0001474439-18-000057.txt : 20181109 0001474439-18-000057.hdr.sgml : 20181109 20181109170851 ACCESSION NUMBER: 0001474439-18-000057 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 82 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181109 DATE AS OF CHANGE: 20181109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Telenav, Inc. CENTRAL INDEX KEY: 0001474439 STANDARD INDUSTRIAL CLASSIFICATION: SEARCH, DETECTION, NAVIGATION, GUIDANCE, AERONAUTICAL SYS [3812] IRS NUMBER: 770521800 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-34720 FILM NUMBER: 181173930 BUSINESS ADDRESS: STREET 1: 4655 GREAT AMERICA PARKWAY STREET 2: SUITE 300 CITY: SANTA CLARA STATE: CA ZIP: 95054 BUSINESS PHONE: (408) 245-3800 MAIL ADDRESS: STREET 1: 4655 GREAT AMERICA PARKWAY STREET 2: SUITE 300 CITY: SANTA CLARA STATE: CA ZIP: 95054 FORMER COMPANY: FORMER CONFORMED NAME: TeleNav, Inc. DATE OF NAME CHANGE: 20100415 FORMER COMPANY: FORMER CONFORMED NAME: TNAV Holdings, Inc. DATE OF NAME CHANGE: 20091014 10-Q 1 tnav930201810q.htm 10-Q Document

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 quarterly period ended September 30, 2018

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)

4655 Great America Parkway, Suite 300
Santa Clara, California 95054
(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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
 
¨
 
Accelerated filer
 
ý
 
 
 
 
 
 
 
Non-accelerated filer
 
¨
 
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 September 30, 2018, there were approximately 45,260,738 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 par value)
(unaudited)
 
 
 
September 30,
2018
 
June 30,
2018
 
 
 
 
 
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
13,596

 
$
17,117

Short-term investments
 
67,675

 
67,829

Accounts receivable, net of allowances of $11 and $17 at September 30, 2018 and June 30, 2018, respectively
 
46,956

 
46,188

Restricted cash
 
2,930

 
2,982

Deferred costs
 
13,842

 
9,906

Prepaid expenses and other current assets
 
3,393

 
3,867

Total current assets
 
148,392

 
147,889

Property and equipment, net
 
6,412

 
6,987

Deferred income taxes, non-current
 
550

 
867

Goodwill and intangible assets, net
 
30,763

 
31,046

Deferred costs, non-current
 
46,466

 
46,363

Other assets
 
3,517

 
2,372

Total assets
 
$
236,100

 
$
235,524

Liabilities and stockholders’ equity
 
 
 
 
Current liabilities:
 
 
 
 
Trade accounts payable
 
$
16,144

 
$
13,008

Accrued expenses
 
36,038

 
38,803

Deferred revenue
 
21,892

 
18,195

Income taxes payable
 
368

 
221

Total current liabilities
 
74,442

 
70,227

Deferred rent, non-current
 
1,200

 
1,112

Deferred revenue, non-current
 
57,031

 
53,855

Other long-term liabilities
 
1,192

 
1,115

Commitments and contingencies
 

 

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; 45,260 and 44,871 shares issued and outstanding at September 30, 2018 and June 30, 2018, respectively
 
45

 
45

Additional paid-in capital
 
168,984

 
167,895

Accumulated other comprehensive loss
 
(1,981
)
 
(1,855
)
Accumulated deficit
 
(64,813
)
 
(56,870
)
Total stockholders’ equity
 
102,235

 
109,215

Total liabilities and stockholders’ equity
 
$
236,100

 
$
235,524

(1) See Note 1 for a summary of adjustments.
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
 
 
September 30,
 
 
2018
 
2017
As Adjusted(1)
Revenue:
 
 
 
 
Product
 
$
40,471

 
$
42,659

Services
 
11,697

 
14,303

Total revenue
 
52,168

 
56,962

Cost of revenue:
 
 
 
 
Product
 
23,930

 
29,441

Services
 
7,174

 
6,382

Total cost of revenue
 
31,104

 
35,823

Gross profit
 
21,064

 
21,139

Operating expenses:
 
 
 
 
Research and development
 
20,102

 
20,681

Sales and marketing
 
4,415

 
5,064

General and administrative
 
5,450

 
5,211

Legal settlement and contingencies
 

 
250

Total operating expenses
 
29,967

 
31,206

Loss from operations
 
(8,903
)
 
(10,067
)
Other income (expense), net
 
1,590

 
(47
)
Loss before provision for income taxes
 
(7,313
)
 
(10,114
)
Provision for income taxes
 
630

 
255

Net loss
 
$
(7,943
)
 
$
(10,369
)
 
 
 
 
 
Net loss per share:
 
 
 
 
Basic and diluted
 
$
(0.18
)
 
$
(0.24
)
Weighted average shares used in computing net loss per share:
 
 
 
 
Basic and diluted
 
45,018

 
44,079

 
 
 
 
 
Stock-based compensation expense included above:
 
 
 
 
Cost of revenue
 
$
32

 
$
35

Research and development
 
1,304

 
1,395

Sales and marketing
 
326

 
438

General and administrative
 
607

 
612

Total stock-based compensation expense
 
$
2,269

 
$
2,480

(1) See Note 1 for a summary of adjustments.
See accompanying Notes to Condensed Consolidated Financial Statements.

2


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


 
 
Three Months Ended
 
 
September 30,
 
 
2018
 
2017
As Adjusted(1)
 
 
 
 
 
Net loss
 
$
(7,943
)
 
$
(10,369
)
Other comprehensive income (loss):
 
 
 
 
Foreign currency translation adjustment, net of tax
 
(217
)
 
359

Available-for-sale securities:
 
 
 
 
Unrealized gain on available-for-sale securities, net of tax
 
89

 
28

Reclassification adjustments for gain on available-for-sale securities recognized, net of tax
 
2

 

Net increase from available-for-sale securities, net of tax
 
91

 
28

Other comprehensive income (loss), net of tax
 
(126
)
 
387

Comprehensive loss
 
$
(8,069
)
 
$
(9,982
)
 
 
 
 
 
(1) See Note 1 for a summary of adjustments.
See accompanying Notes to Condensed Consolidated Financial Statements.


3


TELENAV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 
Three Months Ended
 
 
September 30,
 
 
2018
 
2017
As Adjusted(1)
Operating activities
 
 
 
 
Net loss
 
$
(7,943
)
 
$
(10,369
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
Depreciation and amortization
 
1,010

 
716

Deferred rent reversal due to lease termination
 

 
(538
)
Tenant improvement allowance recognition due to lease termination
 

 
(582
)
Accretion of net premium on short-term investments
 
5

 
59

Stock-based compensation expense
 
2,269

 
2,480

Unrealized gain on non-marketable equity investments
 
(1,259
)
 

Loss (gain) on disposal of property and equipment
 
(1
)
 
8

Bad debt expense
 
1

 
38

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
(780
)
 
(2,109
)
Deferred income taxes
 
308

 
104

Deferred costs
 
(4,039
)
 
(5,474
)
Prepaid expenses and other current assets
 
470

 
(115
)
Other assets
 
42

 
(326
)
Trade accounts payable
 
3,167

 
9,463

Accrued expenses and other liabilities
 
(2,600
)
 
(6,037
)
Income taxes payable
 
149

 
(123
)
Deferred rent
 
35

 
191

Deferred revenue
 
6,873

 
8,826

Net cash used in operating activities
 
(2,293
)
 
(3,788
)
Investing activities
 
 
 
 
Purchases of property and equipment
 
(100
)
 
(2,286
)
Purchases of short-term investments
 
(10,624
)
 
(13,355
)
Proceeds from sales and maturities of short-term investments
 
10,865

 
16,697

Net cash provided by investing activities
 
141

 
1,056

Financing activities
 
 
 
 
Proceeds from exercise of stock options
 
24

 
197

Tax withholdings related to net share settlements of restricted stock units
 
(1,206
)
 
(1,102
)
Net cash used in financing activities
 
(1,182
)
 
(905
)
Effect of exchange rate changes on cash and cash equivalents
 
(239
)
 
345

Net decrease in cash, cash equivalents and restricted cash
 
(3,573
)
 
(3,292
)
Cash, cash equivalents and restricted cash, at beginning of period
 
20,099

 
24,158

Cash, cash equivalents and restricted cash, at end of period
 
$
16,526

 
$
20,866

Supplemental disclosure of cash flow information
 
 
 
 
Income taxes paid, net
 
$
166

 
$
304

Reconciliation of cash, cash equivalents and restricted cash to the condensed consolidated balance sheets
 
 
 
 
Cash and cash equivalents
 
$
13,596

 
$
17,463

Restricted cash
 
2,930

 
3,403

Total cash, cash equivalents and restricted cash
 
$
16,526

 
$
20,866

(1) See Note 1 for a summary of adjustments.
See accompanying Notes to Condensed Consolidated Financial Statements.

4


TELENAV, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 leading provider of connected car and location-based products and services. We utilize our automotive navigation platform and our advertising delivery platform to deliver these products and services. Our automotive navigation platform allows us to deliver enhanced location-based services to automobile manufacturers, as well as original equipment manufacturers and tier one suppliers, to which we refer collectively as tier ones. Our automotive solutions primarily include navigation systems built into vehicles, or on-board, mobile phone based navigation systems, or brought-in, and advanced navigation solutions that offer on-board functionality combined with cloud functionality, or hybrid. Our advertising delivery platform, which we provide through our Thinknear subsidiary, delivers highly targeted advertising services leveraging our location expertise. We operate in three segments - automotive, advertising and mobile navigation. Our fiscal year ends on June 30, and in this report we refer to the fiscal year ended June 30, 2018 as “fiscal 2018” and the fiscal year ending June 30, 2019 as “fiscal 2019.”
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 its 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.
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. The results of Jitu did not have a material impact on our financial statements for the three months ended September 30, 2018 and 2017.
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 2018, included in our Annual Report on Form 10-K for fiscal 2018 filed with the U.S. Securities and Exchange Commission, or SEC, on September 12, 2018.
Effective July 1, 2018, we adopted the requirements of Accounting Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers (Topic 606) as discussed in the section titled “Recently adopted accounting pronouncements” of this Note 1. All amounts and disclosures set forth in this Form 10-Q have been updated to comply with this standard, as indicated by references to “as adjusted” in these condensed consolidated financial statements and related notes.
With the exception of changes in accounting policies associated with our adoption of the new revenue recognition standard, there have been no material changes to our significant accounting policies as compared to the significant accounting policies described in our Form 10-K for fiscal 2018.
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, including estimating and allocating the transaction price of customer contracts, the recoverability of accounts receivable and short-term investments, the determination of acquired intangibles and assessment of goodwill for impairment, the fair value of stock-based awards issued, the determination of income taxes and the recoverability of deferred tax assets. Actual results could differ from those estimates.

5

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

Concentrations of risk and significant customers
Revenue related to products and services provided through Ford Motor Company and affiliated entities, or Ford, comprised 60% and 73% of revenue for the three months ended September 30, 2018 and 2017, respectively. As of September 30, 2018 and June 30, 2018, receivables due from Ford were 50% and 56% of total accounts receivable, respectively. Revenue related to products and services provided through General Motors Holdings and its affiliates, or GM, comprised 13% and less than 10% of revenue for the three months ended September 30, 2018 and 2017, respectively. As of September 30, 2018 and June 30, 2018, receivables due from GM were 16% and 10% of total accounts receivable, respectively.
Restricted cash
As of September 30, 2018 and June 30, 2018, we had restricted cash of $2.9 million and $3.0 million, respectively, on our consolidated balance sheets, comprised primarily of prepayments from a customer.
Accumulated other comprehensive loss, net of tax
The components of accumulated other comprehensive loss, net of related taxes, and activity as of September 30, 2018, 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, 2018
 
$
(1,163
)
 
$
(692
)
 
$
(1,855
)
Other comprehensive income (loss) before reclassifications, net of tax
 
(217
)
 
89

 
(128
)
Amount reclassified from accumulated other comprehensive loss, net of tax
 

 
2

 
2

Other comprehensive income (loss), net of tax
 
(217
)
 
91

 
(126
)
Balance, net of tax as of September 30, 2018
 
$
(1,380
)
 
$
(601
)
 
$
(1,981
)

The amount of income tax benefit allocated to each component of accumulated other comprehensive loss was not material for the three months ended September 30, 2018.
Goodwill
Goodwill represents the excess of the aggregate purchase price paid over the fair value of the net assets acquired. Goodwill is not amortized and is tested for impairment at least annually on April 1 or whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
During the three months ended March 31, 2018, certain mobile navigation customer contracts were amended and certain other customers indicated their intent with respect to terminating services in the near term. Based upon a qualitative assessment indicating that it was more likely than not that the fair value of the mobile navigation reporting unit was less than its carrying value, we performed an interim goodwill impairment test for our mobile navigation segment. In assessing its fair value, we made assumptions regarding our estimated future cash flows, weighted average cost of capital and timing over which the cash flows will occur, amongst other factors. Based on the results of our goodwill impairment test, the carrying value of our mobile navigation business exceeded its estimated fair value and, accordingly, during the three months ended March 31, 2018, we recognized a $2.7 million impairment of all of the goodwill associated with our mobile navigation segment.
Recently adopted accounting pronouncements
In November 2016, the Financial Accounting Standards Board, or FASB, issued new guidance to clarify how entities should present restricted cash and restricted cash equivalents in the statement of cash flows. The new guidance requires that restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning and ending total amounts shown in the statement of cash flows. The new standard was effective for us in our first quarter of fiscal 2019 and requires a retrospective method of adoption. We adopted this standard on July 1, 2018 on a retrospective basis, resulting in immaterial changes to our previously reported condensed consolidated statement of cash flows for the three months ended September 30, 2017.

6

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

In August 2016, the FASB issued new guidance which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. The new standard was effective for us in our first quarter of fiscal 2019. We adopted this standard on July 1, 2018, and it did not have a material impact to our condensed consolidated statements of cash flows.
In March 2016, the FASB issued new guidance to clarify the implementation guidance on principal versus agent considerations for reporting revenue gross versus net. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customer. The new standard was effective for us in our first quarter of fiscal 2019. We adopted this standard on July 1, 2018 in connection with our adoption of ASU 2014-09 discussed below, and it did not have a material impact to our condensed consolidated financial statements.
In January 2016, the FASB issued new guidance that amends the accounting and disclosures of financial instruments, including a provision that requires equity investments (except for investments accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in current earnings. A practicality exception applies to those equity investments that do not have a readily determinable fair value. These investments may be measured at cost, adjusted for changes in observable prices minus impairment. The new standard was effective prospectively for us in our first quarter of fiscal 2019 for our equity investments, which were previously accounted for under the cost-method. We adopted this standard on July 1, 2018. See Note 4 to these condensed consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. Under Topic 606, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. In conjunction with Topic 606, a new subtopic, ASC 340-40, Other Assets and Deferred Costs - Contracts with Customers, was also issued. The updated standard replaces most existing revenue recognition and certain cost guidance under GAAP. Collectively, we refer to Topic 606 and Subtopic 340-40 as “ASC 606.”
We adopted ASC 606 effective July 1, 2018, utilizing the full retrospective transition method. Adoption of ASC 606 resulted in changes to our accounting policies for revenue recognition and deferred costs as detailed below. We applied ASC 606 using a practical expedient where the consideration allocated to the remaining performance obligations or an explanation of when we expect to recognize that amount as revenue for all reporting periods presented before the date of the initial application is not disclosed.
The effect of adopting ASC 606 on fiscal 2018 was material to our statements of operations and balance sheets as a result of its impact on the recognition of revenue and associated third-party content costs for certain of our on-board and brought-in automotive navigation solutions. The adoption of ASC 606 had no significant impact on our advertising and mobile navigation business segments. The adoption of ASC 606 resulted in reductions to deferred costs (asset) and deferred revenue (liability) balances, and accelerated the recognition of revenues and deferred costs in the automotive segment.
With respect to on-board automotive solutions, historically we recognized revenue and associated content costs over the life of our contractual obligations when map updates were included, and we deferred substantially all revenue and associated content costs pending the delivery of future specified upgrades. Instead, as of July 1, 2018, we recognize revenue related to royalties for distinct software and content that has been accepted as transfer of control takes place, with an allocation of the transaction price based on the relative standalone selling price, or SSP, of map updates, specified upgrades, and other services as applicable, which we will recognize with the associated content costs at a point in time or over time as we transfer control of the related performance obligation.
Regarding brought-in automotive solutions, historically we recognized revenue for each royalty over the expected remaining term of the service obligation. Effective July 1, 2018, since these contracts contain variable consideration we will estimate the total transaction price each reporting period using a probability assessment, and then recognize revenue ratably over the period the services obligation is expected to be fulfilled, as further described in the section titled “Services revenue” of this Note 1.
Development costs subject to ASC 340-40 incurred to fulfill future obligations under certain actual or anticipated contracts for automotive solutions are capitalized, provided they are expected to be recovered, and then recognized as control of the related performance obligations is transferred. Historically, such costs were not capitalized until receipt of a signed contract or purchase order for a fixed amount, provided the costs were probable of being recovered. Under ASC 340-40, we are required to capitalize such costs in anticipation of a contract, provided the costs are expected to be recovered; thus, increasing the amount of costs we capitalize under ASC 340-40. For on-board automotive solutions, such capitalized costs represent the customized portion of software development, which will continue to be recognized upon acceptance of the

7

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

software under ASC 340-40 since acceptance is generally required for control of the software to transfer. For brought-in automotive solutions, such costs will be amortized over the period the services obligation is expected to be fulfilled, since software development does not represent a distinct performance obligation in the case of brought-in automotive solutions. Historically, we recognized such costs for brought-in automotive solutions upon acceptance of the software.
We adjusted our condensed consolidated financial statements from amounts previously reported due to the adoption of ASC 606. Summarized financial information depicting the impact of ASC 606 is presented below. Our historical net cash flows provided by or used in operating, investing and financing activities are not impacted by the adoption of ASC 606. (Amounts in thousands, except per share data):
 
 
As of June 30, 2018
 
 
As Reported
 
Adjustments
 
As Adjusted
Assets
 
 
 
 
 
 
Deferred costs
 
$
31,888

 
$
(21,982
)
 
$
9,906

Deferred costs, noncurrent
 
109,269

 
(62,906
)
 
46,363

Liabilities and stockholders’ equity
 
 
 
 
 
 
Deferred revenue
 
52,871

 
(34,676
)
 
18,195

Deferred revenue, noncurrent
 
182,236

 
(128,381
)
 
53,855

Accumulated deficit
 
(135,042
)
 
78,172

 
(56,870
)
 
 
Three Months Ended September 30, 2017
 
 
As Reported
 
Adjustments
 
As Adjusted
Revenue:
 
 
 
 
 
 
Product
 
$
23,964

 
$
18,695

 
$
42,659

Services
 
12,694

 
1,609

 
14,303

Total revenue
 
36,658

 
20,304

 
56,962

Cost of revenue:
 
 
 
 
 
 
Product
 
14,674

 
14,767

 
29,441

Services
 
6,173

 
209

 
6,382

Total cost of revenue
 
20,847

 
14,976

 
35,823

Gross profit
 
15,811

 
5,328

 
21,139

Operating expenses:
 
 
 
 
 
 
Research and development
 
21,082

 
(401
)
 
20,681

Total operating expenses
 
31,607

 
(401
)
 
31,206

Loss from operations
 
(15,796
)
 
5,729

 
(10,067
)
Net loss
 
(16,098
)
 
5,729

 
(10,369
)
Net loss per share, basic and diluted
 
$
(0.37
)
 
$
0.13

 
$
(0.24
)
The following accounting policies have been updated to reflect the adoption of ASC 606.
Revenue recognition
The core principle of ASC 606 is to recognize revenue to depict the transfer of products or services to customers in an amount that reflects the consideration we expect to be entitled to in exchange for those products or services. This principle is achieved through applying the following five-step approach:
Identification of the contract, or contracts, with a customer
Identification of the performance obligations in the contract
Determination of the transaction price

8

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

Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, the company satisfies a performance obligation
We generate revenue primarily from software licenses, service subscriptions and customized software development fees, as well as the delivery of advertising impressions. We evaluate whether it is appropriate to recognize revenue based on the gross amount billed to our customers or the net amount earned as revenue. Since we control the products or services prior to their transfer to the customer, we report our automotive, advertising and mobile navigation revenue on a gross basis. This assessment is based primarily on our ultimate primary responsibility for fulfilling the promises made with respect to the products and services as well as the degree of discretion we have in establishing pricing.
Royalties for on-board navigation solutions are generally earned at various points in time, depending upon the individual customer agreement. We earn each royalty upon either the re-imaging of the software on each individual memory card or the time at which each vehicle is produced. Royalties for brought-in navigation solutions are earned upon vehicle sales reporting or upon initial usage by the end user.
Product revenue
We generate product revenue from the delivery of our on-board automotive navigation solutions, specified map updates and customized software development.
We recognize revenue from on-board automotive navigation solutions upon transfer of control of the customized software and any associated integrated content together forming a distinct performance obligation. Transfer of control generally occurs at a point in time upon acceptance. Any royalties for the use of distinct software combined with integrated content, with an allocation of the transaction price based on the relative SSP of map updates, specified upgrades, and other services as applicable, are recognized at the later of when the royalties are earned or when transfer of control of the related performance obligation has occurred. 
For hybrid automotive solutions, which contain on-board software and cloud functionality, the transaction price allocated to the on-board component is generally recognized as product revenue as described above, and the transaction price allocated to the included cloud functionality based on relative SSP is generally recognized as services revenue. Since the on-board software is still the predominant item in the hybrid solution, the royalties recognition guidance applies as it does for on-board navigation solutions described above. Our brought-in automotive navigation solutions as described below are subject to variable consideration and constraint guidance.
Services revenue
We derive services revenue primarily from our brought-in automotive navigation solutions. Since these contracts typically contain a substantial amount of variable consideration that is required to be estimated and included in the transaction price, we include in the transaction price only variable consideration such that it is probable that a risk of significant revenue reversal will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Total variable consideration to be received is estimated at contract inception and updated at each reporting date. We utilize the expected value method and consider expected unit volume combined with a risk-based probability based on factors including, but not limited to: model year cycles, customer history, technology life cycles, nature of competition and other contract-specific factors. Because customers of our brought-in automotive navigation solutions simultaneously receive and consume the benefit from our performance, we recognize revenue ratably over the period the services obligation is expected to be fulfilled, generally 8 to 12 years, as this provides a faithful depiction of the transfer of control.
We also derive services revenue from the delivery of advertising impressions. We recognize revenue when transfer of control of the related advertising services occur based on the specific terms of each advertising contract, which are generally based on the number of ad impressions delivered. Substantially all contracts for advertising services are cancellable within a short period of notice, and we assess whether pricing within such contracts create any material right which could extend the expected term of the contract beyond the cancellable term.
In addition, we derive a declining amount of services revenue from subscriptions to access our mobile navigation services, which are generally provided through our wireless carrier customers that offer our services to their subscribers. Our wireless carrier customers typically pay us based on a revenue sharing arrangement or a monthly subscription fee per end user, which is considered variable consideration. For such variable consideration related to our mobile navigation services, these fees are recognized in the month in which they are earned because the terms of the variable payments relate specifically to the

9

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

outcome from transferring the distinct time increment (month) of service, which is consistent with the allocation objective when considering all of the performance obligations and payment terms in the contract.
We recognize monthly fees related to our mobile navigation services in the month we provide the services. We defer amounts received or billed in advance of the service being provided and recognize the deferred amounts when the obligation has been fulfilled. Our agreements do not contain general rights of refund once the service has been provided.
In certain instances, due to the nature and timing of monthly revenue and reporting from our customers, we may be required to make estimates of the amount of revenue to recognize from a customer for the current period. Estimates for revenue include our consideration of certain factors and information, including subscriber data, historical subscription and revenue reporting trends, end user subscription data from our internal systems, and data from comparable distribution channels of our other customers. We record any differences between estimated revenue and actual revenue in the reporting period when we determine the actual amounts. To date, actual amounts have not differed materially from our estimates.
Disaggregation of revenue
In order to further depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors, the following table depicts the disaggregation of revenue according to revenue type and pattern of recognition, and is consistent with how we evaluate our financial performance (in thousands):
 
 
Three Months Ended
September 30,
 
 
2018
 
2017
Product
 
 
 
 
On-board automotive navigation solutions (point in time)(1)
 
$
40,471

 
$
42,659

Total product revenue
 
40,471

 
42,659

Services
 
 
 
 
Brought-in automotive navigation solutions (over time)(2)
 
 
2,980

 
2,949

Advertising services (point in time)
 
5,947

 
7,615

Mobile navigation services (over time)
 
2,770

 
3,739

Total services revenue
 
11,697

 
14,303

Total revenue
 
$
52,168

 
$
56,962

(1)Includes royalties earned and recognized at the point in time usage occurs, map updates and customized software development fees.
(2)Includes royalties earned and recognized over time from the allocation of transaction price to service obligations.

10

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

Contracts with multiple performance obligations
Some of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative SSP basis. We determine SSP based on, if available, observable prices for those related products and services when sold separately. When observable prices are not available, we determine SSP based on our overall pricing trends and objectives, taking into consideration market conditions and other factors, including the value of the contracts, the products and services sold, and stated prices for renewal. In such instances, we apply the expected cost plus margin method and the residual method in cases where we have not yet established a price and the product or service has not previously been sold on a standalone basis.
Contract assets
Contract assets relate to our rights to consideration for performance obligations satisfied but not billed at the reporting date. As of September 30, 2018 and June 30, 2018, we had no contract assets.
Deferred revenue
Deferred revenue consists primarily of amounts that have been invoiced, and for which we have the right to bill, in advance of performance obligations being satisfied and revenue being recognized under our contracts with customers. Deferred revenue associated with performance obligations that are anticipated to be satisfied during the succeeding 12-month period is recorded as current deferred revenue, and the remaining portion is recorded as noncurrent deferred revenue in our condensed consolidated balance sheets.
In instances where the timing of revenue recognition differs from the timing of invoicing, we do not adjust consideration for the effects of a significant financing portion for periods of one year or less, for example, in the case of customized software development fees paid in advance of acceptance of the software. Substantially all brought-in automotive navigation solutions contain consideration paid significantly in advance of our provision of the services. In these cases, we have determined such contracts do not include a significant financing component, since neither we nor the applicable automobile manufacturer or tier one is substantially in control of such consideration, as revenue from these contracts is driven by future sales demand of a particular vehicle.
Cost of revenue
Our cost of revenue consists primarily of the cost of third-party royalty based content, such as map, points of interest, or POI, traffic, gas price and weather data, and voice recognition technology that we use in providing our personalized navigation services. Our cost of revenue also includes the cost of third-party exchange ad inventory as well as expenses associated with outsourced hosting services, data center operations, customer support, the amortization of capitalized software, recognition of deferred customized software development costs, stock-based compensation and amortization of acquired developed technology.
Deferred costs
We capitalize and defer recognition of certain third-party royalty-based content costs associated with the fulfillment of future automotive product and services obligations, and we recognize these deferred content costs as cost of revenue as we transfer control of the related performance obligation. Deferred costs are classified as current or non-current consistent with the periods over which the performance obligations are anticipated to be satisfied.
Deferred costs also include the cost of customized software we develop for customers. We begin deferring development costs when they relate directly to a contract or specific anticipated contract and such costs are incurred to satisfy performance obligations in the future, provided they are expected to be recovered. We recognize these deferred software development costs as cost of revenue upon transfer of control of the associated performance obligation. We evaluate contract cost deferrals for impairment on a quarterly basis or whenever events or changes in circumstances indicate that a project may require recognition of a contract loss. We did not record any impairment losses during the three months ended September 30, 2018 and 2017.
In connection with our usage of licensed third-party content, our contracts with certain licensors include minimum guaranteed royalty payments, which are payable regardless of the ultimate volume of revenue derived from the number of paying end users. These contracts contain obligations for the licensor to provide ongoing services and, accordingly, we record any minimum guaranteed royalty payments as an asset when paid and amortize the amount to cost of revenue over the applicable period. Any additional royalties due based on actual usage are expensed monthly as incurred.

11

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

Changes in the balance of total deferred costs (current and non-current) during the three months ended September 30, 2018 are as follows (in thousands):
 
 
Deferred Costs
 
 
Content
 
Development
 
Total
Balance, June 30, 2018 (as adjusted)
 
$
46,790

 
$
9,479

 
$
56,269

Content licensing costs incurred
 
29,114

 

 
29,114

Customized software development costs incurred
 

 
554

 
554

Less: cost of revenue recognized
 
(25,028
)
 
(601
)
 
(25,629
)
Balance, September 30, 2018
 
$
50,876

 
$
9,432

 
$
60,308

Recent accounting pronouncements
In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, or ASU 2018-15, which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to defer and recognize as an asset. This guidance is effective for us in our first quarter of fiscal 2021. Early adoption is permitted and the guidance allows for a retrospective or prospective application. We are evaluating the impact of the adoption of this standard on our consolidated financial statements.
With the exception of the recently adopted and new accounting pronouncements discussed above, there have been no other changes in accounting pronouncements during the three months ended September 30, 2018, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for fiscal 2018, that are of significance or potential significance to us.
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 and restricted stock units using the treasury-stock method.
The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share amounts):
 
 
 
Three Months Ended
September 30,
 
 
2018
 
2017
Net loss
 
$
(7,943
)
 
$
(10,369
)
Weighted average common shares used in computing net loss per share, basic and diluted
 
45,018

 
44,079

Net loss per share, basic and diluted
 
$
(0.18
)
 
$
(0.24
)

The following potential shares outstanding as of September 30, 2018 and 2017 were excluded from the computation of diluted net loss per share for the periods presented because including them would have had an antidilutive effect (in thousands):

 
 
September 30,

 
2018
 
2017
Stock options
 
5,263

 
5,599

Restricted stock units
 
2,536

 
3,035

Total
 
7,799

 
8,634



12

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

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. Short-term investments are classified as current assets, even though maturities may extend beyond one year, because they represent investments of cash available for operations. We classify all 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 months ended September 30, 2018 and 2017.
Cash, cash equivalents and short-term investments consisted of the following as of September 30, 2018 (in thousands):
 
Description
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Cash
 
$
11,053

 
$

 
$

 
$
11,053

Cash equivalents:
 
 
 
 
 
 
 
 
Money market mutual funds
 
196

 

 

 
196

U.S. treasury securities
 
200

 

 

 
200

U.S. agency securities
 
500

 

 

 
500

Commercial paper
 
1,247

 

 

 
1,247

Corporate bonds
 
400

 

 

 
400

Total cash equivalents
 
2,543

 

 

 
2,543

Total cash and cash equivalents
 
13,596

 

 

 
13,596

Short-term investments:
 
 
 
 
 
 
 
 
U.S. treasury securities
 
5,237

 

 
(36
)
 
5,201

U.S. agency securities
 
1,799

 

 
(12
)
 
1,787

Asset-backed securities
 
7,853

 
1

 
(66
)
 
7,788

Municipal securities
 
3,220

 

 
(4
)
 
3,216

Commercial paper
 
3,983

 

 
(1
)
 
3,982

Corporate bonds
 
46,048

 
6

 
(353
)
 
45,701

Total short-term investments
 
68,140

 
7

 
(472
)
 
67,675

Cash, cash equivalents and short-term investments
 
$
81,736

 
$
7

 
$
(472
)
 
$
81,271



13

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

Cash, cash equivalents and short-term investments consisted of the following as of June 30, 2018 (in thousands):
 
Description
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Cash
 
$
10,202

 
$

 
$

 
$
10,202

Cash equivalents:
 
 
 
 
 
 
 
 
Money market mutual funds
 
3,751

 

 

 
3,751

U.S. treasury securities
 
498

 

 

 
498

Commercial paper
 
2,666

 

 

 
2,666

Total cash equivalents
 
6,915

 

 

 
6,915

Total cash and cash equivalents
 
17,117

 

 

 
17,117

Short-term investments:
 
 
 
 
 
 
 
 
U.S. treasury securities
 
4,737

 

 
(34
)
 
4,703

U.S. agency securities
 
2,424

 

 
(16
)
 
2,408

Asset-backed securities
 
8,040

 
1

 
(72
)
 
7,969

Municipal securities
 
2,220

 

 
(4
)
 
2,216

Commercial paper
 
1,249

 

 

 
1,249

Corporate bonds
 
49,717

 
2

 
(435
)
 
49,284

Total short-term investments
 
68,387

 
3

 
(561
)
 
67,829

Cash, cash equivalents and short-term investments
 
$
85,504

 
$
3

 
$
(561
)
 
$
84,946



The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category, that have been in an unrealized loss position for less than twelve months or a continuous unrealized loss position for twelve months or greater, as of September 30, 2018 and June 30, 2018 (in thousands):

 
 
September 30, 2018
 
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
U.S. treasury securities
 
$
4,219

 
$
(21
)
 
$
981

 
$
(15
)
 
$
5,200

 
$
(36
)
U.S. agency securities
 
994

 
(6
)
 
1,293

 
(6
)
 
2,287

 
(12
)
Asset-backed securities
 
3,779

 
(25
)
 
3,400

 
(41
)
 
7,179

 
(66
)
Municipal securities
 
2,716

 
(4
)
 

 

 
2,716

 
(4
)
Commercial paper
 
5,229

 
(1
)
 

 

 
5,229

 
(1
)
Corporate bonds
 
24,920

 
(214
)
 
15,285

 
(139
)
 
40,205

 
(353
)
Total
 
$
41,857

 
$
(271
)
 
$
20,959

 
$
(201
)
 
$
62,816

 
$
(472
)

 
 
June 30, 2018
 
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
U.S. treasury securities
 
$
4,703

 
$
(34
)
 
$

 
$

 
$
4,703

 
$
(34
)
U.S. agency securities
 
1,118

 
(6
)
 
1,290

 
(10
)
 
2,408

 
(16
)
Asset-backed securities
 
5,368

 
(69
)
 
1,562

 
(3
)
 
6,930

 
(72
)
Municipal securities
 
1,716

 
(4
)
 

 

 
1,716

 
(4
)
Commercial paper
 
1,249

 

 

 

 
1,249

 

Corporate bonds
 
34,982

 
(318
)
 
10,880

 
(117
)
 
45,862

 
(435
)
Total
 
$
49,136

 
$
(431
)
 
$
13,732

 
$
(130
)
 
$
62,868

 
$
(561
)

14

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


There were 90 securities and 111 securities in an unrealized loss position for less than twelve months at September 30, 2018 and at June 30, 2018, respectively, and 44 securities and 25 securities in an unrealized loss position for twelve months or greater at September 30, 2018 and at June 30, 2018, respectively.

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 September 30, 2018 (in thousands):
 
 
 
Amortized
Cost
 
Estimated
Fair Value
Due within one year
 
$
36,318

 
$
36,186

Due between one and two years
 
23,888

 
23,637

Due between two and three years
 
7,934

 
7,852

Total
 
$
68,140

 
$
67,675


Declines in fair value judged to be other-than-temporary on securities available for sale are included as a component of other income (expense), 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 September 30, 2018, we did not consider any of our short-term investments to be other-than-temporarily impaired.
4.
Fair value of financial instruments
Cash equivalents and short-term investments
We measure certain financial instruments at fair value on a recurring basis. We utilize 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.
Level 3 valuations are based upon information that is unobservable and significant to the overall fair value measurement.
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.
All of our cash equivalents and short-term investments are classified within Level 1 or Level 2. As of September 30, 2018 and June 30, 2018, we did not have any short-term investments that require Level 3 valuations. The fair values of these financial instruments were determined using the following inputs at September 30, 2018 (in thousands):

15

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


 
 
 
Fair Value Measurements at September 30, 2018 Using
 
 
 
 
Quoted Prices
in Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
Description
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Cash equivalents:
 
 
 
 
 
 
 
 
Money market mutual funds
 
$
196

 
$
196

 
$

 
$

U.S. treasury securities
 
200

 
200

 

 

U.S. agency securities
 
500

 

 
500

 

Commercial paper
 
1,247

 

 
1,247

 

Corporate bonds
 
400

 

 
400

 

Total cash equivalents
 
2,543

 
396

 
2,147

 

Short-term investments:
 
 
 
 
 
 
 
 
U.S. treasury securities
 
5,201

 
5,201

 

 

U.S. agency securities
 
1,787

 

 
1,787

 

Asset-backed securities
 
7,788

 

 
7,788

 

Municipal securities
 
3,216

 

 
3,216

 

Commercial paper
 
3,982

 

 
3,982

 

Corporate bonds
 
45,701

 

 
45,701

 

Total short-term investments
 
67,675

 
5,201

 
62,474

 

Cash equivalents and short-term investments
 
$
70,218

 
$
5,597

 
$
64,621

 
$

The fair values of our financial instruments were determined using the following inputs at June 30, 2018 (in thousands):
 
 
 
Fair Value Measurements at June 30, 2018 Using
 
 
 
 
Quoted Prices
in Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
Description
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Cash equivalents:
 
 
 
 
 
 
 
 
Money market mutual funds
 
$
3,751

 
$
3,751

 
$

 
$

U.S. treasury securities
 
498

 
498

 
 
 
 
Commercial paper
 
2,666

 

 
2,666

 

Total cash equivalents
 
6,915

 
4,249

 
2,666

 

Short-term investments:
 
 
 
 
 
 
 
 
U.S. treasury securities
 
4,703

 
4,703

 

 

U.S. agency securities
 
2,408

 

 
2,408

 

Asset-backed securities
 
7,969

 

 
7,969

 

Municipal securities
 
2,216

 

 
2,216

 

Commercial paper
 
1,249

 

 
1,249

 

Corporate bonds
 
49,284

 

 
49,284

 

Total short-term investments
 
67,829

 
4,703

 
63,126

 

Cash equivalents and short-term investments
 
$
74,744

 
$
8,952

 
$
65,792

 
$

Accretion of net premium on short-term investments totaled $5,000 and $59,000 in the three months ended September 30, 2018 and 2017, respectively.
There were no transfers between Level 1 and Level 2 financial instruments in the three months ended September 30, 2018 and 2017.

16

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

We did not have any financial liabilities measured at fair value on a recurring basis as of September 30, 2018 or June 30, 2018.
Non-marketable equity investments
Our non-marketable equity securities are investments in privately held companies without readily determinable market values.
Prior to July 1, 2018, we accounted for our non-marketable equity investments at cost less impairment. Realized gains and losses on non-marketable equity investments sold or impaired were recognized in other income (expense), net. As of June 30, 2018, non-marketable equity investments accounted for under the cost method had a carrying value of $708,000.
On July 1, 2018, we adopted ASU 2016-01, which changed the way we account for non-marketable equity securities. The carrying value of our non-marketable equity securities is measured at cost and adjusted to fair value for observable transactions for identical or similar investments of the same issuer or impairment (referred to as the measurement alternative). All gains and losses on non-marketable equity securities, realized and unrealized, are recognized in other income (expense), net. Because we adopted ASU 2016-01 prospectively for investments without readily determinable market values, we apply the measurement alternative commencing July 1, 2018. Non-marketable equity securities remeasured during the three months ended September 30, 2018 are classified within Level 3 in the fair value hierarchy because we estimate the value based on valuation methods using the observable transaction price at the transaction date and other unobservable inputs including volatility, rights, and obligations of the securities we hold.
During the three months ended September 30, 2018, we recorded an upward adjustment to carrying value resulting from the sale of similar securities by an investee company. A summary of unrealized gains and losses recorded in other income (expense), net, and included as adjustments to the carrying value of non-marketable equity securities held as of September 30, 2018 is as follows (in thousands):
Carrying value (cost basis), June 30, 2018
 
$
708

Upward adjustments
 
1,259

Downward adjustments (including impairment)
 

Carrying value, September 30, 2018
 
$
1,967

Included in the $2.0 million carrying value of non-marketable equity securities, $1.5 million was measured at fair value based on observable market transactions, resulting in a net unrealized gain of $1.3 million as of September 30, 2018.
5.
Balance sheet information
Goodwill and intangible assets, net
Goodwill as of September 30, 2018 and June 30, 2018 was $28.7 million.
Intangible assets consisted of the following (in thousands):
 
 
September 30,
2018
 
June 30,
2018
Acquired developed technology
 
$
13,875

 
$
13,875

Less accumulated amortization
 
(11,775
)
 
(11,491
)
Intangible assets, net
 
$
2,100

 
$
2,384

Acquired developed technology is amortized on a straight-line basis over the expected useful life. Amortization expense related to intangibles was $284,000 and $283,000 for the three months ended September 30, 2018 and 2017, respectively.
As of September 30, 2018, remaining amortization expense for intangible assets by fiscal year is as follows: $720,000 in fiscal 2019, $872,000 in fiscal 2020 and $509,000 in fiscal 2021.
Accrued expenses
Accrued expenses consisted of the following (in thousands):

17

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

 
 
September 30,
2018
 
June 30,
2018
Accrued compensation and benefits
 
$
5,854

 
$
12,024

Accrued royalties
 
17,823

 
16,298

Customer overpayments and related reserves
 
7,153

 
5,356

Other accrued expenses
 
5,208

 
5,125

Total accrued expenses
 
$
36,038

 
$
38,803

6.
Deferred revenue and remaining performance obligations
Deferred revenue
Deferred revenue, which is a contract liability, consists primarily of payments received in advance of revenue recognition under our contracts with customers and is recognized upon transfer of control. Changes in the balance of total deferred revenue (current and non-current) during the three months ended September 30, 2018 are as follows (in thousands):
Beginning balance, June 30, 2018 (as adjusted)
 
$
72,050

Revenue recognized that was included in beginning balance
 
(6,616
)
Amount billed, net of revenue recognized that was not included in beginning balance
 
13,489

Ending balance, September 30, 2018
 
$
78,923

The cumulative adjustment as a result of changes in the estimate of the transaction price of customer contracts during the three months ended September 30, 2018 was a net reduction in revenue recognized of $0.4 million. In addition, the amount of revenue recognized in the current period from performance obligations satisfied or partially satisfied in previous periods was $0.4 million.
Remaining performance obligations
Transaction price allocated to the remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and amounts that are expected to be invoiced and recognized as revenue in future periods. As of September 30, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations for our automotive segment was $68.5 million, which is expected to be recognized over a remaining period of 5 to 8 years. This amount excludes the variable consideration that falls under the exemption for usage-based royalties promised in exchange for a license of intellectual property. We have used the practical expedient to not disclose amounts related to the comparative period under ASC 606.
The aggregate amount of transaction price allocated to the remaining performance obligations for advertising services and mobile navigation services as of September 30, 2018 was not material.
7.
Commitments and contingencies
Operating lease and purchase obligations
In August 2017, we terminated our sublease with Avaya Inc. for our Santa Clara, California headquarters facility and signed a new direct lease agreement, effective in September 2017, for this same facility. In connection with the sublease termination agreement, we recorded the following amounts during the three months ended September 30, 2017: i) the reversal of $538,000 of deferred rent related to the sublease, with an offsetting credit to rent expense, as amortization of this deferred rent liability is no longer required, and ii) the recognition of $582,000 of tenant improvement allowance related to the sublease, with an offsetting credit to depreciation expense, as amortization of this allowance is no longer required.
As of September 30, 2018, 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 were comprised of the following (in thousands):
 
 
 
Payments Due by Period
 
 
Total
 
Fiscal 2019
 
Fiscal 2020
 
Fiscal 2021
 
Fiscal 2022
 
Fiscal 2023
 
Thereafter
Operating lease obligations
 
$
15,534

 
$
3,023

 
$
4,125

 
$
3,012

 
$
2,642

 
$
2,206

 
$
526

Purchase obligations
 
7,115

 
2,998

 
1,491

 
965

 
415

 
415

 
831

Total contractual obligations
 
$
22,649

 
$
6,021

 
$
5,616

 
$
3,977

 
$
3,057

 
$
2,621

 
$
1,357


18

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

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 July 28, 2016, Nathan Gergetz filed a putative class action complaint in the U.S. District Court for the Northern District of California, alleging that Telenav violated the Telephone Consumer Protection Act, or TCPA. The complaint purports to be filed on behalf of a class, and it alleged that Telenav caused unsolicited text messages to be sent to the plaintiff from July 6, 2016 to July 26, 2016. Plaintiffs sought statutory and actual damages under the TCPA law, attorneys’ fees and costs of the action, and an injunction to prevent any future violations. A settlement was subsequently reached, and the plaintiff filed a motion for preliminary approval of class action settlement on March 5, 2018. The court granted preliminary approval of the class action settlement on April 30, 2018 and final approval of the settlement on September 27, 2018. The settlement became effective on October 30, 2018 and was paid by our technology errors and omissions liability insurance policy, after payment of our deductible of $250,000. We accrued the $250,000 deductible payment in fiscal 2018.
In addition, we have received, and expect to continue to receive, demands for indemnification from our 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 requested that we indemnify them in connection with such cases.
In August 2017, AT&T Mobility LLC, or AT&T, and Sprint Spectrum L.P., or Sprint, sent Telenav indemnification requests relating to patent infringement lawsuits brought by Location Based Services LLC, alleging patent infringement by the AT&T Navigator system and App for iOS and Android, and the Sprint Scout System and the Sprint Scout App for iOS and Android. Location Based Services LLC filed separate lawsuits against AT&T and Sprint in the U.S. District Court for the Eastern District of Texas, asserting five U.S. Patents. Telenav agreed to indemnify and defend AT&T and Sprint in connection with these matters. We accrued $250,000 related to these matters in the three months ended September 30, 2017 and recorded this amount as legal settlement and contingencies expense in our consolidated statement of operations. On November 22, 2017, Location Based Services LLC entered into a Settlement and License Agreement with Telenav for the patents in suit and 15 other patents assigned to Location Based Services LLP.
In November 2017, Traxcell Technologies, LLC, or Traxcell, filed patent infringement lawsuits against AT&T and Sprint in the U.S. District Court for the Eastern District of Texas.  On November 9, 2017, AT&T tendered control of the defense of one of the patents alleged to be infringed upon in the case and sought indemnification for the entire amount of litigation expenses related to the patent and Telenav products, including discovery, defensive intellectual property rights and any judgment rendered in, or settlement of, the lawsuit.  Telenav has not accepted tender of the defense. Although we have agreed to indemnify AT&T to the extent that the claims relate to the ordinary use of Telenav products, we have not yet determined the extent of our indemnification obligations to AT&T.
On April 12, 2018, Traxcell served its infringement contentions, identifying Telenav products as being at issue in the AT&T litigation. On August 14, 2018, we filed a motion to intervene and stay or sever the claims against AT&T related to AT&T Navigator. On September 11, 2018, Traxcell filed a response to that motion objecting only to our motion to stay or sever. On November 7, 2018, the court granted our motion to intervene but did not rule on our motion to stay or sever, which is still pending before the court.
On June 15, 2018, Telenav filed a complaint against Traxcell seeking a declaratory judgment of non-infringement against the plaintiff. On August 31, 2018, Traxcell filed a motion to dismiss the declaratory judgment complaint asserting that there is no actual controversy because Traxcell does not assert that the AT&T product by itself infringes the patent. The motion is pending before the court.
Due to the preliminary nature of and uncertainties relating to the Traxcell litigation, we are unable at this time to estimate the effects of these matters on our financial condition, results of operations or cash flows.

19

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

While we presently believe that the ultimate outcome of these proceedings, individually and in the aggregate, will not materially harm our financial position, cash flows or overall trends in results of operations, legal proceedings are subject to inherent uncertainties and unfavorable rulings could occur. Unfavorable final outcomes may have a material adverse impact on our business, financial position, cash flows or overall trends in results of operations.
8.
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.
9.
Stock-based compensation
Under our 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 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 except per share and contractual life amounts):
 
 
 

Number of
Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life
(years)
 
Aggregate
Intrinsic
Value
Options outstanding as of June 30, 2018
 
5,116

 
$
6.48

 
 
 
 
Granted
 
290

 
$
5.10

 
 
 
 
Exercised
 
(5
)
 
$
5.01

 
 
 
 
Canceled or expired
 
(138
)
 
$
7.44

 
 
 
 
Options outstanding as of September 30, 2018
 
5,263

 
$
6.38

 
5.70
 
$
87,949

As of September 30, 2018:
 
 
 
 
 
 
 
 
Options vested and expected to vest
 
5,100

 
$
6.40

 
5.60
 
$
85,445

Options exercisable
 
3,884

 
$
6.60

 
4.81
 
$
65,956


20

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



A summary of our restricted stock unit, or RSU, activity is as follows (in thousands except contractual life amounts):
 
 
 
Number of
Shares
 
Weighted
Average
Remaining
Contractual 
Life
(years)
 
Aggregate
Intrinsic 
Value
RSUs outstanding as of June 30, 2018
 
3,068

 
 
 
 
Granted
 
187

 
 
 
 
Vested
 
(600
)
 
 
 
 
Canceled
 
(119
)
 
 
 
 
RSUs outstanding as of September 30, 2018
 
2,536

 
1.47
 
$
12,807

As of September 30, 2018:
 
 
 
 
 
 
RSUs expected to vest
 
2,146

 
1.34
 
$
10,839



During the three months ended September 30, 2018, pursuant to the annual increase provisions of our 2009 Equity Incentive Plan, the number of shares available for grant under this plan increased by 1,666,666 shares. The last annual increase in the shares reserved for issuance under our 2009 Equity Incentive Plan will occur on July 1, 2019, and the plan will expire in October 2019 as to new awards. A summary of our shares available for grant activity is as follows (in thousands):

 
 
Number of
Shares
Shares available for grant as of June 30, 2018
 
3,169

Additional shares authorized
 
1,667

Granted
 
(477
)
RSUs withheld for taxes in net share settlements
 
215

Canceled
 
257

Shares available for grant as of September 30, 2018
 
4,831

The following table summarizes the stock-based compensation expense recorded for stock options and RSUs issued to employees and nonemployees (in thousands):
 
 
 
Three Months Ended
September 30,
 
 
2018
 
2017
Stock option awards
 
$
429

 
$
596

RSU awards
 
1,840

 
1,884

Total stock-based compensation expense
 
$
2,269

 
$
2,480


21

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

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 and the resulting weighted average grant date fair value per share were as follows:
 
 
 
Three Months Ended
September 30,
 
 
2018
 
2017
Expected volatility
 
39
%
 
49
%
Expected term (in years)
 
6.87

 
6.22

Risk-free interest rate
 
2.99
%
 
1.64
%
Dividend yield
 
%
 
%
Weighted average grant date fair value per share
 
$
2.32

 
$
3.07

10.
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 provision for income taxes was $630,000 in the three months ended September 30, 2018 compared to $255,000 in the three months ended September 30, 2017. Our provision for income taxes of $630,000 and $255,000 for the three months ended September 30, 2018 and 2017, respectively, was comprised primarily of foreign withholding taxes and income taxes in foreign jurisdictions where we have profit. Our effective tax rate of 9% and 3% for the three months ended September 30, 2018 and 2017, respectively, was less than the tax amount computed at the U.S. federal statutory income tax rate due primarily to losses for which no benefit will be recognized since they are not more likely than not to be realized due to the lack of current and future income and the inability to carryback losses within the two-year carryback period, when applicable.

We record liabilities related to unrecognized tax benefits in accordance with authoritative guidance on accounting for uncertain tax positions. As of September 30, 2018 and June 30, 2018, our cumulative unrecognized tax benefits were $4.7 million and $3.8 million, respectively. Included in the balance of unrecognized tax benefits at September 30, 2018 and June 30, 2018 was $205,000 and $98,000, 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 accrued $100,000 and $97,000 for the payment of interest and penalties at September 30, 2018 and June 30, 2018, 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 filing obligations. The statute of limitations remains open from fiscal 2016 for federal tax purposes, from fiscal 2014 in state jurisdictions, and from 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.

Due to operating losses in previous years and continued earnings volatility, we maintain a valuation allowance on the majority of our deferred tax assets. Our valuation allowance at June 30, 2018 was $58.3 million. 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.
11.
Segments
We report segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of our reportable segments.

Our chief executive officer, or CEO, the chief operating decision maker, reviews revenue and gross margin information for each of our reportable segments. In addition, with the exception of accounts receivable and goodwill and intangible assets, we do not identify or allocate our assets by the reportable segments.

22

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


We report results in three business segments:

Automotive - Our automotive segment utilizes our connected car platform to deliver enhanced location-based navigation services to automobile manufacturers and tier ones. We primarily offer three variations of our connected car products and services to our automobile manufacturer and tier one customers. First, we offer on-board navigation systems that are built into vehicles with all key elements of the system residing in the vehicle as a self-contained application along with the related software and content. Our on-board navigation products do not require access to the Internet or wireless networks to function. Second, we offer advanced hybrid navigation solutions that contain on-board functionality and also add cloud functionality such as cloud search, cloud routing, map updates and “live” data. We refer to these solutions as hybrid navigation. Third, we offer mobile phone-based navigation solutions that run on the phone and provide an interactive map and navigation instructions to the vehicle’s video screen and audio system, which we refer to as brought-in navigation. Finally, we offer a Navigation Software Development Kit, or SDK, that enables our customers to add mapping and location capabilities to their cloud, mobile and on-board automotive applications.

Advertising - Our advertising segment provides interactive mobile advertisements on behalf of our advertising clients to consumers based specifically on the location of the user and other sophisticated targeting capabilities. Our customers include advertisers and advertising agencies.

Mobile Navigation - Our mobile navigation segment provides our map and navigation platform to end users through mobile devices. We distribute our services primarily through our wireless carrier partners.

Our segment results for the three months ended September 30, 2018 and 2017 were as follows (dollars in thousands):

 
 
Three Months Ended
September 30,
 
 
2018
 
2017
Automotive
 
 
 
 
Revenue
 
$
43,451

 
$
45,608

Cost of revenue
 
26,959

 
30,861

Gross profit
 
$
16,492

 
$
14,747

Gross margin
 
38
%
 
32
%
Advertising
 
 
 
 
Revenue
 
$
5,947

 
$
7,615

Cost of revenue
 
3,220

 
3,412

Gross profit
 
$
2,727

 
$
4,203

Gross margin
 
46
%
 
55
%
Mobile Navigation
 
 
 
 
Revenue
 
$
2,770

 
$
3,739

Cost of revenue
 
925

 
1,550

Gross profit
 
$
1,845

 
$
2,189

Gross margin
 
67
%
 
59
%
Total
 
 
 
 
Revenue
 
$
52,168

 
$
56,962

Cost of revenue
 
31,104

 
35,823

Gross profit
 
$
21,064

 
$
21,139

Gross margin
 
40
%
 
37
%


23


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, accounting for and future sources of revenue, expectations regarding 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.
Investors and others should note that we announce material financial information to our investors using our investor relations website (http://investor.telenav.com), SEC filings, press releases, public conference calls and webcasts. We use these channels to communicate with our members and the public about our company, our products and services and other issues. It is possible that the information we post on our investor relations website could be deemed to be material information. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on our investor relations website.
In this Form 10-Q, “we,” “us,” “our” and “Telenav” 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, 2018 as “fiscal 2018” and the fiscal year ending June 30, 2019 as “fiscal 2019.”
Overview
Telenav is a leading provider of location-based products and services for connected cars and advertising. We utilize our connected car platform and our advertising platform to deliver these products and services. Our connected car platform allows us to deliver enhanced location-based navigation services to automobile manufacturers and tier one suppliers, or tier ones. Our advertising platform, which we provide through our Thinknear subsidiary, leverages our location expertise and delivers highly targeted advertising services to advertisers and advertising agencies. We report results in three business segments: automotive, advertising and mobile navigation.
We adopted ASC 606 effective July 1, 2018, utilizing the full retrospective transition method. All prior period amounts and disclosures set forth in this Form 10-Q have been adjusted to comply with ASC 606. See Note 1 to our condensed consolidated financial statements for a summary of adjustments.
We derive revenue primarily from automobile manufacturers and tier ones, advertisers and advertising agencies. We receive revenue from automobile manufacturers and tier ones whose vehicles or systems incorporate our proprietary personalized navigation software and services. These automobile manufacturers and tier ones generally do not provide us with any volume or revenue guarantees. In addition, we have a strategic business in mobile advertising where our customers are primarily advertising agencies, which represent national and regional brands, and channel partners, which work closely with local and small business advertisers.
Our legacy mobile navigation business has declined steadily since fiscal 2013, and we expect it to continue to decline. Mobile navigation revenue was $2.8 million in the three months ended September 30, 2018. We began offering our mobile navigation services in 2003. Our mobile navigation business generates revenue from our partnerships with wireless carriers who sell our navigation services to their subscribers either as a standalone service or in a bundle with other data or services. The mobile navigation business has declined both in absolute dollars and as a percentage of revenue from $116.4 million, or 61% of our revenue, in fiscal 2013 to $2.8 million, or 5% of our revenue, in the three months ended September 30, 2018 as

24


subscriptions for paid navigation services declined in favor of free or freemium navigation services offered by our competitors with greater resources and name recognition, such as Google and Apple. We have experienced and anticipate that we will continue to experience the non-renewal of our agreements for these services by our wireless carrier customers as demand from their subscribers declines. In the event our mobile navigation business ceases to be profitable we may ultimately elect to terminate our legacy wireless carrier mobile navigation business to the extent allowable under our contractual arrangements.
For our automotive manufacturer and tier one customers, we offer our connected car products and services for distribution with their vehicles and systems. We believe our history as a supplier of cloud-based navigation services combined with our proven track record of delivering navigation solutions to three of the top five global automobile manufacturers provides a unique advantage in the automotive navigation marketplace over our competitors.
We offer four variations of our connected car products and services to our automobile manufacturer and tier one customers. First, we offer on-board navigation systems that are built into vehicles with all key elements of the system residing in the vehicle as a self-contained application along with the related software and content. Our on-board navigation products do not require access to the Internet or wireless networks to function. Second, we offer advanced navigation solutions that contain on-board functionality and also add cloud functionality such as cloud search, cloud routing, map updates and “live” data. We refer to these solutions as hybrid navigation. Third, we offer mobile phone-based navigation solutions that run on the phone and provide an interactive map and navigation instructions to the vehicle’s video screen and audio system, which we refer to as brought-in navigation. Finally, we offer a Navigation Software Development Kit, or SDK, that enables our customers to add mapping and location capabilities to their cloud, mobile and on-board automotive applications.
We provide our automotive navigation products and services to automobile manufacturers such as Ford Motor Company and affiliated entities, or Ford, which represented 60% of our revenue in the three months ended September 30, 2018, General Motors Holdings and its affiliates, or GM, which represented 13% of our revenue in the three months ended September 30, 2018, and Toyota Motor Corporation, or Toyota. We also provide our products and services indirectly through tier ones such as XEVO Inc., or XEVO, for certain Toyota solutions, LG Electronics, Inc., or LG, for certain Opel Automobile GmbH, or Opel, solutions and Panasonic Automotive Systems Company of America, or Panasonic, for certain Fiat Chrysler Automobiles, or FCA, solutions.
We believe our advertising delivery platform offers significant audience reach, sophisticated targeting capabilities and the ability to deliver interactive and engaging ad experiences to consumers on their mobile devices. We also believe that we are experts in location-based advertising and offer differentiated value compared to brick-and-mortar and brand advertisers through our location-based ad targeting capabilities. Our technology focuses on leveraging the complexity and scale associated with mobile location data to deliver better mobile campaigns for our advertising 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 advertising exchanges using programmatic real time bidding, or RTB, tools.
We generate product revenue from the delivery of customized software and royalties from the distribution of this customized software in certain automotive navigation applications, map updates to the software and customized software development. We generate services revenue from brought-in automotive navigation solutions, advertising services and mobile navigation services.
Ford utilizes our on-board automotive navigation product in its Ford SYNC® platform. Ford pays us a royalty fee on SYNC 2 on-board solutions as the software is imaged onto an SD card and shipped for installation in vehicles and pays us a royalty fee on SYNC 3 on-board solutions as our software is installed in the vehicle. We also derive product revenue from map update fees.
We generate automotive services revenue primarily from our brought-in automotive navigation solutions. We earn a fee for each new vehicle owner who downloads and activates the associated mobile application featuring GM’s branded mobile and web-based applications, whereby we provide enhanced search capabilities for contracted service periods. We also earn a fee for each new Toyota and Lexus vehicle sold and enabled to connect with our Scout GPS Link mobile application, similarly provided over a contracted service period.
For our hybrid navigation solutions, GM pays us a royalty fee as the SD card is shipped for installation in vehicles; this royalty includes a fee for the initial connected service to be provided once the vehicle is sold. GM will pay us an additional service fee for connected solution subscriptions for each end user that elects to renew their OnStar Connected Navigation or Connected Navigation subscription with GM.

25


We generate revenue from advertising network services through the delivery of advertising impressions based on the specific terms of the advertising contract.
We also generate a declining portion of our services revenue from subscriptions to access our mobile navigation services, which are generally provided through our wireless carrier customers that offer our services to their subscribers. Our wireless carrier customers typically pay us based on a revenue sharing arrangement or a monthly subscription fee per end user. This revenue continues to decline, and in fiscal 2018 we recognized a $2.7 million impairment of all of the goodwill associated with our mobile navigation segment.
Adoption of ASC 606
The effect of adopting ASC 606 on fiscal 2018 was material to our statements of operations and balance sheets as a result of its impact on the recognition of revenue and associated third-party content costs for certain of our on-board and brought-in automotive navigation solutions. The adoption of ASC 606 had no significant impact on our advertising and mobile navigation business segments. The adoption of ASC 606 resulted in reductions to deferred costs (asset) and deferred revenue (liability) balances, and accelerated the recognition of revenues and deferred costs in the automotive segment. Such impact on our statements of operations will continue going forward.
The adjustments required to transition to ASC 606 resulted in $163.1 million of deferred revenue and $89.1 million of deferred costs of the total originally reported on our balance sheet as of June 30, 2018 being recorded instead as revenue and cost of revenue, respectively, in our adjusted prior periods. In addition, the adoption of ASC 606 required us to capitalize an additional $4.2 million, net, of deferred development costs on our adjusted June 30, 2018 balance sheet, resulting in a net decrease in deferred costs of $84.9 million.  In total, our accumulated deficit decreased by $78.2 million as of June 30, 2018. All prior period amounts presented have been adjusted to comply with ASC 606. See the summary of adjustments in Note 1 to our condensed consolidated financial statements.
With respect to on-board automotive solutions, historically we recognized revenue and associated content costs over the life of our contractual obligations when map updates were included, and we deferred substantially all revenue and associated content costs pending the delivery of future specified upgrades. Instead, as of July 1, 2018, we recognize revenue related to royalties for distinct software and content that has been accepted as transfer of control takes place, with an allocation of the transaction price based on the relative standalone selling price, or SSP, of map updates, specified upgrades, and other services as applicable, which we will recognize with the associated content costs at a point in time or over time as we transfer control of the related performance obligation.
Regarding brought-in automotive solutions, historically we recognized revenue for each royalty over the expected remaining term of the service obligation. Effective July 1, 2018, since these contracts contain variable consideration we will estimate the total transaction price each reporting period using a probability assessment, and then recognize revenue ratably over the period the services obligation is expected to be fulfilled.
Development costs subject to ASC 340-40 incurred to fulfill future obligations under certain actual or anticipated contracts for automotive solutions are capitalized, provided they are expected to be recovered, and then recognized as control of the related performance obligations is transferred. Historically, such costs were not capitalized until receipt of a signed contract or purchase order for a fixed amount, provided the costs were probable of being recovered. Under ASC 340-40, we are required to capitalize such costs in anticipation of a contract, provided the costs are expected to be recovered; thus, increasing the amount of costs we capitalize under ASC 340-40. For on-board automotive solutions, such capitalized costs represent the customized portion of software development, which will continue to be recognized upon acceptance of the software under ASC 340-40 since acceptance is generally required for control of the software to transfer. For brought-in automotive solutions, such costs will be amortized over the period the services obligation is expected to be fulfilled, since software development does not represent a distinct performance obligation in the case of brought-in automotive solutions. Historically, we recognized such costs for brought-in automotive solutions upon acceptance of the software.
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 such as billings, direct contribution from billings, direct contribution margin from billings, changes in deferred revenue and deferred costs, adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA, adjusted cash flow from operations and free cash flow are not measures calculated in accordance with GAAP, and should not be considered as an alternative to any measure of financial performance 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.

26


Our key operating and financial performance metrics are as follows (in thousands, except percentages and per share amounts):

 
 
Three Months Ended
September 30,
 
 
2018
 
2017
As Adjusted(1)
Revenue
 
$
52,168

 
$
56,962

Revenue from Ford as a percentage of total revenue
 
60
%
 
73
%
Revenue from GM as a percentage of total revenue
 
13
%
 
4
%
Billings (Non-GAAP)
 
$
59,041

 
$
65,788

Billings to Ford as a percentage of total billings (Non-GAAP)
 
54
%
 
68
%
Billings to GM as a percentage of total billings (Non-GAAP)
 
17
%
 
6
%
Increase in deferred revenue
 
$
6,873

 
$
8,826

Increase in deferred costs
 
$
4,039

 
$
5,474

Gross profit
 
$
21,064

 
$
21,139

Gross margin
 
40
%
 
37
%
Direct contribution from billings (Non-GAAP)
 
$
23,898

 
$
24,491

Direct contribution margin from billings (Non-GAAP)
 
40
%
 
37
%
Net loss
 
$
(7,943
)
 
$
(10,369
)
Diluted net loss per share
 
$
(0.18
)
 
$
(0.24
)
Adjusted EBITDA (Non-GAAP)
 
$
(5,624
)
 
$
(7,741
)
Adjusted cash flow from operations (Non-GAAP)
 
$
(2,790
)
 
$
(4,389
)
Net cash used in operating activities
 
$
(2,293
)
 
$
(3,788
)
Free cash flow (Non-GAAP)
 
$
(2,393
)
 
$
(6,074
)
(1)Certain amounts have been adjusted to reflect the adoption of ASC 606. See Note 1 to our condensed consolidated financial statements for a summary of adjustments.

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 mobile navigation offerings provided through wireless carriers.
Billings measure revenue recognized plus the change in deferred revenue from the beginning to the end of the period. Direct contribution from billings reflects GAAP gross profit plus change in deferred revenue less change in deferred costs. Direct contribution margin from billings reflects direct contribution from billings divided by billings. We have also provided a breakdown of the calculation of the change in deferred revenue by segment, which is added to revenue in calculating our non-GAAP metric of billings. In connection with our presentation of the change in deferred revenue, we have provided a similar presentation of the change in the related deferred costs. Such deferred costs primarily include costs associated with third-party content and certain development costs associated with our customized software solutions. As we enter into more hybrid and brought-in navigation programs, deferred revenue and deferred costs become larger components of our operating results, thus we believe these metrics are useful in evaluating cash flow.
We consider billings, direct contribution from billings and direct contribution margin from billings to be useful metrics for management and investors because billings drive revenue and deferred revenue, which is an important indicator of the viability of our business. We believe direct contribution from billings and direct contribution margin from billings are useful metrics because they reflect the impact of the contribution over time from such billings, exclusive of the incremental costs incurred to deliver any related service obligations. There are a number of limitations related to the use of billings, direct contribution from billings and direct contribution margin from billings versus revenue, gross profit and gross margin calculated in accordance with GAAP. First, billings, direct contribution from billings and direct contribution margin from billings include amounts that have not yet been recognized as revenue or cost and may require additional services to be provided over contracted service periods. For example, billings related to certain brought-in solutions cannot be fully recognized as revenue in a given period due to requirements for ongoing provisioning of services such as hosting, monitoring, customer support and map updates, including

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certain third-party technology and content license fees as applicable. Second, we may calculate billings, direct contribution from billings and direct contribution margin from billings in a manner that is different from peer companies that report similar financial measures, making comparisons between companies more difficult. When we use these measures, we attempt to compensate for these limitations by providing specific information regarding billings and how they relate to revenue, gross profit and gross margin calculated in accordance with GAAP.
Adjusted EBITDA measures our GAAP net loss excluding the impact of stock-based compensation expense, depreciation and amortization, other income (expense), provision (benefit) for income taxes, and other applicable items such as goodwill impairment, legal settlements and contingencies, and deferred rent reversal and tenant improvement allowance recognition due to sublease termination, net of tax. Stock-based compensation expense relates to equity incentive awards granted to our employees, directors, and consultants. Goodwill impairment represents the impairment of all of the goodwill associated with our mobile navigation segment. Legal settlements and contingencies represent settlements and offers made to settle patent litigation cases in which we are a defendant and royalty disputes. Deferred rent reversal and tenant improvement allowance recognition represent the reversal of our deferred rent liability and recognition of our