TELENAV, INC. 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 and the transaction we discuss below regarding the proposed acquisition ofTelenav, Inc. 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 toTelenav, Inc. and its subsidiaries. We operate on a fiscal year endingJune 30 and refer to the fiscal year endedJune 30, 2020 as "fiscal 2020" and the fiscal year endingJune 30, 2021 as "fiscal 2021." OverviewTelenav 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 location-based services, or 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 andToyota . Navigation and LBS are the primary applications for in-vehicle infotainment, or 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-car services to build alternative and recurring revenue models beyond the sale of the vehicle. We believe 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 25 -------------------------------------------------------------------------------- Table of Contents traffic information. 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 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 fromGM'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 featuringGM's branded mobile and web-based applications, whereby we provide enhanced search capabilities for contracted service periods. We also earn a fee for each newToyota 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 withGM . ThroughAugust 2019 , we also generated revenue from advertising network services through the delivery of advertising impressions based on the specific terms of the advertising contract. InAugust 2019 , we sold the Ads Business to inMarketMedia, LLC , which we refer to as inMarket (see Note 11 to our condensed consolidated financial statements). For the three and six months endedDecember 31, 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 throughJune 30, 2019 : automotive, advertising and mobile navigation. CommencingJuly 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 OnNovember 2, 2020 ,Telenav entered into an Agreement and Plan of Merger (as amended onDecember 17, 2020 , and as it may be further amended, supplemented or otherwise modified in accordance with its terms, the "Merger Agreement") withV99, Inc. , aDelaware corporation led byH.P. Jin , Co-Founder, Chair of the Board of Directors, President and Chief Executive Officer ofTelenav ("V99"), andTelenav99, Inc. , a newly formedDelaware corporation and a wholly owned subsidiary of V99 ("Merger Sub"), providing for, subject to the satisfaction or waiver of specified conditions in the Merger Agreement, the acquisition ofTelenav by V99. Subject to the terms and conditions of the Merger Agreement, Merger Sub will be merged with and intoTelenav (the "Merger"), withTelenav surviving the Merger as a wholly owned subsidiary of V99. If the Merger contemplated by the Merger Agreement is completed, the holders ofTelenav's common stock, par value$0.001 per share (the "Company Common Stock"), will receive$4.80 in cash, without interest and less applicable withholding tax (the "Merger Consideration"), for each share of Company Common Stock that they own immediately prior to the time the Merger becomes effective (the "Effective Time"), other than shares (i) held in the treasury ofTelenav or (ii) held by holders who shall neither have voted in favor of the Merger nor consented thereto in writing, and who shall have properly and validly perfected, and not withdrawn or lost, their statutory rights of appraisal under Section 262 of the Delaware General Corporation Law (the "DGCL") immediately prior to the Effective Time. 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 unsecured right to 26 -------------------------------------------------------------------------------- Table of Contents receive an amount in cash, without interest, equal to 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 customary conditions, including, but not limited to, the: (i) approval of a majority of the outstanding shares of the Company Common Stock (the "Company Stockholder Approval"); (ii) the approval of at least 66 and two-thirds percent of the outstanding shares of Company Common Stock not beneficially owned by V99, Merger Sub,H.P. Jin ,Samuel Chen ,Fiona Chang ,Yi-Ting Chen ,Yi-Chun Chen ,Changbin Wang andDigital Mobile Venture Limited ("Digital"), and any affiliate of the foregoing or trust in which any of the foregoing are a beneficiary (the "Two-Thirds of the Minority Approval"), which approval will also serve as a waiver of certain limitations set forth in Section 203 of the DGCL; (iii) the expiration or termination of the applicable waiting period to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"); and (iv) the absence of any law or order restraining, enjoining or otherwise prohibiting the Merger. OnDecember 3, 2020 , theU.S. Federal Trade Commission notifiedTelenav that early termination of the waiting period under the HSR Act was granted, effective immediately. The Merger Agreement does not contain any financing-related closing condition. In connection with the signing of the Merger Agreement,Dr. Jin andMr. Chen and Digital (the "Financing Sources") entered into a commitment letter with V99, dated as ofNovember 2, 2020 , as amendedDecember 17, 2020 (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 Merger, all fees and expenses associated with the transactions incurred by V99 or Merger Sub or any of their respective affiliates and required to be paid on the closing date by such party, 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) a termination fee of$3.5 million , 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 against the Financing Sources. 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. The parties have also agreed to use their reasonable best efforts to consummate the Merger. Under the Merger Agreement, fromNovember 2, 2020 until11:59 p.m. Pacific time onDecember 2, 2020 , we had the right 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. We did not receive any acquisition proposals during such "go-shop" period. After such period and prior to receipt of the later of Company Stockholder Approval and Two-Thirds of the Minority Approval, we have been and will continue to be subject to customary "no-shop" covenants restricting 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 formed by the Board of Directors consisting of independent and disinterested directorsWes Cummins ,Douglas Miller andRandy Ortiz (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 (as such term is defined in the Merger Agreement) or by V99 if we have effected a Change in Recommendation (as such term is defined the Merger Agreement), then the termination fee payable by us to V99 will be$3.5 million . 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 27 -------------------------------------------------------------------------------- Table of Contents mutual closing conditions have been satisfied or waived, all of the conditions to V99's 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. Concurrently with the initial execution of the Merger Agreement, as an inducement toTelenav to enter into the Merger Agreement,Dr. Jin ,Mr. Chen ,Fiona Chang , Digital,Yi-Ting Chen ,Yi-Chun Chen andChangbin Wang (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 agreed to, among other things, vote all shares of Company 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 the Special Committee delivered a Change in Recommendation Notice (as defined in the Merger Agreement) to V99 no later thanDecember 16, 2020 with respect to a Superior Proposal received from anExcluded Party (as defined in the Merger Agreement) (including any amendment to such Superior Proposal made in response to a Parent Proposal (as defined in the Merger Agreement) during any Notice Period (as defined in the Merger Agreement)) (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. OnFebruary 16, 2021 , we are holding a special meeting ofTelenav stockholders at10:00 a.m. (the "Special Meeting") to consider and vote on certain proposals, including a proposal to adopt and approve the Merger Agreement. Upon receipt of the Company Stockholder Approval and Two-Thirds of the Minority Approval at the Special Meeting, we anticipate that the Merger will be consummated shortly thereafter. Ford announced onFebruary 1, 2021 that it intends to utilizeMarch 2020 , theWorld Health Organization declared the outbreak of the novel coronavirus first identified inChina in late 2019 (COVID-19) as a pandemic, which continues to spread throughout theU.S. and the world. In response, businesses and governments, including businesses and the federal and state governments in theU.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 28 -------------------------------------------------------------------------------- Table of Contents downturn in the global economy. The shutdowns announced late in our quarter endedMarch 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 endedMarch 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 endedJune 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 and six months endedDecember 31, 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-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 endedSeptember 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, or at levels that would otherwise be achieved but for the economic or demand impact of COVID-19. 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, reduced facilities and related operating expenses 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 also 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 and demand have 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. 29 -------------------------------------------------------------------------------- Table of Contents 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 withU.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): Six Months Ended Three Months Ended December 31, December 31, 2020 2019 2020 2019 Revenue$ 65,854 $ 73,875 $ 135,450 $ 140,504 Revenue from Ford as a percentage of total revenue 44 % 39 % 45 % 45 % Revenue fromGM as a percentage of total revenue 47 % 31 % 46 % 28 % Billings (Non-GAAP)$ 60,322 $ 72,665 $ 124,505 $ 149,540 Billings to Ford as a percentage of total billings (Non-GAAP) 45 % 45 % 45 % 42 % Billings toGM as a percentage of total billings (Non-GAAP) 48 % 31 % 48 % 28 % Increase (decrease) in deferred revenue$ (5,532) $ (1,210) $ (10,945) $ 9,036 Increase (decrease) in deferred costs$ (4,519) $ 3,968 $ (9,147) $ 1,961 Gross profit$ 27,726 $ 40,153 $ 57,239 $ 69,931 Gross margin 42 % 54 % 42 % 50 % Income (loss) from continuing operations$ (60) $ 13,062 $ 3,275 $ 13,094 Net income (loss)$ (60) $ 13,006 $ 3,275 $ 9,052 Diluted income (loss) from continuing operations per share$ (0.00) $ 0.27 $ 0.07 $ 0.27 Diluted net income (loss) per share$ (0.00) $ 0.27 $ 0.07 $ 0.18 Adjusted EBITDA (Non-GAAP)$ 4,982 $ 14,286 $ 10,618 $ 16,842 Net cash provided by operating activities$ 14,955 $ 12,344 $ 9,947 $ 34,513 Free cash flow (Non-GAAP)$ 14,867 $ 11,727 $ 9,792 $ 33,435 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 30 -------------------------------------------------------------------------------- Table of Contents 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, equity in net income of equity method investees, and other applicable items such as merger and acquisition expense and legal settlements and contingencies. Stock-based compensation expense relates to equity incentive awards which we grant to our employees, directors, and consultants. Merger and acquisition expense represents costs associated with the V99 Merger Agreement. 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 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): 31
--------------------------------------------------------------------------------
Table of Contents
Reconciliation of Revenue to Billings
Three Months Ended December Six Months Ended
31, December 31,
2020 2019 2020 2019
Revenue $ 65,854 $ 73,875 $ 135,450 $ 140,504
Adjustments:
Change in deferred revenue (5,532) (1,210) (10,945) 9,036
Billings $ 60,322 $ 72,665 $ 124,505 $ 149,540
Reconciliation of Deferred Revenue to Change in Deferred Revenue
Reconciliation of Deferred Costs to Change in Deferred Costs
Six Months Ended
Three Months Ended December 31, December 31,
2020 2019 2020 2019
Deferred revenue, end of period $ 127,998 $ 144,171 $ 127,998 $ 144,171
Deferred revenue, beginning of period 133,530 145,381 138,943 135,135
Change in deferred revenue $ (5,532) $
(1,210)
Deferred costs, end of period$ 71,522 $ 81,763 $ 71,522 $ 81,763 Deferred costs, beginning of period 76,041 77,795 80,669 79,802 Change in deferred costs(1)$ (4,519) $
3,968
(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
Six Months Ended
Three Months Ended December 31, December 31,
2020 2019 2020 2019
Revenue from Ford $ 29,041 $ 28,553 $ 60,536 $ 63,465
Adjustments:
Change in deferred revenue attributed to Ford (2,060) 4,184 (5,041) (598)
Billings to Ford $ 26,981 $ 32,737 $ 55,495 $ 62,867
Billings to Ford as a percentage of total
billings 45 % 45 % 45 % 42 %
Revenue from GM $ 30,720 $ 22,798 $ 62,380 $ 39,159
Adjustments:
Change in deferred revenue attributed to GM (1,678) (631) (3,138) 2,641
Billings to GM $ 29,042 $ 22,167 $ 59,242 $ 41,800
Billings to GM as a percentage of total
billings 48 % 31 % 48 % 28 %
32--------------------------------------------------------------------------------
Table of Contents
Reconciliation of Net Income (Loss) to Adjusted EBITDA
Three Months Ended December Six Months Ended
31, December 31,
2020 2019 2020 2019
Net income (loss) $ (60) $ 13,006 $ 3,275 $ 9,052
Loss on discontinued operations - 56 - 4,042
Income (loss) from continuing operations (60) 13,062 3,275 13,094
Adjustments:
Merger and acquisition expense 3,603 - 3,603 - Stock-based compensation expense 2,640 1,478 5,497 3,230 Depreciation and amortization expense 666 934 1,426 1,856 Other income, net (521) (596) (1,235) (1,157) Provision (benefit) for income taxes (67) 205 (53) 616 Equity in net (income) of equity method investees (1,279) (797) (1,895) (797) Adjusted EBITDA$ 4,982 $ 14,286 $ 10,618 $ 16,842 Reconciliation of Net Income (Loss) to Free Cash Flow Three Months Ended December Six Months Ended 31, December 31, 2020 2019 2020 2019 Net income (loss)$ (60) $ 13,006 $ 3,275 $ 9,052 Loss on discontinued operations - 56 - 4,042 Income (loss) from continuing operations (60) 13,062 3,275 13,094 Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities: Change in deferred revenue (1) (5,793) (1,309) (11,449) 9,036 Change in deferred costs (2) 4,586 (3,940) 9,280 (1,961) Changes in other operating assets and liabilities 13,088 2,240 2,262 8,722 Other adjustments (3) 3,134 2,291 6,579 5,622 Net cash provided by operating activities 14,955 12,344 9,947 34,513 Less: Purchases of property and equipment (88) (617) (155) (1,078) Free cash flow$ 14,867 $
11,727
(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.
33
--------------------------------------------------------------------------------
Table of Contents
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 each of the six months ended December 31, 2020 and 2019, revenue from Ford
represented 45% of our total revenue, respectively, and revenue from GM
comprised 46% and 28% 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
34
--------------------------------------------------------------------------------
Table of Contents
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 67% of our revenue in the United
States in the six months ended December 31, 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.
35
--------------------------------------------------------------------------------
Table of Contents
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. In the three and six months ended
December 31, 2020 , general and administrative expenses also include merger and
acquisition expenses we incurred in connection with the V99 Merger Agreement.
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 (benefit) 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 equity method
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 six months ended December 31, 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."
36--------------------------------------------------------------------------------
Table of Contents Results of operations We set forth in the following tables our results of operations for the three and six months endedDecember 31, 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.
© Edgar Online, source
