, or other new technologies do not achieve adequate acceptance and adoption in the market, we may not realize our investments in their research and development, our competitive position will be impaired, and our results of operations could be adversely affected.

In addition, deploying and operating our technology is a complex endeavor. As the size, complexity and scope of our deployments have expanded, we have been able to test product performance at a greater scale and in a variety of new geographic settings and environmental conditions. These larger deployments have presented a number of unforeseen operational and technical challenges, which in some cases have caused delays and required us to commit significant resources to address these challenges. As the number, size and complexity of our deployments grow, we may continue to encounter unforeseen operational, technical and other challenges, some of which could cause significant delays, trigger contractual penalties, result in unanticipated expenses, and/or damage to our reputation, each of which could materially and adversely affect our business, financial condition and results of operations.

If we fail to respond to evolving technological changes, our products and services could become obsolete or less competitive.

Our industry is highly competitive and characterized by new and rapidly evolving technologies, standards, regulations, customer requirements, and frequent product introductions. Accordingly, our operating results depend upon, among other things, our ability to develop and introduce new products and services, as well as our ability to reduce production costs of our existing products. The process of developing new technologies and products is complex, and if we are unable to develop enhancements to, and new features for, our existing products or acceptable new products that keep pace with technological developments or industry standards, our products may become obsolete, less marketable and less competitive and our business could be significantly harmed.

We depend on our ability to develop new products and to enhance and sustain the quality of existing products.

Most of our current revenue and billings are derived from our networking platform and advanced metering solution, but our growth and future success will depend, in part, on our ability to continue to design and manufacture new competitive products that achieve market acceptance and to enhance and sustain the quality and marketability of our existing products. As such, we have made, and expect to continue to make, substantial investments in technology development. Any new technology or product that we develop may not be introduced in a timely or cost-effective manner, may not be priced appropriately, and may not achieve the broad market acceptance necessary to generate significant revenue. For example, in January 2015 we announced Gen5, our next generation networking platform and solutions, and in December 2015 we announced Starfish, a wireless network service for the IoT. In previous years, we introduced our street light and SilverLink Data Platform solutions. These new products and solutions may not be adopted by prospective or existing customers to the extent we anticipate, or at all. In the future, we may not have the necessary capital, or access to capital on acceptable terms, to fund necessary levels of research and development. Even with adequate capital resources, we may nonetheless experience unforeseen problems in the development or performance of our technologies or products. The markets for smart grid, smart city, and broader IoT technology products are still in their early stages, and we cannot assure you that we will be successful in developing or selling new products in these markets. In addition, we may not meet our product development schedules and, even if we do, we may not develop new products fast enough to provide sufficient differentiation from our competitors’ products, which may be more successful. If we are unable to develop new products or enhance or sustain the quality of our existing products, successfully develop and deploy new technology and products or integrate these new technologies into devices manufactured by our third-party devices, our business and operating results could be harmed.

We and our customers operate in a highly regulated business environment and changes in regulation could impose costs on us or make our products less economical.

Our products and our customers are subject to federal, state, local and foreign laws and regulations. Laws and regulations applicable to us and our products govern, among other things, the manner in which our products communicate, and the environmental impact and electrical reliability of our products. Additionally, our U.S. customers are often regulated by national, state and/or local bodies, including public utility commissions, the Department of Energy, the Federal Energy Regulatory Commission and other bodies. International customers are often subject to similar regulatory regimes. Prospective customers may be required to gain approval from any or all of these organizations prior to implementing our products and services, including specific permissions related to the cost recovery of these systems. Regulatory agencies may impose special requirements for implementation and operation of our products. We may incur material costs or liabilities in complying with government regulations applicable to us or our customers. In addition, potentially significant expenditures could be required in order to comply with evolving regulations and requirements that may be adopted or imposed on us or our customers in the future. Such costs could make our products less economical and could impact our customers’ willingness to adopt our products, which could materially and adversely affect our revenue, results of operations and financial condition.

Furthermore, changes in the underlying regulatory conditions that affect utilities could have a potentially adverse effect on a utility’s interest or ability to implement smart grid technologies. For example, ongoing regulatory uncertainties have in the past delayed the timing of some deployments. Many regulatory jurisdictions have implemented rules that provide financial incentives for the implementation of energy efficiency and demand response technologies, often by providing rebates or through the restructuring of utility rates. If these programs were to cease, or if they were restructured in a manner inconsistent with the capabilities enabled by our products and services, our business, financial condition and results of operations could be significantly harmed.

The adoption of industry standards applicable to our products or services could limit our ability to compete in the marketplace.

Standards bodies, which are formal and informal associations that seek to establish voluntary, non-governmental product and technology standards, are influential in the United States and abroad. We participate in voluntary standards organizations in order to both help promote non-proprietary, open standards for interoperability with our products and prevent the adoption of exclusionary standards. However, we are not able to control the content of adopted voluntary standards and do not have the resources to participate in all voluntary standards processes that may affect our markets. Some of the standards bodies and alliances in which we participate may require that we license certain of our patent claims that are necessary or essential to practice a particular standard to other participants, including competitors who elect to produce products compliant with that standard. These obligations to license our necessary patent claims may allow our competitors to use our patents to develop and sell products that compete with our products without spending the time and expense that we incurred to develop the technology covered by the patents, thereby potentially reducing any time to market advantage we might have as a result of these patents. These obligations could also substantially restrict and may eliminate our ability to use our patents as a barrier to entry or as a significant source of revenue. Moreover, because the specifications for these industry standards are generally available to members of the applicable standards bodies and alliances for little or no cost, competitors might be able to more easily create products that compete with our products.

The adoption, or expected adoption, of voluntary standards that are incompatible with our products or technology or that favor our competitors’ products or technology could limit the market opportunity for our products and services or render them obsolete, any of which could materially and adversely affect our revenue, results of operations and financial condition.

If our products do not interoperate with our customers’ other systems, the purchase or deployment of our products and services may be delayed or cancelled.

Our products are designed to interface with our customers’ back office billing and other systems, each of which may have different specifications and utilize multiple protocol standards and products from other vendors. Our products will be required to interoperate with many or all of these products as well as future products in order to meet our customers’ requirements. If we find errors in the existing software or defects in the hardware used in our customers’ systems, we may need to modify our products or services to fix or overcome these errors so that our products will interoperate with the existing software and hardware, which could be costly and negatively affect our business, financial condition, and results of operations. In addition, if our products and services do not interoperate with our customers’ systems, customers may seek to hold us liable, demand for our products could be adversely affected or orders for our products could be delayed or cancelled. This could hurt our operating results, damage our reputation, and seriously harm our business and prospects.

Interruptions or delays in services from our third-party data center facilities, or problems with the third-party hardware or software that we employ, could impair the delivery of our services and harm our business.

We currently offer managed services and SaaS, including disaster recovery services, utilizing two data center facilities operated by separate third parties in California and Nevada. These facilities may be vulnerable to damage or interruption from, among other things, fire, natural disaster, power loss, telecommunications failure, war, acts of terrorism, unauthorized entry, human error, and computer viruses or other defects. They may also be subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct. We rely on software and hardware technology provided by third-parties to enable us to provide these services. Any damage to, or failure of, these third-party data centers or the third-party hardware and software we employ, could result in significant and lengthy interruptions in the services we provide to our customers. Such interruptions could reduce our revenue and billings, cause us to issue credits or pay penalties, cause customers to terminate their services, harm our reputation and adversely affect our ability to attract new customers.

We do not control certain critical aspects of the manufacture of our products and depend on a limited number of contract manufacturers.

Our future success will depend significantly on our ability to manufacture our products timely and cost-effectively, in sufficient volumes, and in accordance with quality standards. Currently, our primary manufacturing relationships are with Celestica, Inc. and Flextronics International Ltd. These vendors provide us with a wide range of operational and manufacturing services, including material procurement, final assembly, test quality control, warranty repair, and shipment to our customers and third-party vendors.

Our reliance on our contract manufacturers reduces our control over the manufacturing process, exposing us to risks, including reduced control over quality assurance, product costs and product supply. Any manufacturing disruption by our contract manufacturers could impair our ability to fulfill orders and warranty repair obligations. We may be unable to manage our relationships with our contract manufacturers effectively as they may experience delays, disruptions, capacity constraints or quality control problems in their manufacturing operations or otherwise fail to meet our future requirements for timely delivery. Similarly, to the extent that our contract manufacturers procure materials on our behalf, we may not benefit from any warranties received by the contract manufacturers from the suppliers or otherwise have recourse against the original supplier of the materials or even the contract manufacturer. In such circumstances, if the original supplier were to provide us or our contract manufacturers with faulty materials, we might not be able to recover the costs of such materials or be compensated for any damages that arise as a result of the inclusion of the faulty components in our products. For example, in the past we discovered that faulty components from third-party suppliers were used in a discrete number of our communications modules.

One or more of our contract manufacturers may suffer an interruption in its business, or experience delays, disruptions or quality control problems in its manufacturing operations, or seek to terminate its relationship with us, or we may choose to change or add additional contract manufacturers for other reasons. Additionally, we do not have long-term supply agreements with our contract manufacturers. As a result, we may be unable to renew or extend our agreement on terms favorable to us, if at all. Although the contract manufacturing services required to manufacture and assemble our products may be readily available from a number of established manufacturers, it is risky, time consuming and costly to qualify and implement contract manufacturer relationships.

We depend on a limited number of key suppliers and if such suppliers fail to provide us with sufficient quantities of components at acceptable levels of quality and at anticipated costs, our revenue and operating results could be materially and adversely affected.

Several of the components used in our products come from sole, limited source or geographically concentrated suppliers, such as Analog Devices, Microchip Technology Incorporated, Renesas Electronics America Inc. and STMicroelectronics, Inc. Additionally, our suppliers are not typically contractually obligated to supply us with components in minimum quantities or at predetermined prices over the long term. Accordingly, we may be vulnerable to price increases, component quality issues, the discontinuance of certain components, and financial, natural disasters, or other difficulties faced by our suppliers, causing shortages or interruptions in supply of components and materials, which could cause us to delay shipments to our customers. For example, some of our key suppliers are located in Japan and their ability to timely provide us with the necessary components used in our products was compromised as a result of the catastrophic earthquake and tsunami in 2011. To help address these issues, we may purchase excess quantities of these items to hold in inventory to help ensure adequate available supply. As a result, we could be forced to record excess and obsolete inventory charges to provide for these excess quantities and we may also be subject to pricing risk or carrying charges, which could harm our operating results.

If we experience any shortages due to reliance on a limited number of suppliers, commodity supply constraints, capacity constraints, discontinuance, natural disasters or price fluctuations related to the raw materials used, or if we are not able to identify, test, qualify, and procure components from alternate sources at acceptable prices and within a reasonable period of time, our reputation could suffer and our business, financial condition and results of operations could be materially and adversely effected. We may not be able to obtain component replacements on commercially reasonable terms in the event of a natural disaster, act of God or similar catastrophic event. In such circumstances, we could be forced to exhaust our excess on-hand inventory and then face a delay in shipments of our products to our customers. In addition, we may also be subject to contractual penalties if we fail to deliver our products and services on time.

Further, our customers may reschedule or cancel orders on relatively short notice. If our customers cancel orders after we have ordered the corresponding product from our suppliers, we may be forced to incur cancellation fees or to purchase products that we may not be able to resell, which could have a material adverse effect on our business, financial condition and results of operations.

Our business could be severely harmed by natural disasters or other catastrophes.

A significant catastrophic event such as war, acts of terrorism, natural disasters, such as earthquakes, or global threats, including, but not limited to, the outbreak of epidemic disease, could disrupt our operations and impair deployment of our solutions by our customers, interrupt critical functions, cause our suppliers to be unable to meet our demand for parts and equipment, reduce demand for our products, prevent our customers from honoring their contractual obligations to us or otherwise affect our business negatively. To the extent that such disruptions or uncertainties result in delays or cancellations of customer orders or the deployment of our products, or the manufacture or shipment of our products, our business, operating results and financial condition could be materially and adversely affected.

We operate in a highly competitive industry and we compete against many companies with substantially greater financial and other resources, and our market share and results of operations may be reduced if we are unable to respond to our competitors effectively.

Competition in our market is intense and involves quickly changing technologies, evolving industry standards, frequent new product introductions, rapid consolidation, and changes in customer requirements. To maintain and improve our competitive position, we must keep pace with the evolving needs of our customers and continue to develop and introduce new solutions, applications and services in a timely and efficient manner. Our competitors range from small companies to very large and established companies. These competitors offer a variety of products and services related to the smart grid and smart city and come from a number of industries, including traditional meter manufacturers, application developers, telecommunications vendors, street light providers, and other service providers. We compete with traditional meter manufacturers that incorporate various communications technologies that provide some level of connectivity to the utility’s back office. Our key competitors in this segment include Aclara Incorporated, Honeywell International Inc., Itron Inc., Toshiba Corporation, Trilliant Holdings, Inc. and Xylem, Inc. Similarly, we compete with traditional providers of distribution automation equipment, such as Cisco Systems, Inc., General Electric, S&C Electric Company and Schweitzer Engineering Laboratories, Inc. We also face competition from newer entrants that are providing specific narrowly focused products for the smart grid, including C3 IoT Inc., Grid Net Inc., Opower Inc. (which was acquired by Oracle Corporation), and Tendril Networks Inc. In smart lighting and smart cities, we compete against companies such as Echelon Corporation, Harvard Engineering PLC, Telensa Limited, Verizon Wireless, and proprietary offerings from lighting manufacturers, such as General Electric, Royal Philips Electronics, Schreder Group and others. We expect to face additional competitors as we expand into the broader IoT from companies such as SIGFOX and Ingenu, as well as Semtech Corporation, which is working to build a broad IoT ecosystem within the cellular community through the LoRa Alliance, an open, non-profit association of members with a mission to enable the IoT. Furthermore, other large companies such as Alcatel-Lucent S.A., AT&T Inc., Cisco Systems, Inc., Enel SpA, Électricité Réseau Distribution France, Fujitsu Limited, General Electric Company, International Business Machines Corporation, Siemens AG, Sprint Nextel Corporation, Vodafone Group Plc, Verizon Communications Inc. and others have announced plans to pursue business opportunities related to the smart grid, smart city, and the broader IoT. As we look to expand into new international markets, we expect to face additional competitors that may be more established in specific geographies. We anticipate that in the future, additional competitors will emerge that offer a broad range of competing products and services related to the smart grid, smart city, and the broader IoT, some of which may be competitive with our offerings.

Some of these larger competitors have substantially broader product offerings and may be able to leverage the existing relationships they have with customers. In some cases, our larger competitors are also currently vendors of ours, and they could decide in the future to develop their own products instead of working with us. Any inability to effectively manage these relationships could have a material adverse effect on our business, operating results, and financial condition, and accordingly affect our chances of success. In addition, some of our competitors may have larger patent portfolios than we have, which may provide them with a competitive advantage and may require us to engage in costly litigation to protect and defend our freedom to operate and/or intellectual property rights.

Conditions in our market could change rapidly and significantly as a result of technological advancements or market consolidation. The development and market acceptance of alternative technologies could decrease the demand for our products or render them obsolete. Our competitors may introduce products and services that are less costly, provide superior performance or achieve greater market acceptance than our products and services. In order to remain competitive, we may need to lower prices or attempt to add incremental features and functionality, which could negatively impact our revenue, billings, gross margin and financial condition. In addition, our larger competitors often have broader product lines and are in a better position to withstand any significant reduction in capital spending by customers in the smart grid and smart city markets, and will therefore not be as susceptible to downturns in a particular market. If we are unable to compete successfully in the future, our business may be harmed.

We have experienced, and may in the future experience, rapid changes in the pace of our growth. If we fail to manage our growth effectively, our financial performance may suffer.

We have substantially expanded our overall business, customer base, employee headcount and operations both domestically and internationally in the past, and may do so in the future in response to market conditions and opportunities. Our expansion has placed, and any future growth could continue to place, a significant strain on our managerial, customer operations, research and development, sales and marketing, manufacturing, administrative, financial and other resources. If we are unable to manage our growth successfully, our operating results will suffer. Moreover, we have in the past undertaken cost savings initiatives, including a restructuring in 2014 that involved a reduction in force. We may from time to time decide to undertake additional cost savings initiatives, such as restructurings, disposing of, and/or otherwise discontinuing certain products, in an effort to focus our resources on key strategic initiatives and streamline our business. Any decision to take these actions may result in charges to earnings associated with, among other things, inventory or other fixed, intangible or goodwill asset reductions (including, without limitation, impairment charges), workforce and facility reductions and penalties and claims from customers or other third parties. These charges would affect our operating results. In addition to the costs associated with these activities, we may not realize any of the anticipated benefits of the underlying cost savings initiatives.

We rely on our management team and need additional personnel to grow our business, and the loss of one or more key employees or our inability to attract and retain qualified personnel could harm our business.

Our success and future growth depend on the skills, working relationships and continued services of our management team and other key personnel. The loss of any member of our senior management team or other key personnel could adversely affect our business.

In September 2015, Michael Bell was appointed as our new President and Chief Executive Officer, or CEO, and Scott A. Lang transitioned to the role of Executive Chairman and remains Chairman of the Board. In June 2016, Kenneth P. Gianella was appointed as our interim Chief Financial Officer, or CFO, following the resignation of our previous CFO. In July 2016, Aysegul Ilendiz was appointed as our Chief Operating Officer, or COO, and we made executive and organization changes in connection with Ms. Ildendiz’s appointment. In March 2017, Eric Dresselhuys, our former Co-Founder and Executive Vice President, Global Development, resigned from the company. Leadership transitions can be inherently difficult to manage and may cause operational and administrative inefficiencies, added costs, uncertainty and decreased productivity among our employees, increase the likelihood of turnover, and result in the loss of personnel with deep institutional knowledge, which could result in significant disruptions to our operations. In addition, we must successfully integrate the new management team members within our organization in order to achieve our operating objectives, and changes in key management positions may temporarily affect our financial performance and results of operations as new management becomes familiar with our business. The presence of new management team members, and the loss of key personnel, may also impact our relationships with customers and vendors, resulting in loss of business and loss of vendor relationships. The uncertainty inherent in our recent management changes could also lead to concerns from current and potential third parties with whom we do business, any of which could damage our business prospects.

Our future success will also depend on our ability to attract, retain and motivate highly skilled management, product development, operations, sales, technical and other personnel in the United States and abroad. We have in the past lost members of our senior management team and other key personnel, which could adversely affect our business. We could also be adversely affected if we fail to adequately plan for the succession of members of our senior management team and other key personnel should we have departures. Even in today’s economic climate, competition for these types of personnel is intense, particularly in the Silicon Valley, where our headquarters are located. All of our employees in the United States work for us on an at-will basis. Given the lengthy sales cycles with customers and deployment periods of our networking platform and solutions, the loss of key personnel could adversely affect our business.

Volatility or lack of performance in our stock price may also affect our ability to attract and retain our senior management, key personnel and other employees. Many of our longest-tenured employees, including members of our senior management and key personnel with deep institutional knowledge, hold significant vested stock options and shares of our common stock. Employees may be more likely to leave us if the shares they own or the shares underlying their vested stock options have significantly appreciated in value relative to the original purchase prices of the shares or the exercise prices of the options, or if the exercise prices of the options that they hold are significantly above the market price of our common stock. As a result of these factors, we may be unable to attract or retain qualified personnel. Our inability to attract and retain the necessary personnel could adversely affect our business.

Our ability to provide bid bonds, performance bonds or letters of credit is limited and could negatively affect our ability to bid on or enter into significant long-term agreements.

We have in the past been, and may in the future be, required to provide bid bonds or performance bonds to secure our performance under customer contracts or, in some cases, as a pre-requisite to submit a bid on a potential project. For example, in connection with the litigation with EON Corp. IP Holdings, LLC, we were required to provide a surety bond that was later released by the district court in order to stay the execution of a judgment pending our appeal. Our ability to obtain such bonds primarily depends upon our capitalization, working capital, past performance, management expertise and reputation and external factors beyond our control, including the overall capacity of the surety market. Surety companies consider those factors in relation to the amount of our tangible net worth and other underwriting standards that may change from time to time. Surety companies may require that we collateralize a percentage of the bond with our cash or other form of credit enhancement. Events that affect surety markets generally may result in bonding becoming more difficult to obtain in the future, or being available only at a significantly greater cost. In addition, some of our customers also require collateral guarantees in the form of letters of credit to secure performance or to fund possible damages as the result of an event of default under our contracts with them. If we enter into significant long-term agreements that require the issuance of letters of credit, our liquidity could be negatively impacted. Our inability to obtain adequate bonding or letters of credit to meet bid requirements or enter into significant long-term agreements could have a material adverse effect on our future revenue and business prospects.

Our ability to grow our business and our future success will depend to a significant extent on our ability to expand our operations and customer base worldwide. Operating in international markets requires significant resources and management attention, and other than our existing international operations, we have limited experience entering new geographic markets. There can be no assurance that our international efforts will be successful. International sales and operations may be subject to risks such as:

Fluctuations in the value of the U.S. dollar may impact our ability to compete in international markets. International expansion and market acceptance depend on our ability to modify our business approach and technology to take into account such factors as differing customer business models, product requirements and needs, the applicable regulatory and business environment, labor costs and other economic conditions. In addition, the laws of certain countries do not protect our intellectual property to the same extent as do the laws of the United States. There can be no assurance that these factors will not have a material adverse effect on our future international sales and, consequently, on our business, financial condition and results of operations.

Developments in data protection laws and regulations may affect technology relating to smart grid products and solutions, which could adversely affect the demand for our products and solutions.

Our products and services may be subject to data protection laws and regulations that impose a general framework for the collection, processing and use of personal data. Our networking platform and solutions rely on the transfer of data relating to individual energy use and may be affected by these laws and regulations. It is unclear how the regulations governing the transfer of personal data in connection with privacy requirements will further develop in the United States and internationally, and to what extent this may affect technology relating to smart grid products and solutions. This could have a material adverse effect on our business, financial condition and results of operations.

Adverse changes in general economic or political conditions in any of the major countries in which we do business could adversely affect our operating results.

Our business can be affected by a number of factors that are beyond our control, such as general geopolitical, economic, and business conditions. The continued global economic uncertainty and continued global monetary, financial and sovereign debt crisis could have a negative effect on our business. For example, the worldwide financial and credit crisis reduced the availability of liquidity and credit to fund the continuation and expansion of business operations worldwide. Even with economic recovery, it may take time for our customers or potential customers to establish new budgets and return to normal purchasing patterns. We cannot predict the recurrence of any economic slowdown or the strength or sustainability of the economic recovery, worldwide, in the United States or in our industry. These and other economic factors could adversely affect the demand for our products and services and, consequently, our business, financial condition and results of operations.

There can be no assurance that a deterioration in financial markets will not impair our ability or our customers’ ability to obtain financing in the future, including, but not limited to, our or our customers’ ability to incur indebtedness if necessary. In addition, there could be several residual effects from the credit crisis on our business, including insolvency of certain of our key customers or suppliers, which could result in the inability of our customers to obtain credit to finance purchases of our products.

Our inability to acquire and integrate other businesses, products or technologies could seriously harm our competitive position.

In order to remain competitive, obtain key competencies or accelerate our time to market, we may seek to acquire additional businesses, products or technologies. To date, we have completed only three small acquisitions, and we therefore have limited experience in successfully acquiring and integrating additional businesses, products or technologies. If we identify an appropriate acquisition candidate, we may not be successful in negotiating the terms of the acquisition, financing the acquisition, or effectively integrating the acquired business, product or technology into our existing business and operations. We may have difficulty integrating acquired businesses, technologies or products with our existing products and services. Our due diligence may fail to identify all of the problems, liabilities or other shortcomings or challenges of an acquired business, product or technology, including issues related to intellectual property, product quality or product architecture, regulatory compliance practices, revenue recognition or other accounting practices or employee or customer issues. If we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders may be diluted, which could affect the market price of our stock. In addition, any acquisitions we are able to complete may not result in the synergies or any other benefits we had expected to achieve, which could result in substantial write-offs or impairment charges. Further, contemplating or completing an acquisition and integrating an acquired business, product or technology will significantly divert management and employee time and resources.

Our business may suffer if it is alleged or found that our products infringe the intellectual property rights of others.

Our industry is characterized by the existence of a large number of patents and by litigation based on allegations of infringement or other violations of intellectual property rights. Moreover, in recent years, individuals and groups have purchased patents and other intellectual property assets for the purpose of making claims of infringement in order to extract settlements from companies like ours. From time to time, third parties have claimed and may continue to claim that we are infringing upon their patents or other intellectual property rights. For example, we are currently engaged in litigation as further described in Part I, Item 3. Legal Proceedings. In

addition, we may be contractually obligated to indemnify our customers or other third parties that use or resell our products in the event our products are alleged to infringe a third-party’s intellectual property rights. Responding to such claims, regardless of their merit, can be time consuming, costly to defend in litigation, divert management’s attention and resources, damage our reputation and brand, and cause us to incur significant expenses. Even if we are indemnified against such costs, the indemnifying party may be unable to uphold its contractual obligations. Further, claims of intellectual property infringement might require us to redesign affected products, delay affected product offerings, enter into costly settlement or license agreements or pay costly damage awards or face a temporary or permanent injunction prohibiting us from marketing, selling or distributing the affected products. If we cannot or do not license alleged infringed technology on reasonable terms or at all, or substitute similar technology from another source, our revenue and earnings could be adversely impacted. Additionally, our customers may not purchase our products if they are concerned that our products infringe third-party intellectual property rights. This could reduce the market opportunity for the sale of our products and services. The occurrence of any of these events may have a material adverse effect on our business, financial condition and results of operations.

The success of our business depends on our ability to protect and enforce our intellectual property rights.

We rely on a combination of patent, trademark, trade dress, copyright, unfair competition and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish and protect our proprietary rights. These laws, procedures and restrictions provide only limited protection and any of our intellectual property rights may be challenged, invalidated, circumvented, infringed or misappropriated. Further, the laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States and, therefore, in certain jurisdictions, we may be unable to protect our proprietary technology adequately against unauthorized third-party copying, infringement or use, which could adversely affect our competitive position.

As of December 31, 2016, we had 110 issued patents and 61 patent applications pending in the United States. In foreign jurisdictions, we have 171 patents granted and 68 patent applications pending, which are collectively based on 69 U.S. patent applications. Our patents expire at various times between 2017 and 2035. We cannot ensure that any of our pending applications will be granted or that any of our issued patents will adequately protect our intellectual property. In addition, third parties have in the past and could in the future bring infringement, invalidity, co-inventorship, re-examination, or similar claims with respect to any of our currently issued patents or any patents that may be issued to us in the future. Any such claims, whether or not successful, could be extremely costly to defend, divert management’s attention and resources, damage our reputation and brand, and substantially harm our business and results of operations.

In order to protect or enforce our patent rights, protect our trade secrets or know-how, or determine the enforceability, scope and validity of the proprietary rights of others, we may initiate patent litigation or other proceedings against third parties, such as infringement suits or interference proceedings. Any lawsuits or proceedings that we initiate could be expensive, take significant time and divert management’s attention from other business concerns. Litigation and other proceedings also put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing. Additionally, we may provoke third parties to assert claims against us. We may not prevail in any lawsuits or other proceedings that we initiate and the damages or other remedies awarded, if any, may not be commercially valuable. The occurrence of any of these events may have a material adverse effect on our business, financial condition and results of operations.

Some of our products rely on technologies developed or licensed by third-parties. We may seek to license technology from third parties for future products and services. We may not be able to obtain or continue to obtain licenses and technologies from these third parties on commercially reasonable terms or at all. Our inability to retain our current third-party licenses or obtain third-party licenses required to develop new products or product enhancements could require us to obtain alternate technology that may be of lower quality or performance standards or at greater cost, or could require that we change our product and design plans, any of which could limit or delay our ability to manufacture and sell our products.

If we are unable to protect the confidentiality of our proprietary information, the value of our technology and products could be adversely affected.

In addition to patented technology, we rely on our unpatented technology and trade secrets. We generally seek to protect this information by confidentiality, non-disclosure and assignment of invention agreements with our employees and contractors and with parties with which we do business. These agreements may be breached and we may not have adequate remedies for any such breach. We cannot be certain that the steps we have taken will prevent unauthorized use or reverse engineering of our technology. Moreover, our trade secrets may be disclosed to or otherwise become known or be independently developed by competitors. To the extent that our employees, contractors, or other third parties with whom we do business use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. If, for any of the above reasons, our intellectual property is disclosed or misappropriated, it would harm our ability to protect our rights and have a material adverse effect on our business, financial condition, and results of operations.

We use open source software in our products and services that may subject our products and services to general release or require us to re-engineer our products and services, which may cause harm to our business.

We use open source software in connection with our products and services. From time to time, companies that incorporate open source software into their products have faced claims challenging the ownership of open source software and/or compliance with open source license terms. Therefore, we could be subject to suits by parties claiming ownership of what we believe to be open source software or noncompliance with open source licensing terms. Some open source software licenses require users who distribute open source software as part of their software to publicly disclose all or part of the source code to such software and/or make available any derivative works of the open source code on unfavorable terms or at no cost. While we monitor the use of open source software in our products and services and try to ensure that none is used in a manner that would require us to disclose the source code to the related product or that would otherwise breach the terms of an open source agreement, such use could inadvertently occur and we may be required to release our proprietary source code, pay damages for breach of contract, re-engineer our products, discontinue the sale of our products in the event re-engineering cannot be accomplished on a timely basis or take other remedial action that may divert resources away from our development efforts, any of which could adversely affect our business, operating results and financial condition.

Some of our customers and potential customers have applied for government grants and may also seek to participate in other government incentive programs, and if those grants or other incentives are not received or are significantly delayed, our results of operations could suffer.

Many utilities, including some of our customers and potential customers, apply for grants and may seek to participate in other government incentive programs, designed to stimulate the economy and support environmental initiatives, including smart grid technologies. Our customers and potential customers who apply for these government grants or incentives may delay or condition the purchase of our products and services upon receipt of such funds or upon their confidence in the future disbursement of those funds. If our customers and potential customers do not receive these funds or if receipt is significantly delayed, our results of operations could suffer. Similarly, the receipt of government funds or incentives may be conditioned upon utilities meeting milestones and other requirements, some of which may not be known until a future point in time. In addition, if our products and services do not meet the requirements necessary for receipt of government funds or other incentives, or if third parties fail to meet their obligations, our customers and potential customers may delay or condition the purchase of our products and services until they meet these requirements and our results of operations could suffer. Furthermore, there can be no assurance of government funds or incentives in future periods, either in the United States or in other countries where we may pursue business. As a result, our customers and potential customers may not have the resources or incentives to purchase our products and services.

We are an “emerging growth company,” and any decision on our part to comply with certain reduced disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

We are an “emerging growth company,” or EGC, as defined in the JOBS Act, and, for as long as we continue to be an EGC, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years from our initial public offering date, although if our annual revenue exceeds $1.0 billion in any year or our market value of our common stock that is held by non-affiliates exceeds $700 million as of June 30 of any year before the end of that five-year period, we would cease to be an EGC as of December 31 of that year. If we lose our EGC status before the end of that five-year period, we will be required to comply with all the reporting requirements applicable to other public companies including, but not limited to, the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002. We cannot predict if investors will find our common stock less attractive as we continue to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may decline or be more volatile.

Under Section 107(b) of the JOBS Act, EGCs can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail our company of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not EGCs.

We identified material weaknesses in our internal control over financial reporting. We will continue to incur costs to remediate these weaknesses and to maintain effective internal controls over financial reporting. If we are unable to remediate these material weaknesses, and if additional material weaknesses are identified in the future, our business, results of operations and investors’ confidence in us could be materially affected.

In the course of preparing our consolidated financial statements for the periods ended June 30, 2016 and September 30, 2016, we identified material weaknesses in internal control over financial reporting. Specifically, we determined that the design and operation of controls related to the classification in the statements of cash flows and the revenue recognition process were inadequate. More specifically our controls over the review of underlying schedules supporting the preparation of our cash flow statement and determination of revenue did not operate at a level of precision to identify errors. For a further discussion of our internal control over financial reporting and a description of the identified material weaknesses, see Part II, Item 9A. Controls and Procedures. Although management has implemented a remediation plan to address these material weaknesses, and has remediated controls related to the statements of cash flows as of December 31, 2016, there can be no assurance that such remediation efforts will be successful or that our internal control over financial reporting will be effective as a result of these efforts. In addition, we may in the future identify additional internal control deficiencies that could rise to the level of a material weakness or uncover errors in financial reporting.

Our remediation efforts related to revenue recognition are in process and have not yet been completed. Because of this material weakness, there is heightened risk that (1) our management might not be able to certify, and our independent registered public accounting firm might not be able to report on, the adequacy of our internal control over financial reporting, which would cause us to fail to meet our reporting obligations, and (2) a material misstatement of our annual or quarterly financial statements may not be prevented or detected. In addition, the planned remediation steps we expect to take may not effectively remediate the revenue recognition material weakness, in which case our internal control over financial reporting would continue to be ineffective. We cannot guarantee that we will be able to complete our remedial actions successfully. In addition, it is possible that we will discover additional material weaknesses in our internal control over financial reporting.

Under Sections 302 and 404 of the Sarbanes-Oxley Act of 2002, our management is required to make certain assessments and certifications regarding our disclosure controls and internal controls over financial reporting. In addition, we are required to disclose changes in our internal control and procedures on a quarterly basis. As an EGC, we are not required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002 until the earlier of five years from our initial public offering date or the date we would cease to be an EGC as of December 31 of that year. At such time, our independent registered public accounting firm may issue a report that is adverse in the event that such firm is not satisfied with the level at which our internal control and procedures are documented, designed or operating. As a result, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring additional accounting or internal audit staff. We have dedicated, and expect to continue to dedicate, significant management, financial and other resources in connection with our compliance with Section 404 of the Sarbanes-Oxley Act. The process of maintaining and evaluating the effectiveness of these controls is expensive, time-consuming and requires significant attention from our management and staff. During the course of our evaluation, we may identify areas requiring improvement and may be required to design enhanced processes and controls to address issues identified through this review. This could result in significant delays and costs to us and require us to divert substantial resources, including management time from other activities.

In addition, all internal control systems, no matter how well designed and operated, can only provide reasonable assurance that the objectives of the control system are met. Because there are inherent limitations in all control systems, no evaluation of control can provide absolute assurance, that all control issues and instances of fraud, if any, within the company have been or will be detected. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

If we are unable to adequately remediate the revenue recognition material weakness, or comply or continue to comply with the foregoing obligations, it could subject us to a variety of administrative sanctions, including the suspension or delisting of our common stock from the New York Stock Exchange and the inability of registered broker-dealers to make a market in our common stock, which could reduce the market price of our common stock. In addition, ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of shares of our common stock. In the event that we do not adequately remediate this material weakness, or if we fail to maintain proper and effective internal control and procedures in future periods, our business, results of operations and financial condition and our ability to run our business effectively could be adversely affected and investors could lose confidence in our financial reporting.

Our business is subject to changing regulations regarding corporate governance and public disclosure that will increase both our costs and the risk of noncompliance.

As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of the New York Stock Exchange. Achieving and maintaining compliance with these rules and regulations, particularly after we cease to be an emerging growth company, has increased and may further increase our legal, accounting and financial compliance costs, has made and may further make some activities more difficult, time-consuming and costly and may also place undue strain on our personnel, systems and resources.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our prior period financial statements. Any failure to implement and maintain effective internal controls also could adversely affect the results of periodic management evaluations regarding the effectiveness of our internal control over financial reporting that we are required to include in our periodic reports filed with the SEC under Section 404(a) of the Sarbanes-Oxley Act, or the annual auditor attestation reports regarding effectiveness of our internal controls over financial reporting that we will be required to include in our annual reports filed with the SEC beginning for the year ending December 31, 2018, unless, under the JOBS Act, we meet certain criteria that would require such reports to be included prior to then, under Section 404(b) of the Sarbanes-Oxley Act. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock.

In order to maintain the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we will need to continue to expend significant resources and provide significant management oversight. We are in the process of implementing appropriate business processes, documenting our system of internal control over relevant processes, assessing their design, remediating any deficiencies identified and testing their operation. As a result, management’s attention may be diverted from other business concerns, which could harm our business, operating results and financial condition. These efforts will also involve substantial accounting-related costs. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the New York Stock Exchange.

Implementing any appropriate changes to our internal controls may require specific compliance training of our directors, officers and employees, entail substantial costs in order to modify our existing accounting systems, and take a significant period of time to complete. Such changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. In the event that our internal controls are perceived as inadequate or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and our stock price could decline.

The Sarbanes-Oxley Act and the rules and regulations of the New York Stock Exchange make it difficult and expensive for us to maintain directors’ and officers’ liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to maintain or increase coverage. If we are unable to maintain adequate directors’ and officers’ insurance, our ability to recruit and retain qualified directors, especially those directors who may be considered independent for purposes of the New York Stock Exchange rules, and officers may be curtailed.

The effects of regulations relating to the source of materials used in the manufacture of our products may adversely affect our business.

The SEC has recently adopted regulations concerning the supply of certain minerals, known as conflict minerals, originating from the conflict zones of the Democratic Republic of Congo, or DRC, and adjoining countries. These regulations require us to determine the origin of certain materials used in our products and disclose whether we use any materials containing conflict minerals originating from the DRC and adjoining countries. Since our supply chain is complex, we may face reputational harm if our customers or other stakeholders conclude that we are unable to verify sufficiently the origins of the minerals used in the products we sell. If it is determined that our products do contain or use any conflict minerals from the DRC or adjoining countries, additional requirements will be triggered. Compliance with these regulations may results in increased costs of regulatory compliance, potential risks to our reputation, difficulty satisfying any customers that insist on conflict-free products, and harm to our business.

We may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs.

In the future we may require additional capital to respond to business opportunities, challenges, acquisitions or unforeseen circumstances and may determine to engage in equity or debt financings, replace our current line of credit, or enter into new credit facilities for other reasons. We may not be able to timely secure additional debt or equity financing on favorable terms, or at all. Any debt financing obtained by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited.

Our investment portfolio may become impaired by deterioration of the capital markets.

Our cash, cash equivalent and short-term investment portfolio as of December 31, 2016 consisted of $118.3 million of money market mutual funds, highly liquid debt instruments of the U.S. government and its agencies, commercial paper, and U.S. and foreign corporate debt securities. Should financial market conditions worsen in the future, investments in some financial instruments may pose risks arising from market liquidity and credit concerns. In addition, any deterioration of the capital markets could cause our other income and expense to vary from expectations. As of December 31, 2016, we had no impairment charges associated with our short-term investment portfolio, and although we believe our current investment portfolio has little risk of material impairment, we cannot predict future market conditions or market liquidity, or credit availability, and can provide no assurance that our investment portfolio will remain materially unimpaired.

We may not be able to utilize a significant portion of our net operating loss or research tax credit carryforwards, which could adversely affect our operating results.

As of December 31, 2016, we had federal and state net operating loss carryforwards due to prior period losses, which if not utilized will begin to expire in 2028 and 2018 for federal and state purposes, respectively. We also have federal research tax credit carryforwards that will begin to expire in 2024, as well as state research tax credit carryforwards that have no expiration date. Realization of these net operating loss and research tax credit carryforwards is dependent upon future income, and there is a risk that our existing federal and state net operating loss carryforwards and federal research tax credit carryforwards could expire unused and be unavailable to offset future income tax liabilities, which could adversely affect our results.

In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, our ability to utilize net operating loss carryforwards or other tax attributes, such as research tax credits, in any taxable year may be limited if we experience an “ownership change.” A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws. It is possible that an ownership change, or any future ownership change, could have a material effect on the use of our net operating loss carryforwards or other tax attributes, which could adversely affect our operating results.

Our business and financial performance could be negatively impacted by changes in tax laws or regulations.

New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time. Those enactments could adversely affect our domestic and international business operations, and our business and financial performance. Further, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us. These events could require us or our customers to pay additional tax amounts on a prospective or retroactive basis, as well as require us or our customers to pay fines and/or penalties and interest for past amounts deemed to be due. If we raise our prices to offset the costs of these changes, existing and potential future customers may elect not to continue or purchase our products and services in the future. Additionally, new, changed, modified or newly interpreted or applied tax laws could increase our customers’ and our compliance, operating and other costs, as well as the costs of our products. Further, these events could decrease the capital we have available to operate our business. Any or all of these events could adversely impact our business and financial performance.

Our stock price has been and may continue to be volatile and may decline regardless of our operating performance.

There has not been a long history of a public market for our common stock, and an active or liquid market in our common stock may not be sustainable. The trading prices of the securities of technology companies have been highly volatile, and the trading price of our common stock has been and may continue to be volatile. The market price of our common stock has in the past and may in the future fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

In addition, the stock markets, and in particular the New York Stock Exchange on which our common stock is listed, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. During the three months ended December 31, 2016, the closing price of our common stock on the New York Stock Exchange ranged from $12.78 to $15.39 per share. In the past, stockholders have instituted securities class action litigation against other companies following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and adversely affect our business, operating results and financial condition.

If there are substantial sales of shares of our common stock, the price of our common stock could decline.

Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales might occur, could depress the market price of our common stock and may make it more difficult for you to sell your common stock at a time and price that you deem appropriate. We are unable to predict the effect that sales may have on the prevailing market price of our common stock. In addition, the holders of an aggregate of 13,732,453 shares of our common stock have rights, subject to some conditions, that require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or our stockholders. Registration of the resale of these shares under the Securities Act would generally result in the shares becoming freely tradable without restriction. Any sales of securities by existing stockholders could adversely affect the trading price of our common stock.

Our directors, executive officers and their respective affiliates have substantial control over us and could delay or prevent a change in corporate control.

As of December 31, 2016, our directors, executive officers and their respective affiliates beneficially owned in the aggregate 25.5% of our outstanding shares of common stock. As a result, these stockholders, acting together, would likely have the ability to significantly influence the outcome of matters submitted to our stockholders for approval, including the election of directors and other significant matters such as a merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, would likely have the ability to significantly influence the management and affairs of our company. Accordingly, this concentration of ownership might harm the market price of our common stock by:

We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. In addition, the terms of our credit facility with Silicon Valley Bank currently restricts our ability to pay dividends. As a result, you may only receive a return on your investment in our common stock if the market price of our common stock increases.

Delaware law and provisions in our amended and restated certificate of incorporation and bylaws could make a merger, tender offer or proxy contest difficult, thereby depressing the trading price of our common stock.

We are a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our restated certificate of incorporation and restated bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our Board of Directors, including the following:

Our corporate headquarters are located in San Jose, California, where we occupy facilities totaling approximately 191,800 square feet under a lease. We use these facilities for administration, sales and marketing, research and development, customer support and professional services.

We also lease office spaces in San Bruno, California; San Diego, California; Chicago, Illinois; San Antonio, Texas; Melbourne, Australia; Paris, France; and London, United Kingdom; we use these office spaces for sales and marketing and to deliver professional services locally. We believe that our existing facilities are adequate to meet our current needs, and we intend to procure additional

space as needed as we add employees and expand our operations. We believe that, if required, suitable additional or substitute space would be available to accommodate any such expansion of our operations.

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, 5,481,546, and 5,592,491, or 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. Following post-trial motions by both parties, 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. 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. The appellate hearing took place in November 2015, and in February 2016 the appellate court issued a ruling reversing the District Court’s prior decision and judgment against us, and holding that no reasonable jury could find we infringed the EON patents. In April 2016, EON filed a petition for a rehearing en banc, which the appellate court denied in May 2016. In June 2016, the appellate court notified the District Court that the prior judgment in favor of EON was vacated and that judgment was in our favor, and the District Court released our appellate bond obligation. In July 2016 the District Court awarded us $0.6 million in costs, which EON appealed in August 2016. EON also filed a petition for certiorari to the Supreme Court in October 2016, seeking review of the appellate court’s reversal of the District Court’s original judgment against us, which the Supreme Court denied in January 2017. In February 2017, we agreed with EON that it would pay us $0.5 million in settlement of the cost award, which we received in March 2017.

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 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. We believe that we have meritorious defenses to Linex’s allegations and intend to continue vigorously defending against the action.

Atlas/ComEd, Atlas/PG&E, and Atlas/FP&L Patent Litigation. In November 2015, Atlas IP, LLC filed separate suits against our customers Commonwealth Edison Company, or ComEd, and Pacific Gas and Electric Co., or PG&E, alleging infringement of United States Patent No. 5,371,734 by communications between smart meters and access points over a neighborhood area network using wireless communication modules and networking equipment supplied by us. In May 2016, Atlas filed a similar suit against our customer Florida Power & Light Company, or FP&L. We have agreed to assume the defense in each of these suits.

ComEd. The suit against ComEd was filed in the Northern District of Illinois in November 2015, and also named Exelon Corp., or Exelon, as a defendant. In January 2016, we filed a motion to dismiss the ComEd complaint and to remove Exelon as a defendant. In February 2016, the court granted our motion to dismiss the complaint, and dismissed Exelon from the case with prejudice. In March 2016, Atlas IP filed an amended complaint against ComEd, which the court dismissed in May 2016, finding the complaint to be legally insufficient. The court awarded us reasonable attorneys’ fees and costs in July 2016. Atlas IP filed a notice of appeal in June 2016, seeking to appeal the dismissal to the U.S. Court of Appeals for the Federal Circuit in Washington, D.C. The hearing date is scheduled for March 2017.

PG&E. The suit against PG&E was filed in the Northern District of California in November 2015. We filed a motion to dismiss the PG&E complaint, which the court granted in March 2016. Atlas IP filed an amended complaint against PG&E, which the court dismissed in June 2016, determining that Atlas IP is collaterally estopped from re-litigating the sufficiency of its complaint as the sufficiency of Atlas IP’s complaint was already decided against Atlas IP by the court in the ComEd suit.

FP&L. The suit against FP&L was filed in the Southern District of Florida in May 2016. In June 2016, the court stayed the action until the conclusion of Atlas IP’s appeal in the ComEd case, pursuant to an agreement between the parties that if the appellate court affirms the dismissal of the ComEd case, it will be dispositive of the FP&L action.

We believe that we have meritorious defenses to Atlas IP’s allegations in each of these matters, and intend to continue vigorously defending against the actions.

Acoustic Technology Patent Litigation. In July 2016, Acoustic Technology, Inc., 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, or the Acoustic Patents, 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, and the hearing was held in March 2017. In March 2017, we filed several petitions for inter partes review with the USPTO, requesting the USPTO to find certain claims of the Acoustic Patents to be unpatentable. We believe that we have meritorious defenses to Acoustic’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.

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock has been listed on the New York Stock Exchange under the symbol “SSNI” since March 13, 2013, the date of our initial public offering.

The following table sets forth for the indicated periods the high and low closing sales prices of our common stock as reported by the New York Stock Exchange.

We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings and do not expect to declare or pay any cash dividends in the foreseeable future. Any future determination to pay dividends on our capital stock will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and other factors that our board of directors considers relevant. In addition, the terms of our credit facility with Silicon Valley Bank currently restrict our ability to pay dividends.

As of December 31, 2016, there were 127 stockholders of record of our common stock, including The Depository Trust Company, which holds shares of our common stock on behalf of an indeterminate number of beneficial owners.

The information required by this item concerning our equity compensation plans is incorporated by reference to the section of our Proxy Statement for the 2017 Annual Meeting of Shareholders entitled “Equity Compensation Plan Information,” to be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2016.

The following shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or incorporated by reference into any of our other filings under the Exchange Act or the Securities Act of 1933, as amended, except to the extent we specifically incorporate it by reference into such filing.

This chart compares the cumulative total return on our common stock with that of the NYSE Composite and the S&P 1500 Communication Equipment Index. The chart assumes $100 was invested at the close of market on March 13, 2013, in our common stock, the NYSE Composite and the S&P 1500 Communications Equipment Index, and assumes the reinvestment of any dividends. The stock price performance on the following graph is not necessarily indicative of future stock price performance.

No shares of our common stock were repurchased during the quarter ended December 31, 2016.

The following selected consolidated financial data should be read together with our consolidated financial statements, related notes and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual Report on Form 10-K. The selected consolidated financial data in this section are not intended to replace our consolidated financial statements and the related notes. Our historical results are not necessarily indicative of our results to be expected for 2017 or in any future period.

The selected consolidated statements of operations data for the years ended December 31, 2016, 2015 and 2014, and the selected consolidated balance sheet data as of December 31, 2016 and 2015 are derived from our audited consolidated financial statements and are included in this Annual Report on Form 10-K. The consolidated statements of operations data for 2013 and 2012 and the consolidated balance sheet data as of December 31, 2014, 2013 and 2012, are derived from our audited consolidated financial statements which are not included in this Annual Report on Form 10-K.

	Year Ended December 31,
	2016			2015			2014			2013			2012
	(in thousands)
Consolidated Statements of Operations Data:
Revenue	$	311,008		$	489,559		$	191,288		$	326,858		$	196,737
Cost of revenue⁽¹⁾		172,809			263,816			134,951			211,504			165,018
Gross profit		138,199			225,743			56,337			115,354			31,719
Operating expenses:⁽¹⁾
Research and development		70,673			61,295			64,771			77,018			61,998
Sales and marketing		39,406			33,452			36,388			34,931			29,104
General and administrative		45,801			46,372			41,260			45,160			29,261
Impairment of intangible assets		2,204			—			—			—			—
Restructuring		39			1,671			1,789			—			—
Total operating expenses		158,123			142,790			144,208			157,109			120,363
Operating (loss) income		(19,924	)		82,953			(87,871	)		(41,755	)		(88,644	)
Other income (expense), net		670			104			123			(24,828	)		(683	)
(Loss) income before income taxes		(19,254	)		83,057			(87,748	)		(66,583	)		(89,327	)
Provision for income taxes		(2,375	)		(3,071	)		(1,422	)		(224	)		(390	)
Net (loss) income		(21,629	)		79,986			(89,170	)		(66,807	)		(89,717	)
Deemed dividend to convertible preferred stockholders		—			—			—			(105,000	)		—
Net (loss) income attributable to common stockholders	$	(21,629	)	$	79,986		$	(89,170	)	$	(171,807	)	$	(89,717	)
Net (loss) income per share attributable to common stockholders
Basic	$	(0.42	)	$	1.60		$	(1.84	)	$	(4.54	)	$	(24.45	)
Diluted	$	(0.42	)	$	1.55		$	(1.84	)	$	(4.54	)	$	(24.45	)
Weighted average shares used to compute net (loss) income per share attributable to common stockholders
Basic		51,444			49,963			48,377			37,877			3,670
Diluted		51,444			51,524			48,377			37,877			3,670

	Year Ended December 31,
	2016		2015		2014		2013		2012
	(in thousands)
Stock-based compensation expense and common stock warrant issuance cost:
Cost of revenue	$	6,744	$	6,135	$	7,610	$	12,275	$	2,553
Research and development		9,309		8,060		9,677		17,333		4,229
Sales and marketing		3,652		4,104		6,062		7,060		2,822
General and administrative		10,104		8,180		10,512		15,836		5,488
Total stock-based compensation expense and common stock warrant issuance cost	$	29,809	$	26,479	$	33,861	$	52,504	$	15,092

	Year Ended December 31,
	2016			2015			2014			2013			2012
	(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments	$	118,259		$	124,445		$	120,796		$	145,852		$	72,646
Deferred cost of revenue, current and non-current		221,408			235,750			333,030			276,123			245,163
Total assets		447,128			457,725			548,194			516,351			417,744
Deferred revenue, current and non-current		385,409			401,813			609,593			524,653			508,056
Long-term debt and capital lease obligations		—			285			1,448			2,998			56,066
Convertible preferred stock		—			—			—			—			270,725
Stockholders’ deficit		(31,536	)		(33,865	)		(133,819	)		(78,118	)		(499,508	)

We supplement our results of operations presented in accordance with GAAP with certain non-GAAP metrics. We manage our business, make planning decisions, evaluate our performance and allocate resources by assessing non-GAAP and other financial metrics such as billings (including product billings, services billings, professional services billings, managed services and SaaS billings, advanced metering infrastructure billings, new solutions billings, and international billings), cost of billings (including product cost of billings and services cost of billings), non-GAAP operating expense and total backlog. We believe that these non-GAAP and other financial metrics, when taken together with the corresponding GAAP financial measures, offer valuable supplemental information regarding the performance of our business, and will help investors better understand the sales volumes and profitability trends, as well as the cash flow characteristics, of our business. The non-GAAP metrics should not be considered in isolation from, are not a substitute for, and do not purport to be an alternative to, revenue, cost of revenue, operating expense, or any other performance measure derived in accordance with GAAP. We may consider whether other significant non-recurring items that arise in the future should also be excluded in calculating the non-GAAP financial measures we use.

Billings represent amounts invoiced for products for which ownership, typically evidenced by title and risk of loss, has transferred or services that have been provided to the customer, and for which payment is expected to be made in accordance with normal payment terms. Billings exclude amounts for undelivered products, services to be performed in the future, and amounts paid or payable to customers. Billings are initially recorded as deferred revenue and are then recognized as revenue when all revenue recognition criteria have been met under our accounting policies as described in Part II, Item 8. Financial Statements and Supplementary Data, Note 1, Significant Accounting Policies — Revenue Recognition, of Notes to Consolidated Financial Statements. We reconcile revenue to billings by adding revenue to the change in deferred revenue in a given period. We use the following categories to further analyze and evaluate billings calculating and reconciling each metric as described above:

Product billings represent billings associated with hardware, such as communications modules, access points, relays, and bridges, and various types of software products used in our networking and data platforms, which have been delivered to the customer.

Services billings represent billings associated with services related to the initial deployment and ongoing operation of our networking platform and solutions that have been provided to the customer. This includes professional services billings and managed services & SaaS billings.

Professional services billings represent billings associated with professional services related to the deployment of our networking platform and solutions that have been provided to the customer.

Managed services & SaaS billings represent billings associated with managed services and SaaS offerings that have been provided to the customer.

Advanced metering infrastructure billings represent billings associated with products and services for our advanced metering solutions.

New solutions billings represent billings derived from our products and services beyond our advanced metering solution, such as distribution automation, demand side management, demand response, smart cities, street lights, and SilverLink Data Platform. New solutions billings represent incremental opportunities to deliver benefits into our customers’ deployed network or in some cases new stand-alone opportunities to deliver our new solutions.

International billings represent billings for products and services that have been provided to customers outside of the United States.

Cost of billings represents the cost associated with products and services that have been delivered to the customer, excluding stock-based compensation and amortization of intangibles and acquisition-related charges. Cost of product shipments for which revenue is not recognized in the period incurred is recorded as deferred cost of revenue. Deferred cost of revenue is expensed in the statement of operations as cost of revenue when the corresponding revenue is recognized. Costs related to services are expensed in the period incurred. We reconcile cost of revenue to cost of billings by adding cost of revenue to the change in deferred cost of revenue, less stock-based compensation, amortization of intangibles, and acquisition-related charges included in cost of revenue, in a given period. We use the following categories to further analyze and evaluate cost of billings, calculating and reconciling each metric as described above:

Product cost of billings represents the cost associated with products that have been delivered to the customer.

Services cost of billings represents the cost associated with services that have been delivered to the customer. This includes professional services cost of billings and managed services & SaaS cost of billings.

Non-GAAP operating expense consists of research and development, sales and marketing, and general and administrative expenses, excluding amortization and impairment of intangible assets, stock-based compensation, acquisition-related charges, restructuring and legal settlements.

Total backlog represents future product and services billings that we expect to generate pursuant to contracts that we have entered into with our utility customers and meter manufacturers. Total backlog includes order backlog, which represents future billings for open purchase orders and other firm commitments.

The non-GAAP financial metrics set forth below for the years ended December 31, 2016, 2015 and 2014 have been derived from our audited financial statements. Reconciliations to the comparable GAAP measures are contained in the notes below.

	Year Ended December 31,
	2016		2015		2014
	(unaudited, in thousands)
Product revenue	$	193,618	$	353,041	$	129,333
Services revenue
Managed services and SaaS		65,309		71,947		35,220
Professional services		52,081		64,571		26,735
Total services revenue		117,390		136,518		61,955
Total revenue	$	311,008	$	489,559	$	191,288

Product billings⁽¹⁾	$	189,284	$	185,583	$	194,024
Services billings⁽¹⁾
Managed services and SaaS⁽¹⁾		60,547		52,416		44,504
Professional services⁽¹⁾		44,772		43,925		38,180
Total services billings⁽¹⁾		105,319		96,341		82,684
Total billings⁽¹⁾	$	294,603	$	281,924	$	276,708

Advanced metering infrastructure revenue	$	269,046	$	421,813	$	167,506
New solutions revenue		41,962		67,746		23,782
Total revenue	$	311,008	$	489,559	$	191,288

Advanced metering infrastructure billings ⁽²⁾	$	241,272	$	226,070	$	235,428
New solutions billings⁽²⁾		53,331		55,854		41,280
Total billings⁽²⁾	$	294,603	$	281,924	$	276,708

International revenue	$	50,779	$	63,608	$	89,477
International billings⁽²⁾	$	53,607	$	44,853	$	33,418

Cost of product revenue	$	106,583	$	202,430	$	77,158
Cost of services revenue
Managed services and SaaS		36,772		31,663		25,800
Professional services		29,454		29,723		31,993
Total cost of services revenue		66,226		61,386		57,793
Total cost of revenue	$	172,809	$	263,816	$	134,951

Cost of product billings⁽³⁾	$	89,773	$	102,827	$	131,671
Cost of services billings⁽³⁾
Managed services and SaaS⁽³⁾		34,357		29,626		24,881
Professional services⁽³⁾		26,801		26,813		27,140
Total cost of services billings⁽³⁾		61,158		56,439		52,021
Total cost of billings⁽³⁾	$	150,931	$	159,266	$	183,692

Research and development	$	70,673	$	61,295	$	64,771
Sales and marketing		39,406		33,452		36,388
General and administrative		45,801		46,372		41,260
Impairment of intangible assets		2,204		—		—
Restructuring		39		1,671		1,789
Total operating expenses	$	158,123	$	142,790	$	144,208

Research and development⁽⁴⁾	$	60,121	$	52,784	$	55,094
Sales and marketing⁽⁴⁾		34,866		28,659		30,129
General and administrative⁽⁴⁾		35,187		32,653		30,847
Total non-GAAP operating expenses⁽⁴⁾	$	130,174	$	114,096	$	116,070

	Year Ended December 31, 2016
	Revenue		Change in Deferred Revenue (a)			Billings
	(unaudited, in thousands)
Product	$	193,618	$	(4,334	)	$	189,284
Services
Managed services and SaaS		65,309		(4,762	)		60,547
Professional services		52,081		(7,309	)		44,772
Total services		117,390		(12,071	)		105,319
Total	$	311,008	$	(16,405	)	$	294,603

	Year Ended December 31, 2015
	Revenue		Change in Deferred Revenue (a)			Billings
	(unaudited, in thousands)
Product	$	353,041	$	(167,458	)	$	185,583
Services
Managed services and SaaS		71,947		(19,531	)		52,416
Professional services		64,571		(20,646	)		43,925
Total services		136,518		(40,177	)		96,341
Total	$	489,559	$	(207,635	)	$	281,924

	Year Ended December 31, 2014
	Revenue		Change in Deferred Revenue (a)			Billings
	(unaudited, in thousands)
Product	$	129,333	$	64,691		$	194,024
Services
Managed services and SaaS		35,220		9,284			44,504
Professional services		26,735		11,445			38,180
Total services		61,955		20,729			82,684
Total	$	191,288	$	85,420		$	276,708
(a) Amounts presented net of foreign currency translation.

	Year Ended December 31, 2016
	Revenue		Change in Deferred Revenue (a)			Billings
	(unaudited, in thousands)
Advanced metering infrastructure	$	269,046	$	(27,774	)	$	241,272
New solutions		41,962		11,369			53,331
Total	$	311,008	$	(16,405	)	$	294,603

International	$	50,779	$	2,828		$	53,607

	Year Ended December 31, 2015
	Revenue		Change in Deferred Revenue (a)			Billings

	(unaudited, in thousands)
Advanced metering infrastructure	$	421,813	$	(195,743	)	$	226,070
New solutions		67,746		(11,892	)		55,854
Total	$	489,559	$	(207,635	)	$	281,924

International	$	63,608	$	(18,755	)	$	44,853

	Year Ended December 31, 2014

	Revenue		Change in Deferred Revenue (a)			Billings
	(unaudited, in thousands)
Advanced metering infrastructure	$	167,506	$	67,922		$	235,428
New solutions		23,782		17,498			41,280
Total	$	191,288	$	85,420		$	276,708

International	$	89,477	$	(56,059	)	$	33,418
(a) Amounts presented net of foreign currency translation.

	Year Ended December 31, 2016
	Cost of Revenue		Change in Deferred Cost of Revenue (a)			Stock-based Compensation			Amortization of Intangible Assets			Acquisition-Related Costs			Cost of Billings
	(unaudited, in thousands)
Cost of product	$	106,583	$	(14,551	)	$	(1,737	)	$	(522	)	$	—		$	89,773
Cost of services
Managed services and SaaS		36,772		—			(2,415	)		—			—			34,357
Professional services		29,454		—			(2,592	)		—			(61	)		26,801
Total cost of services		66,226		—			(5,007	)		—			(61	)		61,158
Total	$	172,809	$	(14,551	)	$	(6,744	)	$	(522	)	$	(61	)	$	150,931

	Year Ended December 31, 2015
	Cost of Revenue		Change in Deferred Cost of Revenue (a)			Stock-based Compensation			Amortization of Intangible Assets			Acquisition-Related Costs			Cost of Billings
	(unaudited, in thousands)
Cost of product	$	202,430	$	(97,274	)	$	(1,288	)	$	(1,041	)	$	—		$	102,827
Cost of services
Managed services and SaaS		31,663		—			(2,037	)		—			—			29,626
Professional services		29,723		—			(2,810	)		—			(100	)		26,813
Total cost of services		61,386		—			(4,847	)		—			(100	)		56,439
Total	$	263,816	$	(97,274	)	$	(6,135	)	$	(1,041	)	$	(100	)	$	159,266

	Year Ended December 31, 2014
	Cost of Revenue		Change in Deferred Cost of Revenue (a)			Stock-based Compensation			Amortization of Intangible Assets			Acquisition-Related Costs			Cost of Billings
	(unaudited, in thousands)
Cost of product	$	77,158	$	56,767		$	(1,837	)	$	(417	)	$	—		$	131,671
Cost of services
Managed services and SaaS		25,800		—			(919	)		—			—			24,881
Professional services		31,993		—			(4,853	)		—			—			27,140
Total cost of services		57,793		—			(5,772	)		—			—			52,021
Total	$	134,951	$	56,767		$	(7,609	)	$	(417	)	$	—		$	183,692
(a) Amounts presented net of foreign currency translation.

(4) The following tables reconcile operating expenses to non-GAAP operating expense:

	Year Ended December 31, 2016
	Operating Expenses		Stock-based Compensation			Amortization and Impairment of Intangible Assets			Restructuring & Litigation			Acquisition-Related Costs			Non-GAAP Operating Expenses
	(unaudited, in thousands)
Research and development	$	70,673	$	(9,309	)	$	—		$	—		$	(1,243	)	$	60,121
Sales and marketing		39,406		(3,652	)		(626	)		—			(262	)		34,866
General and administrative		45,801		(10,104	)		(33	)		—			(477	)		35,187
Impairment of intangible assets		2,204		—			(2,204	)		—			—			—
Restructuring		39		—			—			(39	)		—			—
Total operating expenses	$	158,123	$	(23,065	)	$	(2,863	)	$	(39	)	$	(1,982	)	$	130,174

	Year Ended December 31, 2015
	Operating Expenses		Stock-based Compensation			Amortization and Impairment of Intangible Assets			Restructuring & Litigation			Acquisition-Related Costs			Non-GAAP Operating Expenses
	(unaudited, in thousands)
Research and development	$	61,295	$	(8,060	)	$	—		$	—		$	(451	)	$	52,784
Sales and marketing		33,452		(4,105	)		(601	)		—			(87	)		28,659
General and administrative		46,372		(8,179	)		(32	)		(3,595	)		(1,913	)		32,653
Restructuring		1,671		—			—			(1,671	)		—			—
Total operating expenses	$	142,790	$	(20,344	)	$	(633	)	$	(5,266	)	$	(2,451	)	$	114,096

	Year Ended December 31, 2014
	Operating Expenses		Stock-based Compensation			Amortization and Impairment of Intangible Assets			Restructuring & Litigation			Acquisition-Related Costs			Non-GAAP Operating Expenses
	(unaudited, in thousands)
Research and development	$	64,771	$	(9,677	)	$	—		$	—		$	—		$	55,094
Sales and marketing		36,388		(6,062	)		(197	)		—			—			30,129
General and administrative		41,260		(10,513	)		—			100			—			30,847
Restructuring		1,789		—			—			(1,789	)		—			—
Total operating expenses	$	144,208	$	(26,252	)	$	(197	)	$	(1,689	)	$	—		$	116,070

Non-GAAP metrics have limitations and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. The most significant of these limitations include:

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis in conjunction with the information set forth under Part II, Item 6. Selected Consolidated Financial Data, and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The statements in this discussion regarding our expectations of our future performance, liquidity and capital resources, and other non-historical statements in this discussion, are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under “Risk Factors” and elsewhere in this Annual Report on Form 10-K. Our actual results may differ materially from those contained in or implied by any forward-looking statements.

We have 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 has the capacity to communicate using internet technologies. Our first area of focus was in energy, creating a leading smart grid network platform 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, which enable smarter and more efficient cities, and additional industrial verticals which could benefit from our platform.

We intend to continue to innovate in order to advance our networking platform to support increased performance and a broader range of communications modules, including compact battery-operated solutions and advanced analytics capabilities. We believe this will enable a more powerful smart grid with support for more devices, applications and solutions. We believe these technological advances are also well-suited to provide intelligence to other devices within our core smart grid market, as well as adjacent markets for distribution systems to gas and water utilities.

We believe our technology is also well suited for a range of other solutions across the broader category of the IoT. We are focused on critical infrastructure within the IoT that requires similar networking performance as our smart grid solution. Our first expansion beyond the power grid has been on city infrastructure, specifically networking street lights. We believe that by applying advanced networking technology, we can enable cities to achieve their goals for increasing energy and operating efficiency while improving quality of life. We have begun to expand our reach into an even broader range of IoT markets by working with new and existing customers to open their smart grid networks to third parties and support a wider range of devices, applications and solutions. To date, a substantial majority of our revenue and billings has been attributable to a limited number of customer deployments of our networking platform and advanced metering solution. Please see Part II, Item 6. Selected Consolidated Financial Data, Key Non-GAAP and Other Financial Metrics, and Factors Affecting Our Performance and Key Elements of Operating and Financial Performance discussed later for more information on billings. We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act. Under Section 107(b) of the JOBS act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail our company of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

Our financial performance is correlated to the pace of adoption of the smart grid in the utility industry. The adoption of the smart grid in the United States is evolving and is impacted by multiple factors including the business needs and priorities for utilities, cost benefit analysis, technology testing, rate case timing, regulatory or government reviews and approvals and consumer sentiment. Smart grid adoption in international markets has trailed adoption in the United States as international markets continue to explore the technology and define the benefits and regulatory requirements for the smart grid. Although we believe the adoption of the smart grid will continue to expand globally, the future pace and degree of adoption cannot be determined with certainty.

Sales cycles with our prospective customers, particularly to utilities, which are our primary set of prospective customers, tend to be long and unpredictable. Sales cycles can be subject to multiple trial deployments, or pilots, before a full deployment contract is awarded, with no assurance that our networking platform and solutions will be selected. Our customers also typically need to obtain regulatory approval for these deployments. In addition, a substantial majority of our revenue, billings and cash flows depend on relatively large sales to a limited number of customers. As a result of our lengthy sales cycle and relatively large sales to a small number of customers, our revenue, billings and operating results can fluctuate significantly from period to period.

Our sales are generally made pursuant to MSAs. Our customer arrangements provide that we may bill and collect for products when ownership has transferred and for services when they have been provided. Our MSAs for each customer include initial acceptance provisions, followed by subsequent acceptances as the deployment progresses. The time to achieve these specific performance levels varies based on several factors, which may include the size and density of a customer’s service territory and the complexity of a customer’s deployment plan. From incorporation through December 31, 2014, we deferred revenue for arrangements that contain customer-specific acceptance criteria until we determined whether acceptance was achieved due to our limited experience with customer deployments during that time period. During the quarter ended March 31, 2015, following the completion of analyses of our historical experience, we determined that receipt of customer acceptance is no longer considered necessary if (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 are met. As a result, we have changed the timing of revenue recognition based on customer acceptance. See Part II, Item 8. Financial Statements and Supplementary Data, Note 1, Significant Accounting Policies — Revenue Recognition, of Notes to Consolidated Financial Statements, for further details.

We outsource the manufacturing of our hardware products to third-party contract manufacturers. Accordingly, a significant portion of our cost of revenue and substantially all of our deferred costs consist of payments to our contract manufacturers. Our contract manufacturers generally secure capacity and procure component inventory on our behalf based on a rolling forecast. To protect against component shortages and to provide replacement parts for our service teams, we manage our supply chain with third-party contract manufacturers to establish adequate quantities of key components. As part of our design review process, we also attempt to identify alternative or substitute parts for single-source components to further mitigate the risk of shortages.

Although we gain significant benefits from outsourcing manufacturing, it results in less control over the manufacturing process, exposing us to risks, including reduced control over quality assurance, product costs and product supply.

Our objective is to continue decreasing product costs and improving product gross margins through engineering design cost reductions, higher volume purchasing of our hardware, elimination of single-source parts and additional economies of scale. We leverage the production capacity of our third-party contract manufacturers to maintain production volume capacity and benefit from their volume component buying power. This allows us to preserve flexibility over our supply chain, while committing to minimum production volumes. We do expect fluctuation in our product cost of billings in future periods but expect our third-party content to remain at lower levels in 2017.

An important aspect of our strategy depends on our ability to expand beyond advanced metering sales and sell additional solutions to our existing and prospective customers. In December 2015, we announced Starfish, a wireless IPv6 network service for the IoT. Our internal investments in SilverLink and our January 2015 acquisition of Detectent are intended to assist us in selling additional solutions to our existing and prospective customers. There can be no assurance that these products and services will be accepted by utilities or consumers. Similarly, our future success depends on our ability to expand our business beyond the smart grid into smart city infrastructure. Our May 2014 acquisition of SLV added street light control and management software to broaden our smart city and street lights offerings. There can be no assurance that this or other future smart city products and services, or other future products and services for additional industrial vertical markets will be accepted by potential customers. Other competing products and services for both the smart grid and smart city infrastructure may emerge and may be more successful.

Our future growth will depend, in part, on our ability to increase sales of our networking platform internationally. Historically, the majority of our revenue and billings have been generated from the United States. In 2016, international customers accounted for 16% of revenue and 18% of our billings, respectively. We intend to aggressively pursue new customers internationally, which may increase operating expenses in the near term and may not result in revenue or billings until future periods, if at all.

We believe the smart grid and smart city markets are still in their infancy and our objective is to continue to invest for long-term growth. We expect to continue to invest significantly in our research and development initiatives, which we believe are essential to enhancing our competitive position and developing new products. In addition, we expect to continue to expand our sales organization and partnerships to market our solutions both in the United States and internationally. We may incur losses in future periods as we continue to invest in our growth.

On March 10, 2017, we approved a restructuring plan designed to drive progress towards our long-term 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. See Part II, Item 9B, Other Information, for more details.

We monitor the key elements of our operating and financial performance set forth below to help us evaluate growth trends, determine investment priorities, establish budgets, measure the effectiveness of our sales efforts and assess operational efficiencies. These key elements of operating and financial performance include financial metrics presented in accordance with GAAP as well as non-GAAP metrics which consist of billings (including product billings, services billings, professional services billings, managed services and SaaS billings, advanced metering infrastructure billings, new solutions billings and international billings), cost of billings (including product cost of billings and services cost of billings), non-GAAP operating expenses and total backlog. For more information regarding our use of non-GAAP metrics, see Part II, Item 6. Selected Consolidated Financial Data, Key Non-GAAP and Other Financial Metrics.

We derive revenue from sales of products and services that enable customers to deploy our networking platform. In 2016, product revenue represented 62% and service revenue represented 38% of our total revenue. For the year ended December 31, 2016, we delivered approximately 2.6 million endpoints. We have delivered approximately 25.5 million cumulative endpoints from inception to December 31, 2016.

Our product revenue is derived from sales of hardware such as communications modules, access points, relays and bridges, and various types of software related to our solutions. To date, in our typical customer deployments, we have sold our communications modules to third-party device manufacturers and our other hardware and software products directly to our customers. In such sales of communications modules to third-party device manufacturers, we only record revenue related to the communications modules pursuant to a contractual relationship between us and the third-party device manufacturer. However, in some cases, we have sold

third-party devices such as meters integrated with our communications modules directly to our customers. In those circumstances where we sell third-party devices directly to our customers, we recognize the sale on a gross basis as we are acting as principal. Whether our customer purchases the third-party device from us or the third party device manufacturer is dependent on the nature and extent of the business relationship our customer has with the third-party device manufacturer and how our customer prefers to manage their deployment.

Our service revenue includes fees for managed services and SaaS, and professional services. For the year ended December 31, 2016, revenue from managed services and SaaS, and professional services represented 21% and 17%, respectively, of our total revenue.

For the year ended December 31, 2016, our advanced metering solutions represented 87% of total revenue and our new solutions represented 13% of total revenue. Advanced metering solutions revenue includes hardware and software products along with services primarily related to deployment of the network canopy through our access points and the shipment of our communications modules which are integrated into third-party meters for deployment to homes and businesses supported by our customer base. New solutions revenue includes revenue derived from our products and services beyond our advanced metering solutions, such as distribution automation, demand side management, demand response, smart cities, street lights and SilverLink Data Platform.

To date, a substantial majority of our revenue is attributable to a limited number of customer deployments of our advanced metering solution. In 2016, the deployments for CPS, ComEd and AusNet, represented 29%, 28% and 12% of our total revenue, respectively.

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

For the year ended December 31, 2016, product billings represented 64%, and service billings represented 36%, of our total billings. For a description of billings, see Part II, Item 6. Selected Consolidated Financial Data, Key Non-GAAP and Other Financial Metrics. Our service billings include billings from managed services and SaaS, and professional services. For the year ended December 31, 2016, billings from managed services and SaaS and professional services represented 21% and 15%, respectively, of our total billings.

For the year ended December 31, 2016, billings from our advanced metering solutions and new solutions represented 82% and 18%, respectively, of total billings.

To date, a substantial portion of our billings is attributable to a limited number of customer deployments of our advanced metering solution. In 2016, the deployments for ComEd, FP&L and CPS represented 31%, 11% and 10% of total billings, respectively. We expect that a limited number of customers will continue to account for a substantial portion of our revenue in future periods although these customers have varied and are likely to vary from period to period.

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

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

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

Cost of billings represents the cost associated with products and services that have been delivered to the customer, excluding stock-based compensation and amortization of acquired intangibles and acquisition-related charges as described in Part II, Item 6. Selected Consolidated Financial Data, Key Non-GAAP and Other Financial Metrics.

Operating expenses consist of research and development, sales and marketing, and general and administrative expenses, as well as impairment of acquired intangibles and restructuring charges. Personnel-related expense represents a significant component of our operating expenses. Our regular full-time employee headcount increased from 652 as of December 31, 2015 to 702 as of December 31, 2016.

We expense our research and development costs as they are incurred. Research and development expense represents the largest component of our operating expenses and consists primarily of:

The following table sets forth our consolidated results of operations for the periods shown:

	Year Ended December 31,
	2016			2015			2014			2016 vs. 2015						2015 vs. 2014
	(in thousands)									$ Change			% Change			$ Change			% Change
Consolidated Statements of Operations Data:
Revenue	$	311,008		$	489,559		$	191,288		$	(178,551	)		(36	)%	$	298,271			156	%
Cost of revenue		172,809			263,816			134,951			(91,007	)		(34	)%		128,865			95	%
Gross profit		138,199			225,743			56,337			(87,544	)		(39	)%		169,406			301	%
Operating expenses:
Research and development		70,673			61,295			64,771			9,378			15	%		(3,476	)		(5	)%
Sales and marketing		39,406			33,452			36,388			5,954			18	%		(2,936	)		(8	)%
General and administrative		45,801			46,372			41,260			(571	)		(1	)%		5,112			12	%
Impairment of intangible assets		2,204			—			—			2,204			100	%		—			0	%
Restructuring		39			1,671			1,789			(1,632	)		(98	)%		(118	)		(7	)%
Total operating expenses		158,123			142,790			144,208			15,333			11	%		(1,418	)		(1	)%
Operating (loss) income		(19,924	)		82,953			(87,871	)		(102,877	)		(124	)%		170,824			(194	)%
Other income (expense), net		670			104			123			566			544	%		(19	)		(15	)%
(Loss) income before income taxes		(19,254	)		83,057			(87,748	)		(102,311	)		(123	)%		170,805			(195	)%
Provision for income taxes		(2,375	)		(3,071	)		(1,422	)		696			(23	)%		(1,649	)		116	%
Net (loss) income	$	(21,629	)	$	79,986		$	(89,170	)	$	(101,615	)		(127	)%	$	169,156			(190	)%

	Year Ended December 31,
	2016			2015			2014			2016 vs. 2015						2015 vs. 2014
	(in thousands)									$ Change			% Change			$ Change		% Change
Product revenue	$	193,618		$	353,041		$	129,333		$	(159,423	)		(45	)%	$	223,708		173	%
Percent of revenue		62	%		72	%		68	%
Service revenue
Managed services and SaaS		65,309			71,947			35,220			(6,638	)		(9	)%		36,727		104	%
Professional services		52,081			64,571			26,735			(12,490	)		(19	)%		37,836		142	%
Total services revenue		117,390			136,518			61,955			(19,128	)		(14	)%		74,563		120	%
Percent of revenue		38	%		28	%		32	%
Revenue	$	311,008		$	489,559		$	191,288		$	(178,551	)		(36	)%	$	298,271		156	%

From incorporation through December 31, 2014, we deferred revenue for arrangements that contained customer-specific acceptance criteria until we determined whether acceptance was achieved due to our limited experience with customer deployments during that period. We performed an 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. Explicit receipt of acceptance from customers is no longer necessary if (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.

Total revenue recognized was due to the receipt of customer acceptances and the performance of related services for follow-on phases of deployment of our networking platform and solutions. Of our total revenue, revenue from our advanced metering solutions and new solutions represented 87% and 13%, respectively, for the year ended December 31, 2016, 86% and 14%, respectively, for the year ended December 31, 2015, and 88% and 12%, respectively, of total revenue for the year ended December 31, 2014. The decrease in revenue for the year ended December 31, 2016, as compared to the same period in 2015, was primarily due to the absence of the cumulative catch-up adjustment resulting from the change in assessment of the impact of customer-specific acceptance criteria recorded in 2015, which increased product and service revenue by $111.3 million and $28.1 million, respectively, and from a net reduction in the receipt of initial customer acceptances. This same cumulative catch-up adjustment was the primary reason for the increase in revenue for the year ended December 31, 2015, as compared to the same period in 2014.

In 2016, the deployments for CPS, ComEd and AusNet represented 29%, 28% and 12% of our revenue, respectively. In 2015, the deployments for ComEd and PHI Service Company, or PHI, represented 31% and 27% of our revenue, respectively. In 2014, the deployments for CHED Service Pty Ltd, or CHED, and Progress Energy Service Company LLC (which was acquired by Duke Energy Corporation) or Progress, represented 21% and 13% of our revenue, respectively.

We anticipate that revenue in 2017 will be higher than the levels achieved in 2016, and may fluctuate from period to period throughout 2017 primarily due to the timing of when we expect to meet the completion and acceptance criteria in our customer arrangements as described above under Factors Affecting Our Performance—Customer Acceptance Provisions Impact Timing of Revenue Recognition.

The decrease in product revenue for the year ended December 31, 2016, as compared to the same period in 2015, was due to the absence of the $111.3 million cumulative catch-up adjustment resulting from the change in assessment of the impact of customer-specific acceptance criteria recorded in 2015, with the remaining from a net reduction in the receipt of initial customer acceptances.

The increase in product revenue for the year ended December 31, 2015, as compared to the same period in 2014, was primarily due to the $111.3 million cumulative catch up adjustment recorded during the three months ended March 31, 2015 as a result of a change in assessment of the impact of customer-specific acceptance criteria. The remaining increase of revenue was primarily due to the receipt of initial customer acceptances, and the performance of related services for follow-on phases of deployment of our networking platform and solutions from customers for which acceptance of initial phases of deployment was achieved prior to 2015.

The decrease in service revenue for the year ended December 31, 2016, as compared to the same period in 2015, was primarily due to the absence of the $28.1 million cumulative catch-up adjustment resulting from the change in assessment of the impact of customer-specific acceptance criteria recorded in 2015, offset in part by a net increase in the receipt of initial customer acceptances.

The increase in services revenue for the year ended December 31, 2015, as compared to the same period in 2014, was primarily due to the $28.1 million cumulative catch up adjustment recorded during the three months ended March 31, 2015 as a result of a change in assessment of the impact of customer-specific acceptance criteria. The remaining increase of revenue was due to the receipt of initial customer acceptances, and the performance of related services for follow-on phases of deployment of our networking platform and solutions from customers for which acceptance of initial phases of deployment was achieved prior to 2015.

Our revenue from product, managed services and SaaS, and professional services represented 62%, 21% and 17%, respectively, of our total revenue for the year ended December 31, 2016, and 72%, 15% and 13%, respectively, of our total revenue for the year ended December 31, 2015, and 68%, 18% and 14%, respectively, of our total revenue for the year ended December 31, 2014.

We anticipate that total revenue, product and services, in 2017 may fluctuate from period to period throughout 2017 primarily due to the timing of when we expect to meet the completion and acceptance criteria in our customer arrangements as described above under Factors Affecting Our Performance—Customer Acceptance Provisions Impact Timing of Revenue Recognition.

	Year Ended December 31,
	2016		2015		2014		2016 vs. 2015					2015 vs. 2014
	(unaudited, in thousands)						$ Change		% Change			$ Change			% Change
Product billings	$	189,284	$	185,583	$	194,024	$	3,701		2	%	$	(8,441	)		(4	)%
Services billings
Managed services and SaaS		60,547		52,416		44,504		8,131		16	%		7,912			18	%
Professional services		44,772		43,925		38,180		847		2	%		5,745			15	%
Total services billings		105,319		96,341		82,684		8,978		9	%		13,657			17	%
Total billings	$	294,603	$	281,924	$	276,708	$	12,679		4	%	$	5,216			2	%

For the year ended December 31, 2016, billings from product and services represented 64% and 36% of our total billings, respectively. We delivered approximately 2.6 million endpoints during the year ended December 31, 2016, as compared to approximately 2.7 million endpoints during the same period in 2015. The increase in product billings was primarily driven by an increase in software billings from a significant new customer, offset in part by a decrease in hardware billings from lower endpoint shipments during the year. The increase in services billings was primarily due to an increase in managed services and SaaS billings driven by an expanded footprint of cumulative endpoints delivered and set up fees for new projects. Billings from international customers represented 18% of total billings in 2016.

For the year ended December 31, 2015, billings from product and services represented 66% and 34% of our total billings, respectively. We delivered approximately 2.7 million endpoints during the year ended December 31, 2015, as compared to approximately 2.1 million endpoints during the same period in 2014. The growth in managed services and SaaS business was due to ramp up of full deployment from customers as well as the acquisition of Detectent, which expanded our service offerings. This increase was offset by a net decrease in product billings primarily due to lower third-party content and product mix. The net decrease in product billings was a result of $22.1 million decrease in hardware volume primarily related to reduced third-party content, offset by a $13.7 million increase in software revenue. Billings from international customers represented 16% of total billings in 2015.

Billings from our advanced metering and new solutions represented 82% and 18%, respectively, of our total billings for the year ended December 31, 2016, 80% and 20%, respectively, of our total billings for the year ended December 31, 2015, and 85% and 15%, respectively, of our total billings for the year ended December 31, 2014.

Billings from product, managed services and SaaS, and professional services represented 64%, 21% and 15%, respectively, of our total billings for the year ended December 31, 2016, 66%, 19% and 15%, respectively, of our total billings for the year ended December 31, 2015, and 70%, 15% and 15%, respectively, of our total billings for the year ended December 31, 2014.

To date, a substantial portion of our billings is attributable to a limited number of customer deployments of our advanced metering solution. In 2016, the deployments for ComEd, FP&L and CPS represented 31%, 11% and 10% of total billings, respectively. In 2015, the deployments for ComEd, CPS and FP&L represented 33%, 11% and 11% of total billings, respectively. In 2014, the deployments for ComEd, Baltimore Gas and Electric Company, or BG&E, and Virginia Electric and Power Company, or Dominion, represented 19%, 13%, and 10% of total billings, respectively.

We anticipate that billings will fluctuate period to period throughout 2017, with modest growth as compared to the year ended December 31, 2016 for the reasons as described above under —Factors Affecting Our Performance.

	Year Ended December 31,
	2016		2015		2014		2016 vs. 2015						2015 vs. 2014
	(in thousands)						$ Change			% Change			$ Change			% Change
Cost of product revenue	$	106,583	$	202,430	$	77,158	$	(95,847	)		(47	)%	$	125,272			162	%
Cost of services revenue
Managed services and SaaS		36,772		31,663		25,800		5,109			16	%		5,863			23	%
Professional services		29,454		29,723		31,993		(269	)		(1	)%		(2,270	)		(7	)%
Total cost of services revenue		66,226		61,386		57,793		4,840			8	%		3,593			6	%
Total cost of revenue	$	172,809	$	263,816	$	134,951	$	(91,007	)		(34	)%	$	128,865			95	%

Product Cost of Revenue. The decrease in product cost of revenue for the year ended December 31, 2016, as compared to the year ended December 31, 2015, was primarily due to the absence of a $55.9 million in product costs associated with revenue recognized from the cumulative catch-up adjustment in 2015, from a net reduction in the receipt of initial customer acceptances in 2016, and lower warranty expenses.

The increase in product cost of revenue for the year ended December 31, 2015, as compared to the year ended December 31, 2014, was due in part to the $55.9 million cumulative catch-up adjustment from the change in assessment of the impact of customer-specific acceptance criteria. The remaining increase of $69.4 million was due to the receipt of customer acceptance in 2015 of an initial phase of deployment of our networking platform and solution with the remainder of the increase due to the receipt of customer acceptances and the performance of related services for follow-on phases of deployment of our networking platform and solutions from customers for which acceptance of initial phases of deployment was achieved prior to 2015.

Service Cost of Revenue. The increase in service cost of revenue for the year ended December 31, 2016, as compared to the year ended December 31, 2015, was due to an increase of $3.2 million in employee compensation expense primarily from higher average headcount during 2016, and $1.7 million in higher facilities and infrastructure cost.

The increase in service cost of revenue for the year ended December 31, 2015, as compared to the year ended December 31, 2014, $5.8 million was due to an increase in professional services employee compensation and personnel-related expenses driven by increase in headcount as a result of the Detectent acquisition, and partially offset by a decrease of $2.0 million in stock-based compensation expense.

Changes in our service cost of revenue are disproportionate to changes in our service revenue because we recognize service cost of revenue in the period in which it is incurred even though the associated service revenue may be required to be deferred, as previously described under Key Elements of Operating and Financial Performance—Cost of Revenue. In addition, we may incur gross losses primarily due to the timing of when we expect to meet the completion and acceptance criteria in our customer arrangements.

	Year Ended December 31,
	2016		2015		2014		2016 vs. 2015						2015 vs. 2014
	(unaudited, in thousands)						$ Change			% Change			$ Change			% Change
Cost of product billings	$	89,773	$	102,827	$	131,671	$	(13,054	)		(13	)%	$	(28,844	)		(22	)%
Cost of services billings
Managed services and SaaS		34,357		29,626		24,881		4,731			16	%		4,745			19	%
Professional services		26,801		26,813		27,140		(12	)		(0	)%		(327	)		(1	)%
Total cost of services billings		61,158		56,439		52,021		4,719			8	%		4,418			8	%
Total cost of billings	$	150,931	$	159,266	$	183,692	$	(8,335	)		(5	)%	$	(24,426	)		(13	)%

The overall cost of billings decreased during the year ended December 31, 2016, as compared to the year ended December 31, 2015, primarily due to a decrease in cost of product billings, offset in part by an increase in cost of service billings. Cost of product

billings decreased primarily due to fewer endpoints delivered and cost savings from manufacturing efficiencies. Cost of service billings increased primarily due to an increase in employee compensation expense driven by higher average headcount during 2016.

The overall cost of billings decreased during the year ended December 31, 2015, as compared to the year ended December 31, 2014, primarily due to a decrease in product cost of billings. Cost of billings decreased primarily due to a reduced mix of lower-margin third-party content in our overall billing mix, partially offset by higher service costs.

	Year Ended December 31,
	2016		2015		2014		2016 vs. 2015						2015 vs. 2014
	(in thousands)						$ Change			% Change			$ Change			% Change
Research and development	$	70,673	$	61,295	$	64,771	$	9,378			15	%	$	(3,476	)		(5	)%
Sales and marketing		39,406		33,452		36,388		5,954			18	%		(2,936	)		(8	)%
General and administrative		45,801		46,372		41,260		(571	)		(1	)%		5,112			12	%
Impairment of intangible assets		2,204		—		—		2,204			100	%		—			0	%
Restructuring		39		1,671		1,789		(1,632	)		(98	)%		(118	)		(7	)%
Operating expenses	$	158,123	$	142,790	$	144,208	$	15,333			11	%	$	(1,418	)		(1	)%

Operating expenses consist primarily of employee compensation, including salaries, commissions, bonuses, benefits and stock-based compensation, which fluctuate from period to period. We intend to continue to manage our operating expenses in line with our existing cash and available financial resources and anticipate continued spending in future periods in order to execute our long-term business plan. Facilities and information technology costs are allocated to each department based on usage and headcount.

Research and Development. We focus the bulk of our research and development activities on the continued development of existing products and the development of new offerings for emerging market opportunities.

The increase in research and development expense for the year ended December 31, 2016, as compared to the year ended December 31, 2015, was driven by increases of $4.6 in employee compensation and personnel-related expenses primarily from higher average headcount during 2016, $2.4 million in outside services and engineering spending, $0.5 million in software maintenance costs, and the rest primarily from $1.7 million in facility and infrastructure costs resulting from the new San Jose headquarters.

The decrease in research and development expense for the year ended December 31, 2015, as compared to the year ended December 31, 2014, was primarily due to a decrease of $4.4 million in employee compensation and personnel-related expenses from lower average headcount in 2015, offset in part by an increase in external consulting, outside services and engineering spending of $0.9 million.

We intend to continue to invest significantly in our research and development efforts, which we believe are essential to enhancing our competitive position and developing new products.

Sales and Marketing. We focus a significant proportion of our sales and marketing activities on new and emerging market opportunities.

The increase in sales and marketing expense for the year ended December 31, 2016, as compared to the year ended December 31, 2015, was driven by increases of $3.6 in commissions from several significant new awards during 2016, $0.4 million in employee compensation, $0.6 million in marketing and trade show expenses, $0.5 million in outside service expenses and $0.3 million in facility and infrastructure costs resulting from the new San Jose headquarters.

The decrease in sales and marketing expense for the year ended December 31, 2015, as compared to the year ended December 31, 2014, was due to decrease in employee compensation and personnel-related expenses of $3.3 million primarily due to a decrease in stock-based compensation resulting from higher expenses in the year of 2014 due to equity awards becoming fully vested by the end of the year ended December 31, 2014, equity awards cancelled as a result of restructuring actions in the third quarter of 2014 and lower average grant date fair value of awards granted in 2015. This decrease was offset in part by an increase of $0.4 million in amortization expense related to acquired intangible assets.

General and Administrative. General and administrative expense for the year ended December 31, 2016, as compared to the year ended December 31, 2015, remained relatively flat. Decreases of $3.6 million in legal settlements and $1.4 million in acquisition-related costs in connection with the Detectent acquisition, were partially offset by increases of $4.5 million in employee compensation and personnel-related expenses primarily from higher average headcount.

The increase in general and administrative expense for the year ended December 31, 2015, as compared to the year ended December 31, 2014, was driven by $3.6 million in legal settlements, $2.8 million in external consulting, $1.9 million in acquisition related costs in connection with the Detectent acquisition, and $0.8 million of other administrative expenses. These increases were offset in part by a $1.9 million decrease in employee compensation and personnel-related expense and a $1.6 million decrease in outside services fees.

Impairment of Intangible Assets. During the year ended December 31, 2016, we recorded an impairment charge of $2.2 million related to intangible assets in our consolidated statements of operations. See Part II, Item 8. Financial Statements, Note 6, Goodwill and Intangible Assets, of Notes to Consolidated Financial Statements for more information.

Restructuring. We initiated a restructuring plan during the third quarter of 2014 to refocus our strategy, optimize our structure, and improve operational efficiencies. We completed this restructuring plan during the first quarter of 2016. We incurred restructuring charges of approximately $39,000, $1.7 million and $1.8 million related to workforce reductions as a result of this restructuring plan during the years ended December 31, 2016, 2015 and 2014. See Part II, Item 8. Financial Statements and Supplementary Data, Note 14, Restructuring, of Notes to Consolidated Financial Statements for more information.

The following table sets forth our other income (expense), net, for the periods shown:

	Year Ended December 31,
	2016			2015			2014			2016 vs. 2015					2015 vs. 2014
	(in thousands)									$ Change		% Change			$ Change			% Change
Interest income	$	470		$	468		$	316		$	2		0	%	$	152			48	%
Interest expense		(7	)		(52	)		(132	)		45		(87	)%		80			(61	)%
Other expense, net		207			(312	)		(61	)		519		(166	)%		(251	)		411	%
Other income (expense), net	$	670		$	104		$	123		$	566		544	%	$	(19	)		(15	)%

Other income (expense), net, consists primarily of interest income on cash balances, foreign currency-related gains and losses, interest expense on capital leases. We have historically invested our cash in money market accounts and fixed income securities.

Other income (expense), net, increased for the year ended December 31, 2016, as compared to the year ended December 31, 2015, primarily due to increase in other income due to foreign currency gain.

Other income (expense), net, was relatively flat for the year ended December 31, 2015 as compared to the year ended December 31, 2014, as increase of $0.3 million in foreign currency loss was offset by increase in interest income of $0.2 million and decrease in interest expense of $0.1 million.

Provision for income taxes for the years ended December 31, 2016, 2015 and 2014 was $2.4 million, $3.1 million and $1.4 million, respectively. Our effective tax rate for the years ended December 31, 2016, 2015 and 2014 was (12.3)%, 3.7% and (1.6)%, respectively.

Our 2016, 2015 and 2014 effective tax rates differed from the 35% statutory rate primarily due to the utilization of U.S. deferred tax assets, which were subject to a valuation allowance, differences between the U.S. federal tax rate and tax rates applicable to our non-U.S. operations, non-deductible stock-based compensation and state taxes. The provision for income taxes and the effective rate between 2016 and 2015 differed primarily from a year-over-year decrease in our pre-tax income in addition to having recorded an income tax benefit in 2015 from the release of a valuation allowance related to the purchase accounting effects of our Detectent acquisition. The provision for income taxes and the effective rate between 2015 and 2014 differed primarily due to the year-over-year increase in pre-tax income.

For 2016, our provision for income taxes was primarily comprised of state taxes and foreign taxes associated with our foreign subsidiaries. We have not reported a provision for federal taxes in our consolidated financial statements as our federal taxable income has been offset by deferred tax assets arising from prior year net operating losses. Our state provision arose from state minimum taxes and income tax from several states where there were insufficient net operating losses from prior years to offset state taxable income. Our provision for income taxes for 2015 was similar to 2016 with the exception of a $1.1 million income tax benefit, which was recorded from the release of a valuation allowance due to the purchase accounting effects of our Detectent acquisition. Our provision for income tax for 2014 was primarily comprised of state and foreign taxes.

As of December 31, 2016, we had federal and state net operating loss carryforwards of $140.2 million and $265.1 million, respectively. If not utilized, our federal and state net operating loss carryforwards will begin to expire in 2028 and 2018, respectively.

We recognize deferred tax assets and liabilities for both the expected impact of the book-to-tax basis difference of our assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carryforwards. We record a valuation allowance against deferred tax assets when it is considered more likely than not that all, or a portion, of our deferred tax assets will not be realized. We consider all available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize our existing deferred tax assets. A significant piece of objective negative evidence considered was the U.S. cumulative losses that we incurred over the recent years through December 31, 2016, after adjusting for the cumulative catch-up adjustment resulting from the change in assessment of the impact of customer-specific acceptance criteria recorded in 2015 which resulted in $83.8 million of additional book income.

In 2016 and 2015, we reported U.S. pre-tax income of $22.9 million and $116.5 million, respectively. We, however, have not yet been able to establish a sustained level of profitability in the United States or other sufficient significant positive evidence to conclude that our U.S. deferred tax assets are more likely than not to be realized. Therefore, we continue to maintain a valuation allowance of $131.6 million against our deferred tax assets as of December 31, 2016. The valuation allowance decreased by $11.1 million and $43.6 million in 2016 and 2015, respectively, primarily due to the utilization of U.S. deferred tax assets from net operating loss carryforwards. If or when the U.S. deferred tax assets are recognized, the tax benefits related to any reversal of the valuation allowance on our U.S. deferred tax assets will be accounted for as a reduction of our income tax expense. We have no material valuation allowance against our net deferred tax assets with respect to foreign jurisdictions as of December 31, 2016.

Our effective income tax rates for 2017 and future periods will depend on a variety of factors, including changes in our deferred tax valuation allowance, changes in our business such as acquisitions and intercompany transactions, changes in our international structure, changes in the geographic location of our business functions or assets, changes in the geographic mix of our income, applicable accounting rules, applicable tax laws and regulations, rulings and interpretations thereof, developments in tax audit and other matters, and variations in our annual pre-tax income or loss. We incur certain tax expenses that do not decline proportionately with declines in our pre-tax consolidated income or loss. As a result, in absolute dollar terms, our tax expense will have a greater influence on our effective tax rate at lower levels of pre-tax income or loss than at higher levels. In addition, at lower levels of pre-tax income or loss, our effective tax rate will be more volatile.

As of December 31, 2016, we had $50.4 million in cash and cash equivalents and $67.9 million in short-term investments. Our investment portfolio consisted of money market funds and fixed income securities. Our fixed income securities were denominated in U.S. dollars and consisted of highly liquid debt instruments of the U.S. government and its agencies and U.S. and foreign corporate debt securities. We limit the amount of our domestic and international investments with any single issuer and any single financial institution, and also monitor the diversity of the portfolio, thereby diversifying the credit risk. We believe our existing balances of cash, cash equivalents and short-term investments will be sufficient to satisfy our working capital needs, capital asset purchases, outstanding commitments, and other liquidity requirements associated with our existing operations through the next 12 months.

At December 31, 2016, our total cash, cash equivalents and short-term investments of $118.3 million were held for general corporate purposes. We do not provide for federal income taxes on the undistributed earnings of our foreign subsidiaries, all of which we expect to reinvest outside of the United States indefinitely. However, if these funds were needed for our domestic operations, we would be required to accrue and pay insignificant U.S. state taxes on undistributed earnings of foreign subsidiaries. There are no other restrictions on the use of these funds. If we were to repatriate these earnings to the United States, any associated income tax liability would be insignificant.

We expect that operating expenses will constitute a material use of our cash balances. In the near term, we intend to continue to manage our operating expenses in line with our existing cash and available financial resources and anticipate increased spending in future periods in order to execute our long-term business plan. In addition, we may use cash to fund acquisitions or invest in other businesses, technologies or product lines. Our cash flows from operating activities have fluctuated since our inception, and we expect

cash flows to fluctuate from period to period in 2017 and beyond. We believe that our available cash balances and credit facilities will be sufficient to meet our presently anticipated working capital, capital expenditure and business expansion requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our rate of customer wins and related billings and the expansion of our production capacity, as well as sales and marketing activities, timing and extent of spending on research and development efforts, and the continuing market acceptance of our networking platform and solutions.

On December 18, 2015, we entered into a senior secured credit facilities credit agreement, or Credit Facility, with Silicon Valley Bank and HSBC Bank USA, National Association, or HSBC, which provides a revolving loan facility in an aggregate amount not to exceed $75 million with an available letter of credit sub-facility in the aggregate amount of $75 million and an available swingline sub-facility in the aggregate amount of $5 million. As of December 31, 2016, there were no borrowings outstanding under the Credit Facility; however, this line of credit is backing $17.2 million of letters of credit, leaving $57.8 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 December 31, 2016, we were in compliance with the financial covenants in the Credit Facility.

We are occasionally required to provide performance bonds to secure our performance under customer contracts. Our ability to obtain such bonds primarily depends upon our capitalization, working capital, past performance, management expertise and reputation and external factors beyond our control, including the overall capacity of the surety market. Surety companies consider those factors in relation to the amount of our tangible net worth and other underwriting standards that may change from time to time. Surety companies may require that we collateralize a percentage of the bond with our cash. Events that affect surety markets generally may result in bonding becoming more difficult to obtain in the future, or being available only at a significantly greater cost. For example, in December 2014, we filed a surety bond in the amount of $17.6 million in connection with a notice of appeal that we filed with the U.S. Court of Appeals for the Federal Circuit in Washington, D.C. in our ongoing patent infringement litigation with EON. See Part II, Item 8. Financial Statements and Supplementary Data, Note 15, Commitments and Contingencies, of Notes to Consolidated Financial Statements for more information. In addition, some of our customers also require collateral in the form of letters of credit to secure performance or to fund possible damages as the result of an event of default under our contracts with them. If we enter into significant long-term agreements that require the issuance of letters of credit, our liquidity could be negatively impacted. Our inability to obtain adequate bonding or letters of credit and, as a result, to bid or enter into significant long-term agreements could have a material adverse effect on our future revenue and business prospects.

Our capital expenditures were $24.8 million, $5.4 million and $6.1 million in the years ended December 31, 2016, 2015 and 2014, respectively. The increase in 2016 was primarily related to the investment in our new San Jose headquarters, and to support increased network operations, hosting data centers and corporate infrastructure. In 2017, we expect capital expenditures to decrease. We will continue to use a portion of our cash for capital expenditures in the development of new products and services and expansion of our infrastructure, including servers and equipment related to managed services, SaaS, and other information systems required to support increased demand for our offerings and the related infrastructure.

The following table sets forth the major sources and uses of cash for each of the periods set forth below:

Cash provided by operating activities increased during the year ended December 31, 2016, as compared to the same period in 2015, primarily as a result of an increase in cash provided by working capital of $94.1 million, offset in part by lower net income of $101.6 million.

Cash flows provided by operating activities increased during the year ended December 31, 2015, as compared to the same period in 2014, primarily as a result of higher net income of $169.2 million, offset in part by a decrease in cash used by working capital of $133.7 million.

Cash flows from investing activities primarily relate to purchases sales and maturities of available-for-sale investment securities, capital expenditures to support our growth and cash paid in connection with a business combination.

Cash used in investing activities increased during the year ended December 31, 2016, as compared to the same period in 2015, due to a $19.5 million increase in purchases of leasehold improvements and furniture and fixtures primarily from the investment in our new San Jose headquarters, and from a $7.1 million decrease in cash paid for acquisitions, no payment in 2016 compared to $7.1 million for Detectent in 2015. The remainder of the change related to the timing of purchases, sales and maturities of available-for-sale investments.

Cash used in investing activities decreased during the year ended December 31, 2015, as compared to the same period in 2014. This change was primarily from a $1.6 million decrease in cash paid for acquisitions, $7.1 million for Detectent in 2015 compared to $8.7 million for Streetlight.Vision in 2014, and from a $0.7 million decrease in purchases of property and equipment. The remainder of the change related to the timing of purchases, sales and maturities of available-for-sale investments.

Cash used by financing activities decreased during the year ended December 31, 2016, as compared to the same period in 2015, primarily due to a $0.9 million decrease in payments on capital lease obligations and from an increase of $0.7 million in net proceeds from the issuance of common stock.

Cash used by financing activities increased during the year ended December 31, 2015, as compared to the same period in 2014, primarily due to a decrease of $3.2 million in net proceeds from the issuance of common stock, offset in part by a $0.7 million decrease in payments for taxes related to the net share settlement of equity awards and from a $0.4 million decrease in payments on capital lease obligations.

We typically extend credit to our customers and third-party device manufacturers and do not require collateral or other security in support of accounts receivable. We attempt to mitigate the credit risk in our trade receivables through our credit evaluation process and payment terms. We analyze the need to reserve for potential credit losses and record allowances for doubtful accounts when necessary. As of December 31, 2016, ComEd and FP&L accounted for 25% and 12%, respectively, of our accounts receivable. As of December 31, 2015, AusNet, FP&L, CPS, ComEd and Pacific Gas and Electric Co., or PG&E, accounted for 17%, 15%, 11%, 11% and 10%, respectively, of our accounts receivable.

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements (as that term is defined in Item 303(a)(4)(ii) of Regulation S-K) or other contractually narrow or limited purposes.

During the ordinary course of business, we provide standby letters of credit or other guarantee instruments to third-parties as required for certain transactions initiated either by us or our subsidiaries. As of December 31, 2016, our financial guarantees that were not recorded on our balance sheet consisted of $17.2 million of standby letters of credit under our Credit Facility.

The following is a summary of our contractual obligations as of December 31, 2016 (in thousands)

Our consolidated balance sheet consists of other long-term liability which includes gross unrecognized tax benefits, and related gross interest and penalties. At this time, we are unable to make a reasonably reliable estimate of the timing of payments in individual years in connection with these tax liabilities; therefore, such amounts are not included in the contractual obligation table above.

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. GAAP requires us to make certain estimates and judgments that affect the amounts reported in our financial statements. We base our estimates on historical experience, anticipated future trends and other assumptions we believe to be reasonable under the circumstances. Because these accounting policies require significant judgment, our actual results may differ materially from our estimates.

We consider an accounting policy to be critical if it is important to our financial condition and results of operations, and if it entails significant judgment, subjectivity and complexity on the part of management in its application. We consider the following accounting policies to be our critical accounting policies.

We generally market our products and services for our advanced metering, distribution automation and demand-side management solutions directly to customers. Our advanced metering solution, which includes our UtilOS network operating system, SilverLink Control Platform and SilverLink Applications, networking hardware, and communications modules, provides utilities with two-way communication from our communications modules to the utility’s back office. Our hardware devices include UtilOS embedded software, which functions together with the tangible hardware elements to deliver the tangible products’ essential functionality. Our SilverLink Control Platform and SilverLink Applications software suite of products includes software that is not embedded with the tangible hardware elements, but that is also necessary to deliver the tangible products’ essential network functionality, as well as other application software that provides additional functionality to the network solution. We derive revenue from sales of products, including hardware and software, as well as services, including network design and deployment support, managed services and SaaS, and ongoing customer support. We enter into separate arrangements with third-party device manufacturers to integrate our communications modules with their meters pursuant to our customers’ specifications. While we may receive payment directly from these third party device manufacturers, the timing of revenue recognition related to communications modules delivered to third-party device manufacturers is ultimately determined based upon acceptance by our customers. Much of our sales of communications modules have been fulfilled through third-party device manufacturers in this manner.

We enter into multiple deliverable arrangements with customers to deploy our networking platform and solutions, which include the delivery of hardware and software, as well as services.

From incorporation through December 31, 2014, we deferred revenue for arrangements that contain customer-specific acceptance criteria until we determined whether acceptance was achieved due to limited experience with customer deployments during that time period. We perform an 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.

Explicit receipt of acceptance from customers is no longer necessary if (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.

We provide warranties for substantially all of our products. Our standard warranty period extends from one to five years. We accrue for costs of standard warranty at the time of product shipment. In accordance with our policy, we accrue for product warranty costs when it is probable a liability has been incurred and the amount of loss can be reasonably estimated.

Each quarter, we reevaluate the estimates to assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary. Should actual product failure rates, claim levels, material usage or supplier warranties on parts used in our products differ from our original estimates, revisions to the estimated warranty liability could result in adjustments to our cost of revenue in future periods. While we engage in product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers and contract manufacturer production controls, meter partner integration procedures and customer deployment practices, our warranty obligations are affected by product failure rates, claims levels, material usage and supplier warranties on parts included in our products. Because our products are relatively new and we do not have the benefit of long-term experience observing their performance in the field, it is possible our estimates of a product’s lifespan and incidence of claims could vary from period to period.

In certain customer arrangements, we have provided extended warranties for periods of up to 15 years following the initial standard warranty period.

Deferred cost of revenue is recorded for products for which ownership, typically evidenced by title and risk of loss, has transferred to the customer, but for which criteria for revenue recognition have not been met. We only defer tangible direct costs associated with hardware products delivered. Cost of revenue for providing services is not deferred but is expensed in the period incurred. Deferred cost of revenue is recorded at the standard inventory cost at the time of shipment. Deferred costs are recognized when the applicable revenue recognition criteria are met for the corresponding deferred revenue. See Item 1. Description of Business, Basis of Presentation and Significant Accounting Policies, in the Notes to Consolidated Financial Statements for further detail.

Inventory is stated at the lower of cost or market. Cost is computed using standard cost, which approximates actual cost on a first-in, first-out basis. The determination of market value involves numerous judgments including estimated average selling prices based upon recent sales volumes, industry trends, existing customer orders and current contract prices. We evaluate our ending inventory for excess and obsolescence based on forecasted demand within specific time horizons, technological obsolescence, and an assessment of any inventory that is not in saleable condition. Forecasted demand requires management estimates and is subject to several uncertainties including market and economic conditions, technology changes and new product introductions. Actual demand may differ from forecasted demand, and such differences may have a material impact on recorded inventory values and operating results. Although we strive for accuracy in our forecasts of future product demand and market value, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory commitments and on our reported results. If actual market conditions are less favorable than those projected, additional write-downs and other charges

against earnings may be required. If actual market conditions are more favorable, we may realize higher gross profits in a future period if the written-down inventory is sold. Historically, our excess and obsolete charges have not been material.

In the normal course of business, we make commitments to our third-party contract manufacturers to manage lead times and meet product forecasts and with other parties to purchase various key components used in the manufacture of our products. We establish accruals for estimated losses on purchased components for which we believe it is probable that they will not be recoverable in future operations. To the extent that such forecasts are not achieved, our commitments and associated accruals may change.

We measure and recognize compensation expense for all stock-based awards made to employees and directors, including stock options, restricted stock, restricted stock units and performance stock units, and shares issued pursuant to our employee stock purchase plan, based on estimated fair values.

The determination of fair value of stock-based payment awards utilizing the Black-Scholes-Merton model is affected by the fair value of our common stock as of the time of grant, expected term of the option, and other assumptions related to expected volatility of our common stock and the applicable risk-free interest rates in effect at the date of grant.

We estimate the volatility of our common stock on the date of grant based on the historical and implied volatility of the stock prices of a peer group of publicly-traded companies for the period equal to the expected life of our stock options. We currently have no history or expectation of paying cash dividends on our common stock. 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. 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. We utilize an estimated forfeiture rate when calculating the expense for the period, and apply separate estimated forfeiture rates for executive and non-executive awards, to determine the expense recorded in our consolidated statements of operations. If this estimated rate changes in future periods due to actual forfeitures, our stock compensation expense may increase or decrease significantly. If there are any modifications or cancellations of the underlying unvested securities or the terms of the stock option, we may be required to accelerate, increase or cancel any remaining unamortized stock-based compensation expense.

We are subject to the possibility of various loss contingencies arising in the course of business. We use significant judgment and assumptions to estimate the likelihood of the loss or impairment of an asset or the incurrence of a liability in determining loss contingencies. An estimated loss contingency is accrued when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated. We record a charge equal to the minimum estimated liability for a loss contingency only when both of the following conditions are met: (i) information available prior to issuance of our consolidated financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required. See Part II, Item 8. Consolidated Financial Statements and Supplementary Data, Note 15, Commitments and Contingencies for information about legal contingencies.

We recognize deferred tax assets and liabilities for both the expected impact of differences between the financial statement amount and the tax basis of assets and liabilities and for the expected future tax benefit to be derived from tax losses and tax credit carryforwards. We record a valuation allowance against deferred tax assets when it is considered more likely than not that all or a portion of our deferred tax assets will not be realized. In making this determination, we are required to give significant weight to evidence that can be objectively verified. It is generally difficult to conclude that a valuation allowance is not needed when there is significant negative evidence, such as cumulative losses in recent years. Forecasts of future taxable income are considered to be less objective than past results. Therefore, cumulative losses weigh heavily in the overall assessment.

In addition to considering forecasts of future taxable income, we are also required to evaluate and quantify other possible sources of taxable income in order to assess the realization of our deferred tax assets, namely the reversal of existing deferred tax liabilities, the carry back of losses and credits as allowed under current tax law, and the implementation of tax planning strategies. Evaluating and quantifying these amounts involves significant judgments. Each source of income must be evaluated based on all positive and negative evidence; this evaluation involves assumptions about future activity. Certain taxable temporary differences that are not expected to reverse during the carry forward periods permitted by tax law cannot be considered as a source of future taxable income that may be available to realize the benefit of deferred tax assets.

In 2016 and 2015, we reported U.S. pre-tax income, compared to pre-tax losses in each of the prior seven years. After adjusting for a cumulative catch-up adjustment resulting from the change in assessment of the impact of customer-specific acceptance criteria recorded in 2015, which resulted in $83.8 million of additional book income, the 2015 U.S. pre-tax income would have been significantly reduced. As such, we have not yet been able to establish a sustained level of profitability in the U.S. or other sufficient significant positive evidence to conclude that our U.S. deferred tax assets are more likely than not to be realized. Therefore, we continue to maintain a valuation allowance against our U.S. deferred tax assets.

In the ordinary course of our business, there are many transactions and calculations where the tax law and ultimate tax determination is uncertain. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate prior to the completion and filing of tax returns for such periods. This process requires estimating both our geographic mix of income and our uncertain tax positions in each jurisdiction where we operate. These estimates involve complex issues and require us to make judgments about the likely application of the tax law to our situation, as well as with respect to other matters, such as anticipating the positions that we will take on tax returns prior to our actually preparing the returns. In addition, changes in our business, including acquisitions, changes in our international corporate structure, changes in the geographic location of business functions or assets, changes in the geographic mix and amount of income, as well as changes in our valuation allowances, applicable accounting rules, applicable tax laws and regulations, rulings and interpretations thereof, developments in tax audit and other matters, and variations in the estimated and actual level of annual pre-tax income can affect the overall effective income tax rate.

See Part II, Item 8. Consolidated Financial Statements and Supplementary Data, Note 1, Description of Business, Basis of Presentation and Significant Accounting Policies, of Notes to Consolidated Financial Statements of this Annual Report on Form 10-K, for a full description of recent accounting pronouncements, including the actual and expected dates of adoption and estimated effects on our consolidated results of operations and financial condition, which is incorporated herein by reference.

Our exposure to changes in interest rates relates primarily to interest earned and market value of our cash equivalents and short-term fixed income securities.

Our fixed income investment portfolio is denominated in U.S. dollars and consists of various holdings, types, and maturities. Our primary objective for holding fixed income securities is to achieve an appropriate investment return consistent with preserving principal and managing risk. At any time, a sharp rise in interest rates or credit spreads could have a material adverse impact on the fair value of our fixed income investment portfolio. A sensitivity analysis is performed on our investment portfolio each quarter.

The following table presents the hypothetical changes in the fair value of our short-term investment portfolio as of December 31, 2016, arising from potential changes in interest rates. The modeling technique estimates the change in fair value from immediate hypothetical parallel shifts in the yield curve of plus or minus 50 basis points, or BPS, 100 BPS, and 150 BPS.

We monitor our interest rate and credit risk, including our credit exposures to specific rating categories and to individual issuers. There were no impairment charges on our cash equivalents and fixed income securities during the quarter. These instruments are not leveraged and we do not enter into speculative securities for trading purposes.

Interest rate risk also reflects our exposure to movements in interest rates associated with our Credit Facility. The interest bearing credit facility is denominated in U.S. dollars. The revolving loans and any swingline loans made pursuant to our credit facility bear interest at a rate per annum equal to (i) the higher of (a) the prime rate in effect on such day, and (b) the federal funds effective rate plus 0.5%, but in any case at a minimum rate of 0.0% per annum, plus (ii) 0.75%. As of December 31, 2016, we had not drawn on our Credit Facility.

Our sales contracts are denominated primarily in U.S. dollars and, to a lesser extent, Australian dollars, Euro and Brazilian real. Consequently, our customer billings denominated in foreign currency are subject to foreign currency exchange risk. A portion of our operating expenses are incurred outside the United States and are denominated in foreign currencies, which are also subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Australian dollar, Euro and Brazilian real. Additionally, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our statement of operations. To date, we have not entered into derivatives or hedging strategies as our exposure to foreign currency exchange risk has not been material to our historical operating results, but we may do so in the future if our exposure to foreign currency exchange risk should become more significant. There were no significant foreign exchange gains or losses in the years ended December 31, 2016, 2015 and 2014, respectively.

We have audited the accompanying consolidated balance sheets of Silver Spring Networks, Inc. as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive (loss) income, stockholders’ deficit, and cash flow for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Silver Spring Networks, Inc. at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.

	December 31,
	2016			2015
Assets
Current assets:
Cash and cash equivalents	$	50,383		$	65,264
Short-term investments		67,876			59,181
Accounts receivable		44,770			47,813
Inventory		8,040			4,545
Deferred cost of revenue		194,769			196,868
Prepaid expenses and other current assets		12,536			10,835
Total current assets		378,374			384,506
Property and equipment, net		28,986			14,106
Goodwill and intangible assets		11,005			14,390
Deferred cost of revenue, non-current		26,639			38,882
Deferred tax assets, non-current		481			1,069
Other long-term assets		1,643			4,772
Total assets	$	447,128		$	457,725
Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable	$	26,785		$	30,623
Deferred revenue		292,260			305,471
Accrued and other liabilities		44,146			42,751
Total current liabilities		363,191			378,845
Deferred revenue, non-current		93,149			96,342
Other liabilities		22,324			16,403
Total liabilities		478,664			491,590
Commitments and contingencies (Note 15)
Stockholders’ deficit:
Common stock, $0.001 par value; 1,000,000 shares authorized; 52,185 and 50,621 shares issued and outstanding as of December 31, 2016 and 2015, respectively		52			51
Additional paid-in capital		618,599			594,301
Accumulated other comprehensive loss		(2,113	)		(1,772	)
Accumulated deficit		(648,074	)		(626,445	)
Total stockholders’ deficit		(31,536	)		(33,865	)
Total liabilities and stockholders’ deficit	$	447,128		$	457,725

The accompanying notes are an integral part of these consolidated financial statements.

	Year Ended December 31,
	2016			2015			2014
Revenue:
Product revenue	$	193,618		$	353,041		$	129,333
Service revenue		117,390			136,518			61,955
Total revenue		311,008			489,559			191,288
Cost of revenue:
Product cost of revenue		106,583			202,430			77,158
Service cost of revenue		66,226			61,386			57,793
Total cost of revenue		172,809			263,816			134,951
Gross profit		138,199			225,743			56,337
Operating expenses:
Research and development		70,673			61,295			64,771
Sales and marketing		39,406			33,452			36,388
General and administrative		45,801			46,372			41,260
Impairment of intangible assets		2,204			—			—
Restructuring		39			1,671			1,789
Total operating expenses		158,123			142,790			144,208
Operating income (loss)		(19,924	)		82,953			(87,871	)
Other income (expense), net:
Interest income		470			468			316
Interest expense		(7	)		(52	)		(132	)
Other expense, net		207			(312	)		(61	)
Other income (expense), net		670			104			123
(Loss) income before income taxes		(19,254	)		83,057			(87,748	)
Provision for income taxes		(2,375	)		(3,071	)		(1,422	)
Net (loss) income	$	(21,629	)	$	79,986		$	(89,170	)
Net (loss) income per share
Basic	$	(0.42	)	$	1.60		$	(1.84	)
Diluted	$	(0.42	)	$	1.55		$	(1.84	)
Weighted average shares used to compute net (loss) income per share
Basic		51,444			49,963			48,377
Diluted		51,444			51,524			48,377

The accompanying notes are an integral part of these consolidated financial statements.

										Accumulated
							Additional			other						Total
	Common stock						paid-in			comprehensive			Accumulated			stockholders'
	Shares			Amount			capital			(loss) income			deficit			deficit
Balances as of December 31, 2013		47,384		$	46		$	538,967		$	130		$	(617,261	)	$	(78,118	)
Issuance of common stock upon exercise of stock options and vesting of restricted stock		1,658			1			1,112			—			—			1,113
Shares withheld related to net share settlement of restricted stock		(473	)		(1	)		(6,452	)		—			—			(6,453	)
Issuance of common stock in connection with employee stock purchase plan		493			1			5,906			—			—			5,907
Stock-based compensation		—			—			33,811			—			—			33,811
Other comprehensive loss		—			—			—			(909	)					(909	)
Net loss		—			—			—			—			(89,170	)		(89,170	)
Balances as of December 31, 2014		49,062		$	47		$	573,344		$	(779	)	$	(706,431	)	$	(133,819	)
Issuance of common stock upon exercise of stock options and vesting of restricted stock		1,643			4			546			—			—			550
Shares withheld related to net share settlement of restricted stock		(502	)		—			(5,788	)		—			—			(5,788	)
Issuance of common stock in connection with employee stock purchase plan		418			—			3,244			—			—			3,244
Stock-based compensation		—			—			22,802			—			—			22,802
Tax benefit from share-based award activity		—			—			153			—			—			153
Other comprehensive loss		—			—			—			(993	)		—			(993	)
Net income		—			—			—			—			79,986			79,986
Balances as of December 31, 2015		50,621		$	51		$	594,301		$	(1,772	)	$	(626,445	)	$	(33,865	)
Issuance of common stock upon exercise of stock options and vesting of restricted stock		1,610			1			804			—			—			805
Shares withheld related to net share settlement of restricted stock		(450	)		—			(5,925	)		—			—			(5,925	)
Issuance of common stock in connection with employee stock purchase plan		404			—			3,713			—			—			3,713
Stock-based compensation		—			—			25,623			—			—			25,623
Tax benefit from share-based award activity		—			—			83			—			—			83
Other comprehensive loss		—			—			—			(341	)		—			(341	)
Net loss		—			—			—			—			(21,629	)		(21,629	)
Balances as of December 31, 2016		52,185		$	52		$	618,599		$	(2,113	)	$	(648,074	)	$	(31,536	)

The accompanying notes are an integral part of these consolidated financial statements.

	Year Ended December 31,
	2016			2015			2014
Cash flows from operating activities:
Net (loss) income	$	(21,629	)	$	79,986		$	(89,170	)
Adjustments to reconcile net (loss) income to net cash provided by (used for) operating activities:
Deferred taxes		614			(1,492	)		(225	)
Impairment of intangible assets		2,204			—			—
Depreciation and amortization		8,623			7,822			6,467
Excess tax benefit from share-based payment awards		(83	)		(153	)		—
Stock-based compensation		29,809			26,479			33,861
Other non-cash adjustments		886			766			431
Changes in operating assets and liabilities:
Accounts receivable		3,142			7,398			15,554
Inventory		(3,490	)		2,190			(2,271	)
Prepaid expenses and other current assets		2,335			(5,128	)		194
Landlord incentives related to lease		6,788			—			—
Contingent payments related to Detectent acquisition, held in escrow		—			(4,000	)		—
Deferred cost of revenue		14,421			97,286			(56,907	)
Accounts payable		(4,483	)		3,101			(4,120	)
Customer deposits		61			(448	)		321
Deferred revenue		(16,581	)		(208,305	)		84,590
Accrued and other liabilities		(1,855	)		14,185			2,510
Net cash provided by (used for) operating activities		20,762			19,687			(8,765	)
Cash flows from investing activities:
Business acquisition, net of cash acquired		—			(7,098	)		(8,726	)
Proceeds from sales of available-for-sale investments		41,217			15,690			53,450
Proceeds from maturities of available-for-sale investments		10,970			9,250			6,750
Purchases of available-for-sale investments		(61,295	)		(24,180	)		(57,671	)
Purchases of property and equipment		(24,816	)		(5,350	)		(6,073	)
Net cash used for investing activities		(33,924	)		(11,688	)		(12,270	)
Cash flows from financing activities:
Payments on capital lease obligations		(285	)		(1,163	)		(1,550	)
Proceeds from issuance of common stock, net of repurchases		4,519			3,794			7,020
Excess tax benefit from share-based payment awards		83			153			—
Taxes paid related to net share settlement of equity awards		(5,925	)		(5,788	)		(6,453	)
Net cash used for financing activities		(1,608	)		(3,004	)		(983	)
Effect of exchange rate changes on cash and cash equivalents		(111	)		(188	)		(121	)
Net (decrease) increase in cash and cash equivalents		(14,881	)		4,807			(22,139	)
Cash and cash equivalents—beginning of period		65,264			60,457			82,596
Cash and cash equivalents—end of period	$	50,383		$	65,264		$	60,457
Supplemental cash flow information—cash paid for income taxes	$	5,445		$	2,678		$	659
Non-cash investing and financing activities:
Unpaid purchases of property and equipment	$	1,003		$	2,862		$	523
Leasehold improvements funded by lease incentives	$	—		$	—		$	650

The accompanying notes are an integral part of these consolidated financial statements.

1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

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.

The consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes during the reporting period. Estimates are used for revenue and cost recognition, allowance for doubtful accounts receivable, inventory valuation, estimates related to recovery of long-lived assets and goodwill, warranty obligations, restructuring accruals, stock-based compensation, valuation of assets acquired and liabilities assumed in a business combination, classification of current and non-current deferred revenue and deferred cost of revenue, income taxes and deferred income tax assets and associated valuation allowances. These estimates generally involve complex issues and require judgments, involve the analysis of historical and prediction of future trends, can require extended periods of time to resolve and are subject to change from period to period. Actual results may differ materially from management’s estimates.

Cash equivalents consist of highly liquid investments with insignificant interest rate risk and original maturities at the time of purchase of three months or less, and consist of money market funds. Short-term investments consist of high grade investment securities with original maturities at the time of purchase of greater than three months, and are available for use in current operations. We classify all of our cash equivalents and short-term investments as available-for-sale, which are recorded at fair value. Unrealized gains and losses are included in accumulated other comprehensive (loss) income in stockholders’ deficit. Realized gains and losses are included in other income (expense), net. We evaluate our short-term investments for impairment each reporting period. Determining whether a decline in fair value is other-than-temporary requires management judgment based on the specific facts and circumstances of each security. We consider various factors in determining whether to recognize an impairment charge, including the length of time the investment has been in a loss position, the extent to which the fair value has been less than our cost basis, the investment's financial condition, and near-term prospects of the investee. If we determine that the decline in an investment's fair value is other than temporary, the difference is recognized as an impairment loss in our consolidated statements of operations. Amounts are reclassified out of accumulated other comprehensive (loss) income into earnings using the specific identification method.

Inventory is stated at the lower of cost or market. Cost is computed using standard cost, which approximates actual cost on a first-in, first-out basis. We evaluate our ending inventories for excess quantities and obsolescence based on forecasted demand within specific time horizons, technological obsolescence, and an assessment of any inventory that is not of saleable condition. Actual demand may differ from forecasted demand, and such differences may have a material effect on recorded inventory values and operating results.

In addition, we enter into purchase commitments with third-party contract manufacturers to manage lead times and meet product forecasts and with other parties to purchase various key components used in the manufacture of our products. Accruals are established for estimated losses on purchased components for which we believe it is probable that they will not be recoverable in future operations. To the extent that such forecasts are not achieved, commitments and associated accruals may change.

We generally market our products and services directly to customers. We also contract with third-party device manufacturers, which integrate our communications modules into their devices. Our solutions, which include our UtilOS network operating system, SilverLink Control Platform and SilverLink Applications, networking hardware, and communications modules, provides customers with two-way communication from our communications modules to their back office. Our hardware devices include UtilOS embedded software, which functions together with the tangible hardware elements to deliver the tangible products’ essential functionality. Our SilverLink Control Platform and SilverLink Applications of products includes software that is not embedded with the tangible hardware elements, but that is also necessary to deliver the tangible products’ essential network functionality, as well as other application software that provides additional functionality to the network solution. We derive revenue from sales of products, including hardware and software, as well as services, including network design and deployment support, managed services and SaaS, and ongoing customer support. We enter into separate arrangements with third-party device manufacturers to integrate our communications modules with their devices pursuant to our customers’ specifications. While we may receive payment directly from these third-party device manufacturers, the timing of revenue recognition related to communications modules delivered to third-party device manufacturers is ultimately determined based upon acceptance by our customers. Substantially all of our sales of communications modules have been fulfilled through third-party device manufacturers in this manner.

We enter into multiple deliverable arrangements with customers to deploy our networking platform and solutions, which include the delivery of hardware and software, as well as services.

Judgment is required in determining the separate units of accounting, which depends on whether the delivered items have standalone value to customers. When we sell our products and services separately, or when the customer could resell them on a standalone basis, we treat the delivered elements as having standalone value. In our typical customer arrangements, we consider the following to be separate units of accounting: (i) our hardware together with the related embedded software; (ii) our network management software within our SilverLink Control Platform and SilverLink Applications suite that provides the tangible product’s essential network functionality and related hardware for which the network management software is intended to be used; (iii) other application software within our SilverLink Control Platform and SilverLink Applications suite not essential for the customer to obtain functionality of the hardware; and (iv) our service offerings, which include professional services, managed services and SaaS, and ongoing customer support. We determine total arrangement consideration, and exclude amounts that are contingent upon the delivery of additional items or meeting other specified performance conditions, including potential refunds or penalty provisions. We allocate the total arrangement consideration to the deliverables based on our determination of the units of accounting and their relative selling prices. As we have not yet established vendor-specific objective evidence, or VSOE, or identified third-party evidence of fair value for these units of accounting, we use our best estimate of selling price to perform the relative fair value allocation. Judgment is also required in determining how to measure and allocate arrangement consideration among the separate units of accounting. The process for performing an assessment of our best estimate of selling price for our products and services is based on quantitative and qualitative aspects of multiple factors. These factors include market conditions, such as competitive alternatives and pricing practices, as well as company-specific factors, such as standalone sales, nature and size of the customer, contractually stated prices, costs to manufacture products or provide services and profit objectives. In establishing such profit objectives, we consider prices in previous contracts, size of the transaction, and the drivers, if any, that could influence future margins.

The following revenue recognition criteria are applied to the units of accounting in all customer arrangements, as well as those in which orders of communications modules are fulfilled through third-party device manufacturers as described above. We do not recognize revenue for a unit of accounting until all of the following criteria have been met:

Substantially all of our customer arrangements include acceptance provisions that require testing of the network against specific performance criteria. We consider the following factors in our assessment of whether the acceptance provisions are substantive:

From incorporation through December 31, 2014, we deferred revenue for arrangements that contain customer-specific acceptance criteria until we determine whether acceptance was achieved due to our limited experience with customer deployments during that period. We perform an 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 year ended December 31, 2015 in the consolidated statements of operations included revenue of $139.4 million, which otherwise would have been deferred before the change in assessment, and included cost of revenue of $55.9 million, which otherwise would have been recognized in the period before the change in such assessment. This resulted in a $83.5 million increase in net income, a $1.67 increase to basic net income per share, and a $1.62 increase to diluted net income per share during the year ended December 31, 2015.

Once we have satisfied the necessary acceptance provisions, we recognize revenue as follows:

Amounts that are invoiced prior to a transaction meeting all of the above revenue recognition criteria are recorded in deferred revenue until such criteria are satisfied. For all periods presented herein, the amount and timing of revenue and product cost recognition is dependent primarily on our ability to meet substantive customer acceptance criteria. We consider a variety of factors in estimating the timing of customer acceptance, which includes contractual milestones, project schedules, availability of resources, the nature and extent of remaining testing cycles, and other relevant information provided by our project management team. Accordingly,

we expect that the timing of recognition of revenue and related product costs on both a quarterly and annual basis will not be easily predictable. In addition, it is possible that the amount of current deferred revenue and related deferred cost of revenue reflected as of a balance sheet date will be significantly higher or lower than the amount of deferred revenue and related deferred cost of revenue that is ultimately recognized as revenue and cost of revenue within the 12 months following the balance sheet date. We classify deferred revenue and deferred cost of revenue that we expect to recognize during the 12 months following the balance sheet date as current deferred revenue and current deferred cost of revenue on our balance sheet and the remainder as non-current deferred revenue and non-current deferred cost of revenue.

Certain of our customer and third-party device manufacturer contracts include contingency provisions, which impact our revenue recognition as such contingent amounts limit the amount of the total arrangement consideration under multiple deliverable contracts that can be allocated to delivered and accepted products and services. Amounts that are invoiced prior to a transaction meeting all of the revenue recognition criteria, including contingency provisions, are recorded in deferred revenue until such provisions have lapsed. For the years ended December 31, 2016 and 2015, such amounts were $34.3 million and $32.1 million, respectively, related to those arrangements for which we have started recognizing revenue. These contingencies are related to potential penalties for late delivery, liquidated damages related to failure to meet milestones or deliver specified products or services, or credits to be issued upon the failure to meet service level criteria. The amounts that could be paid under these provisions are typically limited and capped at amounts that do not exceed specific thresholds. Accordingly, even in situations where we have received customer acceptance, we limit the revenue recognized for accepted products and services by the amount that could be paid under these provisions. We do not recognize these deferred amounts until the provisions have lapsed. Predicting when such provisions will lapse is subject to significant uncertainty as the timing is dependent on a variety of factors, including the progress and completion of deployments. Related to the contingency provisions described above, $1.9 million and $1.2 million, respectively, were recorded as current deferred revenue and $32.4 million and $30.9 million, respectively, were recorded as non-current revenue as of December 31, 2016 and 2015.

In cases where we sell third-party products and services such as meters, hardware, services, software or software maintenance as part of the overall solution, we evaluate whether we act as principal or agent under the arrangement. The evaluation considers multiple factors, including whether we are the primary obligor under the arrangement with the customer, whether we bear the risk of loss and credit risk associated with the supply of third-party products and services, whether we have the ability to change the product or perform part of the service, and whether we have the ability to control the price charged to our customers for the third-party products and services. Revenue is presented on a gross basis when we conclude that we are the principal under the arrangement with respect to third-party products and services, and revenue is presented on a net basis when we conclude that we are acting as the agent. Substantially all of our revenue related to third-party products and services is recognized on a gross basis as we are generally acting as the principal under our arrangements.

Shipping charges billed to customers were not significant for the years ended December 31, 2016, 2015 and 2014. Shipping charges are included in revenue, and the related shipping costs are included in cost of revenue in the accompanying consolidated statements of operations.

Cost of revenue consists of cost of product and service revenue. Cost of product revenue includes contract manufacturing costs, including raw materials, components and associated freight, and normal yield loss. In addition, cost of product revenue includes compensation, benefits and stock-based compensation provided to our manufacturing personnel, overhead and other direct costs. Product costs are deferred upon shipment and are recognized in the period in which we recognize the related revenue. Period costs, which consist primarily of logistics costs, manufacturing ramp-up costs, expenses for inventory obsolescence, standard warranty costs and lower of cost or market adjustments are recognized in the period in which they are incurred.

Costs of providing services include personnel-related costs, depreciation and amortization, and software hosting costs. Costs of providing services are not deferred and are included in cost of revenue in the period in which they are incurred.

Deferred revenue results from transactions where we have billed the customer for product delivered or services performed but all revenue recognition criteria have not yet been met.

Deferred cost of revenue is recorded for products for which ownership (typically title and risk of loss) has transferred to the customer, but for which criteria for revenue recognition have not been met. We only defer tangible direct costs associated with hardware products delivered. Cost of revenue for providing services is not deferred, but is expensed in the period incurred. Deferred cost of revenue associated with deferred product revenue is recorded at the standard, which approximates actual, inventory cost at the

time of shipment. We evaluate deferred cost of revenue for recoverability based on multiple factors, including whether net revenue less related direct costs will exceed the amount of deferred cost of revenue based on the terms of the overall arrangement. To the extent that deferred cost of revenue is determined to be unrecoverable, we adjust deferred cost of revenue with a charge to product cost of revenue in the current period. In connection with our recoverability assessments, we have not incurred significant impairment charges during the years ended December 31, 2016, 2015 and 2014.

We recognize deferred revenue and associated deferred cost of revenue in the consolidated statements of operations once all revenue recognition criteria have been met.

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

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

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

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

In certain customer arrangements, we have provided extended warranties for periods of up to 15 years following the initial standard warranty period. We recognize revenue associated with extended warranties over the extended warranty period when the extended warranty period commences. Costs associated with providing extended warranties are expensed as incurred during the extended warranty period.

We have arrangements under which substantially all of our manufacturing activity is subcontracted to third-party vendors. Currently we have our manufacturing relationships with Plexus Corp. and Celestica, Inc. We shifted the entire production of our products previously manufactured by Plexus to a combination of Flextronics International Ltd. and Celestica during 2016. These vendors provide or will provide us with a wide range of operational and manufacturing services, including material procurement, final assembly, test quality control, warranty repair, and shipment to our customers and third-party vendors. Contract manufacturing activities are conducted in the United States and Thailand and are undertaken based on management’s product demand forecasts. Our contract manufacturers procure components necessary to assemble the products anticipated by management’s forecast and test the products according to our quality specifications. If the components are unused for specified periods of time, we may incur carrying charges or obsolete material charges for components that our contract manufacturers purchased to build products to meet our product demand forecasts. Our communications modules and other hardware products consist of commodity parts and certain custom components. Our components are generally available from multiple sources or suppliers. However, some components used in our products are purchased from single or limited sources.

Finished goods are reported as inventory until title transfers to the customer. Consigned finished goods inventory that is maintained at customer locations is also reported as inventory until consumption or acceptance of the product by the customer. We account for consigned inventory on a first-in, first-out basis and record lower of cost or market when appropriate.

Our sales are currently concentrated with a small group of customers and third-party device manufacturers principally located in the United States and Australia. In evaluating customer concentration risk, we attribute revenue to our customers, including amounts billed to third-party device manufacturers for our communications modules.

The following table summarizes the percentage of revenue related to our customers’ deployments in excess of 10% of total revenue:

Each of these total revenue percentages includes amounts related to the customers’ deployments that were billed directly to our third-party device manufacturers, as well as direct revenue from the customers. We typically extend credit to our customers and third-party device manufacturers and do not require collateral or other security in support of accounts receivable. We attempt to mitigate the credit risk in our trade receivables through our credit evaluation process and payment terms. We analyze the need to reserve for potential credit losses and record allowances for doubtful accounts when necessary. To date, we have not had any significant write-offs of uncollectible accounts receivable, and there was an insignificant allowance for doubtful accounts as of December 31, 2016 and 2015.

The following table summarizes the percentage of accounts receivable from customers and third-party device manufacturers in excess of 10% of accounts receivable:

We expense advertising costs as incurred. Advertising costs were $2.6 million, $1.9 million and $2.2 million for each of the years ended December 31, 2016, 2015 and 2014.

Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the following estimated useful lives:

Under our current practice of developing new products, technological feasibility of the underlying software is not established until substantially all product development and testing is complete, which generally includes the development of a working model. Our products are released within a short period of time after achieving technological feasibility. As a result, costs subsequent to achieving technological feasibility have not been significant, and all software development costs generally have been expensed as incurred.

We capitalize certain costs for our internal-use software incurred during the application development stage. Costs related to preliminary project activities and post implementation activities were expensed as incurred. Internal-use software is amortized on a straight line basis over its estimated useful life. The estimated useful life is determined based on management’s judgment on how long the core technology and functionality serves the internal needs. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. To date, amortization expense, including amounts written-off related to capitalized costs have been insignificant. There were insignificant capitalized costs included in property and equipment, net of amortization and write-off in the consolidated balance sheets as of December 31, 2016 and 2015.

We evaluate long-lived assets and amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable in accordance with Financial Accounting Standards Board, or FASB, ASC Topic 360, Property, Plant and Equipment. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired (i.e., if the sum of its estimated future undiscounted cash flows used to test for recoverability is less than its carrying value), the impairment loss to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Intangible assets with definite lives are being amortized over the estimated useful lives of the related assets. Each period, we evaluate the estimated remaining useful life of purchased intangible assets and whether events or changes in circumstances warrant a revision to the remaining period of amortization. We perform an intangible assets impairment test on an annual basis. During the year ended December 31, 2016, we recorded an impairment charge of $2.2 million related to intangible assets in our consolidated statements of operations. For the years ended December 31, 2015 and 2014, no impairment losses were recorded.

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. Goodwill is not subject to amortization but is subject to annual assessment, at a minimum, for impairment in accordance with ASC Topic 350, Intangibles — Goodwill and Other. We evaluate goodwill, at a minimum, on an annual basis and whenever events and changes in circumstances indicate that the carrying amount of an asset may not be recoverable. As we are organized in one operating segment which also represents a reporting unit, impairment of goodwill is tested at the reporting unit level. We first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, it is determined it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we perform the two-step impairment test to measure the amount of the impairment loss, if any. For the years ended December 31, 2016, 2015 and 2014, no goodwill impairment loss was recorded.

Our corporate bonus incentive plan is funded by a combination of cash and restricted stock units, at management’s discretion. We accrue and record the related corporate bonus amounts payable, both in cash and restricted stock units, under this plan in the period in which it is earned. The Compensation Committee may make incentive awards based on such terms, conditions and criteria as it considers appropriate. Stock awards issued in connection with this plan are generally fully vested at the time of grant.

We measure and recognize compensation expense for all stock-based awards made to employees and directors, including stock options, restricted stock, restricted stock units, performance stock units, and employee stock purchase plan, based on estimated fair

values. The fair values of stock options and shares pursuant to our 2012 Employee Stock Purchase Plan, or ESPP, are estimated at the date of grant using the Black-Scholes-Merton option pricing model, which includes assumptions for the dividend yield, expected volatility, risk-free interest rate, and expected life. The fair values of restricted stock and restricted stock units are determined based upon the fair value of the underlying common stock at the date of grant. The fair values of the market based performance stock units are estimated at the date of grant using a Monte-Carlo simulation. We expense stock-based compensation, adjusted for estimated forfeitures, using the straight-line method over the vesting term of all awards except for performance stock unit awards, which are expensed using the accelerated attribution method. Our excess tax benefits cannot be credited to stockholders’ equity until the deduction reduces cash taxes payable; accordingly, we realized $0.1 million, $0.2 million, and $0.1 million in excess tax benefits during fiscal 2016, 2015 and 2014, respectively. The amount of capitalized stock-based employee compensation cost as of December 31, 2016, 2015 and 2014 was insignificant.

We account for income taxes in accordance with ASC Topic 740, Income Taxes, which requires the asset and liability approach for financial accounting and reporting of income taxes. Deferred income taxes are recorded for the expected tax consequences of temporary differences between the tax bases of assets and liabilities for financial reporting purposes and amounts recognized for income tax purposes. The carrying value of net deferred tax assets reflects that we have been unable to generate sufficient taxable income in certain tax jurisdictions. We record a valuation allowance to reduce our deferred tax assets to the amount of future tax benefit that we believe is more likely than not to be realized. The deferred tax assets are still available for us to use in the future to offset taxable income, which would result in the recognition of a tax benefit and a reduction in our effective tax rate. Actual operating results and the underlying amount and category of income in future years could render our current assumptions, judgments and estimates of the realizability of deferred tax assets inaccurate, which could have a material impact on our financial position or results of operations.

We follow a two-step approach to recognizing and measuring tax benefits associated with uncertain tax positions taken or expected to be taken in a tax return. The first step is to determine if, based on the technical merits, it is more likely than not that the tax position will be sustained upon examination by a taxing authority, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement with a taxing authority. We recognize any interest and penalties related to uncertain tax positions in the provision for income taxes line of our consolidated statements of operations. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheets.

We translate the assets and liabilities of our non-U.S. dollar functional currency subsidiaries into U.S. dollars using exchange rates in effect at the end of each period. Revenue and expenses for these subsidiaries are translated using rates that approximate those in effect during the period. Gains and losses from these translations are recognized in foreign currency translation included in accumulated other comprehensive income (loss) in the consolidated statement of stockholders’ deficit. Our subsidiaries that use the U.S dollar as their functional currency remeasure monetary assets and liabilities at exchange rates in effect at the end of each period, and inventories, property and nonmonetary assets and liabilities at historical rates.

In January 2017, the FASB issued Accounting Standards Update, or ASU, No. 2017-04, Intangibles-Goodwill and Other (Topic 350), 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 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 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 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 are currently evaluating the effect that this new guidance will have on our financial statements and related disclosures.

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. The guidance becomes effective for 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 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:

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.

Basic net (loss) income per share is computed by dividing the net (loss) income by the weighted-average number of shares of common stock outstanding during the period. Diluted net (loss) income per share is computed by dividing the net (loss) income by the weighted-average number of shares of common stock outstanding plus dilutive potential shares of common stock outstanding during the period. Dilutive potential shares of common stock consist of common shares issuable upon exercise of stock options, issuances of shares pursuant to the ESPP, vesting of restricted stock units, or RSUs, and contingently issuable performance stock units, or PSUs, to the extent dilutive. We include the common shares underlying PSUs in the calculation of diluted net (loss) income per share when they become contingently issuable and exclude such shares when they are not contingently issuable. Certain potential shares of common stock were excluded from the computation of diluted net (loss) income per share because their effect would be anti-dilutive. As we have incurred losses during the years ended December 31, 2016 and 2014, basic and diluted net loss per share was 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) income per share (in thousands, except per share data):

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

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

Cash, cash equivalents and short-term investments consisted of the following as of December 31, 2015 (in thousands):

	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
Current assets:
Cash	$	59,263	$	—	$	—		$	59,263
Cash equivalents:
Money market mutual funds		6,001		—		—			6,001
Total cash and cash equivalents		65,264		—		—			65,264
Short-term fixed income securities:
U.S. government and agency obligations		38,396		4		(110	)		38,290
U.S. and foreign corporate debt securities		18,945		2		(52	)		18,895
Foreign governments and multi-national agency obligations		2,000		—		(4	)		1,996
Total short-term investments		59,341		6		(166	)		59,181
Total cash, cash equivalents and short-term investments	$	124,605	$	6	$	(166	)	$	124,445

As of December 31, 2016, approximately 83% and 9% of our cash, cash equivalents and short-term investments were held with two financial institutions. As of December 31, 2015, approximately 84% and 11% of our cash, cash equivalents and short-term investments were held with two financial institutions.

The contractual maturities of cash equivalents and short-term investments held at December 31, 2016 and 2015 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 December 31, 2016 and 2015, aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in thousands):

As of December 31, 2016 and 2015, 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 December 31, 2016, we anticipate that we will recover the entire amortized cost basis of such available-for-sale debt securities and have determined that no other-than-temporary impairments associated with credit losses were required to be recognized during the year ended December 31, 2016 and 2015. There were insignificant gross realized gains or losses from available-for-sale securities during the years ended December 31, 2016 and 2015.

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 year ended December 31, 2016 and 2015.

As of December 31, 2016, financial assets recorded at fair value on a recurring basis were determined using the following inputs (in thousands):

	Fair Value Measurement Using
	Quoted Prices in		Significant
	Active Markets for		Other		Significant
	Identical		Observable		Unobservable
	Instruments		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		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 December 31, 2015, financial assets recorded at fair value on a recurring basis were determined using the following inputs (in thousands):

	Fair Value Measurement Using
	Quoted Prices in		Significant
	Active Markets for		Other		Significant
	Identical		Observable		Unobservable
	Instruments		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Cash equivalents:
Money market mutual funds	$	6,001	$	—	$	—	$	6,001
Total cash equivalents		6,001		—		—		6,001
Short-term investments:
U.S. government and agency obligations		—		38,290		—		38,290
U.S. and foreign corporate debt securities		—		18,895		—		18,895
Foreign governments and multi-national agency obligations		—		1,996		—		1,996
Total short-term investments		—		59,181		—		59,181
Total assets measured at fair value	$	6,001	$	59,181	$	—	$	65,182

As of December 31, 2016 and 2015, there were no liabilities that are measured and recorded at fair value on a recurring basis.

As of December 31, 2016, we had no liabilities measured at fair value on a nonrecurring basis.

Our intangible assets are measured at fair value on a nonrecurring basis, if impairment is indicated. During the year ended December 31, 2016, intangible assets were measured at fair value resulting in an impairment charge of $2.2 million, which was recorded in the consolidated statements of operations. We measured the fair value of the assets primarily using discounted cash flow projections. The discounted cash flow projections require estimates for expected performance such as revenue, gross margin and operating expenses, in order to discount the sum of future independent cash flows using discount rates. Acquired intangible assets are classified as Level 3 assets, due to the absence of quoted market prices. See Note 6, Goodwill and Intangibles Assets, for further information.

As of December 31, 2016, there were no assets and liabilities that are measured and recorded at fair value on a nonrecurring basis except for assets and liabilities valued on the date of acquisition for business acquired during 2015.

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

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 of cash consideration. The acquisition of Detectent was accounted for under the acquisition method of accounting. 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. We recorded goodwill of $4.5 million and intangible assets of $3.8 million, which consisted primarily of developed technology, customer relationships, non-compete agreements and order backlog, at the time of acquisition. The goodwill arising from the Detectent acquisition was largely attributable to the synergies expected to be realized and was not deductible for U.S. federal income tax purposes.

In addition, 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 are being recorded as compensation expense over the retention period. During the years ended December 31, 2016 and 2015, we recorded $2.1 million and $1.9 million, respectively, in compensation expense in the consolidated statement of operations. During the year ended December 31, 2016, we released $1.0 million from the escrow account in connection with the satisfaction of the retention terms of the acquisition agreement. We released the remaining $3.0 million from the escrow account in February 2017.

The following table presents goodwill as of December 31, 2016 and 2015 and changes in the carrying amount of goodwill (in thousands):

We test our goodwill annually for impairment and on an interim basis whenever events and changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We operate in one reportable segment and are organized as one reporting unit. We performed our annual impairment test for all reporting units on August 1, 2016, and concluded that there was no impairment to our goodwill during the year ended December 31, 2016.

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

		As of December 31, 2016								As of December 31, 2015
	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	$	2,701	$	882	$	1,282	$	4,865	$	2,180	$	—	$	2,685
Customer relationships	4-7 years		3,640		1,554		1,322		764		3,640		973		—		2,667
Trade name	6 years		369		182		—		187		369		103		—		266
Total		$	8,874	$	4,437	$	2,204	$	2,233	$	8,874	$	3,256	$	—	$	5,618

During the year ended December 31, 2015, we recorded intangible assets of $3.8 million in connection with our acquisition of Detectent.

Intangible assets subject to amortization are amortized over their useful lives are shown in the table above. We test our intangible assets whenever events and changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During the year ended December 31, 2016, we determined that there were indicators of impairment for intangible assets which were acquired as part of our acquisition of SLV. These resulted from 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 SaaS billings. As a result, the impairment analysis for these intangible assets resulted in an impairment charge to operating expense of $2.2 million, which was recorded in our consolidated statements of operations for the year ended December 31, 2016. We evaluated intangible assets for impairment as of December 31, 2015 and concluded that no impairment existed during the year ended December 31, 2015.

The following table illustrates the amortization expense included in the consolidated statements of operations for the years ended December 31, 2016, 2015 and 2014 (in thousands):

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

Our restated certificate of incorporation and amended and restated bylaws became effective upon the closing date of our initial public offering, or IPO. Our restated certificate of incorporation: (a) eliminated the references to the terms of our existing series of preferred stock, which converted to common stock in connection with the IPO; (b) increased the authorized number of shares of common stock to 1,000,000,000 shares; (c) authorized 10,000,000 shares of undesignated preferred stock; (d) provided that holders of common stock will not be entitled to vote on amendments to the restated certificate that relate solely to the terms of any preferred stock designated by our Board of Directors if the holders of such preferred stock are entitled to vote on such amendment; (e) provided that our Board of Directors are classified into three classes of directors; (f) provided that at least two-thirds of the voting power of all of the then-outstanding shares of our capital stock is required to amend the bylaws; (g) provided that stockholders cannot call a special meeting of stockholders, act by written consent without a meeting, fill vacancies in the Board of Directors, remove a director other than for cause, or change the authorized number of directors; and (h) included certain other provisions customary for public companies.

Our Board of Directors adopted the 2012 Equity Incentive Plan, or 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 future issuance. In addition, the number of shares of our common stock available for grant and issuance shall be increased on January 1 of each calendar year during the term of the Plan by the lesser of (i) four percent (4%) of the number of shares of our common stock 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, restricted stock units, and performance 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 on the 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. RSUs generally vest between two to four years. PSUs generally vest over three years.

Our Board of Directors adopted the 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 our common stock reserved for issuance under the ESPP shall be increased automatically by the number of shares equal to 1% of the total number of outstanding shares of our common 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 December 31, 2016 and 2015, there were 5.9 million and 4.9 million shares, respectively, of common stock reserved for future grants under our 2012 ESPP and our 2012 Plan.

On July 6, 2016, we entered into an employment agreement with Aysegul Ildeniz as our Chief Operating Officer, or COO. In connection with her employment, we granted Ms. Ildeniz a stock option to purchase 120,000 shares of our common stock, and RSUs that may be settled for 80,000 shares of our common stock, as inducement grants made outside of the 2012 Plan in reliance upon NYSE Rule 303A.08. The stock option has an exercise price equal to the closing market value of our common stock on the date of grant, and vests (i) with respect to 25% of the underlying shares on the one-year anniversary of the date of grant, and (ii) with respect to an additional 1/48th of the underlying shares each month thereafter, until such time as the option is fully vested and exercisable. The RSUs vest (i) with respect to 25% of the shares on the one-year anniversary of the date of grant, and (ii) with respect to an additional 1/16th of the shares on each three-month anniversary thereafter, until such time as the RSUs are fully vested.

On July 28, 2015, we entered into an employment agreement with Michael Bell as our President and Chief Executive Officer, or CEO. In connection with his employment, we granted Mr. Bell a stock option to purchase 250,000 shares of our common stock, RSUs that may be settled for 125,000 shares of our common stock, and PSUs that may be settled for 125,000 shares of our common stock, as inducement grants made outside of the 2012 Plan in reliance upon NYSE Rule 303A.08. The stock option grant has an exercise price equal to the closing market value of the our common stock on the date of grant, and vests (i) with respect to 25% of the underlying shares on the one-year anniversary of his first day of employment with us, and (ii) with respect to an additional 1/48th of the underlying shares each month thereafter, until such time as the option is fully vested and exercisable. The RSUs vest (i) with respect to 25% of the shares on the one-year anniversary of the date of grant, and (ii) with respect to an additional 1/16th of the shares on each three-month anniversary thereafter, until such time as all of the RSUs are fully vested. The PSUs will become eligible to vest when the average closing price during the 45 consecutive trading days reaches the share price thresholds specified in his grant agreement at any time before the three-year anniversary of the grant date.

In 2015, we granted to our current CEO, former CEO, former Chief Financial Officer, or CFO, and other executive officers PSUs to acquire up to a certain maximum number of 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 such individual’s continued service to us as a director, officer, employee or consultant. The PSUs will become eligible to vest when the average closing price during the 45 consecutive trading days reaches the share price thresholds specified in such individual’s grant at any time before the three-year anniversary of the grant date. We determined the value of these PSUs using a Monte-Carlo simulation. The grant date fair value of these PSUs are being recognized over the requisite service period using the accelerated method.

Of the total stock-based compensation, we recorded $9.6 million, $5.6 million, and $1.9 million, respectively as stock-based compensation related to our corporate bonus incentive plan during the years ended December 31, 2016, 2015 and 2014. As of December 31, 2016 and 2015, stock-based bonus of $9.8 million and $5.8 million, respectively, were recorded under accrued liabilities in the consolidated balance sheets in connection with our corporate bonus incentive plan.

We issue new common shares upon exercise of stock options. The following table summarizes our stock option activity and related information as follows (in thousands, except per share data):

	Options Outstanding
				Weighted		Weighted
				Average		Average
				Exercise		Remaining		Aggregate
	Number of			Price per		Contractual		Intrinsic
	Shares			Share		Term (years)		Value
Balance at December 31, 2013		4,726		$	11.88
Options granted		732			14.67
Options exercised		(378	)		2.94
Options cancelled or expired		(555	)		17.57
Balance at December 31, 2014		4,525		$	12.38
Options granted		669			10.36
Options exercised		(234	)		2.38
Options cancelled or expired		(528	)		17.52
Balance at December 31, 2015		4,432		$	11.99
Options granted		540			13.35
Options exercised		(294	)		2.73
Options cancelled or expired		(670	)		15.77
Balance at December 31, 2016		4,008		$	12.22		5.40	$	12,174
As of December 31, 2016:
Options vested and expected to vest		3,945		$	12.20		5.35	$	12,142
Options exercisable		2,974		$	11.85		4.30	$	11,284

The aggregate intrinsic value disclosed above represents the total intrinsic value (the difference between the fair value of our common stock as of December 31, 2016 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 December 31, 2016. This amount is subject to change based on changes to the fair value of our common stock. During the years ended December 31, 2016, 2015 and 2014, the total cash received from the exercise of stock options was $0.8 million, $0.6 million, and $1.1 million, net of repurchases, respectively, and the total intrinsic value of stock options exercised was $3.1 million, $2.1 million, and $3.6 million, respectively.

The following table summarizes our restricted stock units activity and related information as follows (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, 2013		2,757		$	19.14
Restricted stock units granted		1,218			10.72
Restricted stock units vested		(1,280	)		18.77
Restricted stock units cancelled		(497	)		17.50
Balance at December 31, 2014		2,198		$	15.06
Restricted stock units granted		1,713			12.67
Performance restricted stock units granted		995			6.85
Restricted stock units vested		(1,407	)		15.32
Restricted stock units cancelled		(413	)		14.00
Balance at December 31, 2015		3,086		$	11.11
Restricted stock units granted		2,102			13.12
Restricted stock units vested		(1,316	)		12.97
Restricted stock units cancelled		(241	)		13.51
Performance restricted stock units cancelled		(100	)		7.42
Balance at December 31, 2016		3,531		$	11.55		1.40	$	46,987

The fair values of restricted stock units are determined based upon the fair value of the underlying common stock at the date of grant. The total fair value on the respective vesting dates of restricted stock units during the years ended December 31, 2016, 2015 and 2014 was $17.3 million, $16.5 million and $17.3 million, respectively.

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 and ESPP is determined using the Black-Scholes-Merton option pricing model. The fair value of performance stock awards is determined using a Monte-Carlo simulation. 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 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.

The following table summarizes the assumptions relating to our stock options, ESPP and market-based PSUs:

	Year Ended December 31,
	2016		2015		2014
Stock options⁽¹⁾
Expected volatility	60 – 61%		59 – 66%		43 – 47%
Expected dividends	—%		—%		—%
Expected life in years	6.08		5.85 – 6.08		6.08
Risk-free interest rate	1.21 – 1.36%		1.54 – 1.78%		1.81 – 1.98%
Weighted average grant date fair value per share	$	7.25	$	5.82	$	6.60

ESPP⁽¹⁾
Expected volatility	49 – 55%		33 – 62%		33 – 36%
Expected dividends	—%		—%		—%
Expected life in years	< 1 year		< 1 year		< 1 year
Risk-free interest rate	0.24 – 0.46%		0.05 – 0.24%		0.05 – 0.08%

Market-based PSUs⁽²⁾
Expected volatility		—	60 – 65%			—
Expected dividends		—	—%			—
Risk-free interest rate		—	1.02 – 1.22%			—
Weighted average fair value per share		—	6.85			—


(1) The Black-Scholes-Merton option-pricing model is utilized to estimate the fair value of stock options and ESPP.
(2) The fair value market-based PSUs utilize the Monte Carlo simulation option pricing model. We amortize the fair value of these awards using the accelerated attribution method. Provided that the derived service is rendered, the total fair value of the market-based PSUs at the date of grant is recognized as compensation expense even if the market condition is not achieved. However, the number of shares that ultimately vest can vary significantly with the performance of the specified market criteria.

The following table presents unrecognized compensation cost, adjusted for estimated forfeitures, recognized over a weighted-average period related to unvested stock options, ESPP, RSUs and PSUs as of December 31, 2016 (in millions):

The components of (loss) income before income taxes are as follows (in thousands):

	Year Ended December 31,
	2016			2015			2014
Current:
United States federal	$	—		$	—		$	—
State		(1,068	)		(4,488	)		(1,191	)
Foreign		(309	)		(192	)		(613	)
Total current provision for income taxes		(1,377	)		(4,680	)		(1,804	)
Deferred:
United States federal		—			1,091			—
State		—			37			—
Foreign		(998	)		481			382
Total deferred (provision) benefit for income taxes		(998	)		1,609			382
Provision for income taxes	$	(2,375	)	$	(3,071	)	$	(1,422	)

The provision for income taxes differs from the amount computed by applying the federal statutory income tax rate of 35% to loss before income taxes as follows (in thousands):

Excess tax benefits associated with stock option exercises and other equity awards are credited to stockholders' deficit. The income tax benefits resulting from stock awards that were credited to stockholders' deficit were $0.1 million and $0.2 million for the years ended December 31, 2016 and 2015, respectively.

Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of our deferred tax assets and liabilities are as follows (in thousands):

Our deferred tax asset valuation allowance decreased by $11.1 million and $43.6 million in 2016 and 2015, respectively, which was primarily due to the utilization of U.S. deferred tax assets from net operating loss carryforwards. We have not yet been able to establish a sustained level of profitability in the United States or other sufficient significant positive evidence to conclude that our U.S. deferred tax assets are more likely than not to be realized. Therefore, we continue to maintain a valuation allowance against our U.S. deferred tax assets, our most significant jurisdiction where we maintain a full valuation allowance.

As of December 31, 2016, we had federal and state net operating loss carryforwards of $140.2 million and $265.1 million, respectively. If not utilized, the federal and state net operating loss carryforwards will begin to expire in 2028 and 2018, respectively. In addition, we had federal and California research tax credit carryforwards of $11.9 million and $15.2 million, respectively. The federal credit carryforwards will begin to expire in 2024, and the California credit carryforwards have no expiration date.

Under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, our ability to utilize net operating loss carryforwards or other tax attributes, such as research tax credits, in any taxable year may be limited if we experience an “ownership change.” A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws. It is possible that an ownership change, or any future ownership change, could have a material effect on the use of our net operating loss carryforwards or other tax attributes, which could adversely affect our operating results.

Below summarizes the change in deferred tax assets valuation allowance (in thousands):

Undistributed earnings of our foreign subsidiaries amounted to $3.4 million as of December 31, 2016. Those earnings are considered to be indefinitely reinvested and, accordingly, no U.S. income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes. The income tax liability that might be incurred if these earnings were to be distributed is not material to our financial statements because of our full valuation allowance position.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in thousands):

As of December 31, 2016, $0.2 million of the gross unrecognized tax benefits have been recorded as other liabilities. The remainder is reflected as a reduction of deferred tax assets. Up to $11.6 million and $9.8 million of unrecognized tax benefits at December 31, 2016 and 2015, respectively, would reduce our effective income tax rate in future periods if recognized. However, one or more of these unrecognized tax benefits relate to deferred tax assets that could be subject to a valuation allowance if and when recognized in a future period, which could impact the timing and amount of any related effective tax rate benefit.

We recognize interest and penalties related to uncertain tax positions in income tax expense. To the extent accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction of the provision for income taxes in the period that such determination is made. Due to our net operating loss position, we have not recorded interest and penalties related to uncertain tax positions as of December 31, 2016.

We file income tax returns in the United States, including various states, and certain foreign jurisdictions. The tax years 2002 to 2016 remain open to examination by the major taxing jurisdictions in which we are subject to tax. As of December 31, 2016, we were not under examination by the Internal Revenue Service or any state or foreign tax jurisdiction.

We operate in one reportable segment. 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):

The following table details the activity in deferred cost of revenue (in thousands):

Inventory included consigned inventory totaling $1.4 million and $2.0 million as of December 31, 2016 and 2015, respectively.

Depreciation and amortization expense associated with property and equipment, including amounts for assets held under capital leases, was $7.4 million, $6.1 million, and $5.9 million for the years ended December 31, 2016, 2015 and 2014, respectively. The increase in leasehold improvements in 2016 was primarily related to our new headquarters in San Jose, which are being amortized over the initial 10 year and 6 month lease term.

Machinery and equipment included $0 million and $4.8 million of assets held under capital leases at December 31, 2016 and 2015, respectively, with corresponding accumulated amortization of $0 million and $4.4 million, respectively. Software included $0 million and $3.5 million of assets held under capital leases at December 31, 2016 and 2015, respectively, with corresponding accumulated amortization of $0 and $3.3 million, respectively. We had no remaining capital leases as of December 31, 2016.

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

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

				Unrealized
	Foreign Currency			Losses on Available
	Adjustment			for Sale Securities			Total
Balance as of December 31, 2014	$	(724	)	$	(55	)	$	(779	)
Other comprehensive loss before reclassification		(837	)		(110	)		(947	)
Amounts reclassified from AOCI		—			(46	)		(46	)
Other comprehensive loss		(837	)		(156	)		(993	)
Balance as of December 31, 2015	$	(1,561	)	$	(211	)	$	(1,772	)
Other comprehensive loss before reclassification		(176	)		(125	)		(301	)
Amounts reclassified from AOCI		—			(40	)		(40	)
Other comprehensive loss		(176	)		(165	)		(341	)
Balance as of December 31, 2016	$	(1,737	)	$	(376	)	$	(2,113	)

We had available a line of credit with a bank, which provided for advances and the issuance of letters of credit of up to $50 million. Loans under the credit agreement bear interest at the bank’s prime rate plus a margin. We terminated this credit agreement in December 2015.

On December 18, 2015, we entered into a senior secured credit facilities credit agreement, or Credit Facility, with Silicon Valley Bank, or SVB, and HSBC Bank USA, National Association, or HSBC. The Credit Facility provides for a revolving loan facility to us 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. The revolving loans and any swingline loans made pursuant to the Credit Facility bear interest at a rate per annum equal to (i) the higher of (a) the prime rate in effect on such day, and (b) the federal funds effective rate plus 0.5%, but in any case at a minimum rate of 0.0% per annum, plus (ii) 0.75%, and mature in December 2017. Our obligation under the Credit Facility is secured by a security interest in substantially all our assets (excluding intellectual property assets) and any domestic subsidiaries, subject to certain customary exceptions.

As of December 31, 2016, there were no borrowings outstanding under the Credit Facility; however, $17.2 million of letters of credit were outstanding as discussed under Note 15, Commitments and Contingencies. As of December 31, 2016, the remaining available balance of $57.8 million under the Credit Facility is available 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.

We also have the option to prepay our borrowings under the Credit Facility without penalty prior to maturity. The Credit Facility contains customary representations and warranties and affirmative and negative covenants. Among other negative covenants, we must comply with certain financial covenants, including maintaining a minimum adjusted quick ratio or in certain events a minimum consolidated adjusted EBITDA, as such terms are defined and set forth in the Credit Facility. The terms of our Credit Facility currently restrict our ability to pay dividends. The Credit Facility contains customary events of default, including, among others: non-payment of principal, interest or other amounts when due; inaccuracy of representations and warranties; violation of covenants; cross-defaults with certain other indebtedness; certain undischarged judgments; bankruptcy, insolvency or inability to pay debts; and a change of control of the Company. Upon the occurrence and during the continuance of an event of default, the lenders may terminate the commitments under the Credit Facility and declare the loans and all other obligations under the Credit Facility immediately due and payable. As of December 31, 2016, we were in compliance with the financial covenants under the Credit Facility.

In 2003, our Board of Directors approved the adoption of a savings plan under Section 401(k) of the Code. The plan covers eligible employees who elect to participate. We are allowed to make discretionary profit sharing and qualified non-elective contributions as defined by the Plan and as approved by the Board of Directors. We have not historically matched eligible participants’ 401(k) contributions. No discretionary profit sharing contributions have been made to date.

During 2014, we initiated a restructuring plan, or the 2014 Restructuring Plan, to refocus our strategy, optimize our structure, and improve operational efficiencies. The 2014 Restructuring Plan included a worldwide workforce reduction and was completed during the first quarter of 2016. We recorded $39,000, $1.7 million and $1.8 million in severance costs as restructuring charges during the years ended December 31, 2016, 2015 and 2014, respectively, in our consolidated statement of operations.

Our primary operating lease commitment at December 31, 2016, related to our headquarters in San Jose, California, which 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 $7.6 million, $5.3 million and $5.3 million for the years ended December 31, 2016, 2015 and 2014, respectively.

In 2015, we entered into two substantially similar lease agreements pursuant to which we leased an aggregate of approximately 191,800 square feet of space, or the Premises, located in the buildings at 210 West Tasman Drive and 230 West Tasman Drive, San Jose, California 95134. We use the Premises as our worldwide corporate headquarters. The initial lease term shall be for 10 years and 6 months, and commenced on April 1, 2016. We have the option to extend the initial lease term for up to two consecutive terms, each for an additional five year period. We received possession of approximately 143,900 square feet of the Premises on January 1, 2016, and the remaining approximately 47,900 square feet on January 1, 2017. The base annual rent ranges from $1.0 million to $7.1 million during the initial lease term, for an aggregate base rent obligation of $63.4 million. We are also responsible for certain other costs under the lease agreements, including certain tenant improvement costs, operating expenses, taxes, assessments, insurance, and utilities, net of an allowance for tenant improvements by the landlord.

As of December 31, 2016, the future minimum commitments under our operating leases were as follows (in thousands):

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, 5,481,546, and 5,592,491, or the EON Patents, by certain networking technology and services that we and the other defendants provide. Other defendants included Landis+Gyr AG (which was acquired by Toshiba Corporation), 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. Following post-trial motions by both parties, 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 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 stated in Note 12, Borrowings. 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 cross appeal in January 2015, which it subsequently dropped in June 2015. We filed our opening appellate brief in March 2015, and EON filed its principal brief in May 2015. We filed our reply brief in July 2015, and the hearing took place in November 2015, and in February 2016 the appellate court issued a ruling reversing the District Court’s prior decision and judgment against us, and holding that no reasonable jury could find we infringed the EON patents. In April 2016, EON filed a petition for a rehearing en banc, which the appellate court denied in May 2016. In June 2016, the appellate court notified the District Court that the prior judgment in favor of EON was vacated and that judgment was in our favor, and the District Court released our appellate bond obligation. In July 2016 the District Court awarded us $0.6 million in costs, which EON appealed in August 2016. EON also filed a petition for certiorari to the Supreme Court in October 2016, seeking review of the appellate court’s reversal of the District Court’s original judgment against us, which the Supreme Court denied in January 2017. In February 2017 we agreed with EON that it would pay us $0.5 million in settlement of the cost award, which we received in March 2017.

Atlas/ComEd, Atlas/PG&E, and Atlas/FP&L Patent Litigation. In November 2015, Atlas IP, LLC filed separate suits against our customers Commonwealth Edison Company, or ComEd, and PG&E alleging infringement of United States Patent No. 5,371,734 by communications between smart meters and access points over a neighborhood area network using wireless communication modules and networking equipment supplied by us. In May 2016, Atlas filed a similar suit against our customer Florida Power & Light Company, or FP&L. We have agreed to assume the defense in each of these suits.

PG&E. The suit against PG&E was filed in the Northern District of California. We filed a motion to dismiss the PG&E complaint, which the court granted in March 2016. Atlas IP filed an amended complaint against PG&E, which the court dismissed in June 2016, determining that Atlas IP is collaterally estopped from re-litigating the sufficiency of its complaint as the sufficiency of Atlas IP’s complaint was already decided against Atlas IP by the court in the ComEd suit.

We believe that we have meritorious defenses to Atlas IP’s allegations in each of these matters, and intend to continue vigorously defending the actions.

As of December 31, 2016, 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.

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 December 31, 2016 and 2015, we had a total of $17.2 million and $22.7 million, respectively, of standby letters of credit issued under the Credit Facility with a financial institution. Of these totals, $4.6 million (AUD$6.2 million) and $4.4 million (AUD$6.2 million) were denominated in Australian dollars as of December 31, 2016 and 2015, respectively, and $0 and $13.0 million related to the EON Patent Litigation described above as of December 31, 2016 and 2015, respectively. 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 December 31, 2016 and 2015, we had an unsecured surety bond of $20.3 million. 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.

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 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.

Legal. EON Patent Litigation. In February 2017 we agreed with EON that it would pay us $0.5 million in settlement of the cost award, which we received in March 2017.

Restructuring. On March 10, 2017, we approved a restructuring plan designed to drive progress towards our long-term 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 tables set forth selected unaudited quarterly statements of operations data for each of the last eight quarters in the years ended December 31, 2016 and 2015 (in thousands, except per share data).

	Three Months Ended
	December 31,			September 30,			June 30,			March 31,			December 31,			September 30,			June 30,			March 31,
	2016			2016			2016			2016			2015			2015			2015			2015
Revenue	$	66,250		$	74,186		$	121,952		$	48,620		$	199,247		$	69,505		$	77,167		$	143,640
Cost of revenue		37,833			45,944			57,409			31,623			97,902			36,518			57,211			72,185
Gross profit		28,417			28,242			64,543			16,997			101,345			32,987			19,956			71,455
Operating expenses		41,948			42,461			37,794			35,920			35,600			33,381			36,495			37,314
Operating (loss) income		(13,531	)		(14,219	)		26,749			(18,923	)		65,745			(394	)		(16,539	)		34,141
Other (expense) income , net		(217	)		113			333			441			(159	)		(99	)		74			288
(Loss) income before income taxes		(13,748	)		(14,106	)		27,082			(18,482	)		65,586			(493	)		(16,465	)		34,429
(Provision) benefit for income taxes		(239	)		(1,143	)		(961	)		(32	)		(3,708	)		(129	)		290			476
Net (loss) income	$	(13,987	)	$	(15,249	)	$	26,121		$	(18,514	)	$	61,878		$	(622	)	$	(16,175	)	$	34,905
Net (loss) income per share
Basic	$	(0.27	)	$	(0.29	)	$	0.51		$	(0.36	)	$	1.23		$	(0.01	)	$	(0.32	)	$	0.71
Diluted	$	(0.27	)	$	(0.29	)	$	0.50		$	(0.36	)	$	1.19		$	(0.01	)	$	(0.32	)	$	0.69
Weighted average shares used to compute net (loss) income per share
Basic	$	52,039		$	51,743		$	51,224		$	50,760		$	50,481		$	50,188		$	49,862		$	49,306
Diluted	$	52,039		$	51,743		$	52,766		$	50,760		$	52,167		$	50,188		$	49,862		$	50,899

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Our management, with the participation of our CEO and CFO, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2016. Based on the evaluation of our disclosure controls and procedures as of December 31, 2016, our CEO and CFO concluded that, as of such date, our disclosure controls and procedures were not effective, due to the material weakness in the design and operation of controls over our revenue process as described below in Management’s Report on Internal Control over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) and Rule 15d-15(f). Our management, including our CEO and CFO, conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included evaluation of elements such as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment.

This Annual Report on Form 10-K does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to the rules of the SEC that permit emerging growth companies such as us to provide only management’s report in the Annual Report on Form 10-K.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Based on our management’s assessment we concluded that our internal control over financial reporting was not effective as of December 31, 2016 due to the following material weakness:

The design and operation of controls over our revenue process was inadequate due to insufficient automated processes to address complex computations in schedules supporting determination of revenue and insufficient qualified personnel to review such schedules. Therefore, the review of underlying manually prepared schedules supporting the determination of revenue was neither extensive nor effective enough to identify errors. As a result, a material weakness exists in our internal control over financial reporting related to revenue recognition.

We have performed additional analyses and procedures to enable management to conclude that, despite the existence of the material weakness discussed above, we believe the consolidated financial statements included in this Annual Report on Form 10-K present fairly, in all material respects, our financial position, results of operations, comprehensive income (loss) and cash flows for the periods presented in conformity with U.S. GAAP.

We are in the process of remediating this material weakness in our internal control over financial reporting, including implementing a number of measures designed to address the underlying causes of the above material weakness. Remediation efforts currently in process or expected to be implemented include the following:

We believe the foregoing efforts will effectively remediate this material weakness. We have developed a timetable for the implementation of the foregoing remediation efforts and will monitor the implementation. In addition, under the direction of the Audit Committee, we will continue to review and make necessary changes to the overall design of our internal control environment, as well as to policies and procedures to improve the overall effectiveness of internal control over financial reporting. We believe that these additional procedures and personnel will enable us to broaden the scope and quality of our controls relating to the oversight and review of our financial statements. As we continue to evaluate and work to improve our internal control over financial reporting, our management may determine to take additional measures to address control deficiencies. However, this material weakness will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

As previously reported in Part I, Item 4. Controls and Procedures of our Quarterly Report on Form 10-Q for three months ended June 30, 2016, we identified a material weakness in our internal control over financial reporting as of June 30, 2016, which arose due to inadequate design and operation of review controls that are intended to ensure the accuracy of the calculations and related disclosures in our consolidated statement of cash flows prepared in accordance with GAAP. As disclosed in our Quarterly Reports on Form 10-Q for the three months ended June 30, 2016 and September 30, 2016, we developed and implemented our remediation plans to address the material weakness related to the preparation of the consolidated statement of cash flows. Beginning with the third quarter of 2016, we enhanced our review procedures by implementing review checklists and performing more extensive reviews of important reconciliations supporting the statement of cash flows. As a result, this material weakness in our internal control over financial reporting related to cash flow was remediated as of December 31, 2016.

Other than the changes noted above, we have made no changes to our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the fourth quarter of 2016 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

As a result of the restructuring, we expect to adjust worldwide headcount and incur certain facility-related expenses, and currently estimate that we will incur pre-tax charges of approximately $2.7 to $3.5 million. This consists of approximately $2.0 to $2.5 million in severance and other one-time termination benefits, and approximately $0.7 to $1.0 million in facility-related expenses and other associated costs. These charges are expected to be primarily cash-based and paid over the next eighteen months. We expect to record the majority of the charges in the second half of 2017, and expect the restructuring activities to be substantially complete by the second quarter of 2018. The adjustments associated with these actions along with productivity initiatives undertaken by us were contemplated in our guidance for full year 2017, which we provided on our February 21, 2017 earnings call. As of March 10, 2017, we reaffirm our outlook for the first quarter and full year 2017, which we provided on our February 21, 2017 earnings call.

The information required by this item with respect to our executive officers is incorporated herein by reference from the information under Part I, Item 1. Business—Executive Officers of this Annual Report on Form 10-K. All other information required by this item is incorporated by reference to our Proxy Statement for the 2017 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission, or the SEC, within 120 days of the fiscal year ended December 31, 2016.

Our board of directors has adopted a Code of Business Conduct and Ethics applicable to all officers, directors and employees, including our principal executive officer and principal financial and accounting officer, which is available on our website (ir.ssni.com) under “Corporate Governance.” We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendment to, or waiver from, a provision of our Code of Business Conduct and Ethics by posting such information on our website at the address and location specified above.

The information required by this item is incorporated by reference to our Proxy Statement for the 2017 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2016.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

Our Consolidated Financial Statements are listed in the “Index to Consolidated Financial Statements” under Part II, Item 8 of this Annual Report on Form 10-K.

Financial statement schedules have been omitted because they are not required, not applicable, not present in amounts sufficient to require submission of the schedule, or the required information is shown in the Consolidated Financial Statements or Notes thereto.

See the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, State of California, on this March 10, 2017.

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michael Bell and Kenneth P. Gianella or either of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution, for him and in his or her name, place and stead, in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto the attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that the attorneys-in-fact and agents, or either of them, or their, his or her substitutes or substitute, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date

/s/ Michael Bell	President and Chief Executive Officer, and member of the Board of Directors (Principal Executive Officer)	March 10, 2017
Michael Bell		March 10, 2017

/s/ Kenneth P. Gianella	Chief Financial Officer (Principal Financial and Accounting Officer)	March 10, 2017
Kenneth P. Gianella		March 10, 2017

/s/ Scott A. Lang	Chairman of the Board of Directors	March 10, 2017
Scott A. Lang

/s/ Thomas R. Kuhn	Director	March 10, 2017
Thomas R. Kuhn

/s/ Jonathan Schwartz	Director	March 10, 2017
Jonathan Schwartz

/s/ Richard A. Simonson	Director	March 10, 2017
Richard A. Simonson

/s/ Laura D. Tyson	Director	March 10, 2017
Laura D. Tyson

/s/ Peter Van Camp	Director	March 10, 2017
Peter Van Camp

/s/ Warren M. Weiss	Director	March 10, 2017
Warren M. Weiss

/s/ Thomas H. Werner	Director	March 10, 2017
Thomas H. Werner

Exhibit

Incorporated by Reference

Filed

Number

Description of Exhibit

Form

File No.

Exhibit

Filing Date

Herewith

3.1

Restated Certificate of Incorporation of the Registrant.

10-Q

001-35828

3.1

5/9/2013

3.2

Restated Bylaws of the Registrant.

10-Q

001-35828

3.2

5/9/2013

4.1

Form of Registrant’s common stock certificate.

S-1

333-175393

4.1

11/30/2012

4.2

Fourth Amended and Restated Investors’ Rights Agreement, dated December 11, 2009, by and among Registrant and certain security holders of the Registrant.

S-1

333-175393

4.2

7/7/2011

10.1‡

Form of Indemnification Agreement.

S-1

333-175393

10.1

7/7/2011

10.2‡

2003 Stock Option Plan, as amended to date.

10-Q

001-35828

10.2

11/7/2013

10.3‡

2012 Equity Incentive Plan, as amended to date.

10-Q

001-35828

10.1

8/7/2015

10.4‡

2012 Employee Stock Purchase Plan.

S-1

333-175393

10.4

6/14/2012

10.5†

Master Procurement Agreement, dated April 8, 2015, between the Registrant and AusNet Electricity Services Pty Ltd, as amended.

10.6+

Amended and Restated Services and Materials Agreement, dated January 25, 2012, by and between the Registrant and Commonwealth Edison Company.

10-K/A

001-35828

10.6

7/25/2016

10.7+

Amendment No. 3, effective as of February 29, 2016, and Amendment No. 4, effective as of June 29, 2016, amending that certain Amended and Restated Services and Materials Agreement, dated January 25, 2012, as amended, by and between the Registrant and Commonwealth Edison Company.

10-Q

001-35828

10.7

8/9/2016

10.8†

Third Amended and Restated Master Agreement, dated as of July 25, 2016, by and between the Registrant and The City of San Antonio acting by and through its City Public Service Board.

10.9+

Lease Agreement, dated October 27, 2015, between the Registrant and CF Tasman SV LLC.

10-K

001-35828

10.8

3/9/2016

10.10+

Lease Agreement, dated October 27, 2015, between the Registrant and CF Tasman SV LLC.

10-K

001-35828

10.9

3/9/2016

10.11

Credit Agreement, dated December 18, 2015, by and between the Registrant, lenders parties thereto and Silicon Valley Bank.

10-K

001-35828

10.10

3/9/2016

10.12

First Amendment to Credit Agreement, dated as of June 3, 2016, amending that certain Credit Agreement, dated as of December 18, 2015, by and between the Registrant, lenders parties thereto and Silicon Valley Bank.

10-Q

001-35828

10.1

8/9/2016

10.13‡

Offer Letter Employment Agreement, dated July 28, 2015, between the Registrant and Michael Bell, as amended.

10-K

001-35828

10.11

3/9/2016

10.14‡

Notice of Inducement Stock Option Grant and Inducement Stock Option Agreement, dated October 12, 2015, between the Registrant and Michael Bell.

S-8

333-207906

99.1

11/9/2015

10.15‡

Notice of Inducement Performance Stock Unit Award and Inducement Performance Stock Unit Award Agreement, dated November 10, 2015, between the Registrant and Michael Bell.

S-8

333-207906

99.2

11/9/2015

10.16‡

Notice of Inducement Restricted Stock Award and Inducement Restricted Stock Unit Award Agreement, dated November 10, 2015, between the Registrant and Michael Bell.

S-8

333-207906

99.3

11/9/2015

10.17‡

Offer Letter Employment Agreement, dated July 6, 2016, between the Company and Aysegul Ilendiz.

10-Q

001-35828

10.5

8/9/2016

10.18‡

Notice of Inducement Stock Option Grant and Inducement Stock Option Agreement, dated August 10, 2016, between the Registrant and Aysegul Ildeniz.

S-8

333-213026

99.1

8/9/2016

10.19‡

Notice of Inducement Restricted Stock Award and Inducement Restricted Stock Unit Award Agreement, dated August 10, 2016, between the Registrant and Aysegul Ildeniz.

S-8

333-213026

99.2

8/9/2016

10.20‡

Offer Letter Employment Agreement, dated January 11, 2016, between the Registrant and Philippe Gaglione.

23.1

Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.

24.1

Power of Attorney (see signature page).

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to under Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to under Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

XBRL Instance Document.

101.SCH

XBRL Taxonomy Extension Schema Document.

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.

Delaware		43-1966972
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

230 W. Tasman Drive San Jose, California		95134
(Address of Principal Executive Offices)		(Zip Code)

Title of each class		Name of each exchange on which registered
Common Stock, $0.001 par value per share		New York Stock Exchange


Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☐

	High		Low
Year Ended December 31, 2016
First quarter	$	14.75	$	9.74
Second quarter	$	14.93	$	10.29
Third quarter	$	14.22	$	11.61
Fourth quarter	$	15.39	$	12.78
Year Ended December 31, 2015
First quarter	$	10.17	$	7.10
Second quarter	$	14.93	$	8.95
Third quarter	$	14.25	$	10.80
Fourth quarter	$	16.14	$	12.79

	Base		INDEXED RETURNS
	Period		Year Ending
Company / Index	3/13/2013		12/31/2013		12/31/2014		12/31/2015		12/31/2016
Silver Spring Networks, Inc.		100		95.45		38.32		65.50		60.50
NYSE Composite		100		117.08		124.98		119.87		134.18
S&P 1500 Communications Equipment		100		110.33		124.55		110.62		132.43

		Page
Part I

Item 1. Business		1
Item 1A. Risk Factors		12
Item 1B. Unresolved Staff Comments		32
Item 2. Properties		32
Item 3. Legal Proceedings		33
Item 4. Mine Safety Disclosures		34

Part II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities		35
Item 6. Selected Consolidated Financial Data		37
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		47
Item 7A. Quantitative and Qualitative Disclosures About Market Risk		64
Item 8. Consolidated Financial Statements and Supplementary Data		66
Item 9. Change in and Disagreements With Accountants on Accounting And Financial Disclosures		103
Item 9A. Controls and Procedures		103
Item 9B. Other Information		104

Part III

Item 10. Directors, Executive Officers, and Corporate Governance		105
Item 11. Executive Compensation		105
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		105
Item 13. Certain Relationships and Related Transactions and Director Independence		105
Item 14. Principal Accountant Fees and Services		105

Part IV

Item 15. Exhibits and Financial Statement Schedules		106
Signatures		107

Name	Age	Position(s)
Michael Bell	50	President and Chief Executive Officer, and member of the Board of Directors
Scott A. Lang	54	Executive Chairman and Chairman of the Board of Directors
Richard S. Arnold, Jr.	53	General Counsel and Secretary
Philippe M. Gaglione	50	Executive Vice President, Research and Development
Kenneth P. Gianella	44	Chief Financial Officer
Aysegul Ildeniz	47	Chief Operating Officer
Donald L. Reeves III	49	Chief Technology Officer
Theresa Stynes	57	Chief Human Resources Officer
Raj Vaswani	51	Co-Founder

	Payments Due by Period
			Less than 1		1 to 3		3 to 5		More than 5
Contractual Obligations	Total		Year		Years		Years		Years
Operating lease obligations⁽¹⁾	$	71,899	$	7,728	$	7,850	$	22,174	$	34,147
Purchase commitments⁽²⁾		8,695		8,695		—		—		—
Total	$	80,594	$	16,423	$	7,850	$	22,174	$	34,147

		Page
Report of Independent Registered Public Accounting Firm		67
Consolidated Balance Sheets		68
Consolidated Statements of Operations		69
Consolidated Statements of Comprehensive (Loss) Income		70
Consolidated Statements of Stockholders’ Deficit		71
Consolidated Statements of Cash Flow		72
Notes to Consolidated Financial Statements		73
Note 1. Description of Business, Basis of Presentation and Significant Accounting Policies…………………………..		73
Note 2. Net (Loss) Income Per Share………………………………………………………………………………........		82
Note 3. Cash, Cash Equivalent and Short-term Investments……………………………………………………….........		82
Note 4. Fair Value Measurements……………………………………………………….......…………………..............		84
Note 5. Business Acquisitions……………………………………………………….......……………………………....		85
Note 6. Goodwill and Intangible Assets…………………………………………….......…………………………….....		86
Note 7. Common Stock…………………………………………….......……………………………...............................		87
Note 8. Stock-Based Compensation…………………………………………….......……………………………...........		88
Note 9. Income Taxes…………………………………………….......…………………………….................................		91
Note 10. Segment Information…………………………………………….......……………………………....................		94
Note 11. Balance Sheet Details…………………………………………….......……………………………...................		94
Note 12. Borrowings…………………………………………….......……………………………...................................		96
Note 13. Benefit Plan…………………………………………….......……………………………..................................		97
Note 14. Restructuring…………………………………………….......……………………………................................		97
Note 15. Commitments and Contingencies…………………………………………….......…………………………….		97
Note 16. Subsequent Events………………………………………….......……………………………............................		100
Note 17. Selected Quarterly Financial Data (Unaudited)…………….......……………………………............................		102

Software	3 to 7 years
Computer and network equipment	2 to 5 years
Machinery and equipment	3 years
Furniture and fixtures	3 to 7 years
Leasehold improvements	Lesser of the lease term or the estimated useful lives of the improvements, generally 1 to 10 years

	December 31, 2016				December 31, 2015
	Amortized		Aggregate		Amortized		Aggregate
	Cost Basis		Fair Value		Cost Basis		Fair Value
Due within one year	$	19,017	$	18,988	$	25,183	$	25,163
Due from 1 year through 3 years		51,219		50,923		40,159		40,019
Total cash equivalents and short-term investments	$	70,236	$	69,911	$	65,342	$	65,182

	As of December 31, 2016					As of December 31, 2015
	Total (Less Than 12 Months)					Total (Less Than 12 Months)
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. and foreign corporate debt securities	$	27,520	$	(116	)	$	15,894	$	(52	)
Foreign governments and multi-national agency obligations		—		—			1,996		(4	)
U.S. government and agency obligations		40,356		(209	)		31,792		(110	)
Total	$	67,876	$	(325	)	$	49,682	$	(166	)

	Year Ended December 31,
Amortization of purchased intangible assets:	2016		2015		2014
Cost of revenue	$	522	$	1,041	$	417
Sales and marketing		626		601		197
General and administrative		33		32		—
Total	$	1,181	$	1,674	$	614

	Year Ended
2017	$	770
2018		738
2019		378
2020		335
2021		12
2022 and thereafter		—
	$	2,233

			Weighted
	Unrecognized		Average
	Compensation		Period
	Cost		(Years)
Stock options	$	5.9	2.5
ESPP		0.2	0.1
RSUs and PSUs	$	26.5	2.74

	Balance at Beginning of Period		Net Change			Balance at End of Period
Deferred tax assets valuation allowances
Year ended December 31, 2015	$	186,273	$	(43,638	)	$	142,635
Year ended December 31, 2016		142,635		(11,054	)		131,581

	Operating
	Leases
2017	$	7,728
2018		7,850
2019		7,531
2020		7,279
2021		7,364
2022 and thereafter		34,147
Net minimum lease payments	$	71,899