You should read the following discussion and analysis 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 we based on our beliefs and assumptions and on information
currently available to us. 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,
retention and expansion of existing customer relationships 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.
Forward-looking statements represent our 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 investors 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," the "Company" 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, 2020 as "fiscal 2020" and the fiscal
year ending June 30, 2021 as "fiscal 2021."
Overview
Telenav is a leading provider of automotive software and services providing both
in-vehicle and cloud-based solutions. Over the past twenty years our focus has
been on navigation and LBS, where we pioneered many innovations including the
market's first mobile cloud-based navigation service. As a leader in hybrid
navigation, Telenav counts among its customers three of the top five automobile
manufacturers, or OEMs, by revenue and sales - Ford, GM and Toyota. Navigation
and LBS are the primary applications for IVI systems and we are using our
strengths and core competencies to address the growing demand for overall
connected car services.
In addition to navigation and LBS, our connected car platform, VIVID, enables us
to deliver IVI software solutions and services that are growing in importance as
consumers increasingly include digital technologies as a factor in their
automobile purchase decision. OEMs are also looking to software and connected
services to build alternative and recurring revenue models beyond the sale of
the vehicle. VIVID will provide OEMs a platform and a set of IVI applications to
deliver an integrated and brand-specific, cloud-connected digital experience to
their customers in a fast and cost-efficient manner.
Our VIVID Nav application delivers hybrid navigation, which can provide
in-vehicle navigation that is cloud connected for real-time traffic and
up-to-date destinations search, but which can also function when not cloud
connected, such as when driving in areas with bad cell coverage.
We offer five variations of our VIVID Infotainment and navigation software
products and services to our OEM and tier-one automobile supplier customers, or
tier ones, for distribution with their vehicles and systems. 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. However, they
can utilize satellite or radio transmission to provide, for example, real-time
traffic information. Second, we offer advanced navigation solutions that contain
on-board functionality and also add cloud
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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 project interactive map and navigation
instructions to the vehicle's video screen and audio system, which we refer to
as brought-in navigation. Fourth, we offer a VIVID Nav Software Development Kit,
or SDK, that enables our customers to add mapping and location capabilities to
their cloud, mobile and on-board automotive applications. Finally, we offer
VIVID Infotainment, our connected car infotainment system that has navigation,
commerce, voice, media, car controls and phone integration, which can be
delivered as a turnkey solution or as an SDK.
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. For example, Ford currently utilizes our on-board
automotive navigation product in its Ford SYNC® platform and pays us a royalty
fee on SYNC 3 on-board solutions as our software is installed in the vehicle.
Ford also pays us for periodic map updates. We also derive product revenue from
GM's on-board navigation solutions and the on-board component of its hybrid
navigation solutions. For its hybrid navigation solutions, GM pays us a product
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.
We generate services revenue primarily from brought-in automotive navigation
solutions and the cloud functionality included in our hybrid automotive
solutions. For example, 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 Motor
Corporation, or Toyota, and Lexus vehicle sold and enabled to connect with our
Scout GPS Link mobile application, similarly provided over a contracted service
period. For its hybrid navigation solutions, GM will pay us an additional
service fee for connected solution subscriptions for each end user that elects
to renew the OnStar Connected Navigation or Connected Navigation subscription
with GM.
Through August 2019, we also generated revenue from advertising network services
through the delivery of advertising impressions based on the specific terms of
the advertising contract. In August 2019, we sold the Ads Business to inMarket
Media, LLC, which we refer to as inMarket (see Note 11 to our condensed
consolidated financial statements). For the three months ended September 30,
2020 and for all prior comparative periods, we reported the operating results of
the Ads Business and the loss on its sale as discontinued operations in our
condensed consolidated financial statements.
We reported revenue, cost of revenue and gross profit results in three business
segments through June 30, 2019: automotive, advertising and mobile navigation.
Commencing July 1, 2019, we operate in a single segment, automotive. Our CEO,
who is the chief operating decision maker, does not review mobile navigation
results, which represented less than 5% of both total revenue, and cost of
revenue. As a result, we combine the mobile navigation services business with
the automotive business in a single segment.
For a discussion of trends, uncertainties and other factors that could impact
our business, financial condition and operating results, see the section
entitled "Risk Factors" in Part II, Item 1A, which is incorporated herein by
reference.
Recent Developments
On October 2, 2020, V99, a Delaware corporation ("V99"), led by HP Jin,
President, Chief Executive Officer and Chair of our Board of Directors,
submitted a proposal to acquire all of the Company's outstanding shares of
Common Stock for $4.32 per share in cash in a "go private" transaction to be
structured as a reverse triangular merger (the "Proposed Transaction"). On
October 5, 2020, Samuel Chen, also a member of our Board of Directors, filed a
Schedule 13D in which Mr. Chen disclosed that he has orally expressed to Dr. Jin
that Mr. Chen currently intends to provide funding for the Proposed Transaction
(directly or indirectly, including through Digital Mobile Venture Limited) on
economic terms to be agreed, and to provide Dr. Jin access to Mr. Chen's network
of potential financing sources.
Our Board of Directors has formed a Special Committee consisting of independent
directors Wes Cummins, Douglas Miller and Randy Ortiz (the "Special Committee").
The Special Committee has retained independent financial and legal advisors to
evaluate and consider the Proposed Transaction. Consistent with its fiduciary
duties, and in consultation with its independent advisors, the Special Committee
will carefully review the proposal and will consider all potential strategic
alternatives to maximize shareholder value. The Company cannot provide any
assurances regarding the terms and details of any transaction, that the Special
Committee will accept a proposal made by V99 regarding the Proposed Transaction,
that the Company will execute definitive documentation relating to any such
transaction, or that the Company will consummate a transaction in accordance
with that documentation, if at all.
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On November 2, 2020, we entered into an Agreement and Plan of Merger (the
"Merger Agreement") with V99 and Telenav99, Inc., a Delaware corporation and
wholly owned subsidiary of V99 ("Merger Sub"), providing for the merger of
Merger Sub with and into Telenav (the "Merger"), with Telenav surviving the
Merger as a wholly owned subsidiary of V99. The Merger Agreement provides that,
at the effective time of the Merger, each share of common stock, par value
$0.001 per share, of Telenav ("Company Common Stock") issued and outstanding
immediately prior to such (other than shares held in treasury, shares held by
Dr. Jin, Mr. Chen and their affiliates, including Digital Mobile Venture
Limited, and certain of their related parties, including trusts in which any of
the foregoing are a beneficiary (the "Purchaser Group") and dissenting shares)
will be cancelled and extinguished, and automatically converted into the right
to receive cash in an amount equal to $4.80, without interest thereon (the
"Merger Consideration"). The Merger Agreement also provides for the cancellation
of out-of-the-money options; the conversion of in-the-money options to the right
to receive the Merger Consideration less the applicable exercise price and
withholding taxes; the conversion of unvested restricted stock units into the
right to receive the Merger Consideration less applicable withholding taxes,
subject to the satisfaction of time-based vesting and other terms that applied
to such unvested restricted stock units and subject to any other written
agreements with the holders thereof; and the cash out of vested restricted stock
units for the Merger Consideration less applicable withholding taxes.
The completion of the Merger is subject to certain conditions, including, but
not limited to, the: (i) approval of a majority of the outstanding shares of our
capital stock (the "Company Stockholder Approval"); (ii) the approval of a
majority of shares not beneficially owned by any member of the Purchaser Group
("Majority of the Minority Approval"); (iii) the expiration or termination of
any waiting periods applicable to the consummation of the Merger under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976; and (iv) the absence of
any law or order restraining, enjoining or otherwise prohibiting the Merger.
In connection with the signing of the Merger Agreement, Dr. Jin and Mr. Chen and
Digital Mobile Venture Limited (the "Financing Sources") entered into a
commitment letter with V99 (the "Commitment Letter"), pursuant to which the
Financing Sources have committed, jointly and severally, to provide debt
financing in an amount sufficient to pay (a) the aggregate of all Merger
Consideration payable in connection with the transaction, all fees and expenses
associated with the transactions contemplated by the Merger Agreement, and all
amounts necessary to repay or prepay any of our indebtedness required to be
repaid or prepaid at the closing of the Merger (the "Commitment Amount") or (b)
the Parent Termination Fee (as defined below), if applicable. The funding of the
Commitment Amount is subject only to the satisfaction by us or waiver by V99 of
the closing conditions in the Merger Agreement applicable to us. Subject to the
terms and conditions of the Commitment Letter, we have certain third-party
beneficiary rights to enforce the terms of the Commitment Letter.
We made customary representations and warranties in the Merger Agreement and
have agreed to customary covenants, including those regarding the operation of
our business and that of our subsidiaries prior to the effective time of the
Merger. The parties have also agreed to use their reasonable best efforts to
consummate the Merger.
We also have the right to a 30-day "go-shop" period beginning on November 2,
2020 and continuing until 11:59 p.m. Pacific time on December 2, 2020 to solicit
alternative acquisition proposals from third parties and to provide information
to, and participate in discussions and engage in negotiations with, third
parties regarding any alternative acquisition proposals. However, after such
go-shop period and prior to receipt of the later of Company Stockholder Approval
and Majority of the Minority Approval, we will be subject to customary "no-shop"
restrictions on our ability to engage in such actions, subject to a customary
"fiduciary out" provision that allows us, under certain specified circumstances,
to provide information to, and participate in discussions and engage in
negotiations with, third parties with respect to an alternative acquisition
proposal if the Board of Directors or the Special Committee determines in good
faith (after consultation with its financial advisor and outside legal counsel)
that such alternative acquisition proposal constitutes or is reasonably likely
to constitute or lead to a Superior Proposal (as defined in the Merger
Agreement), and the Board of Directors or Special Committee determines in good
faith, after consultation with outside legal counsel, that the failure to take
such action would be reasonably likely to be inconsistent with the directors'
fiduciary duties pursuant to applicable law.
The Merger Agreement contains certain termination rights for us and V99. Upon
termination of the Merger Agreement under specified circumstances, we will be
required to pay V99 a termination fee. If the Merger Agreement is terminated by
us in order to enter a definitive agreement with respect to a Superior Proposal
or by V99 if we have effected a Change in Recommendation, then the termination
fee payable by us to V99 will be $3.5 million (provided, that such termination
fee will be $2.0 million if the Merger Agreement is terminated in connection
with a Superior Proposal by a third party that made an alternative acquisition
proposal prior to the expiration of the "go-shop" period). We will also have to
pay a $3.5 million termination fee to V99 if the Merger Agreement is terminated
by V99 under certain circumstances, and prior to such termination, a proposal to
acquire at least 50% of our stock or assets is publicly announced or disclosed,
and within one year of such termination, we consummate or enter into a
definitive agreement for such a transaction, and such transaction is
subsequently consummated. V99 will be required to pay us a termination fee of
$3.5 million in certain circumstances, including if we terminate the Merger
Agreement following V99's material breach of its obligation to have at least
$6.0 million in its bank account, we terminate because all mutual closing
conditions have been satisfied or waived, all of the conditions to V99's
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obligation to close have been satisfied or waived, and we notify V99 that all of
the conditions to our obligations to close have been satisfied or waived, and
that we stand ready, willing and able to consummate the Merger, and V99 fails to
close within two business days of such notice, or either party terminates the
Merger Agreement if a governmental entity has enacted a law or order permanently
restraining, enjoining or otherwise prohibiting the Merger, and at the time of
termination, all conditions to V99's obligations to consummate the Merger, other
than certain specified conditions, have been satisfied or waived.

In connection and concurrently with the execution of the Merger Agreement,
members of the Purchaser Group (the "Support Agreement Stockholders") entered
into a voting and support agreement (the "Support Agreement") with us. Pursuant
to the Support Agreement, the Support Agreement Stockholders have agreed to,
among other things, vote all shares of our Common Stock owned by them in
accordance with the publicly disclosed recommendation to our stockholders by
action of the Board of Directors, the Special Committee or any other duly
constituted committee of the Board of Directors (a "Public Board
Recommendation"), irrespective of whether such Public Board Recommendation is to
vote: (i) in favor of the adoption of the Merger Agreement and the approval of
the Merger and the transactions contemplated thereby or against an extraordinary
corporate transaction or proposal provided that certain specified circumstances
are met, (ii) subject to specified exceptions, in favor of an Accepted Superior
Proposal (as defined below) if, in the event that the Merger Agreement is
terminated, the Board of Directors or Special Committee has delivered a Change
in Recommendation Notice (as defined in the Merger Agreement) to V99 no later
than December 16, 2020 with respect to a Superior Proposal received from an
Excluded Party (as defined in the Merger Agreement) (including any amendment to
such Superior Proposal made in response to a Parent Proposal during any Notice
Period) (an "Accepted Superior Proposal"), or (iii) in favor of or against any
other matter determined by action of the Board of Directors, the Special
Committee or any other duly constituted committee of the Board of Directors, in
good faith, to be necessary or appropriate in connection with the Merger
Agreement and the Merger or any Accepted Superior Proposal, in each case if
recommended to our stockholders by a Public Board Recommendation.
Impact of coronavirus (COVID-19) pandemic
In March 2020, the World Health Organization declared the outbreak of the novel
coronavirus first identified in China in late 2019 (COVID-19) as a pandemic,
which continues to spread throughout the U.S. and the world. In response,
businesses and governments, including businesses and the federal and state
governments in the U.S., have implemented numerous measures to contain the
virus, including travel bans and restrictions, quarantines, shelter-in-place
orders, and business limitations and shutdowns. These measures have impacted and
will continue to impact our workforce and operations, and those of our customers
and vendors. As such, we expect the impact to our business and results of
operations to be significant, and to continue for some period.
Our top priority is the health and safety of our employees and their families,
as well as our automobile manufacturer customers and tier-one partners. Despite
the challenges we and our suppliers and partners face, we believe we will be
able to continue to deliver our personalized navigation and connected car
software products and services to our customers and partners, without
compromising our employees' safety. Like many companies, we have put in place
work-from-home procedures, which we expect to continue to maintain. We believe
our employees have the necessary tools and technology to remain connected and
productive while working from home offices around the world. We believe these
cumulative efforts should allow us to continue to deliver our products and
services.
However, the COVID-19 outbreak has caused and will continue to cause disruption
to our business operations that may impact our ability to develop and design our
products in a timely manner or meet required milestones or customer commitments.
In addition, public health problems resulting from COVID-19 and precautionary
measures instituted by governments and businesses worldwide to mitigate its
spread have contributed to a general, significant and continuing downturn in the
global economy. The shutdowns announced late in our quarter ended March 31, 2020
of manufacturing operations by Ford, GM and other automobile manufacturer
partners did not have a substantial impact to our financial results for the
three months ended March 31, 2020. However, COVID-19 did have a significant and
direct impact on the demand for our products and on our operating results in the
three months ended June 30, 2020. While we saw a significant manufacturing
rebound from our OEM partners that minimized the negative impact on our
operating results for the three months ended September 30, 2020, we expect
COVID-19 to continue to have an impact in the remainder of fiscal 2021. In
addition, COVID-19 could have an impact on the companies in which we have
strategic investments, which could also negatively affect our financial results.
The extent of the impact of the COVID-19 pandemic on our operational and
financial performance will depend on future developments, including the duration
and spread of the outbreak, its severity, the actions to contain the virus or
treat its impact, and how quickly and to what extent normal economic and
operating conditions can resume, all of which are uncertain and we cannot
predict.
Our revenue and prospects for continued business directly depend upon the volume
of new vehicles being produced by Ford, GM, Toyota and others, whose businesses
and operating activities have been directly affected by the COVID-19 outbreak,
related adverse public health developments and prospects for a global recession.
The shutdowns and recent re-
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openings of manufacturing operations by Ford, GM and our other automobile
manufacturer partners will decrease our revenue, operating results, financial
condition and cash flows until our automobile manufacturer partners resume full
production. In addition, a sustained economic recession will negatively impact
demand for new vehicles, even when full production resumes. Should these
conditions continue, they would also negatively impact our ability to maintain
cash balances to support our operations and future investments. For example, in
the three months ended September 30, 2020, we used $5.0 million of cash in
operating activities. While we maintain what we believe are sufficient cash
balances to support our operations, we believe such periods of cash usage in our
operations could continue for the near-to-mid-term, and until our automobile
manufacturer partners resume full production.
In light of the COVID-19 pandemic and likely continuing economic recession,
demand forecasts from our automobile manufacturer partners are likely to be
revised and may not be reliable indicators of actual future production. Our
outlook remains uncertain in the immediate to short term as we cannot predict
when that resumption of production may occur, at what level our partners may
resume production and how long they may be able to sustain such production
levels. It is likely that for an extended period the production rate will be
substantially below maximum production or levels which preceded the initial
COVID-19 shutdown. As a result, it may be difficult for us to forecast our
revenue and to adjust costs appropriately if customer demand forecasts are
inaccurate.
In the short-to-medium-term, we may benefit from cost savings, including reduced
growth in employee compensation costs primarily due to slower hiring, reductions
in travel and employee-related expenses as our sales and marketing activities
shift from an in-person to an online format and other factors associated with
our work-from-home procedures. We anticipate a small increase in overall aging
of accounts receivable; however, we do not expect to be negatively impacted by a
material increase in our allowance for doubtful accounts. Although we expect to
manage our operating expenses closely, we expect to experience periods of
negative cash burn, both due to operations and as we continue to use our cash to
make investments in companies where we believe they present opportunities for
synergies across our product offering or to expand our technology and in-car
commerce ecosystem and to continue to develop our products for future automobile
model years.
Over the longer term, once manufacturing production has fully resumed, we
believe there may be new opportunities with our existing OEM partners to
increase the lifetime value of our existing programs. However, there are many
uncertainties, and we expect to see continued impact from the COVID-19 pandemic
in future periods. In addition to the aforementioned uncertainties in the auto
industry, changes in how we and companies worldwide conduct business, including
but not limited to restrictions on travel and in-person meetings, may cause
increasing disruption in the timing and results of our product development and
sales and marketing initiatives. We will continue to evaluate the nature and
extent of the impact of COVID-19 to our business.
See "Risk Factors" in Part II, Item 1A for further discussion of the potential
impact of COVID-19 and its related public health measures on our business.
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, changes in deferred
revenue and deferred costs, adjusted earnings before interest, taxes,
depreciation and amortization, or adjusted EBITDA and free cash flow are not
measures we calculated in accordance with U.S. generally accepted accounting
principles, or GAAP, and you should not consider them as an alternative to any
measure of financial performance we 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.
Our key operating and financial performance metrics are as follows (in
thousands, except percentages and per share amounts):
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                                                                         Three Months Ended September
                                                                                      30,
                                                                            2020               2019
Revenue                                                                 $  69,596           $ 66,629
Revenue from Ford as a percentage of total revenue                             45   %             52  %
Revenue from GM as a percentage of total revenue                               45   %             25  %
Billings (Non-GAAP)                                                     $  64,183           $ 76,875
Billings to Ford as a percentage of total billings (Non-GAAP)                  44   %             39  %
Billings to GM as a percentage of total billings (Non-GAAP)                    47   %             26  %
Increase (decrease) in deferred revenue                                 $  (5,413)          $ 10,246
Decrease in deferred costs                                              $  (4,628)          $ (2,007)
Gross profit                                                            $  29,513           $ 29,778
Gross margin                                                                   42   %             45  %
Income from continuing operations                                       $   3,335           $     32
Net income (loss)                                                       $   3,335           $ (3,954)
Diluted income from continuing operations per share                     $    0.07           $      -
Diluted net income (loss) per share                                     $    0.07           $  (0.08)
Adjusted EBITDA (Non-GAAP)                                              $   5,636           $  2,556
Net cash provided by (used in) operating activities                     $  (5,008)          $ 22,169
Free cash flow (Non-GAAP)                                               $  (5,075)          $ 21,708



Gross margin is our gross profit, or total revenue less cost of revenue, which
we express 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 we
derive from automotive navigation solutions, which generally have higher
associated third-party content costs than our mobile navigation offerings
provided through wireless carriers.
Billings equals revenue we recognize plus the change in deferred revenue from
the beginning to the end of the applicable period. We have also provided a
breakdown of the calculation of the change in deferred revenue, which we add to
revenue in calculating our non-GAAP billings metric. 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. We include in such
deferred costs primarily costs associated with third-party content and certain
development costs associated with our customized software solutions whereby we
earn customized engineering fees. As we enter into more hybrid and brought-in
navigation programs, deferred revenue and deferred costs become larger
components of our operating results, so we believe these metrics are useful in
evaluating cash flows.
We consider billings to be a useful metric for management and investors because
billings drive revenue and deferred revenue, which is an important indicator of
our business. There are a number of limitations related to the use of billings
versus revenue calculated in accordance with GAAP. First, we include in billings
amounts that we have not yet recognized as revenue. For example, we cannot fully
recognize billings related to certain brought-in solutions as revenue in a given
period due to requirements for ongoing map updates and provisioning of services
such as hosting, monitoring, customer support and, for certain customers,
additional period content and associated technology costs. Second, we may
calculate billings in a manner that is different from peer companies that report
similar financial measures, making comparisons between companies more difficult.
When we use this measure, we attempt to compensate for these limitations by
providing specific information regarding billings and how they relate to revenue
calculated in accordance with GAAP.
We measure adjusted EBITDA, a non-GAAP financial measure, as our GAAP net loss
adjusted for discontinued operations and from which we exclude the impact of
stock-based compensation expense, depreciation and amortization, other income
(expense), net, provision (benefit) for income taxes, and other applicable items
such as legal settlements and contingencies. Stock-based compensation expense
relates to equity incentive awards which we grant to our employees, directors,
and consultants. Legal settlements and contingencies represent settlements,
offers we made to settle, or loss accruals relating to litigation or other
disputes in which we are a party or the indemnitor of a party.
Adjusted EBITDA, while generally a measure of profitability, can also represent
a loss. Adjusted EBITDA is a key measure we use to understand and evaluate our
core operating performance and trends, to prepare and approve our annual budget
and to develop short- and long-term operational plans. In particular, we believe
that the exclusion of the expenses we
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eliminate in calculating adjusted EBITDA can provide a useful measure for
period-to-period comparisons of our core business. Accordingly, we believe that
adjusted EBITDA generally provides useful information to investors and others in
understanding and evaluating our operating results in the same manner as we do.
Free cash flow is a non-GAAP financial measure we define as net cash provided by
(used in) operating activities less purchases of property and equipment. We
consider free cash flow to be a liquidity measure that provides useful
information to management and investors about the amount of cash (used in)
generated by our business after purchases of property and equipment.
These non-GAAP measures have limitations as analytical tools and you should not
consider them in isolation or as substitutes for our financial results as
reported under GAAP. Some of these limitations are:
•we expect to incur additional costs in the future due to requirements to
provide ongoing provisioning of services such as hosting, monitoring and
customer support; accordingly, deferred costs do not reflect all costs
associated with billings;
•we may have to replace in the future assets being depreciated and amortized,
and adjusted EBITDA does not reflect cash capital expenditure requirements for
such replacements or for new capital expenditures;
•adjusted EBITDA does not reflect the potentially dilutive impact of
equity-based compensation;
•adjusted EBITDA does not reflect the use of cash for net share settlements of
RSUs;
•adjusted EBITDA does not reflect tax payments that historically have
represented a reduction in cash available to us or tax benefits that may arise
as a result of generating net losses; and
•other companies may calculate adjusted EBITDA, free cash flow or similarly
titled measures differently, which reduces the usefulness of these measures as a
comparison.
Because of these and other limitations, you should consider billings, adjusted
EBITDA and free cash flow alongside other GAAP-based financial performance
measures.
We reconcile the most directly comparable GAAP financial measure to each
non-GAAP financial metric used. We present the following table reconciliations
of revenue to billings, deferred revenue to the change in deferred revenue,
deferred costs to the change in deferred costs, net loss to adjusted EBITDA, and
net loss and net cash flow used in operating activities to free cash flow for
each of the periods indicated (dollars in thousands):
                     Reconciliation of Revenue to Billings

                                        Three Months Ended September 30,
                                               2020                      2019
Revenue                         $         69,596                      $ 66,629
Adjustments:
Change in deferred revenue                (5,413)                       10,246
Billings                        $         64,183                      $ 76,875



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                   Reconciliation of Deferred Revenue to Change in Deferred Revenue
                     Reconciliation of Deferred Costs to Change in Deferred Costs

                                                                      Three Months Ended September 30,
                                                                          2020                2019
Deferred revenue, end of period                                       $  133,530          $ 145,381
Deferred revenue, beginning of period                                    138,943            135,135
Change in deferred revenue                                            $

(5,413) $ 10,246



Deferred costs, end of period                                         $   76,041          $  77,795
Deferred costs, beginning of period                                       80,669             79,802
Change in deferred costs(1)                                           $

(4,628) $ (2,007)



(1) Deferred costs primarily include costs associated with third-party content and in connection with
certain customized software solutions, the costs incurred to develop those solutions. We expect to
incur additional costs in the future due to requirements to provide ongoing map updates and
provisioning of services such as hosting, monitoring, customer support and, for certain customers,
additional period content and associated technology costs.



                          Reconciliation of Revenue to Billings - Ford and GM

                                                                          Three Months Ended September
                                                                                       30,
                                                                             2020               2019
Revenue from Ford                                                        $  31,495           $ 34,912
Adjustments:
Change in deferred revenue attributed to Ford                               (2,981)            (4,782)
Billings to Ford                                                         $  28,514           $ 30,130
Billings to Ford as a percentage of total billings                              44   %             39  %

Revenue from GM                                                          $  31,659           $ 16,362
Adjustments:
Change in deferred revenue attributed to GM                                 (1,460)             3,272
Billings to GM                                                           $  30,199           $ 19,634
Billings to GM as a percentage of total billings                                47   %             26  %


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                         Reconciliation of Net Income (Loss) to Adjusted EBITDA

                                                                          Three Months Ended September
                                                                                       30,
                                                                             2020               2019
Net income (loss)                                                        $    3,335          $ (3,954)
Loss on discontinued operations                                                   -             3,986
Income from continuing operations                                             3,335                32

Adjustments:



Stock-based compensation expense                                              2,857             1,752
Depreciation and amortization expense                                           760               922
Other income, net                                                              (714)             (561)
Provision for income taxes                                                       14               411
Equity in net (income) loss of equity method investees                         (616)                -
Adjusted EBITDA                                                          $    5,636          $  2,556




                         Reconciliation of Net Income (Loss) to Free Cash Flow

                                                                          Three Months Ended September
                                                                                      30,
                                                                             2020              2019
Net income (loss)                                                        $   3,335          $ (3,954)
Loss on discontinued operations                                                  -             3,986
Income from continuing operations                                            3,335                32

Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities: Change in deferred revenue (1)

                                              (5,656)           10,345
Change in deferred costs (2)                                                 4,694             1,979
Changes in other operating assets and liabilities                          (10,826)            6,482
Other adjustments (3)                                                        3,445             3,331
Net cash provided by (used in) operating activities                         (5,008)           22,169
Less: Purchases of property and equipment                                      (67)             (461)
Free cash flow                                                           $

(5,075) $ 21,708



(1) Consists of product royalties, customized software development fees, service fees and subscription
fees.
(2) Consists primarily of third-party content costs and customized software development expenses.
(3) Consist primarily of depreciation and amortization, stock-based compensation expense and other
non-cash items.



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Key components of our results of operations
Sources of revenue
Overview. We classify our revenue as either product or services revenue. Product
revenue consists primarily of revenue we receive from the delivery of customized
software and royalties from the distribution of this customized software in
certain automotive navigation applications, map updates to the software and
customized software development. Services revenue consists primarily of revenue
we derive from our brought-in automotive navigation services and the cloud
functionality included in our hybrid automotive solutions.
Commencing July 1, 2019, we operate in a single segment, automotive. Our CEO,
who is the chief operating decision maker, does not review mobile navigation
revenue and cost of revenue separately. As a result, we combine the mobile
navigation services business with the automotive business in a single segment.
In the three months ended September 30, 2020 and 2019, revenue from Ford
represented 45% and 52% of our total revenue, respectively, and revenue from GM
comprised 45% and 25% of total revenue, respectively.
We include a general summary of the terms of our contracts with Ford and GM in
"Management's Discussion and Analysis of Results of Operations -Key components
of our results of operations" in our Annual Report on Form 10-K for fiscal 2020,
filed with the SEC on August 21, 2020 (our "Form 10-K").
Product revenue. Our automotive product revenue is generated primarily from
on-board and hybrid automotive navigation solutions provided to Ford and GM. Our
on-board solutions consist of software, memory card, map and point of interest,
or POI, data loaded in the vehicle that provides voice-guided turn by turn
navigation displayed on the vehicle screen. Our hybrid navigation solutions
contain on-board software functionality and also add cloud functionality such as
cloud search, cloud routing, map updates and "live" data.
We generally earn royalties for on-board navigation solutions 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.
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. We recognize any royalties
for the use of distinct software combined with integrated content, 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, at the later of when we earn the royalties or when we transfer
control of the related performance obligation.
For hybrid automotive solutions, we generally recognize as product revenue the
transaction price we allocated to the on-board component as described above, and
we generally recognize as services revenue the transaction price allocated to
the included cloud functionality based on SSP. 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.
In August 2019, we entered into certain agreements with affiliates of Grab
Holdings, Inc., which, collectively with certain of its affiliates, we refer to
as Grab, including a services agreement, a license agreement and an asset
purchase agreement. These agreements together comprise the "Grab Transaction"
(see Note 12 to our condensed consolidated financial statements). During fiscal
2020, we recognized product revenue over time under the Grab Transaction as the
software development occurred and Grab obtained control as the software was
modified and enhanced. We recognized services revenue for implementation
services as they were performed, and we recognize software support and
maintenance over the term of the obligation. The asset sale to Grab was
completed on January 1, 2020.
Services revenue. We derive services revenue primarily from our brought-in
automotive navigation solutions and, to a lesser extent, from the cloud
functionality that is a component of our hybrid automotive navigation solutions
as discussed above. Royalties for brought-in navigation solutions are earned
upon vehicle sales reporting or upon initial usage by the end user.
Since these contracts typically contain a substantial amount of variable
consideration that we are required to estimate and include 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. We estimate total variable consideration to be received at contract
inception and we update this estimate at each reporting date. We utilize the
expected value method and consider expected unit volume combined with a
risk-based probability
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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 include a general summary of the nature of our product and service offerings
and how we earn fees through Ford, GM, Toyota and Xevo, Inc., a tier-one
supplier to Toyota, in "Management's Discussion and Analysis of Results of
Operations -Key components of our results of operations" in our Form 10-K.
We generate mobile navigation 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. We include mobile
navigation revenue, which represents less than 5% of total revenue, with
automotive revenue for all periods presented.
Revenue concentrations. We generated 87% and 74% of our revenue in the United
States in the three months ended September 30, 2020 and 2019, respectively. With
respect to revenue we receive from automobile manufacturers and tier ones for
sales of vehicles in other countries, we classify the majority of that revenue
as being generated in the United States, because we provide deliverables to and
receive compensation from the manufacturer's or tier one's United States'
entity. It is possible that this classification may change in the future, as
existing and new customers may elect to contract through subsidiaries.
Cost of revenue
We classify our cost of revenue as either cost of product revenue or cost of
services revenue. Cost of product revenue consists primarily of the cost of
third-party content we incur in providing our on-board automotive navigation
solutions, memory cards and recognition of deferred software development costs.
Cost of services revenue consists primarily of the costs associated with
third-party content we incur in providing our brought-in automotive navigation
solutions, data center operations and outsourced hosting services, software
maintenance, customer support, the amortization of capitalized software,
recognition of deferred customized software development costs, stock-based
compensation and amortization of acquired developed technology.

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. We
recognize the deferred revenue and related deferred costs as we transfer control
of the related performance obligation. As such, we will also incur ongoing costs
of revenue for network operations, hosting and data center, customer service
support, and other related costs over time.
We also capitalize and defer recognition of certain costs, primarily payroll and
related compensation and benefits expense, of customized software we develop for
customers. We begin deferring development costs when they relate directly to a
contract or specific anticipated contract and we incur such costs to satisfy
performance obligations in the future, provided we expect to recover such costs.
We recognize these deferred software development costs as cost of revenue upon
transfer of control of the associated performance obligation.
Operating expenses
We generally classify our operating expenses into three categories: research and
development, sales and marketing and general and administrative. Our operating
expenses consist primarily of personnel costs, which include salaries, bonuses,
payroll taxes, employee benefit costs and stock-based compensation expense.
Other expenses include third-party contractor and temporary staffing services,
legal, audit, tax consulting and other professional service fees,
facilities-related costs including rent expense and marketing program costs. We
allocate stock-based compensation expense resulting from the amortization of the
fair value of stock-based awards granted based on the department in which the
award holder works. We allocate overhead, such as rent and depreciation, to each
expense category based on headcount. In addition, when we incur legal
settlements, make offers to settle contingencies or accrue losses relating to
litigation or other disputes in which we are a party, or the indemnitor of a
party, we classify such operating expense amounts separately as legal
settlements and contingencies.
Research and development. Research and development expenses consist primarily of
personnel costs for our development and product management employees and related
costs of outside consultants and temporary staffing. We have focused our
research and development efforts on improving the ease of use and functionality
of our existing products and services, as well as developing new products and
services. In addition to our U.S. employee base, a significant number of our
research and development employees are located in our development centers in
China and Romania; as a result, a portion of our research and development
expense is subject to changes in foreign exchange rates, notably the Chinese
Renminbi, or RMB, the Romanian Leu, or RON, and the Euro.
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Sales and marketing. Sales and marketing expenses consist primarily of personnel
costs for our sales and marketing staff and the cost of marketing programs,
advertising and promotional activities. Our sales and marketing activities
include the costs of our business development efforts. Our automobile
manufacturer partners and tier ones also provide primary marketing for our
on-board and brought-in navigation services.
General and administrative. General and administrative expenses consist
primarily of personnel costs for our executive, finance, legal, human resources
and administrative personnel, legal, audit and tax consulting and other
professional services and corporate expenses.
Legal settlements and contingencies. Legal settlements and contingencies
represent settlements, offers made to settle, or loss accruals relating to
litigation or other disputes in which we are a party or the indemnitor of a
party.
Other
Other income (expense), net. Other income (expense), net consists primarily of
interest we earn on our cash and cash equivalents and short-term investments,
gain or loss on investments, unrealized gains or losses on non-marketable equity
investments and foreign currency gains or losses.
Provision for income taxes. Our provision for income taxes primarily consists of
corporate income taxes related to profits earned in foreign jurisdictions,
foreign withholding taxes, and changes to our tax reserves. Our effective tax
rate could fluctuate significantly from period to period, particularly in those
periods in which we incur losses, due to our inability to benefit from net
operating losses since we are not likely to realize the tax assets due to the
lack of current and forecasted future income. For interim reporting purposes, we
calculate an annual estimated tax rate and apply that rate to actual results to
estimate our taxes. In cases when we cannot reliably estimate an annual
estimated tax rate, we utilize the actual tax expense as the estimate.
Furthermore, on a quarterly basis our tax rates can fluctuate due to changes in
our tax reserves resulting from the settlement of tax audits or the expiration
of the statute of limitations. Our effective tax rate could also fluctuate due
to a change in our earnings or loss projections, changes in the valuation of our
deferred tax assets or liabilities, release of or increase in the valuation
allowance placed on deferred tax assets, or changes in tax laws, regulations, or
accounting principles, as well as the expiration and retroactive reinstatement
of tax holidays.
Equity in net income of equity method investees. Equity in net income of equity
method investees includes our proportionate share of equity in our
non-marketable equity investments.

Critical accounting policies and estimates
We prepare our condensed consolidated financial statements in accordance with
GAAP. In many cases, the accounting treatment of a particular transaction is
specifically dictated by GAAP and does not require our judgment in its
application. In other cases, we exercise judgment in selecting among available
alternative accounting policies that allow different accounting treatment for
similar transactions. The preparation of condensed consolidated financial
statements also requires us to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue, costs and expenses and related
disclosures. We base our estimates on historical experience and various other
assumptions that we believe are reasonable under the circumstances. In many
instances, we could reasonably use different accounting estimates, and in some
instances changes in the accounting estimates are reasonably likely to occur
from period to period. Accordingly, actual results could differ significantly
from the estimates made by our management. To the extent that there are
differences between our estimates and actual results, our future financial
condition, results of operations and cash flows will be affected.

There have been no material changes in our critical accounting policies and
estimates during the three months ended September 30, 2020 as compared to the
critical accounting policies and estimates disclosed in Part II, Item 7 of our
Form 10-K, except as described in Note 1 to our condensed consolidated financial
statements, "Summary of business and significant accounting policies."
Recent Accounting Pronouncements
For information with respect to recent accounting pronouncements and the impact
of these pronouncements on our condensed consolidated financial statements, see
Note 1 to our condensed consolidated financial statements, "Summary of business
and significant accounting policies."
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Results of operations
We set forth in the following tables our results of operations for the three
months ended September 30, 2020 and 2019, as well as a percentage that each line
item represents of our total revenue for those periods. We use the additional
key metrics presented above in addition to the financial measures reflected in
the condensed consolidated statements of operations data to help us evaluate
growth trends, establish budgets and measure the effectiveness of our sales and
marketing efforts. The period to period comparison of financial results is not
necessarily indicative of financial results to be achieved in future periods.

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