10-Q 1 tnav331201410q.htm 10-Q TNAV 3.31.2014 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the three months ended March 31, 2014

or 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
Commission file number: 001-34720
 
TELENAV, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
77-0521800
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)

950 De Guigne Drive
Sunnyvale, California 94085
(Address of principal executive offices, including zip code)
(408) 245-3800
(Registrant’s telephone number, including area code)
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
 
¨
 
Accelerated filer
 
ý
 
 
 
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of March 31, 2014, there were approximately 39,156,793 shares of the Registrant’s Common Stock outstanding.



TELENAV, INC.
TABLE OF CONTENTS
 



PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements.

TELENAV, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
 
 
 
March 31,
2014
 
June 30, 2013*
 
 
(unaudited)
 
 
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
15,351

 
$
25,787

Short-term investments
 
130,651

 
165,898

Accounts receivable, net of allowances of $154 and $241 at March 31, 2014 and June 30, 2013, respectively
 
27,118

 
28,193

Deferred income taxes
 
1,526

 
867

Restricted cash
 
6,085

 
2,668

Prepaid expenses and other current assets
 
13,325

 
11,113

Total current assets
 
194,056

 
234,526

Property and equipment, net
 
9,458

 
11,753

Deferred income taxes, non-current
 
6,159

 
3,771

Goodwill and intangible assets, net
 
41,485

 
18,805

Other assets
 
3,880

 
4,814

Total assets
 
$
255,038

 
$
273,669

Liabilities and stockholders’ equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
3,540

 
$
1,604

Accrued compensation
 
8,868

 
8,855

Accrued royalties
 
4,900

 
9,833

Other accrued expenses
 
12,443

 
16,729

Deferred revenue
 
2,275

 
7,025

Income taxes payable
 
74

 
95

Total current liabilities
 
32,100

 
44,141

Deferred rent, non-current
 
7,940

 
8,884

Other long-term liabilities
 
7,269

 
6,180

Commitments and contingencies (Note 5)
 

 

Stockholders’ equity:
 
 
 
 
Preferred stock, $0.001 par value: 50,000 shares authorized; no shares issued or outstanding
 

 

Common stock, $0.001 par value: 600,000 shares authorized; 39,157 shares and 39,342 shares issued and outstanding at March 31, 2014 and June 30, 2013, respectively
 
39

 
40

Additional paid-in capital
 
126,702

 
118,193

Accumulated other comprehensive income
 
496

 
373

Retained earnings
 
80,492

 
95,858

Total stockholders’ equity
 
207,729

 
214,464

Total liabilities and stockholders’ equity
 
$
255,038

 
$
273,669


* Derived from audited consolidated financial statements as of and for the year ended June 30, 2013
See accompanying Notes to Condensed Consolidated Financial Statements.

1


TELENAV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

 
 
Three Months Ended
 
Nine Months Ended
 
 
March 31,
 
March 31,
 
 
2014
 
2013
 
2014
 
2013
Revenue:
 
 
 
 
 


 


Product
 
$
17,689

 
$
24,824

 
$
55,347

 
$
48,214

Services
 
16,782

 
30,163

 
60,581

 
96,524

Total revenue
 
34,471

 
54,987

 
115,928

 
144,738

Cost of revenue:
 
 
 
 
 
 
 
 
Product
 
8,535

 
12,882

 
27,211

 
26,253

Services
 
5,704

 
8,795

 
18,298

 
24,398

Total cost of revenue
 
14,239

 
21,677

 
45,509

 
50,651

Gross profit
 
20,232

 
33,310

 
70,419

 
94,087

Operating expenses:
 
 
 
 
 
 
 
 
Research and development
 
15,837

 
16,067

 
44,970

 
45,372

Sales and marketing
 
8,853

 
7,941

 
24,521

 
22,752

General and administrative
 
6,895

 
5,259

 
19,623

 
18,635

Total operating expenses
 
31,585

 
29,267

 
89,114

 
86,759

Operating income (loss)
 
(11,353
)
 
4,043

 
(18,695
)
 
7,328

Other income (expense), net
 
(344
)
 
266

 
1,059

 
1,302

Income (loss) from continuing operations before provision (benefit) for income taxes
 
(11,697
)
 
4,309

 
(17,636
)
 
8,630

Provision (benefit) for income taxes
 
(4,142
)
 
488

 
(6,093
)
 
2,170

Income (loss) from continuing operations, net of tax
 
(7,555
)
 
3,821

 
(11,543
)
 
6,460

Income from discontinued operations, net of tax
 

 
33

 

 
999

Net income (loss)
 
$
(7,555
)
 
$
3,854

 
$
(11,543
)
 
$
7,459

 
 
 
 
 
 
 
 
 
Basic income (loss) per share:
 
 
 
 
 
 
 
 
Income (loss) from continuing operations, net of tax
 
$
(0.19
)
 
$
0.10

 
$
(0.30
)
 
$
0.16

Income from discontinued operations, net of tax
 
$

 
$

 
$

 
$
0.02

Net income (loss)
 
$
(0.19
)
 
$
0.10

 
$
(0.30
)
 
$
0.18

Diluted income (loss) per share:
 
 
 
 
 
 
 
 
Income (loss) from continuing operations, net of tax
 
$
(0.19
)
 
$
0.09

 
$
(0.30
)
 
$
0.15

Income from discontinued operations, net of tax
 
$

 
$

 
$

 
$
0.03

Net income (loss)
 
$
(0.19
)
 
$
0.09

 
$
(0.30
)
 
$
0.18

Weighted average shares used in computing net income (loss) per share:
 
 
 
 
 
 
 
 
Basic
 
38,777

 
39,874

 
38,698

 
40,672

Diluted
 
38,777

 
41,628

 
38,698

 
42,394

 
 
 
 
 
 
 
 
 
Stock compensation expense included above:
 
 
 
 
 
 
 
 
Cost of revenue
 
$
17

 
$
41

 
$
83

 
$
117

Research and development
 
1,131

 
1,017

 
3,203

 
2,545

Sales and marketing
 
757

 
684

 
2,223

 
1,676

General and administrative
 
970

 
875

 
2,512

 
1,876

Total stock compensation expense
 
$
2,875

 
$
2,617

 
$
8,021

 
$
6,214

See accompanying Notes to Condensed Consolidated Financial Statements.

2


TELENAV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)


 
 
Three Months Ended
 
Nine Months Ended
 
 
March 31,
 
March 31,
 
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(7,555
)
 
$
3,854

 
$
(11,543
)
 
$
7,459

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of tax
 
(80
)
 
68

 
(35
)
 
22

Available-for-sale securities:
 
 
 
 
 
 
 
 
Unrealized gain on available-for-sale securities, net of tax
 
30

 
107

 
270

 
253

Reclassification adjustments for gain (loss) on available-for-sale securities recognized, net of tax
 
(26
)
 
(19
)
 
(112
)
 
(73
)
Net increase from available-for-sale securities, net of tax
 
4

 
88

 
158

 
180

Other comprehensive income (loss), net of tax:
 
(76
)
 
156

 
123

 
202

Comprehensive income (loss)
 
$
(7,631
)
 
$
4,010

 
$
(11,420
)
 
$
7,661

 
 
 
 
 
 
 
 
 

See accompanying Notes to Condensed Consolidated Financial Statements.


3


TELENAV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 
Nine Months Ended
 
 
March 31,
 
 
2014
 
2013
Operating activities
 
 
 
 
Net income (loss)
 
$
(11,543
)
 
$
7,459

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
5,119

 
6,427

Amortization of net premium on short-term investments
 
2,720

 
3,269

Stock-based compensation expense
 
8,021

 
6,214

Loss due to impairment
 
250

 
425

Loss on disposal of property and equipment
 
105

 
18

Bad debt expense
 
20

 
15

Excess tax benefits from employee stock option plans
 
270

 
5

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
1,233

 
(3,761
)
Deferred income taxes
 
(3,047
)
 
(879
)
Prepaid expenses and other current assets
 
(2,151
)
 
4,410

Restricted cash
 
(3,417
)
 
(2,428
)
Other assets
 
369

 
(924
)
Accounts payable
 
1,699

 
(811
)
Accrued compensation
 
(395
)
 
(1,522
)
Accrued royalties
 
(4,933
)
 
6,206

Accrued expenses and other liabilities
 
(3,030
)
 
5,091

Income taxes payable
 
(291
)
 
(768
)
Deferred rent
 
(740
)
 
1,141

Deferred revenue
 
(4,802
)
 
5,050

Net cash provided by (used in) operating activities
 
(14,543
)
 
34,637

Investing activities
 
 
 
 
Purchases of property and equipment
 
(754
)
 
(1,887
)
Additions to capitalized software
 

 
(793
)
Purchases of short-term investments
 
(54,662
)
 
(86,569
)
Purchase of long-term investments
 
(600
)
 
(950
)
Proceeds from sales and maturities of short-term investments
 
87,348

 
109,059

Acquisition, net of cash acquired
 
(19,245
)
 
(18,254
)
Net cash provided by investing activities
 
12,087

 
606

Financing activities
 
 
 
 
Proceeds from exercise of stock options
 
758

 
2,633

Repurchase of common stock
 
(7,899
)
 
(24,209
)
Tax withholdings related to net share settlements of restricted stock units
 
(535
)
 
(51
)
Excess tax benefits from employee stock option plans
 
(270
)
 
(5
)
Net cash used in financing activities
 
(7,946
)
 
(21,632
)
Effect of exchange rate changes on cash and cash equivalents
 
(34
)
 
22

Net increase (decrease) in cash and cash equivalents
 
(10,436
)
 
13,633

Cash and cash equivalents, at beginning of period
 
25,787

 
6,920

Cash and cash equivalents, at end of period
 
$
15,351

 
$
20,553

Supplemental disclosure of cash flow information
 
 
 
 
Income taxes paid, net
 
$
255

 
$
501

See accompanying Notes to Condensed Consolidated Financial Statements.

4


TELENAV, INC.
Notes to Condensed Consolidated Financial Statements
1.
Summary of business and significant accounting policies
Description of business
Telenav, Inc., also referred to in this report as “we,” “our” or “us,” was incorporated in September 1999 in the State of Delaware. We are a leader in personalized mobile navigation. We help on the go people by creating products that (1) provide easily-accessed, relevant, and personalized information for discovery, traffic, local search, and navigation and (2) are available across multiple platforms and devices, including mobile phones, tablets, computers and cars. We operate in a single segment. Our fiscal year ends on June 30 and in this report we refer to the fiscal year ended June 30, 2013 as “fiscal 2013” and the fiscal year ending June 30, 2014 as “fiscal 2014.”
Basis of presentation
The unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The condensed consolidated financial statements include the accounts of Telenav, Inc. and our wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The financial statements include all adjustments (consisting only of normal recurring adjustments) that our management believes are necessary for a fair presentation of the periods presented. These interim financial results are not necessarily indicative of results expected for the full fiscal year or for any subsequent interim period. Certain prior period amounts in the consolidated financial statements have been reclassified to conform to current period presentation for comparative purposes.
Our condensed consolidated financial statements also include the financial results of Shanghai Jitu Software Development Ltd., or Jitu, located in China. Based on our contractual arrangements with the shareholders of Jitu, we have determined that Jitu is a variable interest entity, or VIE, for which we are the primary beneficiary and are required to consolidate in accordance with Accounting Standards Codification, or ASC, subtopic 810-10, or ASC 810-10, Consolidation: Overall. Despite our lack of legal ownership, there exists a parent-subsidiary relationship between Telenav, Inc. and Jitu, whereby through contractual arrangement, the equity holders of Jitu have effectively assigned all of their voting rights underlying their equity interest in Jitu to us. In addition, through these agreements, we have the ability and intention to absorb all of the expected losses and profits of Jitu. The results of Jitu did not have a material impact on our overall operating results for the three and nine months ended March 31, 2014 and 2013.
The condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for fiscal 2013, included in our Annual Report on Form 10-K for fiscal 2013 filed with the U.S. Securities and Exchange Commission (the “SEC”).
There have been no material changes to our significant accounting policies as compared to the significant accounting policies described in our Form 10-K.
Use of estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Significant estimates and assumptions made by us include the determination of revenue recognition and deferred revenue, the recoverability of accounts receivable, the determination of acquired intangibles and goodwill, the fair value of stock awards issued, the determination of income taxes and the recoverability of deferred tax assets. Actual results could differ from those estimates.
Concentrations of risk and significant customers
Revenue related to services provided through Ford Motor Company, or Ford, comprised 50% and 46% of revenue for the three months ended March 31, 2014 and 2013, respectively, and 45% and 34% of revenue for the nine months ended March 31, 2014 and 2013, respectively. As of March 31, 2014 and June 30, 2013, receivables due from Ford were 40% and 45% of total accounts receivable, respectively. Revenue related to services provided through AT&T Mobility LLC, or AT&T, comprised 25% and 23% of revenue for the three months ended March 31, 2014 and 2013, respectively, and 25% and 30% of revenue for the nine months ended March 31, 2014 and 2013, respectively. Receivables due from AT&T were 31% and 23% of total accounts receivable at March 31, 2014 and June 30, 2013, respectively. Revenue related to services provided through Sprint Nextel Corporation, or Sprint, comprised 2% and 15% of revenue for the three months ended March 31, 2014 and 2013,

5

TELENAV, INC.
Notes to Condensed Consolidated Financial Statements—(Continued)

respectively, and 7% and 17% of revenue for the nine months ended March 31, 2014 and 2013, respectively. No other customer represented 10% of our revenue or 10% of our accounts receivable for any period presented.
Our map and points of interest, or POI, data have been provided principally by TomTom North America, Inc., or TomTom, and HERE North America, LLC, or HERE, a Nokia company, in the three and nine months ended March 31, 2014 and 2013. To date, we are not aware of circumstances that may impair either party’s intent or ability to continue providing such services to us.
Restricted cash
As of March 31, 2014 and June 30, 2013, we had restricted cash of $6.1 million and $2.7 million, respectively, on our consolidated balance sheets. As of March 31, 2014, restricted cash is comprised primarily of a $6.0 million overpayment from a customer that will be refunded. In January 2014, the $2.7 million of restricted cash previously held in escrow related to our acquisition of Thinknear was paid to Thinknear stockholders.
Accumulated other comprehensive income (loss), net of tax
The components of accumulated other comprehensive income (loss), net of related taxes, during the nine months ended March 31, 2014, were as follows (in thousands):
 
 
Foreign Currency
Translation
Adjustments
 
Unrealized
Gains (Losses) on
Available-for-Sale
Securities
 
Total
Balance, net of tax as of June 30, 2013
 
$
270

 
$
103

 
$
373

Other comprehensive income (loss) before reclassifications, net of tax
 
(35
)
 
270

 
235

Amount reclassified from accumulated other comprehensive income (loss), net of tax
 

 
(112
)
 
(112
)
Other comprehensive income (loss), net of tax
 
(35
)
 
158

 
123

Balance, net of tax as of March 31, 2014
 
$
235

 
$
261

 
$
496


The amount reclassified from accumulated other comprehensive income (loss), net of tax, was determined using the specific identification method and the amount was included in other income (expense), net, for the nine months ended March 31, 2014, and 2013, respectively.

The amount of income tax benefit allocated to each component of accumulated other comprehensive income (loss) was not material for the nine months ended March 31, 2014.
Long-term investments

As of March 31, 2014, our investments in privately-held companies were $1.8 million. These investments are accounted for as cost-basis investments, as we own less than 20% of the voting securities and do not have the ability to exercise significant influence over operating and financial policies of the entities. Our investments are in entities that are not publicly traded and, therefore, no established market for the securities exists. Our cost-method investments are carried at historical cost in our condensed consolidated balance sheets and measured at fair value on a nonrecurring basis when indicators of impairment exist. If we believe that the carrying value of the cost basis investments is in excess of estimated fair value, our policy is to record an impairment charge to adjust the carrying value to estimated fair value, when the impairment is deemed other-than-temporary. We regularly evaluate the carrying value of these cost-method investments for impairment. We recorded a $0.3 million impairment charge for one cost-method investment during the three and nine months ended March 31, 2014. We did not record any impairment charges for the three and nine months ended March 31, 2013.

Included in other income (expense), net in the nine months ended March 31, 2014 is a $0.8 million gain from the sale in December 2013 of an investment in a privately-held company.


6

TELENAV, INC.
Notes to Condensed Consolidated Financial Statements—(Continued)

Recent accounting pronouncements
In February 2013, the Financial Accounting Standards Board, or, FASB, issued amended guidance on how to report the effect of significant reclassifications out of accumulated other comprehensive income. We adopted this guidance effective July 1, 2013 and the adoption of this guidance did not have a material effect on our consolidated financial statements.

In June 2013, the FASB ratified Emerging Issues Task Force (EITF) Issue 13-C, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” which concludes an unrecognized tax benefit should be presented as a reduction of a deferred tax asset when settlement in this manner is available under the tax law.  We will adopt this amendment beginning in the first quarter of fiscal 2015.  The result of adoption may be to reclassify certain long term liabilities for uncertain income tax positions to reduce the carrying value of long term deferred tax assets. However, the adoption is not expected to result in a material change to the tax provision.  We do not believe that the impact on our consolidated financial statements will be significant.
2.
Net income (loss) per share
Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding for the period, including potential dilutive common shares assuming the dilutive effect of outstanding stock options, restricted stock units and restricted common stock using the treasury-stock method.
The following table presents the calculation of basic and diluted net income (loss) per share (in thousands, except per share amounts):
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
March 31,
 
March 31,
 
 
2014
 
2013
 
2014
 
2013
Income (loss) from continuing operations, net of tax
 
$
(7,555
)
 
$
3,821

 
$
(11,543
)
 
$
6,460

Income from discontinued operations, net of tax
 

 
33

 

 
999

Net income (loss)
 
$
(7,555
)
 
$
3,854

 
$
(11,543
)
 
$
7,459

Shares used in computing net income (loss) per share:
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
Weighted average common shares used in computing basic net income (loss) per share
 
38,777

 
39,874

 
38,698

 
40,672

Diluted:
 
 
 
 
 
 
 
 
Weighted average common shares used in computing basic net income (loss) per share
 
38,777

 
39,874

 
38,698

 
40,672

Add weighted average effect of dilutive securities:
 
 
 
 
 
 
 
 
Stock options
 

 
1,582

 

 
1,633

Restricted common stock and restricted stock units
 

 
172

 

 
89

Weighted average common shares used in computing diluted net income (loss) per share
 
38,777

 
41,628

 
38,698

 
42,394

Basic income (loss) per share:
 
 
 
 
 
 
 
 
Income (loss) from continuing operations, net of tax
 
$
(0.19
)
 
$
0.10

 
$
(0.30
)
 
$
0.16

Income from discontinued operations, net of tax
 
$

 
$

 
$

 
$
0.02

Net income (loss)
 
$
(0.19
)
 
$
0.10

 
$
(0.30
)
 
$
0.18

Diluted income (loss) per share:
 
 
 
 
 
 
 
 
Income (loss) from continuing operations, net of tax
 
$
(0.19
)
 
$
0.09

 
$
(0.30
)
 
$
0.15

Income from discontinued operations, net of tax
 
$

 
$

 
$

 
$
0.03

Net income (loss)
 
$
(0.19
)
 
$
0.09

 
$
(0.30
)
 
$
0.18



7

TELENAV, INC.
Notes to Condensed Consolidated Financial Statements—(Continued)

The following outstanding shares were excluded from the computation of diluted net income (loss) per share for the periods presented because including them would have had an antidilutive effect (in thousands):


 
 
Three Months Ended
 
Nine Months Ended
 
 
March 31,
 
March 31,
 
 
2014
 
2013
 
2014
 
2013
Stock options
 
5,835

 
3,773

 
5,835

 
4,083

Restricted stock units
 
4,361

 

 
4,361

 
313

Restricted common stock
 
155

 
720

 
155

 

Total
 
10,351

 
4,493

 
10,351

 
4,396



3.
Cash, cash equivalents and short-term investments
Cash and cash equivalents consist of highly liquid fixed-income investments with original maturities of three months or less at the time of purchase, including money market funds. Short-term investments consist of readily marketable securities with a remaining maturity of more than three months from the date of purchase. We classify all of our cash equivalents and short-term investments as “available for sale,” as these investments are free of trading restrictions. These marketable securities are carried at fair value, with the unrealized gains and losses, net of tax, reported as accumulated other comprehensive income (loss) and included as a separate component of stockholders’ equity. Gains and losses are recognized when realized. When we have determined that an other-than-temporary decline in fair value has occurred, the amount of the decline that is related to a credit loss is recognized in earnings. Gains and losses are determined using the specific identification method. We had no material realized gains or losses in the three and nine months ended March 31, 2014 and 2013.
Cash, cash equivalents and short-term investments consisted of the following as of March 31, 2014 (in thousands):
 
 
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Cash
 
$
13,315

 
$

 
$

 
$
13,315

Cash equivalents:
 
 
 
 
 
 
 
 
Money market mutual funds
 
1,036

 

 

 
1,036

Commercial paper
 
1,000

 

 

 
1,000

Total cash equivalents
 
2,036

 

 

 
2,036

Total cash and cash equivalents
 
15,351

 

 

 
15,351

Short-term securities:
 
 
 
 
 
 
 
 
Certificates of deposit
 

 

 

 

Municipal securities
 
104,418

 
338

 
(3
)
 
104,753

Commercial paper
 
1,995

 
2

 

 
1,997

Corporate bonds
 
23,834

 
71

 
(4
)
 
23,901

Total short-term investments
 
130,247

 
411

 
(7
)
 
130,651

Cash, cash equivalents and short-term investments
 
$
145,598

 
$
411

 
$
(7
)
 
$
146,002



8

TELENAV, INC.
Notes to Condensed Consolidated Financial Statements—(Continued)

Cash, cash equivalents and short-term investments consisted of the following as of June 30, 2013 (in thousands):
 
 
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Cash
 
$
23,546

 
$

 
$

 
$
23,546

Cash equivalents:
 
 
 
 
 
 
 
 
Money market mutual funds
 
2,241

 

 

 
2,241

Total cash equivalents
 
2,241

 

 

 
2,241

Total cash and cash equivalents
 
25,787

 

 

 
25,787

Short-term investments:
 
 
 
 
 
 
 
 
Certificates of deposit
 
1,000

 
3

 

 
1,003

Municipal securities
 
148,888

 
242

 
(137
)
 
148,993

Commercial paper
 
3,389

 
2

 

 
3,391

Corporate bonds
 
12,462

 
58

 
(9
)
 
12,511

Total short-term investments
 
165,739

 
305

 
(146
)
 
165,898

Cash, cash equivalents and short-term investments
 
$
191,526

 
$
305

 
$
(146
)
 
$
191,685


The following table summarizes the cost and estimated fair value of short-term fixed income securities classified as short-term investments based on stated maturities as of March 31, 2014 (in thousands):
 
 
 
Amortized
Cost
 
Estimated
Fair Value
Due within one year
 
$
52,981

 
$
53,120

Due within two years
 
56,139

 
56,330

Due after two years
 
21,127

 
21,201

Total
 
$
130,247

 
$
130,651


Declines in fair value judged to be other-than-temporary on securities available for sale are included as a component of other income, net. In order to determine whether a decline in value is other-than-temporary, we evaluate, among other factors: the duration and extent to which the fair value has been less than the carrying value and our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair market value. As of March 31, 2014, we did not consider any of our investments to be other-than-temporarily impaired.
4.
Fair value of financial instruments
We measure certain financial instruments at fair value on a recurring basis. We have established a hierarchy, which consists of three levels, for disclosure of the inputs used to determine the fair value of our financial instruments.
Level 1 valuations are based on quoted prices in active markets for identical assets or liabilities.
Level 2 valuations are based on inputs that are observable, either directly or indirectly, other than quoted prices included within Level 1. Such inputs used in determining fair value for Level 2 valuations include quoted prices in active markets for similar assets or liabilities, 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 assets or liabilities.
Where applicable, we use quoted prices in active markets for similar assets to determine fair value of Level 2 short-term investments. If quoted prices in active markets for identical assets are not available to determine fair value, we use quoted prices for similar assets and liabilities or inputs that are observable either directly or indirectly. If quoted prices for identical or similar assets are not available, we use third party valuations utilizing underlying assets assumptions.

9

TELENAV, INC.
Notes to Condensed Consolidated Financial Statements—(Continued)

Level 3 valuations are based on information that is unobservable and significant to the overall fair value measurement. All of our cash equivalents and short-term investments are classified within Level 1 or Level 2. The fair values of these financial instruments were determined using the following inputs at March 31, 2014 (in thousands):
 
 
 
Fair Value Measurements at March 31, 2014 Using
 
 
 
 
Quoted Prices
in Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Description
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market mutual funds
 
$
1,036

 
$
1,036

 
$

 
$

Commercial paper
 
1,000

 

 
1,000

 

Total cash equivalents
 
2,036

 
1,036

 
1,000

 

Short-term investments:
 
 
 
 
 
 
 
 
Certificates of deposit
 

 

 

 

Municipal securities
 
104,753

 

 
104,753

 

Commercial paper
 
1,997

 

 
1,997

 

Corporate bonds
 
23,901

 

 
23,901

 

Total short-term investments
 
130,651

 

 
130,651

 

Cash equivalents and short-term investments
 
$
132,687

 
$
1,036

 
$
131,651

 
$

The fair values of our financial instruments were determined using the following inputs at June 30, 2013 (in thousands):
 
 
 
Fair Value Measurements at June 30, 2013 Using
 
 
 
 
Quoted Prices
in Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Description
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market mutual funds
 
$
2,241

 
$
2,241

 
$

 
$

Total cash equivalents
 
2,241

 
2,241

 

 

Short-term investments:
 
 
 
 
 
 
 
 
Certificates of deposit
 
1,003

 

 
1,003

 

Municipal securities
 
148,993

 

 
148,993

 

Commercial paper
 
3,391

 

 
3,391

 

Corporate bonds
 
12,511

 

 
12,511

 

Total short-term investments
 
165,898

 

 
165,898

 

Cash equivalents and short-term investments
 
$
168,139

 
$
2,241

 
$
165,898

 
$

Amortization of net premium on short-term investments totaled $2.7 million and $3.3 million in the nine months ended March 31, 2014 and 2013, respectively.
There were no transfers between Level 1 and Level 2 financial instruments in the nine months ended March 31, 2014 and 2013, respectively.
We did not have any financial liabilities measured at fair value on a recurring basis as of March 31, 2014 or June 30, 2013.

10

TELENAV, INC.
Notes to Condensed Consolidated Financial Statements—(Continued)

5.
Commitments and contingencies
Operating lease and purchase obligations
As of March 31, 2014, we had future minimum non-cancelable financial commitments primarily related to office space under non-cancelable operating leases and license fees due to certain of our third party content providers, regardless of usage level. The aggregate future minimum commitments, net of sublease income, were comprised of the following (in thousands):
 
 
 
Payments Due by Period
 
 
Total
 
Fiscal 2014
 
Fiscal 2015
 
Fiscal 2016
 
Fiscal 2017
 
Fiscal 2018
 
Thereafter
Operating lease obligations, net of sublease income
 
$
31,262

 
$
6,596

 
$
4,727

 
$
4,751

 
$
4,644

 
$
4,294

 
$
6,250

Purchase obligations
 
6,480

 
2,989

 
3,278

 
213

 

 

 

Total contractual obligations
 
$
37,742

 
$
9,585

 
$
8,005

 
$
4,964

 
$
4,644

 
$
4,294

 
$
6,250

Contingencies
From time to time, we may become involved in legal proceedings, claims and litigation arising in the ordinary course of business. When we believe a loss or a cost of indemnification is probable and can be reasonably estimated, we accrue the estimated loss or cost of indemnification in our consolidated financial statements. Where the outcome of these matters is not determinable, we do not make a provision in our financial statements until the loss or cost of indemnification, if any, is probable and can be reasonably estimated or the outcome becomes known. We expense legal fees related to these matters as they are incurred.
On December 31, 2009, Vehicle IP, LLC, or Vehicle IP, filed a patent infringement lawsuit against us in the U.S. District Court for the District of Delaware, seeking monetary damages, fees and expenses and other relief. Verizon Wireless was named as a co-defendant in the Vehicle IP litigation based on the VZ Navigator product and has demanded that we indemnify and defend Verizon against Vehicle IP. At this time, we have not agreed to defend or indemnify Verizon. AT&T was also named as a co-defendant in the Vehicle IP litigation based on the AT&T Navigator and Telenav Track products. AT&T has tendered the defense of the litigation to us and we are defending the case on behalf of AT&T. After the Court issued its claim construction ruling the parties agreed to focus on early summary judgment motions, and asked the Court to postpone the rest of the case schedule pending the resolution of these potentially case-dispositive motions. The defendants filed motions for summary judgment of noninfringement. On April 10, 2013 the Court granted AT&T and our motion for summary judgment of noninfringement. While the Court's ruling appears to be dispositive of plaintiff's claims, plaintiff is appealing the district court's claim construction and summary judgment ruling. The appeal is currently ongoing in the U.S. Court of Appeals for the Federal Circuit; the oral argument was held on April 10, 2014. Due to the uncertainties related to litigation, we are unable to evaluate the likelihood of either a favorable or unfavorable outcome. We believe that it is reasonably possible that we will incur a loss; however, we cannot currently estimate a range of any possible losses we may experience in connection with this case. Accordingly, we are unable at this time to estimate the effects of this lawsuit on our financial condition, results of operations, or cash flows.
On April 30, 2010, Traffic Information, LLC filed a patent infringement lawsuit against us in the U.S. District Court for the Eastern District of Texas, seeking monetary damages, fees and expenses, and other relief. The patent at issue was subject to reexamination by the PTO and the reexamined claims were found invalid. Plaintiff appealed this finding and on May 30, 2013, the Patent Trial and Appeal Board, or PTAB, confirmed the invalidity of these claims. Plaintiff filed a request for reconsideration of this decision with the PTAB, which was denied on January 13, 2014. Plaintiff has indicated its intent to appeal this finding. In light of the reexamination and plaintiff's appeal of the reexamination findings, the Court stayed the case and the case will remain stayed and administratively closed unless the patentee obtains a favorable decision on appeal before the PTAB or Federal Circuit Court of Appeals. On March 12, 2014, Traffic Information filed an appeal with the U.S. Appeals Court for the Federal Circuit. Due to the preliminary status of the lawsuit and uncertainties related to litigation, we are unable to evaluate the likelihood of either a favorable or unfavorable outcome. We believe that it is reasonably possible that we will incur a loss; however, we cannot currently estimate a range of any possible losses we may experience in connection with this case. Accordingly, we are unable at this time to estimate the effects of this complaint on our financial condition, results of operations or cash flows.


11

TELENAV, INC.
Notes to Condensed Consolidated Financial Statements—(Continued)

On November 22, 2013, Bay Area Surgical Group, Inc., Knowles Surgery Center, LLC, National Ambulatory Surgery Center, LLC, Los Altos Surgery Center, LP, Forest Ambulatory Surgical Associates, LP, and SOAR Surgery Center, LLC filed a lawsuit against Aetna Life Insurance Company and approximately 300 Aetna health plan sponsors, including Telenav, Inc. in the U.S. District Court for the Northern District of California. The complaint alleges that Aetna and the co-defendants failed to properly pay benefits and administer claims and provide the requested documents mandated by the Employee Retirement Income Security Act of 1974 (“ERISA”). On March 6, 2014 the Court dismissed without prejudice all causes of action against Telenav, Inc. and the Telenav Health and Welfare Plan.

In addition, we have received, and expect to continue to receive, demands for indemnification from our wireless carrier and other customers, which demands can be very expensive to settle or defend, and we have in the past offered to contribute to settlement amounts and incurred legal fees in connection with certain of these indemnity demands. A number of these indemnity demands, including demands relating to pending litigation, remain outstanding and unresolved as of the date of this Form 10-Q. Furthermore, in response to these demands we may be required to assume control of and bear all costs associated with the defense of our customers in compliance with our contractual commitments. At this time, we are not a party to the following cases; however our customers have requested that we indemnify them in connection with such cases:
In 2008, Alltel, AT&T, Sprint and T-Mobile USA, or T-Mobile, each demanded that we indemnify and defend them against patent infringement lawsuits brought by patent holding companies EMSAT Advanced Geo-Location Technology LLC and Location Based Services LLC (collectively, “EMSAT”) in the U.S. District Court for the Northern District of Ohio. After T-Mobile also sought indemnification and defense from Google, Inc., Google intervened in the T-Mobile litigation. After claim construction and related motion practice, EMSAT agreed to dismiss all claims against Google in the T-Mobile suit, and in March 2011, EMSAT and AT&T settled their claims. By March 2011, all the EMSAT cases were either dismissed or stayed while the PTO completed its reexamination of the validity of the patents at issue. The PTO has concluded its reexamination of two of the patents in suit, confirming the validity of only two of the asserted claims from those patents. At this time, all patent claims that EMSAT alleged to be infringed by the Telenav GPS Navigator product have been cancelled during reexamination. EMSAT agreed to dismiss its allegations relating to the patent claims that were cancelled during reexamination. Accordingly, the Court has lifted the stays in the suits against T-Mobile, Alltel and Sprint. Due to uncertainties related to litigation, we are unable to evaluate the likelihood of either a favorable or unfavorable outcome. We have arbitrated with and compensated one carrier for our defense obligations, without a negative effect on our financial condition, results of operations, or cash flows. We have not yet determined the extent of our indemnification and defense obligations to the other wireless carriers. We believe that it is reasonably possible that we will incur additional loss; however, we cannot currently estimate a range of other possible losses we may experience in connection with this case. Accordingly, we are unable at this time to estimate the overall effects of these cases on our financial condition, results of operations, or cash flows.

In March 2009, AT&T demanded that we indemnify and defend them against a patent infringement lawsuit brought by Tendler Cellular of Texas LLC, or Tendler, in the U.S. District Court for the Eastern District of Texas. In June 2010, AT&T settled its claims with Tendler and we came to an agreement with AT&T as to the extent of our contribution towards AT&T's settlement and the amount of our contribution was not material; however, there continues to be a disagreement as to whether any additional amounts are owed to AT&T for legal fees and expenses related to the defense of the matter. We believe that it is reasonably possible that we will incur additional loss; however, we cannot currently estimate a range of other possible losses we may experience in connection with this case. Accordingly, we are unable at this time to estimate the overall effects on our financial condition, results of operations, or cash flows.
6.Guarantees and indemnifications
Our agreements with our customers generally include certain provisions for indemnifying them against liabilities if our products and services infringe a third party’s intellectual property rights or for other specified matters. We have in the past received indemnification requests or notices of their intent to seek indemnification in the future from our customers with respect to specific litigation claims in which our customers have been named as defendants. The maximum amount of potential future indemnification is unlimited.
We have agreed to indemnify our directors, officers and certain other employees for certain events or occurrences, subject to certain limits, while such persons are or were serving at our request in such capacity. We may terminate the indemnification agreements with these persons upon the termination of their services with us, but termination will not affect claims for indemnification related to events occurring prior to the effective date of termination. The maximum amount of potential future indemnification is unlimited. We have a directors and officers insurance policy that limits our potential exposure. We believe that any financial exposure related to these indemnification agreements is not material.

12

TELENAV, INC.
Notes to Condensed Consolidated Financial Statements—(Continued)

7.
Stock-based compensation
Under our 2002 Executive Stock Option Plan, 2009 Equity Incentive Plan and 2011 Stock Option and Grant Plan, eligible employees, directors and consultants are able to participate in our future performance through awards of nonqualified stock options, incentive stock options and restricted stock units through the receipt of such awards as authorized by our board of directors. In addition, we have granted restricted common stock in connection with certain acquisitions.
A summary of our stock option activity is as follows (in thousands):
 
 
 
Number of
Shares
Options outstanding as of June 30, 2013
 
6,577

Granted
 
9

Exercised
 
(178
)
Canceled
 
(573
)
Options outstanding as of March 31, 2014
 
5,835

Information regarding stock options outstanding at March 31, 2014 is summarized below (in thousands except per share amounts):

 
 
Number of
Shares
(thousands)
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life
(years)
 
Aggregate
Intrinsic
Value
(thousands)
Options outstanding
 
5,835

 
$
5.61

 
5.60
 
$
7,848

Options vested and expected to vest
 
5,721

 
$
5.59

 
5.55
 
$
7,835

Options exercisable
 
4,428

 
$
5.14

 
5.00
 
$
7,649

A summary of our restricted stock units, or RSUs, activity is as follows (in thousands):
 
 
 
Number of
Shares
 
Weighted
average
remaining
contractual life
(years)
 
Aggregate
intrinsic value
RSUs outstanding as of June 30, 2013
 
2,032

 
 
 
 
Granted
 
2,876

 
 
 
 
Vested
 
(262
)
 
 
 
 
Canceled
 
(285
)
 
 
 
 
RSUs outstanding as of March 31, 2014
 
4,361

 
1.82
 
$
25,993

RSUs vested and expected to vest as of March 31, 2014
 
3,712

 
1.72
 
$
22,122


In connection with our acquisition of skobbler in January 2014, included in the table above is approximately 634,920 RSUs granted to skobbler founders outside of our stock option and equity incentive plans. During the nine months ended March 31, 2014, pursuant to the annual increase provisions of our 2009 Equity Incentive Plan, we increased the number of shares available for grant under our stock option and equity incentive plans by approximately 1,574,000 shares. As of March 31, 2014 and June 30, 2013, there were a total of approximately 1,120,000 and 852,000 shares available for grant under our stock option and equity incentive plans, respectively.

13

TELENAV, INC.
Notes to Condensed Consolidated Financial Statements—(Continued)

The following table summarizes the stock-based compensation expense recorded for stock options, RSUs and restricted common stock issued to employees and nonemployees (in thousands):
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
March 31,
 
March 31,
 
 
2014
 
2013
 
2014
 
2013
Stock option awards
 
$
847

 
$
1,680

 
$
3,131

 
$
4,470

RSU awards
 
1,572

 
482

 
3,522

 
881

Restricted common stock
 
456

 
455

 
1,368

 
863

Total stock-based compensation expense
 
$
2,875

 
$
2,617

 
$
8,021

 
$
6,214

We use valuation pricing models to determine the fair value of stock-based awards. The determination of the fair value of stock-based payment awards on the date of grant is affected by the stock price as well as assumptions regarding a number of complex and subjective variables. These variables include expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rates and expected dividends. The weighted average assumptions used to value stock option awards granted were as follows:
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
March 31,
 
March 31,
 
 
2014
 
2013
 
2014
 
2013
Expected volatility
 
%
 
70
%
 
62
%
 
72
%
Expected term (in years)
 

 
4.69

 
4.45

 
4.79

Risk-free interest rate
 
%
 
0.77
%
 
1.44
%
 
0.66
%
Dividend yield
 

 

 

 


No stock option awards were granted during the three months ended March 31, 2014.
8.
Stock repurchase program
On March 18, 2013, we announced that our Board of Directors authorized a program for the repurchase of up to $10.0 million of our shares of common stock through open market purchases. The timing and amount of repurchase transactions under this program depends on market conditions and other considerations. Under this program, we utilized $7.9 million of cash to repurchase 1,268,658 shares of our common stock at an average purchase price of $6.23 per share during the nine months ended March 31, 2014. As of March 31, 2014, we had completed this program.
The repurchased shares are retired and designated as authorized but unissued shares. The timing and amount of repurchase transactions under our stock repurchase program depend on market conditions and other considerations. We use the par value method of accounting for our stock repurchases. Under the par value method, common stock is first charged with the par value of the shares involved. The excess of the cost of shares acquired over the par value is allocated to additional paid-in capital (“APIC”), based on an estimated average sales price per issued share with the excess amounts charged to retained earnings. As a result of our stock repurchases during the nine months ended March 31, 2014, we reduced common stock and APIC by an aggregate of $4.1 million and charged $3.8 million to retained earnings.
9.
Income taxes
The effective tax rate for the periods presented is the result of the mix of forecasted fiscal year income earned or loss incurred in various tax jurisdictions that apply a broad range of income tax rates. Our effective tax rate, excluding discontinued operations, was 35% and 25% for the nine months ended March 31, 2014 and 2013, respectively. Our effective tax rate, excluding discontinued operations, of 35% which resulted in the recognition of a tax benefit for the nine months ended March 31, 2014 was the same as the tax benefit computed at the U.S. federal statutory income tax rate due primarily to nondeductible stock compensation and nondeductible expenses offset by exempt interest income and research and development credits, and true ups.  Our effective tax rate, excluding discontinued operations, of 25% for the nine months ended March 31, 2013 was lower than the tax computed at the U.S. federal statutory income tax rate due primarily to the extension of the R&D credit offset by nondeductible stock compensation and discrete tax benefits of $1.0 million as a result of changes in intercompany arrangements and $0.8 million related to the retroactive effect of the R&D credit extension.

14

TELENAV, INC.
Notes to Condensed Consolidated Financial Statements—(Continued)

We record liabilities related to unrecognized tax benefits in accordance with authoritative guidance on accounting for uncertain tax positions. As of March 31, 2014 and June 30, 2013, our cumulative unrecognized tax benefits were $6.9 million and $6.3 million, respectively. Included in the balance of unrecognized tax benefits at March 31, 2014 and June 30, 2013 was $5.3 million and $4.8 million, respectively, that, if recognized, would affect the effective tax rate.
We recognize interest and penalties related to unrecognized tax benefits as part of our provision for federal, state and foreign income taxes. We had accrued $434,000 and $314,000 for the payment of interest and penalties at March 31, 2014 and June 30, 2013, respectively.
We file income tax returns with the Internal Revenue Service, or IRS, California and various states and foreign tax jurisdictions in which we have subsidiaries. The statute of limitations remains open for fiscal 2011 through fiscal 2013 in the U.S., for fiscal 2008 through fiscal 2013 in state jurisdictions, and for fiscal 2007 through fiscal 2013 in foreign jurisdictions. Fiscal years outside the normal statute of limitation remain open to audit by tax authorities due to tax attributes generated in those early years which have been carried forward and may be audited in subsequent years when utilized.
We record a valuation allowance to reduce our net deferred tax assets to the amount that it is more likely than not to be realized in future periods. In evaluating our ability to recover our deferred tax assets each quarter, we consider all available positive and negative evidence, including current and previous operating results, ability to carryback losses for a tax refund, and forecasts of future operating results.
Based on the information available at March 31, 2014, our conclusion is that most of our US and a portion of our state deferred tax assets are realizable. We continue to monitor and evaluate the realizability on a quarterly basis.  If it is determined that it is not more likely than not that all or a portion of our deferred tax assets will be realized we may record additional valuation allowance at that time. Our valuation allowance at June 30, 2013 was $2.9 million which was primarily attributable to California and foreign deferred tax assets.
On December 31, 2013, the research and development credit expired for federal tax purposes. The 2012 Taxpayer Relief Act extended the research and development credit for two years until December 31, 2013. Although the research and development credit has been extended every year since enactment, a tax benefit cannot be recorded for the expired period until the tax extenders bill, or the bill, has been enacted. If and when the bill is enacted, a retroactive tax benefit will be recorded in the period of enactment. We have recorded a tax benefit for the federal research and development credit for the six months ended December 31, 2013.
10. Acquisitions
skobbler GmbH
On January 29, 2014, we completed our acquisition of all of the shares of privately held skobbler GmbH, or skobbler, a navigation company based in Germany. We acquired skobbler for consideration of approximately $23.8 million, consisting of approximately $19.2 million in cash and $4.6 million in shares of our common stock. We believe the acquisition of skobbler will enable us to combine its OpenStreetMap (OSM)-based GPS navigation technology with our existing mobile navigation solutions. The transaction has been accounted for under the acquisition method of accounting. We recorded the assets acquired and liabilities assumed at their estimated fair value, with the difference between the fair value of the net assets acquired and the purchase consideration reflected as goodwill.
The total purchase consideration of $23.8 million was comprised of $19.2 million in cash and 731,623 shares of our common stock valued at $4.6 million. The 731,623 shares of our common stock are held in escrow and will be released at the rate of 50% per year on each anniversary date of closing. These shares are released from escrow solely with the passage of time and do not contain a service or performance requirement. In addition to the total purchase consideration, we issued 634,920 RSUs to the founders of skobbler. The fair value of the 634,920 RSUs issued in connection with the acquisition was $4.0 million, which is being accounted for as post-combination stock-based compensation and is being amortized over a weighted average period of 2.0 years.
The fair value of our common stock issued in connection with the acquisition was determined to be $6.32 per share, the closing price of our common stock on the acquisition measurement date, which is the date the acquisition closed.

15

TELENAV, INC.
Notes to Condensed Consolidated Financial Statements—(Continued)

The following table reflects the preliminary values of the assets acquired and liabilities assumed as of the acquisition date (in thousands):
Cash
 
$
100

Accounts receivable
 
177

Other assets
 
209

Customer relationships
 
400

Developed technology
 
7,100

Goodwill
 
16,907

Liabilities assumed
 
(1,135
)
    Total value of assets acquired and liabilities assumed
 
$
23,758

Our purchase price allocation is preliminary, and goodwill and liabilities assumed are subject to adjustment pending completion of our analysis of income tax accounting.
We determined the fair value of developed technology and customer relationships to be $7.1 million and $0.4 million, respectively. The fair value of the developed technology and customer relationships is being amortized using the straight-line method over the estimated life of 7.0 years and 18 months, respectively. Developed technology and customer relationships are included in goodwill and intangible assets, net of amortization on the consolidated balance sheets. We have recorded amortization expense of $213,000 related to developed technology and customer relationships for the three and nine months ended March 31, 2014.
As of March 31, 2014, expected amortization expense relating to acquisition-related intangible assets for each of the next five years and thereafter was as follows (in thousands):
Remainder of fiscal 2014
 
$
321

Fiscal 2015
 
1,281

Fiscal 2016
 
1,036

Fiscal 2017
 
1,014

Fiscal 2018
 
1,014

Thereafter
 
2,621

 
 
$
7,287

Goodwill of $16.9 million was recorded as the excess of the fair value of the purchase consideration over the fair value of the net assets acquired. This asset is attributed to buyer-specific value resulting from synergies that are not included in the fair value of assets. No goodwill was deemed to be deductible for income tax purposes.
Included in the purchase consideration is $3.7 million in cash that was paid by us and deposited in escrow to satisfy potential indemnification claims.
For the three and nine months ended March 31, 2014, we recognized $0.6 million and $1.1 million, respectively, in acquisition related costs that were included in general and administrative expenses. The amounts of revenue and income from skobbler for the three and nine months ended March 31, 2014 were not material.
Thinknear
On October 10, 2012, we completed our acquisition of privately held Thinknear, a California-based hyper-local mobile advertising company. We acquired 100% of the outstanding stock of Thinknear for consideration of approximately $22.5 million, consisting of approximately $18.4 million in cash, plus restricted shares of our common stock and assumed stock options. The acquisition of Thinknear has enabled us to combine its location ad targeting technology with our existing advertising solution to create a new mobile local advertising platform. The transaction has been accounted for under the acquisition method of accounting.
We recorded the assets acquired and liabilities assumed at their estimated fair value, with the difference between the fair value of the net assets acquired and the purchase consideration reflected as goodwill.

16

TELENAV, INC.
Notes to Condensed Consolidated Financial Statements—(Continued)

The total purchase consideration of $18.4 million was comprised of cash. In addition to cash, we issued 586,580 shares of restricted common stock and assumed options to acquire 74,491 shares (on an as-converted basis) of our common stock. The fair value of the restricted shares and assumed options issued in connection with the acquisition was $4.1 million, which is being accounted for as post-combination stock-based compensation. The $3.6 million fair value of the restricted shares and the $457,000 fair value of the assumed options will be amortized over a weighted average period of 1.78 years and 2.82 years, respectively.
The fair value of our common stock issued in connection with the acquisition was determined to be $6.23 per share, the closing price of our common stock on the acquisition measurement date, which is the date the acquisition closed. The weighted average fair value of the assumed stock options to purchase 74,491 shares of our common stock was $6.13 per share based on the Black-Scholes fair value on the acquisition measurement date.
The following table reflects the values of the assets acquired and liabilities assumed as of the acquisition date (in thousands):
Cash
 
$
181

Accounts receivable
 
410

Other assets
 
259

Developed technology
 
5,100

Goodwill
 
14,343

Liabilities assumed
 
(1,858
)
    Total value of assets acquired and liabilities assumed
 
$
18,435

We determined the fair value of developed technology to be $5.1 million, which is being amortized using the straight-line method over the estimated life of three years. Developed technology is included in goodwill and intangible assets, net of amortization on the consolidated balance sheet. Goodwill of $14.3 million was recorded as the excess of the fair value of the purchase consideration over the fair value of the net assets acquired. This asset is attributed to buyer-specific value resulting from synergies that are not included in the fair value of assets. No goodwill was deemed to be deductible for income tax purposes.
Included in the purchase consideration of $18.4 million is $2.7 million in cash that was withheld and deposited in escrow to satisfy potential indemnification claims. In January 2014, the $2.7 million held in escrow was paid to Thinknear stockholders.
11. Sale of enterprise business
On April 16, 2013, we completed the sale of our enterprise business to FleetCor Technologies Operating Company, LLC, or FleetCor, for $10.0 million in cash. In connection with the completion of the transaction, 50 of our employees became employees of FleetCor.
We entered an asset purchase agreement with FleetCor on March 12, 2013, which was amended and restated on April 16, 2013. The amended and restated asset purchase agreement, or the Agreement, included customary representations, warranties and covenants, including a license permitting FleetCor to utilize certain of our intellectual property. Upon closing, $1.3 million of the purchase price was held back by FleetCor and will be maintained for a period of twelve months to satisfy any amounts owed by us to FleetCor pursuant to our obligations under the Agreement, including indemnification provisions. As of March 31, 2014, $1.3 million was recorded in prepaid expenses and other current assets in our balance sheet. We received payment of the $1.3 million in May 2014.
In connection with the sale, we entered into a transition services agreement, pursuant to which we expect to continue to support certain aspects of the enterprise business while that business is transitioned to FleetCor, and a noncompetition agreement, pursuant to which we agreed not to compete with FleetCor in certain business areas related to the enterprise business for three years. The amounts of income from the transition services agreement for the three and nine months ended March 31, 2014 were not material.
Our continuing involvement through the transition services agreement with FleetCor was determined to be insignificant. Accordingly, the results of operations of our enterprise business have been classified as discontinued operations in our statement of income for all periods presented through fiscal 2013.
We recorded a gain of $6.5 million on the sale of our enterprise business, net of tax, in the fourth quarter of fiscal 2013.

17

TELENAV, INC.
Notes to Condensed Consolidated Financial Statements—(Continued)

12. Subsequent events

In April 2014, in connection with a consolidation of our facilities, we announced the expected closure of our Boston office by June 30, 2014. In addition, we anticipate completing the consolidation of our Sunnyvale headquarters facilities from two buildings into one during the fourth quarter of fiscal 2014. We expect to record costs of approximately $1.0 million in the fourth quarter of fiscal 2014 related to the facilities consolidation and severance and benefits for the positions eliminated.

18


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read together with our condensed consolidated financial statements and the notes to those statements included elsewhere in this Form 10-Q. This Form 10-Q contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally in the sections entitled “Risk Factors” and this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking statements include information concerning our possible or assumed future results of operations, future sources of revenue, expectations of expenses, business strategies, financing plans, competitive position, industry environment, potential growth opportunities and the effects of competition. Forward-looking statements include statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts, “projects,” “should,” “will,” “would” or similar expressions and the negatives of those terms.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail in “Risk factors” and elsewhere in this Form 10-Q. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Form 10-Q.
Except as required by law, we assume no obligation to update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. You should read this Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect.
In this Form 10-Q, “we,” “us” and “our” refer to Telenav, Inc. and its subsidiaries. We operate on a fiscal year ending June 30 and refer to the fiscal year ended June 30, 2013 as “fiscal 2013,” the fiscal year ending June 30, 2014 as “fiscal 2014 and the fiscal year ending June 30, 2015 as "fiscal 2015.”
Overview

Telenav is a leading provider of mobile navigation services and location based advertising services, and the worldwide leader delivering Open Street Map solutions. We deliver our navigation services in connected vehicles to auto manufacturers and through mobile devices to consumers to help people make smarter decisions about where to go, how to get there and what to do. Our Thinknear location based advertising services platform delivers highly targeted advertising for national brands and small business at locations that drive consumer behavior to the advertisers' goals.

We are a leader in personalized mobile navigation. We help on the go people by creating products that (1) provide easily-accessed, relevant, and personalized information for discovery, traffic, maps, local search, and navigation and (2) are available across multiple platforms and devices, including mobile phones, tablets, computers and cars. With millions of users able to access Telenav services while on the go today, we believe that we are well positioned to capitalize on growing location services market opportunities, especially as related to connected cars and mobile advertising.

We offer our mobile navigation services to customers in a number of ways. We distribute our services through our wireless carrier partners, including AT&T Mobility LLC, or AT&T, and directly to consumers through mobile application stores and marketplaces. Generally, we provide our basic services to consumers for free and provide consumers the opportunity to purchase premium versions of the product. We refer to the free to premium distribution as the “freemium” model of distribution. Our free products are designed to be monetized through delivery of advertising to consumers. Our success with the freemium model depends upon our ability to generate a substantial active user base as well as the ability to generate revenue from advertising and conversion of users from free to premium services.
We offer our automotive navigation services to auto manufacturers and original equipment manufacturers, or OEMs, for distribution with their vehicles. Our primary customer to date, Ford Motor Company, or Ford, currently distributes our product as an optional feature with the majority of its models in the U.S. Our product is now included on models manufactured in the U.S., Mexico, South America and China. We also have a relationship with another automotive OEM that distributes our products with another major auto manufacturer and in January 2014 we announced an agreement with a top five worldwide auto manufacturer for integration of our off-board and connected solutions in its vehicles, which we expect to commence in model year 2017. Our automotive solutions are typically a self-contained solution including software and related services and content within the car, or on-board, and are often enhanced through connection to data services for additional real time capabilities such as traffic. Our history as a cloud based supplier of navigation services provides a unique advantage in the marketplace over our competitors.

19



Our mobile advertising network offers advertisers significant audience reach, sophisticated targeting capabilities and the ability to deliver interactive and engaging ad experiences to consumers on their mobile devices. We are experts in location-based advertising and offer unique value to brick-and-mortar and brand advertisers with our location targeting capabilities. Our technology focuses on managing the complexity and scale associated with mobile location data to deliver better mobile campaigns for our brand and agency partners. We deliver mobile advertisements by leveraging our proprietary in-house ad serving technology. Our inventory, or accessible market, is comprised of thousands of mobile applications and mobile websites that are accessed through programmatic real-time bidding, or RTB, tools. In March 2014, our platform had access to over 75 billion potential ad impressions.

We derive revenue from wireless carriers and end users, automobile manufacturers and OEMs, and mobile advertisers and advertising agencies. We primarily derive our revenue from automobile manufacturers whose vehicles contain our proprietary software and are able to access our personalized navigation services. We also derive revenue from our partnerships with wireless carriers who sell our mobile navigation services to their subscribers. In addition, we have a growing business in mobile advertising where our customers are primarily advertising agencies that represent national and regional brands and channel partners that work closely with local and small business advertisers.

We generate revenue from the delivery of customized software and royalties from the distribution of customized software in automotive navigation applications. For example, Ford utilizes our on-board automotive navigation product in its Ford SYNC platform, which includes MyFord Touch and MyLincoln Touch. Ford began shipping this product in certain North American vehicles with the 2011 model year, and our navigation solution is currently deployed in 16 different Ford and Lincoln models in North America. Ford and Lincoln models with our on-board automotive navigation product began shipping to South America with the 2012 model year and China with the 2013 model year. Our automobile manufacturer and OEM customers pay us a royalty fee as the software is reproduced for installation in vehicles with our automotive navigation solutions.

We generate revenue from mobile navigation services through service subscriptions. End users with subscriptions for our services are generally billed for our services through their wireless carrier or through mobile application stores and marketplaces. Our wireless carrier customers pay us based on several different revenue models, including (1) a revenue sharing arrangement that may include a minimum fee per end user, (2) a monthly or annual subscription fee per end user, or (3) based on usage.

We generate revenue from advertising network services through the delivery of search and display advertising impressions based on the specific terms of the advertising contract.

Historically, our write-offs for uncollectible accounts have not been significant. However, as we generate more of our revenue from advertising services, we believe the risk profile of our customers is changing. We believe that certain of our advertising customers, who are often not as well capitalized as our mobile navigation and automotive navigation services customers, may present a higher risk of default and remit payment over extended collection periods. As a result, we anticipate that we may experience a greater risk of delayed payments and potential write-offs for uncollectible accounts as our advertising revenue grows.

Recent Developments

In April 2014, in connection with a consolidation of our facilities, we announced the expected closure of our Boston office by June 30, 2014. In addition, we anticipate completing the consolidation of our Sunnyvale headquarters facilities from two buildings into one during the fourth quarter of fiscal 2014. We expect to record costs of approximately $1.0 million in the fourth quarter of fiscal 2014 related to the facilities consolidation and severance and benefits for the positions eliminated.

On January 29, 2014, we completed our acquisition of all of the shares of privately held skobbler GmbH, or skobbler, a navigation company based in Germany. We acquired skobbler for consideration of approximately $23.8 million, consisting of approximately $19.2 million in cash and $4.6 million in restricted shares of our common stock. We believe the acquisition of skobbler will enable us to combine its OpenStreetMap (OSM)-based GPS navigation technology with our existing mobile navigation solutions. The transaction has been accounted for under the acquisition method of accounting.

In January 2014, we announced that we had entered into a contract with one of the five largest global auto manufacturers to provide worldwide embedded and connected navigation services beginning with select model year 2017 vehicles. The agreement covers an initial three-year production cycle, which we expect to commence with select model year 2017 vehicles.

20


Under the terms of the agreement, we expect our connected services to support navigation in more than 100 countries. There are no volume or revenue guarantees provided by this auto manufacturer.

As of October 1, 2013, Sprint Nextel Corporation, or Sprint, no longer provides us compensation for our services on a fixed fee basis for bundled offerings provided to its customers. The revenue we receive from Sprint consists primarily of revenue from monthly recurring fees paid by end users for premium services. The current monthly recurring fee revenue is substantially lower than the fee revenue we had previously received from Sprint for the bundling of our services and we anticipate that this trend will continue. Subsequent to October 1, 2013, we have not experienced significant replacement revenue from subscribers who formerly had access to our services through the Sprint bundles.

During fiscal 2013 and the three and nine months ended March 31, 2014, we also experienced declines in the number of paid monthly recurring fee end users at other large wireless carrier customers, including AT&T, T-Mobile USA, or T-Mobile, and U.S. Cellular Corporation, or USCC, and we expect this trend to continue. As a result, we expect that our revenue from wireless carrier partners will continue to decline substantially and that the composition of the remaining wireless carrier revenue will change over the near term. We expect our total revenue in fiscal 2014 will decline substantially from previous years as we do not foresee revenue from automotive navigation or advertising growing sufficiently to offset the loss of wireless carrier revenue in fiscal 2014.
In fiscal 2014, as was the case in fiscal 2013, we expect that subscription revenue from our partnerships with wireless carriers for navigation will continue to decline substantially as our agreement with Sprint has transitioned to a predominantly freemium model and our wireless carrier customers continue to experience declines in subscribers paying monthly recurring charges for navigation applications. We expect that over time, certain other wireless carrier partners will shift to models in which we are not compensated on a fixed basis for our services but instead share revenue received with them, whether that revenue is generated directly from monthly recurring charges for navigation services or from advertising in our navigation services.

We do not expect to be able to reduce our cost of services revenue at the same rate as services revenue, if at all. We will continue to incur significant costs, especially third party content and data center operations costs, associated with providing our navigation services at reduced revenue rates across a smaller group of subscribers or free under our freemium distribution model. We also anticipate that because of our efforts to grow automotive, mobile advertising and other strategic revenue sources, our operating expenses will not decline in fiscal 2014 at the same rate as our revenue, and in fact may increase. As a result, we incurred a net loss in the three months ended December 31, 2013, for the first time since fiscal 2007. We continued to incur a net loss for the three months ended March 31, 2014, and we believe that we will incur substantial net losses in fiscal 2014. At this time we do not know when we may return to profitability. We also expect our acquisition of skobbler to be dilutive to our results of operations in the near term.
In an effort to focus more and strengthen our strategic consumer, advertising and automotive businesses, in April 2013 we completed the sale of our enterprise business to FleetCor Technologies Operating Company, LLC, or FleetCor, for approximately $10.0 million in cash and the assumption by FleetCor of certain liabilities relating to our enterprise business. In connection with the completion of the transaction, 50 of our employees became employees of FleetCor. We entered into a noncompetition agreement with FleetCor in which we agreed not to re-enter the enterprise business for a period of three years after the closing. We are providing certain services to FleetCor to facilitate the transition of the business and we expect to continue to provide those services during the remainder of fiscal 2014. These services are not material to our statement of income for fiscal 2014 and they have not been presented as discontinued operations. The results of operations of our enterprise business have been classified as discontinued operations in our statement of income for all periods presented through fiscal 2013.

All information in the following management's discussion and analysis of financial condition and results of operations includes only results from continuing operations (excluding our enterprise business) for all periods presented, unless otherwise noted.
Key operating and financial performance metrics

We monitor the key operating and financial performance metrics set forth in the tables below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess our operational efficiencies. Certain of these measures, non-GAAP income (loss) from continuing operations, net of tax, adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA, from continuing operations and diluted non-GAAP income (loss) from continuing operations, net of tax, per share are not measures calculated in accordance with U.S. generally accepted accounting principles, or GAAP, and should not be considered as an alternative to any measure of financial performance

21


calculated and presented in accordance with GAAP. In addition, these non-GAAP measures may not be comparable to similarly titled measures of other companies because other companies may not calculate them in the same manner that we do.

 
 
Three Months Ended
 
Nine Months Ended
 
 
March 31,
 
March 31,
 
 
2014
 
2013
 
2014
 
2013
Revenue
 
$
34,471

 
$
54,987

 
$
115,928

 
$
144,738

Gross margin
 
59
%
 
61
%
 
61
%
 
65
%
Non-GAAP gross margin
 
62
%
 
63
%
 
63
%
 
67
%
Income (loss) from continuing operations, net of tax
 
$
(7,555
)
 
$
3,821

 
$
(11,543
)
 
$
6,460

Non-GAAP income (loss) from continuing operations, net of tax
 
$
(4,365
)
 
$
6,907

 
$
(2,703
)
 
$
15,073

Adjusted EBITDA from continuing operations
 
$
(6,783
)
 
$
8,832

 
$
(5,555
)
 
$
21,269

Diluted income (loss) from continuing operations, net of tax, per share
 
$
(0.19
)
 
$
0.09

 
$
(0.30
)
 
$
0.15

Diluted non-GAAP income (loss) from continuing operations, net of tax, per share
 
$
(0.11
)
 
$
0.17

 
$
(0.07
)
 
$
0.36


Gross margin is our gross profit, or total revenue less cost of revenue, expressed as a percentage of our total revenue. Our gross margin has been and will continue to be impacted by the increasing percentage of our revenue base derived from automotive navigation solutions and advertising network services, which generally have higher associated third party content costs and third party display ad inventory costs, respectively, than our navigation offerings provided through wireless carriers.
Non-GAAP gross margin measures our GAAP gross margin, excluding the impact of stock-based compensation expense and capitalized software and developed technology amortization expenses. Non-GAAP income (loss) from continuing operations, net of tax, measures GAAP net income (loss) from continuing operations, net of tax, excluding the impact of stock-based compensation expense, capitalized software and developed technology amortization expenses, and other items such as legal settlements and restructuring costs, net of taxes. Stock-based compensation expense relates to equity incentive awards granted to our employees, directors, and consultants. Stock-based compensation expense has been and will continue to be a significant recurring non-cash expense for us. While we include the dilutive impact of such equity awards in weighted average shares outstanding, the expense associated with stock-based awards reflects a non-cash charge that we exclude from non-GAAP income (loss) from continuing operations, net of tax, non-GAAP income (loss) from continuing operations, net of tax, per share, and adjusted EBITDA from continuing operations. Capitalized software amortization expense represents internal software costs that are previously capitalized and charged to expense as the software is used in our operations. Developed technology amortization expense relates to the amortization of acquired intangible assets. Legal settlements represent settlements from patent litigation cases in which we are defendants and royalty disputes.  Restructuring costs represent recognition of the estimated amount of costs associated with restructuring activities. Our non-GAAP tax rate from continuing operations differs from the GAAP tax rate from continuing operations due to the elimination of any tax effect of the GAAP stock-based compensation expenses, capitalized software and developed technology amortization expenses, legal settlements, restructuring costs, and other items that are being eliminated to arrive at the non-GAAP income (loss) from continuing operations, net of tax.
Adjusted EBITDA from continuing operations measures our GAAP income (loss) excluding the impact of stock-based compensation expense, depreciation, amortization, interest income, other income (expense), provision (benefit) for income taxes, and other items such as legal settlements and restructuring costs, net of tax. Adjusted EBITDA, while generally a measure of profitability, can also represent a loss and this metric excludes certain non-cash expenses, interest and other income (expense), income taxes, and certain other items that management believes affect the comparability of operating results.
Non-GAAP gross margin, non-GAAP income (loss) from continuing operations, net of tax, and adjusted EBITDA from continuing operations are key measures used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans. In particular, we believe that the exclusion of the expenses eliminated in calculating non-GAAP gross margin, non-GAAP income (loss) from continuing operations, net of tax, and adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. In addition, non-GAAP income (loss) from continuing operations, net of tax, and adjusted EBITDA are key financial measures used by the compensation committee of our board of directors in connection with the development of incentive-based compensation for our executive officers. Accordingly, we believe that non-GAAP gross margin, non-GAAP income (loss) from continuing operations, net of tax, and adjusted EBITDA provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

22


Diluted non-GAAP income (loss) from continuing operations, net of tax, per share is calculated as non-GAAP income (loss) from continuing operations, net of tax, divided by the diluted weighted average number of shares outstanding during the period.
These non-GAAP measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our financial results as reported under GAAP. Some of these limitations are:
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA from continuing operations does not reflect cash capital expenditure requirements for such replacements or for new capital expenditures;
non-GAAP gross margin, non-GAAP income (loss) from continuing operations, net of tax, and adjusted EBITDA from continuing operations do not reflect the potentially dilutive impact of equity-based compensation;
adjusted EBITDA does not reflect tax payments that historically have represented a reduction in cash available to us or tax benefits that may arise as a result of generating net losses; and
other companies, including companies in our industry, may calculate adjusted EBITDA or similarly titled measures differently, which reduces its usefulness as a comparative measure.
Because of these and other limitations, you should consider non-GAAP gross margin, non-GAAP income (loss) from continuing operations, net of tax, adjusted EBITDA from continuing operations and diluted non-GAAP income (loss) from continuing operations, net of tax, per share alongside other GAAP-based financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP financial results.
The following tables present reconciliations of gross margin to non-GAAP gross margin, income (loss) from continuing operations, net of tax, to non-GAAP income (loss) from continuing operations, net of tax, and income (loss) from continuing operations, net of tax, to adjusted EBITDA from continuing operations for each of the periods indicated:

 
 
Three Months Ended
March 31,
 
Nine Months Ended
March 31,
 
 
2014
 
2013
 
2014
 
2013
Gross margin
 
59
%
 
61
%
 
61
%
 
65
%
Adjustments:
 
 
 
 
 
 
 
 
Capitalized software and developed technology amortization
 
3
%
 
2
%
 
2
%
 
2
%
Stock-based compensation expense
 
%
 
%
 
%
 
%
Non-GAAP gross margin
 
62
%
 
63
%
 
63
%
 
67
%

 
 
Three Months Ended
March 31,
 
Nine Months Ended
March 31,
 
 
2014
 
2013
 
2014
 
2013
Net income (loss)
 
$
(7,555
)
 
$
3,854

 
$
(11,543
)
 
$
7,459

Income from discontinued operations, net of tax
 

 
33

 

 
999

Income (loss) from continuing operations, net of tax
 
(7,555
)
 
3,821

 
(11,543
)
 
6,460

Adjustments:
 
 
 
 
 
 
 
 
Legal settlement
 

 

 

 
1,300

Capitalized software and developed technology amortization
 
947

 
1,024

 
2,666

 
2,700

Stock-based compensation expense:
 
 
 
 
 
 
 
 
Cost of revenue
 
$
17

 
$
41

 
$
83

 
$
117

Research and development
 
1,131

 
1,017

 
3,203

 
2,545

Sales and marketing
 
757

 
684

 
2,223

 
1,676

General and administrative
 
970

 
875

 
2,512

 
1,876

Total stock-based compensation
 
2,875

 
2,617

 
8,021

 
6,214

Tax effect of adding back adjustments
 
(632
)
 
(555
)
 
(1,847
)
 
(1,601
)
Non-GAAP income (loss) from continuing operations, net of tax
 
$
(4,365
)
 
$
6,907

 
$
(2,703
)
 
$
15,073


23




 
 
Three Months Ended
March 31,
 
Nine Months Ended
March 31,
 
 
2014
 
2013
 
2014
 
2013
Net income (loss)
 
$
(7,555
)
 
$
3,854

 
$
(11,543
)
 
$
7,459

Income from discontinued operations, net of tax
 

 
33

 

 
999

Income (loss) from continuing operations, net of tax
 
(7,555
)
 
3,821

 
(11,543
)
 
6,460

Adjustments:
 
 
 
 
 
 
 
 
Legal settlement
 

 

 

 
1,300

Stock-based compensation expense
 
2,875

 
2,617

 
8,021

 
6,214

Depreciation and amortization
 
1,695

 
2,172

 
5,119

 
6,427

Interest and other (income) expense, net
 
344

 
(266
)
 
(1,059
)
 
(1,302
)
Provision (benefit) for income taxes
 
(4,142
)
 
488

 
(6,093
)
 
2,170

Adjusted EBITDA from continuing operations
 
$
(6,783
)
 
$
8,832

 
$
(5,555
)
 
$
21,269


Key components of our results of operations
Sources of revenue
We offer voice-guided, real time, turn by turn, mobile navigation service under several brand names including Scout by Telenav and Telenav GPS as well as under wireless carrier brands (or “white label” brands) including AT&T Navigator and Your Navigator Deluxe. Our technology also powers automotive navigation solutions that provide accurate, easy to use navigation services to drivers, including search, points of interest, or POI, and traffic services. We believe our cash, cash equivalents and short-term investments will be sufficient to cover the anticipated use of cash from operations for the foreseeable future.
We offer our mobile navigation services to customers in a number of ways. Currently, we primarily derive our revenue from our wireless carrier customers for their end users' subscriptions to our mobile navigation services. Our wireless carrier customers pay us based on several different revenue models, including (1) a revenue sharing arrangement that may include a minimum fee per end user, (2) a monthly or annual subscription fee per end user, or (3) based on usage. Certain of our contracts provide our wireless carrier customers with discounts based on the number of end users paying for our services in a given month. In general, our wireless carrier customers pay us a lower monthly fee per end user if an end user subscribes to our mobile navigation services as part of a bundle of mobile data or voice services than if an end user subscribes to our mobile navigation services on a standalone basis. We also offer our applications directly to end users through application stores such as the Apple App Store and the Google Play marketplace. Finally, we provide free versions of our services which can generate revenue through advertising supported arrangements, and subscriber upgrades to premium versions for a fee.
We derive revenue from the delivery of customized software products and royalties from the distribution of these software products in certain automotive navigation applications. We also derive revenue from advertising network services through the delivery of search and display advertising impressions based on the specific terms of the advertising contract, which we began to offer in the three months ended December 31, 2012 with our acquisition of Thinknear. In the future, we may have other revenue models. We classify our revenue as either product or services revenue. Product revenue consists primarily of revenue we receive from the delivery of customized software and royalties from the distribution of this customized software in certain automotive navigation applications; services revenue consists primarily of revenue we derive from our mobile navigation services, off-board automotive navigation services, mobile advertising and premium navigation services.

For services that our subscribers purchase through our wireless carriers, our wireless carrier customers are responsible for billing and collecting the fees they charge their subscribers for the right to use our navigation services. With respect to Sprint, through September 30, 2013, we received a guaranteed fixed fee from Sprint for navigation applications provided to subscribers in bundles with other Sprint services. We recognized revenue for the aggregate fees monthly on a straight-line basis over the term of the agreement. When we are paid on a revenue sharing basis with our wireless carrier customers, the amount we receive varies depending on several factors, including the revenue share rate negotiated with the wireless carrier customer, the price charged to the subscriber by the wireless carrier customer, the specific sales channel of the wireless carrier customer in which the service is offered and the features and capability of the service. As a result of these factors, the amount we receive for a subscriber may vary considerably and is subject to change over time.

24



In addition, the amount we are paid per end user in our revenue sharing arrangements may also vary depending upon the metric used to determine the amount of the payment, including the number of end users at any time during a month, the average monthly paying end users, the number and timing of end user billing cycles and end user activity. Although our wireless carrier customers generally have sole discretion about how to price our mobile navigation services to their subscribers, our revenue sharing arrangements generally include monthly minimum fees per end user. To a much lesser extent, we also sell our services directly to consumers through application stores.
Ford represented 45% and 34% of our revenue in the nine months ended March 31, 2014 and 2013, respectively. In April 2014, our agreement with Ford was extended through December 2017. We provide both on-board and off-board connected navigation solutions to Ford. Our on-board solution consists of software, map and POI data loaded in the vehicle that provides voice-guided turn by turn navigation displayed on the vehicle screen. We recognize revenue from our on-board solutions as the related customized software is delivered to, and accepted by our customers. In addition, we recognize royalties earned from our on-board solutions generally as the software is reproduced for installation in vehicles. Our off-board connected solution enables a mobile device that is paired with the vehicle to activate in-vehicle text-based and voice-guided turn by turn navigation. We recognize revenue from our off-board connected solutions monthly based on annual subscriptions, which are subject to a maximum annual fee with Ford. We anticipate that we will continue to depend on Ford for a material portion of our revenue for the foreseeable future.
AT&T represented 25% and 30% of our revenue in the nine months ended March 31, 2014 and 2013, respectively. In March 2014, our agreement with AT&T was automatically renewed, under its existing terms through March 2015, and provides that we will continue to be the exclusive provider of white label GPS navigation services to AT&T. AT&T is not required to offer our navigation services. We anticipate that we will continue to depend on AT&T for a material portion of our revenue for the foreseeable future; however, we have recently seen substantial declines in the number of paying subscribers for our services through AT&T.
Sprint represented 7% and 17% of our revenue in the nine months ended March 31, 2014 and 2013, respectively. We operate under an agreement with Sprint, which we most recently amended in April 2013. Under this amended agreement, we and Sprint agreed to continue the fixed fee arrangement related to the Sprint bundle through September 30, 2013, and to partner to generate revenue from premium navigation and mobile advertising programs through December 31, 2015. Commencing on October 1, 2013, Sprint no longer bundles our navigation services, which caused our revenue to decrease substantially in the three and nine months ended March 31, 2014. A majority of the Sprint subscribers who were receiving our services through bundles as of September 30, 2013 did not convert to our paid navigation services and we have not recouped the lost revenue through freemium or monthly recurring charges paid by those Sprint subscribers.
Subscription fee revenue from our mobile navigation services represented 44% and 64% of our revenue in the nine months ended March 31, 2014 and 2013, respectively. Subscription fee revenue from our mobile navigation services declined in the comparable nine month period, primarily due to the transition to the termination of the Sprint fixed fee services as of October 1, 2013 and a decrease in the number of paying subscribers for navigation services provided through wireless carriers. Revenue from our automotive navigation solutions represented 49% and 34% of our revenue in the nine months ended March 31, 2014 and 2013, respectively. Revenue from our mobile advertising services represented 7% and 2% of our revenue in the nine months ended March 31, 2014 and 2013, respectively.

We expect that the percentage of our revenue represented by wireless carrier customers will decline substantially in fiscal 2014 because Sprint ceased to bundle our services as of October 1, 2013 and more end users are using free navigation services rather than paying monthly recurring charges with other wireless carrier customers. Subsequent to October 1, 2013, we have not been successful in the short term at fully replacing lost wireless carrier revenue with revenue from automotive and advertising, resulting in a substantial decline in our total revenue in fiscal 2014 relative to prior years.

For fiscal 2014, we expect automotive and advertising revenue to represent the most rapidly growing components of our revenue but our expectations may not be realized. Although we are working to replace historical wireless carrier revenue, we believe that the growth of alternative sources of revenue, while material, will be insufficient to offset the declines in wireless carrier revenue in the short-term. As a result, we have incurred and expect to continue to incur net losses in fiscal 2014 and we do not know when we may return to profitability.

In the nine months ended March 31, 2014 and 2013, we generated 94% and 92% of our revenue, respectively, in the United States. With respect to revenue we receive from automobile manufacturers and OEMs for sales of vehicles in other countries, we classify that revenue as being generated in the United States, because we provide deliverables to and receive compensation from the manufacturer's or OEM's United States' entity.

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Cost of revenue
Our cost of revenue consists primarily of the cost of third party content, such as map, POI, traffic, gas price and weather data and voice recognition technology that we use in providing our navigation services. Our cost of revenue also includes the cost of third party exchange ad inventory as well as expenses associated with data center operations, customer support, the amortization of capitalized software, recognition of deferred development costs on specific projects, and amortization of developed technology. The largest component of our cost of revenue is the fee we pay to providers of map, POI and traffic data, TomTom North America, Inc., or TomTom, and HERE North America, LLC, or HERE, a Nokia Company . We have agreements with TomTom and HERE pursuant to which we pay royalties according to a variety of different fee schedules, including on a per use basis, on a per end user per month basis, and on a per installed vehicle basis. With respect to TomTom, we are required to pay certain minimum fees for access to its content by our mobile navigation customers, as well as a usage fee. For our on-board navigation solutions provided to Ford, we pay royalties on a per unit produced basis to HERE. We classify our cost of revenue as either cost of product revenue or cost of services revenue. Cost of product revenue consists primarily of the cost of third party content we incur in providing our on-board automotive navigation solutions and recognition of deferred development costs. Cost of services revenue consists primarily of the costs associated with third party content, third party exchange ad inventory, data center operations, customer support, amortization of capitalized software, stock-based compensation and amortization of developed technology that we incur in providing our navigation services, mobile advertising and premium navigation services.
We primarily provide mobile navigation service customer support through a third party provider to whom we provide training and assistance with problem resolution. We use two outsourced, hosted data centers and industry standard hardware to provide our navigation services. We generally offer to our wireless carrier customers and generally maintain at least 99.9% uptime every month, excluding designated periods of maintenance. Our internal targets for service uptime are even higher. We have in the past, and may in the future, not achieve our targets for service availability and may incur penalties for failure to meet contractual service availability requirements, including loss of a portion of subscriber fees for the month or termination of our wireless carrier customer agreement.

While we expect that services revenue from wireless carrier customers will decline substantially in fiscal 2014 and fiscal 2015, we do not expect to be able to reduce our cost of services revenue at the same rate as services revenue, if at all. We will continue to incur significant costs, especially third party content and data center operations costs, associated with providing our navigation services at reduced revenue rates or free under our freemium distribution model. We expect that our total cost of revenue will increase as a percentage of revenue as we increase the percentage of our revenue from automotive navigation solutions and advertising network services, which generally have higher associated third party content costs and third party display ad costs, respectively, than our navigation offerings provided through wireless carriers. We expect that our cost of revenue will decrease in absolute dollars, as it will be impacted by declining third party content costs associated with the decline in revenue from wireless carrier customers, partially offset by increased amortization of developed technology acquired. Cost of revenue related to our advertising business will be impacted by our ability to grow advertising revenue, as well as the cost and availability of display ad inventory sourced from third party exchanges. We anticipate that we may be able to realize a slight decrease in cost of services revenue with the launch of our OSM-based application, initially on our freemium solution, in fiscal 2015.
Operating expenses
We classify our operating expenses into three categories: research and development, sales and marketing and general and administrative. Our operating expenses consist primarily of personnel costs, which include salaries, bonuses, payroll taxes, employee benefit costs and stock-based compensation expense. Other expenses include marketing program costs, facilities, legal, audit and tax consulting and other professional service fees. We allocate stock-based compensation expense resulting from the amortization of the fair value of stock-based awards granted, based on the department in which the award holder works. We allocate overhead, such as rent and depreciation, to each expense category based on headcount. Our operating expenses have stabilized in absolute dollars in the past year, as we have reduced certain headcount and achieved greater operational effectiveness. Despite these recent efforts, we expect that certain costs will continue to increase over time, including compensation and related costs; however, we are continuing to evaluate spending in certain areas and taking actions to create greater efficiencies. We anticipate continued investment of resources, including the hiring of additional headcount in, or reallocation of employee personnel into, our growth areas, which include automotive and mobile advertising.
Research and development. Research and development expenses consist primarily of personnel costs for our development employees and costs of outside consultants. We have focused our research and development efforts on improving the ease of use and functionality of our existing services, as well as developing new service and product offerings in our existing markets and in new markets. A majority of our research and development employees are located in our development centers in China and, as a result, a portion of our research and development expense is subject to changes in foreign exchange rates, notably the

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Chinese Renminbi, or RMB. In addition, with the January 2014 acquisition of skobbler, we expect to also incur research and development expenses in the Romanian Leu.
Sales and marketing. Sales and marketing expenses consist primarily of personnel costs for our sales, product management and marketing staff, commissions earned by our sales personnel and the cost of marketing programs, advertising and promotional activities. Historically, a majority of our revenue was derived from wireless carriers, which bore much of the expense of marketing and promoting our services to their subscribers, as well as consumers acquired through open market application stores. More recently, our automotive and advertising revenue have represented the most rapidly growing components of our revenue, and we have invested in building our advertising sales team. Our sales and marketing activities supporting our automotive navigation services include product management and business development efforts. Our automotive manufacturer partners and OEMs also provide primary marketing for our on-board and off-board navigation services at the time a vehicle is sold to their end customer. We expect to increase our investment in sales and marketing activities, in part, to support our initiatives in the automotive industry and mobile advertising and to promote our branded services directly to end users.
General and administrative. General and administrative expenses consist primarily of personnel costs for our executive, finance, legal, human resources and administrative personnel, legal, audit and tax consulting and other professional services and corporate expenses.
Other income (expense), net. Other income, net consists primarily of interest we earn on our cash, cash equivalents and short-term investments, and foreign exchange gains and losses.
Income from discontinued operations, net of tax. Income from discontinued operations, net of tax, consists of results of operations of our enterprise business, which was sold in April 2013.

Provision (benefit) for income taxes. Historically, our provision for income taxes primarily consisted of corporate income taxes related to profits earned in the United States. However, in the three and nine months ended March 31, 2014, we have recognized a tax benefit on