10-Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the three months ended March 31, 2016

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

4655 Great America Parkway, Suite 300
Santa Clara, California 95054
(Address of principal executive offices, including zip code)
(408) 245-3800
(Registrant’s telephone number, including area code)
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
 
¨
 
Accelerated filer
 
ý
 
 
 
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of March 31, 2016, there were approximately 42,551,408 shares of the Registrant’s Common Stock outstanding.


Table of Contents

TELENAV, INC.
TABLE OF CONTENTS
 
 
 
Page No.
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.


Table of Contents

PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements.

TELENAV, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
 
 
 
March 31,
2016
 
June 30,
2015*
 
 
(unaudited)
 
 
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
15,437

 
$
18,721

Short-term investments
 
93,147

 
101,195

Accounts receivable, net of allowances of $75 and $211 at March 31, 2016 and June 30, 2015, respectively
 
39,434

 
36,493

Deferred income taxes, net
 

 
327

Restricted cash
 
4,687

 
4,878

Income taxes receivable
 
5,464

 
6,080

Deferred costs
 
1,850

 
432

Prepaid expenses and other current assets
 
4,576

 
3,856

Total current assets
 
164,595

 
171,982

Property and equipment, net
 
5,846

 
7,126

Deferred income taxes, non-current
 
722

 
443

Goodwill and intangible assets, net
 
36,253

 
37,528

Deferred costs, non-current
 
8,567

 
2,709

Other assets
 
2,262

 
4,134

Total assets
 
$
218,245

 
$
223,922

Liabilities and stockholders’ equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
6,438

 
$
830

Accrued compensation
 
8,064

 
9,628

Accrued royalties
 
11,235

 
9,358

Other accrued expenses
 
11,984

 
10,918

Deferred revenue
 
5,392

 
2,109

Income taxes payable
 
237

 
724

Total current liabilities
 
43,350

 
33,567

Deferred rent, non-current
 
983

 
4,858

Deferred revenue, non-current
 
15,315

 
4,719

Other long-term liabilities
 
2,673

 
4,595

Commitments and contingencies
 

 

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

 

Common stock, $0.001 par value: 600,000 shares authorized; 42,551 and 40,537 shares issued and outstanding at March 31, 2016 and June 30, 2015, respectively
 
43

 
41

Additional paid-in capital
 
147,822

 
140,406

Accumulated other comprehensive loss
 
(1,574
)
 
(1,540
)
Retained earnings
 
9,633

 
37,276

Total stockholders’ equity
 
155,924

 
176,183

Total liabilities and stockholders’ equity
 
$
218,245

 
$
223,922

* Derived from audited consolidated financial statements as of and for the year ended June 30, 2015
See accompanying Notes to Condensed Consolidated Financial Statements.

1

Table of Contents

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

 
 
Three Months Ended
 
Nine Months Ended
 
 
March 31,
 
March 31,
 
 
2016
 
2015
 
2016
 
2015
Revenue:
 
 
 
 
 


 


Product
 
$
33,936

 
$
28,915

 
$
96,205

 
$
71,292

Services
 
12,342

 
13,371

 
39,387

 
45,761

Total revenue
 
46,278

 
42,286

 
135,592

 
117,053

Cost of revenue:
 
 
 
 
 
 
 
 
Product
 
20,957

 
15,475

 
57,404

 
38,477

Services
 
5,149

 
5,364

 
16,621

 
17,855

Total cost of revenue
 
26,106

 
20,839

 
74,025

 
56,332

Gross profit
 
20,172

 
21,447

 
61,567

 
60,721

Operating expenses:
 
 
 
 
 
 
 
 
Research and development
 
16,990

 
17,384

 
51,630

 
51,002

Sales and marketing
 
6,793

 
6,869

 
20,315

 
19,775

General and administrative
 
5,521

 
5,682

 
17,600

 
17,592

Restructuring
 
107

 
422

 
(1,361
)
 
987

Total operating expenses
 
29,411

 
30,357

 
88,184

 
89,356

Loss from operations
 
(9,239
)
 
(8,910
)
 
(26,617
)
 
(28,635
)
Other income (expense), net
 
(610
)
 
900

 
(277
)
 
3,073

Loss before provision (benefit) for income taxes
 
(9,849
)
 
(8,010
)
 
(26,894
)
 
(25,562
)
Provision (benefit) for income taxes
 
(11
)
 
(3,243
)
 
429

 
(10,135
)
Net loss
 
$
(9,838
)
 
$
(4,767
)
 
$
(27,323
)
 
$
(15,427
)
 
 
 
 
 
 
 
 
 
Net loss per share:
 
 
 
 
 
 
 
 
Basic and diluted
 
$
(0.23
)
 
$
(0.12
)
 
$
(0.66
)
 
$
(0.39
)
Weighted average shares used in computing net loss per share:
 
 
 
 
 
 
 
 
Basic and diluted
 
42,047

 
40,140

 
41,226

 
39,863

 
 
 
 
 
 
 
 
 
Stock-based compensation expense included above:
 
 
 
 
 
 
 
 
Cost of revenue
 
$
39

 
$
15

 
$
110

 
$
66

Research and development
 
1,483

 
1,243

 
4,712

 
3,868

Sales and marketing
 
582

 
699

 
2,257

 
2,193

General and administrative
 
516

 
675

 
1,808

 
2,432

Total stock-based compensation expense
 
$
2,620

 
$
2,632

 
$
8,887

 
$
8,559

See accompanying Notes to Condensed Consolidated Financial Statements.

2

Table of Contents

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


 
 
Three Months Ended
 
Nine Months Ended
 
 
March 31,
 
March 31,
 
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
Net loss
 
$
(9,838
)
 
$
(4,767
)
 
$
(27,323
)
 
$
(15,427
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of tax
 
394

 
(883
)
 
(183
)
 
(1,888
)
Available-for-sale securities:
 
 
 
 
 
 
 
 
Unrealized (gain) loss on available-for-sale securities, net of tax
 
362

 
254

 
129

 
(50
)
Reclassification adjustments for gain (loss) on available-for-sale securities recognized, net of tax
 
14

 
(1
)
 
20

 
(257
)
Net increase (decrease) from available-for-sale securities, net of tax
 
376

 
253

 
149

 
(307
)
Other comprehensive income (loss), net of tax:
 
770

 
(630
)
 
(34
)
 
(2,195
)
Comprehensive loss
 
$
(9,068
)
 
$
(5,397
)
 
$
(27,357
)
 
$
(17,622
)
 
 
 
 
 
 
 
 
 

See accompanying Notes to Condensed Consolidated Financial Statements.


3

Table of Contents

TELENAV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 
Nine Months Ended
 
 
March 31,
 
 
2016
 
2015
Operating activities
 
 
 
 
Net loss
 
$
(27,323
)
 
$
(15,427
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
Depreciation and amortization
 
2,696

 
4,054

Amortization of net premium on short-term investments
 
523

 
1,099

Stock-based compensation expense
 
8,887

 
8,559

Write-off of long-term investments
 
977

 
460

(Gain) loss on disposal of property and equipment
 
(15
)
 
10

Bad debt expense
 
59

 
33

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
(3,000
)
 
(11,076
)
Deferred income taxes
 
48

 
1,334

Restricted cash
 
191

 
910

Income taxes receivable
 
616

 
2,354

Deferred costs
 
(7,276
)
 
(2,061
)
Prepaid expenses and other current assets
 
(720
)
 
4,452

Other assets
 
895

 
277

Accounts payable
 
5,485

 
889

Accrued compensation
 
(1,564
)
 
(5,080
)
Accrued royalties
 
1,877

 
10,882

Accrued expenses and other liabilities
 
(2,456
)
 
(2,951
)
Income taxes payable
 
(487
)
 
(82
)
Deferred rent
 
(505
)
 
(1,149
)
Deferred revenue
 
13,879

 
2,986

Net cash provided by (used in) operating activities
 
(7,213
)
 
473

Investing activities
 
 
 
 
Purchases of property and equipment
 
(1,775
)
 
(650
)
Purchases of short-term investments
 
(38,010
)
 
(101,394
)
Purchase of long-term investments
 

 
(450
)
Proceeds from sales and maturities of short-term investments
 
45,686

 
109,215

Net cash provided by investing activities
 
5,901

 
6,721

Financing activities
 
 
 
 
Proceeds from exercise of stock options
 
1,536

 
3,321

Repurchase of common stock
 
(570
)
 
(2,519
)
Tax withholdings related to net share settlements of restricted stock units
 
(2,755
)
 
(2,057
)
Net cash used in financing activities
 
(1,789
)
 
(1,255
)
Effect of exchange rate changes on cash and cash equivalents
 
(183
)
 
(1,888
)
Net increase (decrease) in cash and cash equivalents
 
(3,284
)
 
4,051

Cash and cash equivalents, at beginning of period
 
18,721

 
14,534

Cash and cash equivalents, at end of period
 
$
15,437

 
$
18,585

Supplemental disclosure of cash flow information
 
 
 
 
Income taxes paid (received), net
 
$
150

 
$
(10,981
)
See accompanying Notes to Condensed Consolidated Financial Statements.

4

Table of Contents

TELENAV, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1.
Summary of business and significant accounting policies
Description of business
Telenav, Inc., also referred to in this report as “we,” “our” or “us,” was incorporated in September 1999 in the State of Delaware. We are a leader in personalized mobile navigation. We help on the go people by creating products that (1) provide easily-accessed, relevant, and personalized information for discovery, traffic, local search, and navigation and (2) are available across multiple platforms and devices, including mobile phones, tablets, computers and cars. We operate in three segments - automotive, advertising and mobile navigation. Our fiscal year ends on June 30 and in this report we refer to the fiscal year ended June 30, 2015 as “fiscal 2015” and the fiscal year ending June 30, 2016 as “fiscal 2016.”
Basis of presentation
The unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The condensed consolidated financial statements include the accounts of Telenav, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The financial statements include all adjustments (consisting only of normal recurring adjustments) that our management believes are necessary for a fair presentation of the periods presented. These interim financial results are not necessarily indicative of results expected for the full fiscal year or for any subsequent interim period. Certain prior period amounts in the consolidated financial statements have been reclassified to conform to current period presentation for comparative purposes.
Our condensed consolidated financial statements also include the financial results of Shanghai Jitu Software Development Ltd., or Jitu, located in China. Based on our contractual arrangements with the shareholders of Jitu, we have determined that Jitu is a variable interest entity, or VIE, for which we are the primary beneficiary and are required to consolidate in accordance with Accounting Standards Codification, or ASC, subtopic 810-10, or ASC 810-10, Consolidation: Overall. The results of Jitu did not have a material impact on our financial statements for the three and nine months ended March 31, 2016 and 2015.
The condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for fiscal 2015, included in our Annual Report on Form 10-K for fiscal 2015 filed with the U.S. Securities and Exchange Commission, or SEC on August 24, 2015.
There have been no material changes to our significant accounting policies as compared to the significant accounting policies described in our Form 10-K for fiscal 2015.
Use of estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Significant estimates and assumptions made by us include the determination of revenue recognition and deferred revenue, the recoverability of accounts receivable, the determination of acquired intangibles and goodwill, the fair value of stock awards issued, the determination of income taxes and the recoverability of deferred tax assets. Actual results could differ from those estimates.
Concentrations of risk and significant customers
Revenue related to services provided through Ford Motor Company, or Ford, comprised 72% and 68% of revenue for the three months ended March 31, 2016 and 2015, respectively, and 69% and 60% of revenue for the nine months ended March 31, 2016 and 2015, respectively. As of March 31, 2016 and June 30, 2015, receivables due from Ford were 63% and 58% of total accounts receivable, respectively. Revenue related to services provided through AT&T Mobility LLC, or AT&T, comprised 8% and 13% of revenue for the three months ended March 31, 2016 and 2015, respectively, and 10% and 17% of revenue for the nine months ended March 31, 2016 and 2015, respectively. Receivables due from AT&T were 7% and 14% of total accounts receivable at March 31, 2016 and June 30, 2015, respectively.

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

Certain of our licensed map, points of interest, or POI, and traffic data have been provided principally by TomTom North America, Inc., or TomTom, and HERE North America, LLC, or HERE, in the three and nine months ended March 31, 2016 and 2015. To date, we are not aware of circumstances that may impair either party’s intent or ability to continue providing such services to us.
Restricted cash
As of March 31, 2016 and June 30, 2015, we had restricted cash of $4.7 million and $4.9 million, respectively, on our consolidated balance sheets, comprised primarily of an overpayment from a customer that is expected to be refunded.
Accumulated other comprehensive loss, net of tax
The components of accumulated other comprehensive loss, net of related taxes, during the nine months ended March 31, 2016, were as follows (in thousands):
 
 
Foreign Currency
Translation
Adjustments
 
Unrealized
Gains (Losses) on
Available-for-Sale
Securities
 
Total
Balance, net of tax as of June 30, 2015
 
$
(1,377
)
 
$
(163
)
 
$
(1,540
)
Other comprehensive loss before reclassifications, net of tax
 
(183
)
 
129

 
(54
)
Amount reclassified from accumulated other comprehensive loss, net of tax
 

 
20

 
20

Other comprehensive loss, net of tax
 
(183
)
 
149

 
(34
)
Balance, net of tax as of March 31, 2016
 
$
(1,560
)
 
$
(14
)
 
$
(1,574
)

The amounts reclassified from accumulated other comprehensive loss, net of tax, were determined using the specific identification method and the amounts were included in other income (expense), net, for the nine months ended March 31, 2016 and 2015.

The amount of income tax benefit allocated to each component of accumulated other comprehensive loss was not material for the nine months ended March 31, 2016 and 2015.
Long-term investments
As of March 31, 2016, the carrying value of our investments in privately-held companies totaled $1.0 million. These investments are accounted for as cost-basis investments, as we own less than 20% of the voting securities and do not have the ability to exercise significant influence over operating and financial policies of the entities. Our investments are in entities that are not publicly traded and, therefore, no established market for the securities exists. Our cost-basis investments are carried at historical cost in our condensed consolidated balance sheets and measured at fair value on a nonrecurring basis when indicators of impairment exist. If we believe that the carrying value of the cost-basis investments is in excess of estimated fair value, our policy is to record an impairment charge to adjust the carrying value to estimated fair value, when the impairment is deemed other-than-temporary. We regularly evaluate the carrying value of these cost-basis investments for impairment. We recorded impairment charges of $500,000 and $750,000 for cost-method investments during the three and nine months ended March 31, 2016, respectively. We recorded an impairment charge of $460,000 for cost-method investments during the three and nine months ended March 31, 2015.
In addition to these cost basis investments, in June 2015 we entered into an agreement to spin off a product line developed by our Xi'an, China team, including certain assets and technology as well as the transfer of 12 employees, and we agreed to invest $800,000 in the form of a convertible note. We are the primary investor; however, we do not have significant influence over the operations of the business. Accordingly, we recorded the monthly net change in operating results against the carrying value of the convertible note recorded in long-term investments on our consolidated balance sheet. The entity's success is contingent upon its ability to generate revenue and raise additional capital.  Based upon the early stage of this entity, its lack of success to date in each of these endeavors, and China's recent unfavorable macroeconomic conditions making the raising of additional capital difficult, we recorded an impairment charge of $227,000 to write down the carrying value of the convertible note to zero during the nine months ended March 31, 2016.


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

Including the impairment in the Xi'an, China spin off above, we recorded total impairment charges of $500,000 and $977,000 in the three and nine months ended March 31, 2016, respectively, and $460,000 in the three and nine months ended March 31, 2015.
Warranty
We warrant our automotive navigation products to be free from defects in materials, workmanship and design for periods ranging from three months to seven years. We accrue costs related to warranty claims when they are probable and reasonably estimable. Our warranty costs have historically not been material. From time to time, we experience incidents where it may be necessary for us to expend resources to investigate and remedy a potential warranty claim.
Recent accounting pronouncements
In March 2016, the Financial Accounting Standards Board, or FASB, issued new guidance to revise aspects of stock-based compensation guidance which include income tax consequences, classification of awards as equity or liabilities, and classification on the statement of cash flows. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. We are evaluating the effect that this new standard will have on our consolidated financial statements.

In March 2016, the FASB issued new guidance to clarify the implementation guidance on principal versus agent considerations for reporting revenue gross versus net. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customer. The new standard will be effective for us in the first quarter of our fiscal year ending June 30, 2019. We are evaluating the effect that this new standard will have on our consolidated financial statements.

In February 2016, the FASB issued new guidance which amends the existing accounting standards for leases. Under the new guidance, a lessee will be required to recognize right-of-use assets and lease liabilities on the balance sheet for certain leases classified as operating leases. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. We are evaluating the effect that this new standard will have on our consolidated financial statements.

In January 2016, the FASB issued new guidance that amends the accounting and disclosures of financial instruments, including a provision that requires equity investments (except for investments accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in current earnings. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. We are evaluating the effect that this new standard will have on our consolidated financial statements.

In November 2015, the FASB issued new guidance which simplifies the presentation of deferred income taxes. This new standard requires that deferred tax assets and liabilities be classified as non-current in a statement of financial position. We early adopted this standard effective October 1, 2015 on a prospective basis, which resulted in a reclassification of our net current deferred tax asset to the net non-current deferred tax asset in our consolidated balance sheet. No prior periods were retrospectively adjusted. Adoption of this standard resulted in a $327,000 decrease in current deferred tax assets and a corresponding $89,000 increase in non-current deferred tax assets and a $238,000 decrease in other long-term liabilities on our consolidated balance sheet.

In February 2015, the FASB issued new guidance related to consolidations. The new standard amends the guidelines for determining whether certain legal entities should be consolidated and reduces the number of consolidation models. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. We are evaluating the effect that this new standard will have on our consolidated financial statements.

In May 2014, the FASB issued guidance related to revenue from contracts with customers, which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. Under this guidance, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The updated standard will replace most existing revenue recognition guidance under GAAP when it becomes effective and permits the use of either the full retrospective or cumulative effect transition method. Early adoption is permitted. In August 2015, the FASB deferred the effective date of this guidance by

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

one year. The updated standard will now be effective for us in the first quarter of our fiscal year ending June 30, 2019. We have not yet selected a transition method and we are currently evaluating the effect that this new standard will have on our consolidated financial statements and related disclosures.
2.
Net income (loss) per share
Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding for the period, including potential dilutive common shares assuming the dilutive effect of outstanding stock options, restricted stock units and restricted common stock using the treasury-stock method.
The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share amounts):
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
March 31,
 
March 31,
 
 
2016
 
2015
 
2016
 
2015
Net loss
 
$
(9,838
)
 
$
(4,767
)
 
$
(27,323
)
 
$
(15,427
)
Weighted average common shares used in computing net loss per share, basic and diluted
 
42,047

 
40,140

 
41,226

 
39,863

Net loss per share, basic and diluted
 
$
(0.23
)
 
$
(0.12
)
 
$
(0.66
)
 
$
(0.39
)

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


 
 
Three Months Ended
 
Nine Months Ended
 
 
March 31,
 
March 31,
 
 
2016
 
2015
 
2016
 
2015
Stock options
 
5,492

 
5,001

 
5,492

 
5,001

Restricted stock units
 
3,640

 
4,308

 
3,640

 
4,308

Total
 
9,132

 
9,309

 
9,132

 
9,309


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

3.
Cash, cash equivalents and short-term investments
Cash and cash equivalents consist of highly liquid fixed-income investments with original maturities of three months or less at the time of purchase, including money market funds. Short-term investments consist of readily marketable securities with a remaining maturity of more than three months from the date of purchase. Short-term investments are classified as current assets, even though maturities may extend beyond one year, because they represent investments of cash available for operations. We classify all of our cash equivalents and short-term investments as “available for sale,” as these investments are free of trading restrictions. These marketable securities are carried at fair value, with the unrealized gains and losses, net of tax, reported as accumulated other comprehensive income (loss) and included as a separate component of stockholders’ equity. Gains and losses are recognized when realized. When we have determined that an other-than-temporary decline in fair value has occurred, the amount of the decline that is related to a credit loss is recognized in earnings. Gains and losses are determined using the specific identification method. We had no material realized gains or losses in the three and nine months ended March 31, 2016 and 2015.
Cash, cash equivalents and short-term investments consisted of the following as of March 31, 2016 (in thousands):
 
 
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Cash
 
$
8,597

 
$

 
$

 
$
8,597

Cash equivalents:
 
 
 
 
 
 
 
 
Money market mutual funds
 
6,840

 

 

 
6,840

Total cash equivalents
 
6,840

 

 

 
6,840

Total cash and cash equivalents
 
15,437

 

 

 
15,437

Short-term securities:
 
 
 
 
 
 
 
 
U.S. treasury securities
 
3,558

 
16

 

 
3,574

Asset-backed securities
 
12,687

 
4

 
(7
)
 
12,684

Municipal securities
 
6,182

 
15

 

 
6,197

Commercial paper
 
3,491

 
3

 

 
3,494

Agency bonds
 
7,813

 
28

 

 
7,841

Corporate bonds
 
59,292

 
98

 
(33
)
 
59,357

Total short-term investments
 
93,023

 
164

 
(40
)
 
93,147

Cash, cash equivalents and short-term investments
 
$
108,460

 
$
164

 
$
(40
)
 
$
108,584


Cash, cash equivalents and short-term investments consisted of the following as of June 30, 2015 (in thousands):
 
 
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Cash
 
$
10,806

 
$

 
$

 
$
10,806

Cash equivalents:
 
 
 
 
 
 
 
 
Money market mutual funds
 
7,915

 

 

 
7,915

Total cash equivalents
 
7,915

 

 

 
7,915

Total cash and cash equivalents
 
18,721

 

 

 
18,721

Short-term investments:
 
 
 
 
 
 
 
 
Asset-backed securities
 
16,977

 
9

 
(3
)
 
16,983

Municipal securities
 
10,018

 
8

 
(9
)
 
10,017

Commercial paper
 
1,996

 
2

 

 
1,998

Agency bonds
 
7,642

 
6

 
(2
)
 
7,646

Corporate bonds
 
64,587

 
39

 
(75
)
 
64,551

Total short-term investments
 
101,220

 
64

 
(89
)
 
101,195

Cash, cash equivalents and short-term investments
 
$
119,941

 
$
64

 
$
(89
)
 
$
119,916



9

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

The following table summarizes the cost and estimated fair value of short-term fixed income securities classified as short-term investments based on stated maturities as of March 31, 2016 (in thousands):
 
 
 
Amortized
Cost
 
Estimated
Fair Value
Due within one year
 
$
48,271

 
$
48,279

Due between one and two years
 
27,762

 
27,790

Due after two years
 
16,990

 
17,078

Total
 
$
93,023

 
$
93,147


Declines in fair value judged to be other-than-temporary on securities available for sale are included as a component of other income, net. In order to determine whether a decline in value is other-than-temporary, we evaluate, among other factors: the duration and extent to which the fair value has been less than the carrying value and our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair market value. As of March 31, 2016, we did not consider any of our investments to be other-than-temporarily impaired.
4.
Fair value of financial instruments
We measure certain financial instruments at fair value on a recurring basis. We have established a hierarchy, which consists of three levels, for disclosure of the inputs used to determine the fair value of our financial instruments.
Level 1 valuations are based on quoted prices in active markets for identical assets or liabilities.
Level 2 valuations are based on inputs that are observable, either directly or indirectly, other than quoted prices included within Level 1. Such inputs used in determining fair value for Level 2 valuations include quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Where applicable, we use quoted prices in active markets for similar assets to determine fair value of Level 2 short-term investments. If quoted prices in active markets for identical assets are not available to determine fair value, we use quoted prices for similar assets and liabilities or inputs that are observable either directly or indirectly. If quoted prices for identical or similar assets are not available, we use third party valuations utilizing underlying assets assumptions.

10

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

Level 3 valuations are based on information that is unobservable and significant to the overall fair value measurement. All of our cash equivalents and short-term investments are classified within Level 1 or Level 2. The fair values of these financial instruments were determined using the following inputs at March 31, 2016 (in thousands):
 
 
 
Fair Value Measurements at March 31, 2016 Using
 
 
 
 
Quoted Prices
in Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Description
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market mutual funds
 
$
6,840

 
$
6,840

 
$

 
$

Total cash equivalents
 
6,840

 
6,840

 

 

Short-term investments:
 
 
 
 
 
 
 
 
U.S. treasury securities
 
3,574

 
3,574

 

 

Asset-backed securities
 
12,684

 

 
12,684

 

Municipal securities
 
6,197

 

 
6,197

 

Commercial paper
 
3,494

 

 
3,494

 

Agency bonds
 
7,841

 

 
7,841

 

Corporate bonds
 
59,357

 

 
59,357

 

Total short-term investments
 
93,147

 
3,574

 
89,573

 

Cash equivalents and short-term investments
 
$
99,987

 
$
10,414

 
$
89,573

 
$

The fair values of our financial instruments were determined using the following inputs at June 30, 2015 (in thousands):
 
 
 
Fair Value Measurements at June 30, 2015 Using
 
 
 
 
Quoted Prices
in Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Description
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market mutual funds
 
$
7,915

 
$
7,915

 
$

 
$

Total cash equivalents
 
7,915

 
7,915

 

 

Short-term investments:
 
 
 
 
 
 
 
 
Asset-backed securities
 
16,983

 

 
16,983

 

Municipal securities
 
10,017

 

 
10,017

 

Commercial paper
 
1,998

 

 
1,998

 

Agency bonds
 
7,646

 

 
7,646

 

Corporate bonds
 
64,551

 

 
64,551

 

Total short-term investments
 
101,195

 

 
101,195

 

Cash equivalents and short-term investments
 
$
109,110

 
$
7,915

 
$
101,195

 
$

Amortization of net premium on short-term investments totaled $523,000 and $1.1 million in the nine months ended March 31, 2016 and 2015, respectively.
There were no transfers between Level 1 and Level 2 financial instruments in the nine months ended March 31, 2016 and 2015, respectively.
We did not have any financial liabilities measured at fair value on a recurring basis as of March 31, 2016 or June 30, 2015.

11

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

5.
Commitments and contingencies
Operating lease and purchase obligations
On October 16, 2015, we entered into a lease termination agreement with our landlord for the termination of our office lease dated June 28, 2011 for our corporate facilities on De Guigne Drive in Sunnyvale, California. The lease termination (a) became effective on March 31, 2016 with respect to 920 De Guigne Drive and 950 De Guigne Drive; and (b) is to become effective on June 30, 2016 with respect to 930 De Guigne Drive. On the same day, we also entered into a lease termination agreement with our sublease tenant for the termination of our sublease of 930 De Guigne Drive. The sublease termination is to become effective on June 30, 2016, and the sublease tenant has the right to advance the termination date to no earlier than March 31, 2016, subject to certain terms and conditions. As of March 31, 2016, the sublease tenant has not advanced the termination date.
In connection with these lease termination agreements, we recorded the following amounts during the three months ended December 31, 2015: i) the reversal of a $1.5 million restructuring accrual related to 920 De Guigne Drive, as this amount represents the fair value of our lease obligation from April 2016 through November 2019 that is no longer payable; ii) the reversal of a $0.5 million loss accrual related to 930 De Guigne Drive, as this amount represents our loss from subleasing the building from July 2016 through November 2019 that we will no longer incur, partly offset by an accrual of $0.4 million related to the early lease termination fee payable to our sublease tenant; and iii) the reversal of $621,000 of the total $1.2 million of deferred rent related to 950 De Guigne Drive, as this amount represents our deferred rent liability that is no longer required. We reversed $621,000 as a credit to rent expense in the three months ended December 31, 2015. The remaining excess deferred rent balance of $621,000 was reversed and credited to rent expense in the three months ended March 31, 2016.

On December 18, 2015, we entered into a sublease agreement dated November 11, 2015 (the “Lease”) with Avaya Inc. to lease approximately 55,000 square feet of office and research and development space located at 4655 Great America Parkway, 3rd Floor, in Santa Clara, California (the “Great America Facility”) for a period of five years and one month (the “Term”), with a commencement date of April 1, 2016. On March 21, 2016, Avaya Inc. agreed to early occupancy of the Great America Facility by us for a prorated rent amount. The Lease provides for average monthly base rent payments during the Term of approximately $99,000 as set forth in the Lease. The Lease also provides that we must pay certain expenses and fees, including common area maintenance and property tax, in addition to the base rent. In March 2016, we relocated our corporate headquarters, and all employees formerly based at our De Guigne Drive facilities in Sunnyvale, California, to the Great America Facility.
As of March 31, 2016, we had future minimum non-cancelable financial commitments primarily related to office space under non-cancelable operating leases and license fees due to certain of our third party content providers, regardless of usage level. The aggregate future minimum commitments, net of sublease income, were comprised of the following (in thousands):
 
 
 
Payments Due by Period
 
 
Total
 
Fiscal 2016
 
Fiscal 2017
 
Fiscal 2018
 
Fiscal 2019
 
Fiscal 2020
 
Thereafter
Operating lease obligations, net of sublease income
 
$
13,129

 
$
794

 
$
3,168

 
$
2,904

 
$
2,441

 
$
2,014

 
$
1,808

Purchase obligations
 
5,083

 
1,032

 
2,094

 
655

 
372

 
207

 
723

Total contractual obligations
 
$
18,212

 
$
1,826

 
$
5,262

 
$
3,559

 
$
2,813

 
$
2,221

 
$
2,531



Joint venture investment commitment
In September 2015, we entered into an agreement with Ningbo Huazhong Holdings Company Limited, or Huazhong, a subsidiary of a publicly traded automotive original equipment manufacturer, or OEM, supplier in China, whereby we and Huazhong agreed to form a joint venture limited liability company in China for the development, manufacture and sales of connected navigation systems for the China automotive aftermarket and local OEMs. We agreed to invest RMB 9.95 million (approximately $1.5 million as of March 31, 2016) in cash, which is expected to represent 19.9% of the equity interests of the joint venture. We and Huazhong also agreed to negotiate a Technology License Agreement, or TLA, whereby we will license our existing navigation platform technologies to the joint venture in exchange for a RMB 5.0 million (approximately $775,000 as of March 31, 2016) license fee.

12

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

We have not made any capital contributions to the joint venture, and the parties are currently renegotiating the nature, timing and amounts of capital to be contributed. Accordingly, the joint venture has not been formed. In December 2015, we and Huazhong completed the TLA with a term of ten years. In addition, we and Huazhong negotiated a Technology Development Service Agreement, whereby we will provide the joint venture with specified technical services in exchange for a non-refundable technical services fee, subject to the completion of a statement of work by the parties. The TLA and the Technology Development Services Agreement will not go into effect until the joint venture is formed and funded.
Contingencies
From time to time, we may become involved in legal proceedings, claims and litigation arising in the ordinary course of business. When we believe a loss or a cost of indemnification is probable and can be reasonably estimated, we accrue the estimated loss or cost of indemnification in our consolidated financial statements. Where the outcome of these matters is not determinable, we do not make a provision in our financial statements until the loss or cost of indemnification, if any, is probable and can be reasonably estimated or the outcome becomes known. We expense legal fees related to these matters as they are incurred.
On December 31, 2009, Vehicle IP, LLC, or Vehicle IP, filed a patent infringement lawsuit against us in the U.S. District Court for the District of Delaware, seeking monetary damages, fees and expenses and other relief. Verizon Wireless, or Verizon, was named as a co-defendant in the Vehicle IP litigation based on the VZ Navigator product and has demanded that we indemnify and defend Verizon against Vehicle IP. At this time, we have not agreed to defend or indemnify Verizon. AT&T was also named as a co-defendant in the Vehicle IP litigation based on the AT&T Navigator and Telenav Track products. AT&T has tendered the defense of the litigation to us and we are defending the case on behalf of AT&T. After the district court issued its claim construction ruling the parties agreed to focus on early summary judgment motions, the defendants filed motions for summary judgment of noninfringement. On April 10, 2013 the district court granted AT&T and our motion for summary judgment of noninfringement. Plaintiff appealed the district court's claim construction and summary judgment rulings to the U.S. Court of Appeals for the Federal Circuit. On November 18, 2014, the U.S. Court of Appeals for the Federal Circuit reversed the district court's claim construction and overturned the district court's grant of summary judgment of noninfringement. The case has been sent back to the U.S. District Court for the District of Delaware and trial is currently scheduled for February 2017. During the nine months ended March 31, 2016, we accrued $750,000 related to this litigation. We believe that it is probable that we will incur a loss; however, beyond the amount accrued we cannot currently estimate a range of any possible losses we may experience in connection with this case. Accordingly, we are unable at this time to estimate the effects of this lawsuit on our financial condition, results of operations, or cash flows.
In addition, we have received, and expect to continue to receive, demands for indemnification from our customers, which demands can be very expensive to settle or defend, and we have in the past offered to contribute to settlement amounts and incurred legal fees in connection with certain of these indemnity demands. A number of these indemnity demands, including demands relating to pending litigation, remain outstanding and unresolved as of the date of this Form 10-Q. Furthermore, in response to these demands we may be required to assume control of and bear all costs associated with the defense of our customers in compliance with our contractual commitments. At this time, we are not a party to the following cases; however our customers have requested that we indemnify them in connection with such cases.
In 2008, Alltel, AT&T, Sprint Corporation, or Sprint, and T-Mobile USA, or T-Mobile, each demanded that we indemnify and defend them against patent infringement lawsuits brought by patent holding companies EMSAT Advanced Geo-Location Technology LLC and Location Based Services LLC (collectively, EMSAT) in the U.S. District Court for the Northern District of Ohio. In March 2011, EMSAT and AT&T settled their claims. The PTO reexamined two of the patents in suit, confirming the validity of only two of the asserted claims from those patents. All patent claims that EMSAT alleged to be infringed by the Telenav GPS Navigator product were cancelled during reexamination. In the suits against T-Mobile, Alltel and Sprint, EMSAT amended its allegations to remove allegations of infringement of the patent claims that were cancelled during reexamination. EMSAT and T-Mobile stipulated to a dismissal and their case was dismissed on January 28, 2015. On March 20, 2015, the Court dismissed and closed the Alltel case and on April 10, 2015 the Court dismissed and closed the Sprint case. We have not yet determined the extent of our indemnification obligations to AT&T. We believe that it is reasonably possible that we will incur additional loss; however, we cannot currently estimate a range of other possible losses we may experience in connection with this case. Accordingly, we are unable at this time to estimate the effects of this matter on our financial condition, results of operations, or cash flows.
In March 2009, AT&T demanded that we indemnify and defend them against a patent infringement lawsuit brought by Tendler Cellular of Texas LLC, or Tendler, in the U.S. District Court for the Eastern District of Texas. In June 2010, AT&T settled its claims with Tendler and we came to an agreement with AT&T as to the extent of our contribution towards AT&T's

13

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

settlement and the amount of our contribution was not material; however, there continues to be a disagreement as to whether any additional amounts are owed to AT&T for legal fees and expenses related to the defense of the matter. We believe that it is reasonably possible that we will incur additional loss; however, we cannot currently estimate a range of other possible losses we may experience in connection with this case. Accordingly, we are unable at this time to estimate the effects on our financial condition, results of operations, or cash flows.

On April 6, 2016, Venus Locations LLC, or Venus, filed patent infringement lawsuits against AT&T, Inc., T-Mobile and Sprint in the U.S. District Court for the Eastern District of Texas, alleging infringement of U.S. Patent Number 6,442,485 by AT&T Navigator, Telenav Navigator, and Sprint Navigator, respectively. AT&T, Inc., T-Mobile, and Sprint have each demanded that we defend and indemnify them against the claims brought by Venus. Due to the preliminary nature of this matter and uncertainties relating to litigation, we are unable at this time to estimate the effects of these lawsuits and any potential indemnification requests from our customers on our financial condition, results of operations, or cash flows.
In connection with a software quality issue that was identified related to maps displayed in software deployed to certain vehicles released in North America in 2015, we have accrued a reserve of $50,000 as of March 31, 2016. The software quality issue does not present a risk to driver safety. The actual costs are uncertain at this time and we are currently working with our customer to evaluate the appropriate solution. If the actual costs exceed our estimates, our results of operations and financial condition may be adversely affected.
6.
Guarantees and indemnifications
Our agreements with our customers generally include certain provisions for indemnifying them against liabilities if our products and services infringe a third party’s intellectual property rights or for other specified matters. We have in the past received indemnification requests or notices of their intent to seek indemnification in the future from our customers with respect to specific litigation claims in which our customers have been named as defendants. The maximum amount of potential future indemnification is unlimited.
We have agreed to indemnify our directors, officers and certain other employees for certain events or occurrences, subject to certain limits, while such persons are or were serving at our request in such capacity. We may terminate the indemnification agreements with these persons upon the termination of their services with us, but termination will not affect claims for indemnification related to events occurring prior to the effective date of termination. The maximum amount of potential future indemnification is unlimited. We have a directors and officers insurance policy that limits our potential exposure. We believe that any financial exposure related to these indemnification agreements is not material.
7.
Stock-based compensation
Under our 2002 Executive Stock Option Plan, 2009 Equity Incentive Plan and 2011 Stock Option and Grant Plan, eligible employees, directors and consultants are able to participate in our future performance through awards of nonqualified stock options, incentive stock options and restricted stock units through the receipt of such awards as authorized by our board of directors. In addition, we have granted restricted common stock in connection with certain acquisitions.
A summary of our stock option activity is as follows (in thousands except per share and contractual life amounts):
 
 
 
Number of
Shares

 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life
(years)
 
Aggregate
Intrinsic
Value

Options outstanding as of June 30, 2015
 
4,781

 
$
5.40

 
 
 
 
Granted
 
2,351

 
 
 
 
 
 
Exercised
 
(1,295
)
 
 
 
 
 
 
Canceled
 
(345
)
 
 
 
 
 
 
Options outstanding as of March 31, 2016
 
5,492

 
$
6.79

 
6.78
 
$
711

As of March 31, 2016:
 
 
 
 
 
 
 
 
Options vested and expected to vest
 
4,966

 
$
6.81

 
6.58
 
$
680

Options exercisable
 
2,740

 
$
6.92

 
5.14
 
$
484


14

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

A summary of our restricted stock unit, or RSU, activity is as follows (in thousands except contractual life amounts):
 
 
 
Number of
Shares
 
Weighted
Average
Remaining
Contractual 
Life
(years)
 
Aggregate
Intrinsic 
Value
RSUs outstanding as of June 30, 2015
 
4,290

 
 
 
 
Granted
 
1,530

 
 
 
 
Vested
 
(1,222
)
 
 
 
 
Canceled
 
(958
)
 
 
 
 
RSUs outstanding as of March 31, 2016
 
3,640

 
1.46
 
$
21,478

As of March 31, 2016:
 
 
 
 
 
 
RSUs expected to vest
 
3,032

 
1.34
 
$
17,890


RSUs vested above includes 427,018 shares withheld for taxes related to net share settlements of RSUs.

During the nine months ended March 31, 2016, pursuant to the annual increase provisions of our 2009 Equity Incentive Plan, the number of shares available for grant under this plan increased by 1,621,476 shares. A summary of our shares available for grant activity is as follows (in thousands):

 
 
Number of
Shares
Shares available for grant as of June 30, 2015
 
1,947

Additional shares authorized
 
1,621

Granted
 
(3,881
)
RSUs withheld for taxes in net share settlements
 
427

Canceled
 
1,301

Shares available for grant as of March 31, 2016
 
1,415

The following table summarizes the stock-based compensation expense recorded for stock options, RSUs and restricted common stock issued to employees and nonemployees (in thousands):
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
March 31,
 
March 31,
 
 
2016
 
2015
 
2016
 
2015
Stock option awards
 
$
518

 
$
446

 
$
1,369

 
$
1,680

RSU awards
 
2,102

 
2,186

 
7,518

 
6,373

Restricted common stock
 

 

 

 
506

Total stock-based compensation expense
 
$
2,620

 
$
2,632

 
$
8,887

 
$
8,559


15

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

We use valuation pricing models to determine the fair value of stock-based awards. The determination of the fair value of stock-based payment awards on the date of grant is affected by the stock price as well as assumptions regarding a number of complex and subjective variables. These variables include expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rates and expected dividends. The weighted average assumptions used to value stock option awards granted were as follows:
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
March 31,
 
March 31,
 
 
2016
 
2015
 
2016
 
2015
Expected volatility
 
43
%
 
55
%
 
47
%
 
54
%
Expected term (in years)
 
4.58

 
4.39

 
4.53

 
4.38

Risk-free interest rate
 
1.23
%
 
1.50
%
 
1.35
%
 
1.62
%
Dividend yield
 

 

 

 


Performance-based RSUs

We established a 2015 Performance Share Program under our 2009 Equity Incentive Plan, under which RSUs and/or cash bonuses may be earned based on the achievement of specified performance conditions measured over periods ranging from approximately 15 to 21 months. Holders of performance-based awards generally have the ability to receive 0% to 100% of the target number of RSUs or cash bonus originally granted. The expense associated with performance-based RSU grants is recorded when the performance condition is determined to be probable. Fully vested restricted stock units and/or cash bonuses will be awarded upon management’s certification of the level of achievement.
As of June 30, 2015, we had granted 106,000 performance-based RSUs to certain non-executive employees. No performance-based RSUs were vested, and 20,000 performance-based RSUs were canceled during the nine months ended March 31, 2016.

In addition, in July 2015, our board of directors approved reserving an aggregate of approximately 1.2 million of shares for performance-based RSUs to be earned by certain non-executive employees based upon the achievement of specified performance milestones measured over approximately six months. Upon achievement and approval of each milestone RSU grant by our board of directors, 50% of the RSUs will vest immediately and the remaining 50% will vest one year following the vest date of the first grant. The size of each RSU grant will be determined by dividing the value of the reward for each milestone by the price of our common stock on the date of grant. As of March 31, 2016, 29,246 shares had been granted under these milestones and are included as a component of shares granted in our summary table of RSU activity above.
8.
Stock repurchase program
In September 2014, we announced that our board of directors authorized a program for the repurchase of shares of our common stock up to an aggregate of $10.0 million through open market purchases. The timing and amount of repurchase transactions under this program depends on market conditions and other considerations. Under this program, we utilized $570,000 of cash to repurchase 75,943 shares of our common stock at an average purchase price of $7.50 per share during the three months ended September 30, 2015. As of September 30, 2015, this repurchase program expired.
Repurchased shares are retired and designated as authorized but unissued shares. We use the par value method of accounting for our stock repurchases. Under the par value method, common stock is first charged with the par value of the shares involved. The excess of the cost of shares acquired over the par value is allocated to additional paid-in capital, or APIC, based on an estimated average sales price per issued share with the excess amounts charged to retained earnings. As a result of our stock repurchases included in the nine months ended March 31, 2016, we reduced common stock and APIC by an aggregate of $249,000 and charged $321,000 to retained earnings.

16

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

9.
Income taxes
The effective tax rate for the periods presented is the result of the mix of forecasted fiscal year income earned or loss incurred in various tax jurisdictions that apply a broad range of income tax rates. Our effective tax rate, which resulted in the recognition of a tax expense, was 2% in the nine months ended March 31, 2016 compared to an effective tax rate, which resulted in the recognition of a tax benefit, of 40% in the nine months ended March 31, 2015. Our effective tax rate of 2% for the nine months ended March 31, 2016 was less than the tax benefit computed at the U.S. federal statutory income tax rate due primarily to losses for which no benefit will be recognized since they are not more likely than not to be realized due to the lack of current and future income and the inability to carryback losses within the two year carryback period. Our effective tax rate of 40% for the nine months ended March 31, 2015 was greater than the tax benefit computed at the U.S. federal statutory income tax rate due primarily to tax benefits recorded discretely from the recognition of a $3.0 million state income tax refund as a result of the filing and subsequent audit of our California amended returns for fiscal 2009 and 2010, true up adjustments totaling $1.5 million in connection with the filing of our fiscal 2014 tax return, and the reversal of tax reserves due to the expiration of the statute of limitations and settlement of our California audit, partially offset by an increase in the valuation allowance as a result of the limitations of benefit from the tax loss carryback.
We record liabilities related to unrecognized tax benefits in accordance with authoritative guidance on accounting for uncertain tax positions. As of March 31, 2016 and June 30, 2015, our cumulative unrecognized tax benefits were $6.1 million. Included in the balance of unrecognized tax benefits at March 31, 2016 and June 30, 2015 was $1.6 million and $1.7 million, respectively, that if recognized, would affect the effective tax rate.
We recognize interest and penalties related to unrecognized tax benefits as part of our provision for federal, state and foreign income taxes. We accrued $547,000 and $493,000 for the payment of interest and penalties at March 31, 2016 and June 30, 2015, respectively.
We file income tax returns with the Internal Revenue Service, or IRS, California and various states and foreign tax jurisdictions in which we have subsidiaries. The statute of limitations remains open for fiscal 2012 through fiscal 2015 in the U.S., for fiscal 2011 through fiscal 2015 in state jurisdictions, and for fiscal 2010 through fiscal 2015 in foreign jurisdictions. Fiscal years outside the normal statute of limitation remain open to audit by tax authorities due to tax attributes generated in those early years which have been carried forward and may be audited in subsequent years when utilized.
Due to operating losses in previous years and continued earnings volatility, we maintain a valuation allowance on the majority of our deferred tax assets. Our valuation allowance at June 30, 2015 was $17.7 million. In evaluating our ability to recover our deferred tax assets each quarter, we consider all available positive and negative evidence, including current and previous operating results, ability to carryback losses for a tax refund, and forecasts of future operating results.
We have recorded a $5.4 million income tax receivable as of March 31, 2016 for a U.S. federal tax refund resulting from our ability to carry back fiscal 2015 losses and credits to previous years. Subsequent to March 31, 2016 2016, we received $4.8 million of the total $5.4 million receivable due.

On December 18, 2015, the Protecting Americans from Tax Hikes Act of 2015 became effective, which made several tax extender provisions permanent as well as extending others. Most notable was the permanent extension of the research and development credit which has been temporary since its enactment in 1981. Due to the inability to utilize the research and development credits, we do not expect this legislation to have a material impact on our financial statements.

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

10.
Restructuring
During fiscal 2014, we recorded restructuring charges of $2.4 million related to severance and benefits for certain eliminated positions and $2.0 million related to the impairment of facility leases in connection with our consolidation of facilities. During the three months ended December 31, 2015, in connection with our office lease termination agreement described further in Note 5 Commitments and Contingencies, we reversed $1.5 million previously charged to our restructuring accrual as facility exit costs. As of March 31, 2016, our remaining restructuring liabilities are primarily associated with facility exit costs. Activity related to our restructuring liabilities for the nine months ended March 31, 2016 is presented in the following table (in thousands):
 
 
 
Balance at June 30, 2015
 
$
2,644

Restructuring expenses
 
135

Cash payments
 
(1,259
)
Other
 
(1,468
)
Balance at March 31, 2016
 
$
52


11.
Segments
We report segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of our reportable segments.

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

Commencing July 1, 2014, we began to report results in three business segments:

Automotive - Our Automotive segment provides our map and navigation platform to auto manufacturers and original equipment manufacturers, or OEMs, for distribution with their vehicles. Our automotive solutions are typically a self-contained solution including software and related services and content within the car, or on-board, and are often enhanced through connection to data services for additional real time capabilities such as maps, POI, or traffic.

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

Mobile Navigation - Our Mobile Navigation segment provides our map and navigation platform to end users through mobile devices. We distribute our services through our wireless carrier partners, and directly to consumers through mobile application stores and marketplaces.

Prior to July 1, 2014, we operated in a single segment: location-based platform services.


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

Our segment results for the three and nine months ended March 31, 2016 and 2015 were as follows (dollars in thousands):


 
 
Three Months Ended
March 31,
 
Nine Months Ended March 31,
 
 
2016
 
2015
 
2016
 
2015
Revenue
 
 
 
 
 
 
 
 
Automotive
 
$
34,717

 
$
29,472

 
$
98,306

 
$
73,051

Advertising
 
5,156

 
4,019

 
16,695

 
12,726

Mobile Navigation
 
6,405

 
8,795

 
20,591

 
31,276

Total revenue
 
46,278

 
42,286

 
135,592

 
117,053

Cost of revenue
 
 
 
 
 
 
 
 
Automotive
 
21,495

 
15,759

 
58,947

 
39,395

Advertising
 
2,788

 
2,690

 
9,538

 
8,528

Mobile Navigation
 
1,823

 
2,390

 
5,540

 
8,409

Total cost of revenue
 
26,106

 
20,839

 
74,025

 
56,332

Gross profit
 
 
 
 
 
 
 
 
Automotive
 
13,222

 
13,713

 
39,359

 
33,656

Advertising
 
2,368

 
1,329

 
7,157

 
4,198

Mobile Navigation
 
4,582

 
6,405

 
15,051

 
22,867

Total gross profit
 
$
20,172

 
$
21,447

 
$
61,567

 
$
60,721

Gross margin
 
 
 
 
 
 
 
 
Automotive
 
38
%
 
47
%
 
40
%
 
46
%
Advertising
 
46
%
 
33
%
 
43
%
 
33
%
Mobile Navigation
 
72
%
 
73
%
 
73
%
 
73
%
Total gross margin
 
44
%
 
51
%
 
45
%
 
52
%





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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read together with our condensed consolidated financial statements and the notes to those statements included elsewhere in this Form 10-Q. This Form 10-Q contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally in the sections entitled “Risk Factors” and this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking statements include information concerning our possible or assumed future results of operations, future sources of revenue, expectations regarding expenses, business strategies, financing plans, competitive position, industry environment, potential growth opportunities and the effects of competition. Forward-looking statements include statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts, “projects,” “should,” “will,” “would” or similar expressions and the negatives of those terms.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail in “Risk factors” and elsewhere in this Form 10-Q. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Form 10-Q.
Except as required by law, we assume no obligation to update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. You should read this Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect.
In this Form 10-Q, “we,” “us,” “our” and "Telenav" refer to Telenav, Inc. and its subsidiaries. We operate on a fiscal year ending June 30 and refer to the fiscal year ended June 30, 2015 as “fiscal 2015" and the fiscal year ending June 30, 2016 as "fiscal 2016.”
Overview

Telenav is a leading provider of location-based platform services. These services consist of our automotive and mobile navigation platform and our advertising delivery platform. Our automotive and mobile navigation platform allows us to deliver enhanced location-based services to auto manufacturers, developers, and end users through various distribution channels, including wireless carriers. Our advertising delivery platform delivers highly targeted advertising services leveraging our location expertise. We report revenue, cost of revenue and gross profit results in three business segments: automotive, advertising and mobile navigation.
Our map and navigation platform was originally developed to target mobile devices with real-time directions and information about places near the user’s mobile device. More recently, we have evolved our platform so that it is primarily targeted to deliver solutions for automotive manufacturers and original equipment manufacturers, or OEMs. We have also enhanced our solutions to make them better suited for the in-car experience.
We have developed proprietary technologies that enable us to provide location-based mapping and navigation services. These technologies include both client-based and cloud-based services. Our client-based technologies include a navigation and guidance engine and tools allowing us to efficiently develop and deploy new applications to mobile phones and in vehicles. Our back-end cloud-based services technologies allow us to deliver real-time location-based data for users and third party software developers that adopt our software development kit, or SDK, and application protocol interfaces, or APIs. We have developed a flexible platform that allows us to use multiple data providers for navigation, maps, points of interest, or POIs, traffic and other location-based content services. More recently, we have been expanding our offering of automotive solutions that utilize navigation to also enhance automotive OEM offerings of Advanced Driver Assistance Systems, or ADAS, and semi-autonomous capabilities. Such ADAS features use map attributes to tell the vehicle about upcoming road characteristics such as curvature and elevation. This information is used by the vehicle to improve fuel economy and safety.
For our automotive segment customers, we offer our auto and mobile navigation platform services to vehicle manufacturers and OEMs for distribution with their vehicles. We believe our history as a supplier of cloud-based navigation services provides an advantage in the automotive navigation marketplace over many of our competitors.
Our primary automotive customer to date, Ford Motor Company, or Ford, currently distributes our on-board product as an optional feature with all of its models in the United States, Canada, Mexico, Europe and China, as well as in models in South America, Australia and New Zealand. In addition, in July 2015, Ford Australia and New Zealand adopted a map update

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program as part of its Sync 2 product distribution. Under this program, Ford owners with Sync 2 will be eligible to receive annual map updates at no additional cost through December 2023. Ford will pay us an annual fee and a per unit fee for these updates.
In January 2014, we entered into an agreement with General Motors Corporation, or GM, for integration of our on-board and connected navigation solutions in its vehicles, which we expect to launch in model year 2017. Our relationship with GM also includes brought-in services for vehicles, and in January 2015 GM launched the new version of its OnStar RemoteLink® mobile application powered by our location-based services platform, which includes mapping and one-box search. In November 2015, the European equivalent of GM's OnStar RemoteLink® was launched in Europe for its Opel and Vauxhall brands.
In July 2015, we and Toyota Motor Corporation, or Toyota, announced a partnership for brought-in navigation services where our Scout® GPS Link will be available in Entune™ Audio Plus equipped model year 2016 Toyota vehicles in the United States. In August 2015, Toyota began shipping vehicles enabled to connect with our Scout® GPS Link mobile application, and as of March 2016, the ability to connect to our mobile application is a standard feature or is available as an option on more than 75% of 2016 Toyota models in the United States.
For our advertising segment customers, we believe our advertising delivery platform offers significant audience reach, sophisticated targeting capabilities and the ability to deliver interactive and engaging ad experiences to consumers on their mobile devices. We are experts in location-based advertising and believe we offer unique value to brick-and-mortar and brand advertisers through our location targeting capabilities. Our technology focuses on managing the complexity and scale associated with mobile location data to deliver better mobile campaigns for our advertising partners. We deliver mobile advertisements by leveraging our proprietary in-house ad serving technology. Our inventory, or accessible market, is comprised of thousands of mobile applications and mobile websites that are accessed through programmatic real-time bidding, or RTB, tools.
We derive revenue from automobile manufacturers and OEMs, advertisers and advertising agencies, and wireless carriers. We receive revenue from automobile manufacturers whose vehicles contain our proprietary software and are able to access our personalized navigation services. These manufacturers have typically not provided us with any volume or revenue guarantees. In addition, we have a growing business in mobile advertising where our customers are primarily advertising agencies, which represent national and regional brands, and channel partners that work closely with local and small business advertisers. We also derive revenue from our partnerships with wireless carriers, who pay us to enable their subscribers to use our mobile navigation services. Some of these wireless carriers bill their subscribers on a monthly recurring basis and the number of those monthly recurring subscribers to which we provide services continues to decline, resulting in substantial declines in our revenue from wireless carriers.
We generate revenue from the delivery of customized software and royalties from the distribution of this customized software in automotive navigation applications. For example, Ford utilizes our on-board automotive navigation product in its Ford SYNC platform. Ford pays us a royalty fee on Sync 2 on-board solutions as the software is reproduced for installation in vehicles with our automotive navigation solutions and pays us a royalty fee on Sync 3 on-board solutions as our software is installed in the vehicle. In addition, we earn a one-time royalty for each new vehicle owner who downloads the GM OnStar RemoteLink® application, whereby we provide enhanced search capabilities for contracted service periods. We also earn a one-time royalty for each new Toyota vehicle enabled to connect with our Scout® GPS Link mobile application.
We generate revenue from advertising network services through the delivery of search and display advertising impressions based on the specific terms of the advertising contract.
We also generate revenue from subscriptions to our mobile navigation services. End users with subscriptions for our services are generally billed for our services through their wireless carrier or through mobile application stores and marketplaces. Our wireless carrier customers pay us based on several different revenue models, including (1) a revenue sharing arrangement that may include a minimum fee per end user, (2) a monthly or annual subscription fee per end user, or (3) based on usage.
Recent Developments
In September 2015, we entered into an agreement with Ningbo Huazhong Holdings Company Limited, or Huazhong, a subsidiary of a publicly traded automotive OEM supplier in China, whereby we and Huazhong agreed to form a joint venture limited liability company in China for the development, manufacture and sales of connected navigation systems for the China automotive aftermarket and local OEMs. We agreed to invest RMB 9.95 million (approximately $1.5 million as of March 31, 2016) in cash, which is expected to represent 19.9% of the equity interests of the joint venture. We and Huazhong also agreed to

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negotiate a Technology License Agreement, or TLA, whereby we will license our existing navigation platform technologies to the joint venture in exchange for a RMB 5.0 million (approximately $0.8 million as of March 31, 2016) license fee.
We have not made any capital contributions to the joint venture, and the parties are currently renegotiating the nature, timing and amounts of capital to be contributed. Accordingly, the joint venture has not been formed. In December 2015, we and Huazhong completed the TLA with a term of ten years. In addition, we and Huazhong negotiated a Technology Development Service Agreement, whereby we will provide the joint venture with specified technical services in exchange for a non-refundable technical services fee, subject to the completion of a statement of work by the parties. The TLA and Technology Development Service Agreement will not be effective until the joint venture is formed.
On October 16, 2015, we entered into a lease termination agreement with our landlord for the termination of our office lease dated June 28, 2011 for our corporate facilities on De Guigne Drive in Sunnyvale, California. The lease termination (a) became effective on March 31, 2016 with respect to 920 De Guigne Drive and 950 De Guigne Drive; and (b) is to become effective on June 30, 2016 with respect to 930 De Guigne Drive. On the same day, we also entered into a lease termination agreement with our sublease tenant for the termination of our sublease of 930 De Guigne Drive. The sublease termination is to become effective on June 30, 2016, and the sublease tenant has the right to advance the termination date to no earlier than March 31, 2016, subject to certain terms and conditions. As of March 31, 2016, the sublease tenant has not advanced the termination date.
In connection with these lease termination agreements, we recorded the following amounts during the three months ended December 31, 2015: i) the reversal of a $1.5 million restructuring accrual related to 920 De Guigne Drive, as this amount represents the fair value of our lease obligation from April 2016 through November 2019 that is no longer payable; ii) the reversal of a $0.5 million loss accrual related to 930 De Guigne Drive, as this amount represents our loss from subleasing the building from July 2016 through November 2019 that we will no longer incur, partly offset by an accrual of $0.4 million related to the early lease termination fee payable to our sublease tenant; and iii) the reversal of $0.6 million of the total $1.2 million of deferred rent related to 950 De Guigne Drive, as this amount represents our deferred rent liability that is no longer required. We reversed $0.6 million as a credit to rent expense in the three months ended December 31, 2015. The remaining excess deferred rent balance of $0.6 million was reversed and credited to rent expense in the three months ended March 31, 2016.
On December 18, 2015, we entered into a sublease agreement dated November 11, 2015 (the “Lease”) with Avaya Inc. to lease approximately 55,000 square feet of office and research and development space located at 4655 Great America Parkway, 3rd Floor, in Santa Clara, California (the “Great America Facility”) for a period of five years and one month (the “Term”), with a commencement date of April 1, 2016. On March 21, 2016, Avaya Inc. agreed to early occupancy of the Great America Facility by us for a prorated rent amount. The Lease provides for average monthly base rent payments during the Term of approximately $0.1 million as set forth in the Lease. The Lease also provides that we must pay certain expenses and fees, including common area maintenance and property tax, in addition to the base rent. In March 2016, we relocated our corporate headquarters, and all employees formerly based at the De Guigne Drive facilities in Sunnyvale, California, to the Great America Facility.
In January 2016, we decided to shift our focus in our advertising business from growth to profitability. We anticipate that our quarter ended March 31, 2016, which was lower in revenue compared to the three months ended December 31, 2015 due primarily to seasonality, will be the peak quarter of losses for our advertising business. In the near-term, we are taking actions to reduce our operating costs and are targeting to achieve break-even on a cash basis for our advertising business by the end of calendar 2016. We use the adjusted EBITDA metric in measuring this performance. This shift in strategy from growth to profitability required us to evaluate the carrying value of our goodwill and intangible assets for impairment during the three months ended March 31, 2016 rather than in the ordinary course of practice during the last quarter of our fiscal year. Based on the results of our goodwill and intangible assets impairment test as of January 31, 2016, the estimated fair value of our advertising business exceeded its carrying value by 18%. We have not recognized any impairment of goodwill or intangible assets in the three year period ended June 30, 2015 and the nine months ended March 31, 2016.

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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, change in deferred revenue, change in deferred costs, non-GAAP gross margin, non-GAAP net income (loss), adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA, diluted non-GAAP net income (loss) per share, and free cash flow are not measures calculated in accordance with U.S. generally accepted accounting principles, or GAAP, and should not be considered as an alternative to any measure of financial performance 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 (in thousands, except percentages and per share amounts):

 
 
Three Months Ended
 
Nine Months Ended
 
 
March 31,
 
March 31,
 
 
2016
 
2015
 
2016
 
2015
Revenue
 
$
46,278

 
$
42,286

 
$
135,592

 
$
117,053

Billings (Non-GAAP)
 
$
53,134

 
$
42,465

 
$
149,471

 
$
120,039

 
 
 
 
 
 
 
 
 
Increase in deferred revenue
 
$
6,856

 
$
179

 
$
13,879

 
$
2,986

Increase in deferred costs
 
$
2,974

 
$
1,338

 
$
7,276

 
$
2,061

 
 
 
 
 
 
 
 
 
Gross margin
 
44
%
 
51
%
 
45
%
 
52
%
Non-GAAP gross margin
 
45
%
 
53
%
 
46
%
 
54
%
 
 
 
 
 
 
 
 
 
Net loss
 
$
(9,838
)
 
$
(4,767
)
 
$
(27,323
)
 
$
(15,427
)
Non-GAAP net loss
 
$
(7,472
)
 
$
(1,177
)
 
$
(19,014
)
 
$
(8,044
)
Adjusted EBITDA
 
$
(6,353
)
 
$
(4,678
)
 
$
(16,887
)
 
$
(15,035
)
 
 
 
 
 
 
 
 
 
Diluted net loss per share
 
$
(0.23
)
 
$
(0.12
)
 
$
(0.66
)
 
$
(0.39
)
Diluted non-GAAP net loss per share
 
$
(0.18
)
 
$
(0.03
)
 
$
(0.46
)
 
$
(0.20
)
 
 
 
 
 
 
 
 
 
Free cash flow (Non-GAAP)
 
$
(1,994
)
 
$
5,761

 
$
(8,988
)
 
$
(177
)
 
 
 
 
 
 
 
 
 

Billings measures revenue recognized plus the change in deferred revenue from the beginning to the end of the period. We consider billings to be a useful metric for management and investors because billings drives deferred revenue, which is an important indicator of the health and viability of our business. While we believe a disproportionately high degree of costs and value in the product or service has been incurred and provided at the time of billing to the customer, we are required under GAAP to defer revenue recognition over much longer periods, currently up to ten years. There are a number of limitations related to the use of billings versus revenue calculated in accordance with GAAP. First, billings include amounts that have not yet been recognized as revenue and may require additional services to be provided over contracted service periods. For example, billings related to certain connected solutions cannot be recognized as revenue in a given period due to requirements for ongoing provisioning of services such as hosting, monitoring and customer support. Second, we may calculate billings in a manner that is different from peer companies that report similar financial measures. When we use these measures, we compensate for these limitations by providing specific information regarding revenue and evaluating billings together with revenue calculated in accordance with GAAP. We have also provided a breakdown of the calculation of the change in deferred revenue by segment, which is added to revenue in calculating our non-GAAP metric of billings. In connection with our presentation of the change in deferred revenue, we have provided a similar presentation of the change in the related deferred costs. Such deferred costs primarily include costs associated with third party content and in connection with certain customized software solutions, the costs incurred to develop those solutions. As deferred revenue and deferred costs become larger components of our operating results, we believe these metrics are useful in evaluating cash flow.
Gross margin is our gross profit, or total revenue less cost of revenue, expressed as a percentage of our total revenue. Our gross margin has been and will continue to be impacted by the increasing percentage of our revenue base derived from automotive navigation solutions and advertising network services, which generally have higher associated third party content costs and third party display ad inventory costs, respectively, than our mobile navigation offerings provided through wireless carriers.
Non-GAAP gross margin measures our gross margin, excluding the impact of stock-based compensation expense and capitalized software and developed technology amortization expenses. Non-GAAP net loss measures GAAP net loss,

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excluding the impact of stock-based compensation expense, capitalized software and developed technology amortization expenses, and other applicable items such as legal contingencies, certain unique tax matters, restructuring accruals and reversals, and deferred rent reversals due to lease termination, net of taxes or tax benefits. Stock-based compensation expense relates to equity incentive awards granted to our employees, directors, and consultants. Stock-based compensation expense has been and will continue to be a significant recurring non-cash expense for us that we exclude from non-GAAP net loss and non-GAAP net loss per share. Legal contingencies represent settlements and offers made to settle patent litigation cases in which we are defendants and royalty disputes. Deferred rent reversals represent the reversal of our deferred rent liability that is no longer required due to our facility lease termination. Capitalized software amortization expense represents internal software costs that were capitalized and are charged to expense as the software is used in our operations. Developed technology amortization expense relates to the amortization of acquired intangible assets. Our non-GAAP tax rate differs from the tax rate due to the elimination of any tax effect of the stock-based compensation expenses, capitalized software and developed technology amortization expense, and applicable legal contingencies, restructuring accruals and reversals, and other items, including unique tax matters, that are being eliminated to arrive at the non-GAAP net loss.
Adjusted EBITDA measures our GAAP net loss excluding the impact of stock-based compensation expense, depreciation, amortization, interest and other income (expense), provision (benefit) for income taxes, and other applicable items such as legal contingencies, restructuring accruals and reversals and deferred rent reversals due to lease termination, net of tax. Adjusted EBITDA, while generally a measure of profitability, can also represent a loss. We consider Adjusted EBITDA to be a useful metric as a proxy for operating cash flow.
Non-GAAP gross margin, non-GAAP net loss and adjusted EBITDA are key measures used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans. In particular, we believe that the exclusion of the expenses eliminated in calculating non-GAAP gross margin, non-GAAP net loss and adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. In addition, non-GAAP net loss and adjusted EBITDA are key financial measures used by the compensation committee of our board of directors in connection with the development of incentive-based compensation for our executive officers. Accordingly, we believe that non-GAAP gross margin, non-GAAP net loss, net of tax, and adjusted EBITDA provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.
Diluted non-GAAP net loss per share is calculated as non-GAAP net loss divided by the diluted weighted average number of shares outstanding during the period.

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 generated by our business after the 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 analysis of our financial results as reported under GAAP. Some of these limitations are:
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditures;
non-GAAP gross margin, non-GAAP net loss and adjusted EBITDA do not reflect the potentially dilutive impact of equity-based compensation;
non-GAAP net loss and adjusted EBITDA do 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, including companies in our industry, may calculate adjusted EBITDA, free cash flow or similarly titled measures differently, which reduces their usefulness as comparative measures.
Because of these and other limitations, you should consider billings, non-GAAP gross margin, non-GAAP net loss, adjusted EBITDA, diluted non-GAAP net loss per share and free cash flow alongside other GAAP-based financial performance measures, including various cash flow metrics, net loss and our other GAAP financial results.

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The following tables present reconciliations of revenue to billings, deferred revenue to the change in deferred revenue, deferred costs to the change in deferred costs, gross margin to non-GAAP gross margin, net loss to non-GAAP net loss, net loss to adjusted EBITDA and net loss to free cash flow for each of the periods indicated (dollars in thousands):
 
 
Automotive
 
Advertising
 
Mobile Navigation
 
Total
 
 
Three Months Ended
March 31,
 
Three Months Ended
March 31,
 
Three Months Ended
March 31,
 
Three Months Ended
March 31,
 
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Revenue
 
$
34,717

 
$
29,472

 
$
5,156

 
$
4,019

 
$
6,405

 
$
8,795

 
$
46,278

 
$
42,286

Adjustments:
   Change in deferred revenue
 
6,992

 
297

 

 

 
(136
)
 
(118
)
 
6,856

 
179

Billings (Non-GAAP)
 
$
41,709

 
$
29,769

 
$
5,156

 
$
4,019

 
$
6,269

 
$
8,677

 
$
53,134

 
$
42,465

 
 
Automotive
 
Advertising
 
Mobile Navigation
 
Total
 
 
Nine Months Ended March 31,
 
Nine Months Ended March 31,
 
Nine Months Ended March 31,
 
Nine Months Ended March 31,
 
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Revenue
 
$
98,306

 
$
73,051

 
$
16,695

 
$
12,726

 
$
20,591

 
$
31,276

 
$
135,592

 
$
117,053

Adjustments:
   Change in deferred revenue
 
14,243

 
3,650

 

 

 
(364
)
 
(664
)
 
13,879

 
2,986

Billings (Non-GAAP)
 
$
112,549

 
$
76,701

 
$
16,695

 
$
12,726

 
$
20,227

 
$
30,612

 
$
149,471

 
$
120,039


 
 
Automotive
 
Advertising
 
Mobile Navigation
 
Total
 
 
Three Months Ended
March 31,
 
Three Months Ended
March 31,
 
Three Months Ended
March 31,
 
Three Months Ended
March 31,
 
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Deferred revenue, March 31
 
$
19,435

 
$
3,780

 
$

 
$

 
$
1,272

 
$
1,642

 
$
20,707

 
$
5,422

Deferred revenue, December 31
 
12,443

 
3,483

 

 

 
1,408

 
1,760

 
13,851

 
5,243

Increase (decrease) in deferred revenue (Non-GAAP)
 
$
6,992

 
$
297

 
$

 
$

 
$