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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 September 30, 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 September 30, 2016, there were approximately 43,139,415 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)
 
 
 
September 30,
2016
 
June 30,
2016*
 
 
(unaudited)
 
 
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
16,535

 
$
21,349

Short-term investments
 
85,816

 
88,277

Accounts receivable, net of allowances of $80 and $111 at September 30, 2016 and June 30, 2016, respectively
 
42,712

 
42,216

Restricted cash
 
4,980

 
5,109

Income taxes receivable
 
686

 
687

Deferred costs
 
2,354

 
1,784

Prepaid expenses and other current assets
 
4,473

 
4,448

Total current assets
 
157,556

 
163,870

Property and equipment, net
 
5,141

 
5,247

Deferred income taxes, non-current
 
642

 
661

Goodwill and intangible assets, net
 
35,734

 
35,993

Deferred costs, non-current
 
12,579

 
10,292

Other assets
 
1,919

 
2,184

Total assets
 
$
213,571

 
$
218,247

Liabilities and stockholders’ equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
9,542

 
$
4,992

Accrued compensation
 
6,449

 
9,308

Accrued royalties
 
14,777

 
15,331

Other accrued expenses
 
10,087

 
11,635

Deferred revenue
 
4,994

 
4,334

Income taxes payable
 
180

 
88

Total current liabilities
 
46,029

 
45,688

Deferred rent, non-current
 
1,272

 
1,124

Deferred revenue, non-current
 
23,417

 
19,035

Other long-term liabilities
 
1,273

 
2,715

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; 43,139 and 42,708 shares issued and outstanding at September 30, 2016 and June 30, 2016, respectively
 
43

 
43

Additional paid-in capital
 
151,083

 
149,775

Accumulated other comprehensive loss
 
(1,845
)
 
(1,767
)
Retained earnings (deficit)
 
(7,701
)
 
1,634

Total stockholders’ equity
 
141,580

 
149,685

Total liabilities and stockholders’ equity
 
$
213,571

 
$
218,247

* Derived from audited consolidated financial statements as of and for the year ended June 30, 2016.
See accompanying Notes to Condensed Consolidated Financial Statements.

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Table of Contents

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

 
 
Three Months Ended
 
 
September 30,
 
 
2016
 
2015
Revenue:
 
 
 
 
Product
 
$
29,423

 
$
31,109

Services
 
12,804

 
12,952

Total revenue
 
42,227

 
44,061

Cost of revenue:
 
 
 
 
Product
 
17,761

 
18,083

Services
 
5,715

 
5,304

Total cost of revenue
 
23,476

 
23,387

Gross profit
 
18,751

 
20,674

Operating expenses:
 
 
 
 
Research and development
 
18,018

 
17,987

Sales and marketing
 
5,268

 
6,998

General and administrative
 
5,491

 
6,235

Total operating expenses
 
28,777

 
31,220

Loss from operations
 
(10,026
)
 
(10,546
)
Other income (expense), net
 
296

 
(187
)
Loss before provision (benefit) for income taxes
 
(9,730
)
 
(10,733
)
Provision (benefit) for income taxes
 
(395
)
 
113

Net loss
 
$
(9,335
)
 
$
(10,846
)
 
 
 
 
 
Net loss per share:
 
 
 
 
Basic and diluted
 
$
(0.22
)
 
$
(0.27
)
Weighted average shares used in computing net loss per share:
 
 
 
 
Basic and diluted
 
42,838

 
40,601

 
 
 
 
 
Stock-based compensation expense included above:
 
 
 
 
Cost of revenue
 
$
29

 
$
32

Research and development
 
1,490

 
1,458

Sales and marketing
 
494

 
840

General and administrative
 
528

 
757

Total stock-based compensation expense
 
$
2,541

 
$
3,087

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
 
 
September 30,
 
 
2016
 
2015
 
 
 
 
 
Net loss
 
$
(9,335
)
 
$
(10,846
)
Other comprehensive income (loss):
 
 
 
 
Foreign currency translation adjustment, net of tax
 
66

 
(184
)
Available-for-sale securities:
 
 
 
 
Unrealized (gain) loss on available-for-sale securities, net of tax
 
(138
)
 
6

Reclassification adjustments for gain (loss) on available-for-sale securities recognized, net of tax
 
(6
)
 
2

Net increase (decrease) from available-for-sale securities, net of tax
 
(144
)
 
8

Other comprehensive income (loss), net of tax
 
(78
)
 
(176
)
Comprehensive loss
 
$
(9,413
)
 
$
(11,022
)
 
 
 
 
 

See accompanying Notes to Condensed Consolidated Financial Statements.


3

Table of Contents

TELENAV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 
Three Months Ended
 
 
September 30,
 
 
2016
 
2015
Operating activities
 
 
 
 
Net loss
 
$
(9,335
)
 
$
(10,846
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
Depreciation and amortization
 
637

 
1,069

Accretion of net premium on short-term investments
 
125

 
205

Stock-based compensation expense
 
2,541

 
3,087

Write-off of long-term investments
 

 
442

Bad debt expense
 
67

 
73

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
(563
)
 
(1,933
)
Deferred income taxes
 
19

 
(247
)
Restricted cash
 
129

 
99

Income taxes receivable
 
1

 
608

Deferred costs
 
(2,857
)
 
(2,673
)
Prepaid expenses and other current assets
 
(25
)
 
100

Other assets
 
18

 
141

Accounts payable
 
4,533

 
(97
)
Accrued compensation
 
(2,859
)
 
(2,662
)
Accrued royalties
 
(554
)
 
3,401

Accrued expenses and other liabilities
 
(2,775
)
 
(436
)
Income taxes payable
 
92

 
27

Deferred rent
 
75

 
(68
)
Deferred revenue
 
5,042

 
3,841

Net cash used in operating activities
 
(5,689
)
 
(5,869
)
Investing activities
 
 
 
 
Purchases of property and equipment
 
(394
)
 
(242
)
Purchases of short-term investments
 
(16,841
)
 
(10,249
)
Proceeds from sales and maturities of short-term investments
 
19,032

 
11,483

Proceeds from sales of long-term investments
 
246

 

Net cash provided by investing activities
 
2,043

 
992

Financing activities
 
 
 
 
Proceeds from exercise of stock options
 
23

 
204

Repurchase of common stock
 

 
(570
)
Tax withholdings related to net share settlements of restricted stock units
 
(1,256
)
 
(1,313
)
Net cash used in financing activities
 
(1,233
)
 
(1,679
)
Effect of exchange rate changes on cash and cash equivalents
 
65

 
(184
)
Net decrease in cash and cash equivalents
 
(4,814
)
 
(6,740
)
Cash and cash equivalents, at beginning of period
 
21,349

 
18,721

Cash and cash equivalents, at end of period
 
$
16,535

 
$
11,981

Supplemental disclosure of cash flow information
 
 
 
 
Income taxes paid (received), net
 
$
910

 
$
(549
)
See accompanying Notes to Condensed Consolidated Financial Statements.

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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 leading provider of connected car and location-based platform services. 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. Our advertising delivery platform delivers highly targeted advertising services leveraging our location expertise. We operate in three segments - automotive, advertising and mobile navigation. Our fiscal year ends on June 30 and in this report we refer to the fiscal year ended June 30, 2016 as “fiscal 2016” and the fiscal year ending June 30, 2017 as “fiscal 2017.”
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 months ended September 30, 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 2016, included in our Annual Report on Form 10-K for fiscal 2016 filed with the U.S. Securities and Exchange Commission, or SEC, on August 22, 2016.
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 2016.
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 and short-term investments, 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 and affiliated entities, or Ford, comprised 68% and 69% of revenue for the three months ended September 30, 2016 and 2015, respectively. As of September 30, 2016 and June 30, 2016, receivables due from Ford were 61% and 64% of total accounts receivable, respectively. Revenue related to services provided through AT&T Mobility LLC, or AT&T, comprised 8% and 11% of revenue for the three months ended September 30, 2016 and 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, HERE North America, LLC, or HERE, and Nav2 (Shanghai) Co., Ltd. in the three months ended September 30, 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 September 30, 2016 and June 30, 2016, we had restricted cash of $5.0 million and $5.1 million, respectively, on our consolidated balance sheets, comprised primarily of overpayments from a customer that are expected to be refunded.
Accumulated other comprehensive loss, net of tax
The components of accumulated other comprehensive loss, net of related taxes, during the three months ended September 30, 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, 2016
 
$
(1,889
)
 
$
122

 
$
(1,767
)
Other comprehensive income (loss) before reclassifications, net of tax
 
66

 
(138
)
 
(72
)
Amount reclassified from accumulated other comprehensive loss, net of tax
 

 
(6
)
 
(6
)
Other comprehensive income (loss), net of tax
 
66

 
(144
)
 
(78
)
Balance, net of tax as of September 30, 2016
 
$
(1,823
)
 
$
(22
)
 
$
(1,845
)

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 three months ended September 30, 2016 and 2015.

The amount of income tax benefit allocated to each component of accumulated other comprehensive loss was not material for the three months ended September 30, 2016 and 2015.
Long-term investments
As of September 30, 2016, the carrying value of our investments in privately held companies totaled $708,000. These investments are accounted for as cost method 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. We regularly evaluate the carrying value of these cost method investments for impairment. We recorded impairment charges of zero and $442,000 for cost method investments during the three months ended September 30, 2016 and 2015, respectively.
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 may receive information from users about our products where it may be necessary for us to expend resources to investigate and remedy a potential warranty claim.
Recent accounting pronouncements
In October 2016, the Financial Accounting Standards Board, or FASB, issued new guidance which is intended to eliminate diversity in practice and provide a more accurate depiction of the tax consequences on intercompany asset transfers (excluding inventory). The new guidance removes the current prohibition against immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. The new standards is effective for us in our first quarter of fiscal 2019 and requires a modified retrospective method of adoption. Early adoption is permitted, but only in the first quarter of an entity’s annual fiscal year. We are evaluating the effect that this new standard will have on our consolidated financial statements.

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

In August 2016, the FASB issued new guidance which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. The new standard is effective for us in our first quarter of fiscal 2019 and early adoption is permitted. We are evaluating the effect that this new standard will have on our consolidated financial statements.
With the exception of the new standards discussed above, there have been no other recent accounting pronouncements or changes in accounting pronouncements during the three months ended September 30, 2016, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for fiscal 2016, that are of significance or potential significance to us.
2.
Net income (loss) per share
Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding for the period, including potential dilutive common shares assuming the dilutive effect of outstanding stock options and restricted stock units using the treasury-stock method.
The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share amounts):
 
 
 
Three Months Ended
 
 
September 30,
 
 
2016
 
2015
Net loss
 
$
(9,335
)
 
$
(10,846
)
Weighted average common shares used in computing net loss per share, basic and diluted
 
42,838

 
40,601

Net loss per share, basic and diluted
 
$
(0.22
)
 
$
(0.27
)

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
 
 
September 30,
 
 
2016
 
2015
Stock options
 
6,316

 
5,472

Restricted stock units
 
3,218

 
4,750

Total
 
9,534

 
10,222


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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 months ended September 30, 2016 and 2015.
Cash, cash equivalents and short-term investments consisted of the following as of September 30, 2016 (in thousands):
 
Description
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Cash
 
$
11,861

 
$

 
$

 
$
11,861

Cash equivalents:
 
 
 
 
 
 
 
 
Money market mutual funds
 
4,174

 

 

 
4,174

U.S. agency securities
 
500

 

 

 
500

Total cash equivalents
 
4,674

 

 

 
4,674

Total cash and cash equivalents
 
16,535

 

 

 
16,535

Short-term investments:
 
 
 
 
 
 
 
 
U.S. agency securities
 
3,619

 
6

 
(6
)
 
3,619

Asset-backed securities
 
9,722

 
17

 
(2
)
 
9,737

Municipal securities
 
5,025

 
7

 
(1
)
 
5,031

Commercial paper
 
3,243

 

 

 
3,243

Foreign government securities
 
751

 

 

 
751

Corporate bonds
 
63,342

 
123

 
(30
)
 
63,435

Total short-term investments
 
85,702

 
153

 
(39
)
 
85,816

Cash, cash equivalents and short-term investments
 
$
102,237

 
$
153

 
$
(39
)
 
$
102,351


Cash, cash equivalents and short-term investments consisted of the following as of June 30, 2016 (in thousands):
 
Description
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Cash
 
$
14,308

 
$

 
$

 
$
14,308

Cash equivalents:
 
 
 
 
 
 
 
 
Money market mutual funds
 
5,641

 

 

 
5,641

U.S. agency securities
 
1,400

 

 

 
1,400

Total cash equivalents
 
7,041

 

 

 
7,041

Total cash and cash equivalents
 
21,349

 

 

 
21,349

Short-term investments:
 
 
 
 
 
 
 
 
U.S. treasury securities
 
1,699

 
3

 

 
1,702

U.S. agency securities
 
5,907

 
22

 

 
5,929

Asset-backed securities
 
10,160

 
17

 
(2
)
 
10,175

Municipal securities
 
6,004

 
14

 

 
6,018

Commercial paper
 
3,494

 
1

 

 
3,495

Corporate bonds
 
60,754

 
217

 
(13
)
 
60,958

Total short-term investments
 
88,018

 
274

 
(15
)
 
88,277

Cash, cash equivalents and short-term investments
 
$
109,367

 
$
274

 
$
(15
)
 
$
109,626



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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 September 30, 2016 (in thousands):
 
 
 
Amortized
Cost
 
Estimated
Fair Value
Due within one year
 
$
37,645

 
$
37,652

Due between one and two years
 
27,917

 
28,004

Due between two and three years
 
20,140

 
20,160

Total
 
$
85,702

 
$
85,816


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 September 30, 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.

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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 September 30, 2016 (in thousands):
 
 
 
Fair Value Measurements at September 30, 2016 Using
 
 
 
 
Quoted Prices
in Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
Description
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market mutual funds
 
$
4,174

 
$
4,174

 
$

 
$

U.S. agency securities
 
500

 

 
500

 

Total cash equivalents
 
4,674

 
4,174

 
500

 

Short-term investments:
 
 
 
 
 
 
 
 
U.S. agency securities
 
3,619

 

 
3,619

 

Asset-backed securities
 
9,737

 

 
9,737

 

Municipal securities
 
5,031

 

 
5,031

 

Commercial paper
 
3,243

 

 
3,243

 

Foreign government securities
 
751

 

 
751

 

Corporate bonds
 
63,435

 

 
63,435

 

Total short-term investments
 
85,816

 

 
85,816

 

Cash equivalents and short-term investments
 
$
90,490

 
$
4,174

 
$
86,316

 
$

The fair values of our financial instruments were determined using the following inputs at June 30, 2016 (in thousands):
 
 
 
Fair Value Measurements at June 30, 2016 Using
 
 
 
 
Quoted Prices
in Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
Description
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market mutual funds
 
$
5,641

 
$
5,641

 
$

 
$

U.S. agency securities
 
1,400

 

 
1,400

 

Total cash equivalents
 
7,041

 
5,641

 
1,400

 

Short-term investments:
 
 
 
 
 
 
 
 
U.S. treasury securities
 
1,702

 
1,702

 

 

U.S. agency securities
 
5,929

 

 
5,929

 

Asset-backed securities
 
10,175

 

 
10,175

 

Municipal securities
 
6,018

 

 
6,018

 

Commercial paper
 
3,495

 

 
3,495

 

Corporate bonds
 
60,958

 

 
60,958

 

Total short-term investments
 
88,277

 
1,702

 
86,575

 

Cash equivalents and short-term investments
 
$
95,318

 
$
7,343

 
$
87,975

 
$

Amortization of net premium on short-term investments totaled $125,000 and $205,000 in the three months ended September 30, 2016 and 2015, respectively.
There were no transfers between Level 1 and Level 2 financial instruments in the three months ended September 30, 2016 and 2015, respectively.

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

We did not have any financial liabilities measured at fair value on a recurring basis as of September 30, 2016 or June 30, 2016.
5.
Commitments and contingencies
Operating lease and purchase obligations
As of September 30, 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 2017
 
Fiscal 2018
 
Fiscal 2019
 
Fiscal 2020
 
Fiscal 2021
 
Thereafter
Operating lease obligations, net of sublease income
 
$
14,595

 
$
3,067

 
$
4,024

 
$
3,585

 
$
2,127

 
$
1,792

 
$

Purchase obligations
 
3,525

 
1,386

 
805

 
382

 
217

 
217

 
518

Total contractual obligations
 
$
18,120

 
$
4,453

 
$
4,829

 
$
3,967

 
$
2,344

 
$
2,009

 
$
518

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 September 30, 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 $750,000 as of September 30, 2016) license fee.
We have not made any capital contributions to the joint venture, and 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 be effective until the joint venture is formed and funded. We are currently in discussions with Huazhong as to the next steps for the joint venture.
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 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 was sent back to the U.S. District Court for the District of

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

Delaware. A joint trial with Verizon on the issue of the invalidity of the patent in suit is scheduled for mid-February 2017, which will be followed by a separate AT&T and Telenav trial on issues of infringement and damages. During fiscal 2016, we accrued $850,000 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.
On July 28, 2016, Nathan Gergetz filed a putative class action complaint in the U.S. District Court for the Northern District of California, alleging that Telenav violated the Telephone Consumer Protection Act, or TCPA. The complaint purports to be filed on behalf of a class, and it alleges that Telenav caused unsolicited text messages to be sent to the plaintiff from July 6, 2016 to July 26, 2016. Plaintiffs seek statutory and actual damages under the TCPA law, attorneys’ fees and costs of the action, and an injunction to prevent any future violations. Due to the preliminary nature of this matter and uncertainties relating to litigation, 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 Communications LLC, or 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 U.S. Patent and Trademark Office, or 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 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.
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

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

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 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, 2016
 
5,370

 
$
6.80

 
 
 
 
Granted
 
1,085

 
$
5.15

 
 
 
 
Exercised
 
(13
)
 
$
1.84

 
 
 
 
Canceled
 
(126
)
 
$
7.20

 
 
 
 
Options outstanding as of September 30, 2016
 
6,316

 
$
6.52

 
6.91
 
$
1,197

As of September 30, 2016:
 
 
 
 
 
 
 
 
Options vested and expected to vest
 
5,749

 
$
6.56

 
6.69
 
$
1,045

Options exercisable
 
3,026

 
$
6.87

 
5.11
 
$
410

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, 2016
 
3,302

 
 
 
 
Granted
 
728

 
 
 
 
Vested
 
(651
)
 
 
 
 
Canceled
 
(161
)
 
 
 
 
RSUs outstanding as of September 30, 2016
 
3,218

 
1.61
 
$
18,436

As of September 30, 2016:
 
 
 
 
 
 
RSUs expected to vest
 
2,669

 
1.48
 
$
15,291




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

During the three months ended September 30, 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 1,666,666 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, 2016
 
1,719

Additional shares authorized
 
1,667

Granted
 
(1,813
)
RSUs withheld for taxes in net share settlements
 
232

Canceled
 
287

Shares available for grant as of September 30, 2016
 
2,092

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
 
 
September 30,
 
 
2016
 
2015
Stock option awards
 
$
474

 
$
410

RSU awards
 
2,067

 
2,677

Total stock-based compensation expense
 
$
2,541

 
$
3,087

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
 
 
September 30,
 
 
2016
 
2015
Expected volatility
 
39
%
 
52
%
Expected term (in years)
 
4.15

 
4.46

Risk-free interest rate
 
1.14
%
 
1.54
%
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 September 30, 2016, we had granted 106,000 RSUs under the 2015 Program, no RSUs had been earned, and 36,000 RSUs had been canceled.

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

8.
Income taxes
The effective tax rate for the periods presented is the result of the mix of forecasted fiscal year income earned or loss incurred in various tax jurisdictions that apply a broad range of income tax rates. Our provision (benefit) for income taxes was $(395,000) in the three months ended September 30, 2016 compared to $113,000 in the three months ended September 30, 2015. In July 2016, the state of New York completed its audit of our income tax returns for fiscal 2010 through fiscal 2012. We paid $442,000 to settle the audit and recorded a tax benefit of $1.0 million in July 2016 to reverse the remaining related tax reserves. Our benefit from income taxes of $(395,000) for the three months ended September 30, 2016 was comprised primarily of the aforementioned $1.0 million reversal of tax reserves, partially offset by foreign withholding taxes on revenue generated in China. Our effective tax rate, which resulted in the recognition of a tax benefit, was 4% in the three months ended September 30, 2016 compared to an effective tax rate, which resulted in the recognition of a tax expense, of 1% in the three months ended September 30, 2015. Our effective tax rate of 4% and 1% for the three months ended September 30, 2016 and 2015, respectively, was less than the tax amount computed at the U.S. federal statutory income tax rate due primarily to losses for which no benefit will be recognized since they are not more likely than not to be realized due to the lack of current and future income and the inability to carryback losses within the two year carryback period.
We record liabilities related to unrecognized tax benefits in accordance with authoritative guidance on accounting for uncertain tax positions. As of September 30, 2016 and June 30, 2016, our cumulative unrecognized tax benefits were $5.5 million and $6.7 million, respectively. Included in the balance of unrecognized tax benefits at September 30, 2016 and June 30, 2016 was $468,000 and $1.6 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 $295,000 and $570,000 for the payment of interest and penalties at September 30, 2016 and June 30, 2016, 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 2016 in the U.S., for fiscal 2012 through fiscal 2016 in state jurisdictions, and for fiscal 2011 through fiscal 2016 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, 2016 was $29.8 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.
9.
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.

We report results in three business segments:

Automotive - Our automotive segment provides our automotive and mobile navigation platform to vehicle manufacturers and original equipment manufacturers, or OEMs, for distribution with their vehicles. We provide both embedded, or on-board, and mobile phone-based wireless connectivity, or brought-in, navigation solutions. Our on-board solutions consist of software, map and point of interest, or POI, data loaded in the vehicle that provides voice-guided turn by turn navigation displayed on the vehicle screen. Our brought-in connected solutions enable a mobile device that is paired with the vehicle to activate in-vehicle text-based and voice-guided turn by turn navigation.

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.


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

Mobile Navigation - Our mobile navigation segment provides our mobile 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.

Our segment results for the three months ended September 30, 2016 and 2015 were as follows (dollars in thousands):

 
 
Three Months Ended
September 30,
 
 
 
2016
 
2015
 
Revenue
 
 
 
 
 
Automotive
 
$
30,267

 
$
31,743

 
Advertising
 
6,545

 
4,851

 
Mobile Navigation
 
5,415

 
7,467

 
Total revenue
 
42,227

 
44,061

 
Cost of revenue
 
 
 
 
 
Automotive
 
18,545

 
18,521

 
Advertising
 
3,526

 
2,995

 
Mobile Navigation
 
1,405

 
1,871

 
Total cost of revenue
 
23,476

 
23,387

 
Gross profit
 
 
 
 
 
Automotive
 
11,722

 
13,222

 
Advertising
 
3,019

 
1,856

 
Mobile Navigation
 
4,010

 
5,596

 
Total gross profit
 
$
18,751

 
$
20,674

 
Gross margin
 
 
 
 
 
Automotive
 
39
%
 
42
%
 
Advertising
 
46
%
 
38
%
 
Mobile Navigation
 
74
%
 
75
%
 
Total gross margin
 
44
%
 
47
%
 



16

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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, 2016 as “fiscal 2016" and the fiscal year ending June 30, 2017 as "fiscal 2017.”
Overview

Telenav is a leading provider of connected car and location-based platform products and services using 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. Our advertising delivery platform delivers highly targeted advertising services leveraging our location expertise. We operate in three segments: automotive, advertising and mobile navigation.
For our automotive segment customers, we offer our automotive and mobile navigation platform products and services to vehicle manufacturers and original equipment manufacturers, or OEMs, for distribution with their vehicles. We believe our history as a supplier of cloud-based navigation services provides a unique advantage in the automotive navigation marketplace over our competitors.
Our primary automotive customer to date, Ford Motor Company and affiliated entities, or Ford, currently distributes our embedded, or on-board, product as a standard or optional feature with all of its models in the United States. Our automotive products are now included on models manufactured in North America, Europe and China, as well as distributed in models sold in South America, Australia and New Zealand. In addition, in July 2015, Ford Australia and New Zealand adopted a map update program for its SYNC® 2 generation of vehicles. Under this program, Ford owners with SYNC 2 or SYNC 3 in Australia and New Zealand are eligible to receive annual map updates at no additional cost through December 2023.
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 the second half of fiscal year 2017. Our relationship with GM also includes our mobile phone-based wireless connectivity, or brought-in, services for vehicles including GM's OnStar RemoteLink® and associated branded mobile applications powered by our location-based services platform, which includes mapping and one-box search. In November 2015, the localized version of GM's OnStar RemoteLink was launched in Europe for GM's Opel and Vauxhall brands. In the three months ended September 30, 2016, GM added new branding to the provisioning of this service which included MyBuick, MyCadillac, MyChevrolet and MyGMC, or MyBrand applications.
In July 2015, we and Toyota Motor Corporation, or Toyota, announced a partnership for brought-in navigation services where our Scout® GPS Link is available in Entune™ Audio Plus equipped model year 2016 and later Toyota vehicles in the United States, and in August 2015, Toyota began shipping vehicles enabled to connect with our Scout GPS Link mobile

17

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application. On August 24, 2016, we and the Lexus division of Toyota announced that Lexus will begin offering Scout GPS Link in certain of its Lexus models equipped with Lexus Display Audio multimedia. In September 2016, Lexus began shipping vehicles enabled to connect with our Scout GPS Link.
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 primarily from automobile manufacturers and OEMs and advertisers and advertising agencies. 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, which work closely with local and small business advertisers. We also derive a declining portion of revenue from our partnerships with wireless carriers, who pay us to enable their subscribers to use our mobile navigation services.
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 or associated application, whereby we provide enhanced search capabilities for contracted service periods. We also earn a one-time royalty for each new Toyota and Lexus vehicle sold and enabled to connect with our Scout GPS Link mobile application.
We generate revenue from advertising network services through the delivery of display advertising impressions based on the specific terms of the advertising contract.
We also generate a declining portion of our 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.

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Table of Contents

Key operating and financial performance metrics
We monitor the key operating and financial performance metrics set forth in the tables below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess our operational efficiencies. Certain of these measures such as billings, adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA 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
 
 
September 30,
 
 
2016
 
2015
Revenue
 
$
42,227

 
$
44,061

Billings (Non-GAAP)
 
$
47,269

 
$
47,902

 
 
 
 
 
Increase in deferred revenue
 
$
5,042

 
$
3,841

Increase in deferred costs
 
$
2,857

 
$
2,673

 
 
 
 
 
Gross margin
 
44
%
 
47
%
Net loss
 
$
(9,335
)
 
$
(10,846
)
Diluted net loss per share
 
$
(0.22
)
 
$
(0.27
)
 
 
 
 
 
Adjusted EBITDA (Non-GAAP)
 
$
(6,848
)
 
$
(6,390
)
Free cash flow (Non-GAAP)
 
$
(6,083
)
 
$
(6,111
)

Billings measure 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 drive deferred revenue, which is an important indicator of the health and viability of our business. While we believe a disproportionately high degree of cost 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.
Adjusted EBITDA measures our GAAP net loss excluding the impact of stock-based compensation expense, depreciation, amortization, 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. 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. 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 Sunnyvale facility lease

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termination in fiscal 2016. 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.
Adjusted EBITDA is a key measure 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 adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. In addition, adjusted EBITDA is a key financial measure 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 adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.
Free cash flow is a non-GAAP financial measure we define as net cash provided by (used in) operating activities less purchases of property and equipment. We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash (used) generated by our business after the purchases of property and equipment.
We determined that it would be meaningful to investors to develop a breakout of the operating results of our advertising business beyond the current GAAP segment reporting of revenue, cost of revenue and gross margin, and we are including such presentation in our non-GAAP reporting results.  This presentation reflects operating expenses that are directly attributable to the advertising business. We are unable to provide a similar breakout of operating results for the automotive and mobile navigation businesses beyond the current GAAP segment reporting of revenue, cost of revenue and gross margin because these segments share many of the same technologies and resources and as such, comprise operating expenses which are not fully attributable to one segment versus the other.   In addition, the reported non-GAAP operating results for the advertising business only include an allocation of certain shared corporate general and administrative costs that directly benefit the business, such as accounting and human resource services.
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;
adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation;
adjusted EBITDA does not reflect the use of cash for net share settlements of RSUs;
adjusted EBITDA does not reflect tax payments that historically have represented a reduction in cash available to us or tax benefits that may arise as a result of generating net losses; and
other companies, 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, adjusted EBITDA and free cash flow alongside other GAAP-based financial performance measures, including various cash flow metrics, net loss and our other GAAP financial results.
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, 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
September 30,
 
Three Months Ended
September 30,
 
Three Months Ended
September 30,
 
Three Months Ended
September 30,
 
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Revenue
 
$
30,267

 
$
31,743

 
$
6,545

 
$
4,851

 
$
5,415

 
$
7,467

 
$
42,227

 
$
44,061

Adjustments:
   Change in deferred revenue
 
5,113

 
3,817

 

 

 
(71
)
 
24

 
5,042

 
3,841

Billings (Non-GAAP)
 
$
35,380

 
$
35,560

 
$
6,545

 
$
4,851

 
$
5,344

 
$
7,491

 
$
47,269

 
$
47,902


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Automotive
 
Advertising
 
Mobile Navigation
 
Total
 
 
Three Months Ended
September 30,
 
Three Months Ended
September 30,
 
Three Months Ended
September 30,
 
Three Months Ended
September 30,
 
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Deferred revenue, September 30
 
$
27,266

 
$
9,009

 
$

 
$

 
$
1,145

 
$
1,660

 
$
28,411

 
$
10,669

Deferred revenue, June 30
 
22,153

 
5,192

 

 

 
1,216

 
1,636

 
23,369

 
6,828

Increase (decrease) in deferred revenue
 
$
5,113

 
$
3,817

 
$

 
$

 
$
(71
)
 
$
24

 
$
5,042

 
$
3,841

 
 

 

 

 

 

 

 

 

Deferred costs, September 30
 
$
14,933

 
$
5,814

 
$

 
$

 
$

 
$

 
$
14,933

 
$
5,814

Deferred costs, June 30
 
12,076

 
3,141

 

 

 

 

 
12,076

 
3,141

Increase in deferred costs
 
$
2,857

 
$
2,673

 
$

 
$

 
$

 
$

 
$
2,857

 
$
2,673

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
September 30,
 
 
2016
 
2015
Net loss
 
$
(9,335
)
 
$
(10,846
)
Adjustments:
 
 
 
 
Stock-based compensation expense
 
2,541

 
3,087

Depreciation and amortization
 
637

 
1,069

Other income (expense), net
 
(296
)
 
187

Provision (benefit) for income taxes
 
(395
)
 
113

Adjusted EBITDA (Non-GAAP)
 
$
(6,848
)
 
$
(6,390
)


 
 
Three Months Ended
September 30,
 
 
2016
 
2015
Net loss
 
$
(9,335
)
 
$
(10,846
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
Increase in deferred revenue (1)
 
5,042

 
3,841

Increase in deferred costs (2)
 
(2,857
)
 
(2,673
)
Changes in other operating assets and liabilities
 
(1,909
)
 
(1,067
)
Other adjustments (3)
 
3,370

 
4,876

Net cash used in operating activities
 
(5,689
)
 
(5,869
)
Less: Purchases of property and equipment
 
(394
)
 
(242
)
Free cash flow (Non-GAAP)
 
$
(6,083
)
 
$
(6,111
)
 
 
 
 
 
(1) Consists of royalties, customized software development fees and subscription fees.
(2) Consists primarily of third party content costs and customized software development expenses.
(3) Consist primarily of depreciation and amortization, stock-based compensation expense and other non-cash items.



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Telenav, Inc.
Unaudited Reconciliation of Non-GAAP Adjustments
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP metrics for the Advertising segment and the combined Automotive and Mobile Navigation segments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2016
 
 
GAAP
Consolidated
 
Non-GAAP Consolidated
 
Non-GAAP Advertising
 
Automotive (1)
 
Mobile Navigation (1)
 
Total
Non-GAAP Automotive and Mobile Navigation (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
42,227

 
 
 
$
6,545

 
$
30,267

 
$
5,415

 
$
35,682

Cost of revenue
 
23,476

 
 
 
3,526

 
18,545

 
1,405

 
19,950

Gross profit
 
18,751

 
 
 
3,019

 
$
11,722

 
$
4,010

 
15,732

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
 
18,018

 
 
 
1,173

(2) 
 
 
 
 
16,845

Sales and marketing
 
5,268

 
 
 
2,470

(2) 
 
 
 
 
2,798

General and administrative
 
5,491

 
 
 
463

(3) 
 
 
 
 
5,028

Total operating expenses:
 
28,777

 
 
 
4,106

 
 
 
 
 
24,671

Loss from operations
 
(10,026
)
 
 
 
(1,087
)
 
 
 
 
 
(8,939
)
Other income (expense), net
 
296

 
 
 

(4) 
 
 
 
 
296

Loss before benefit from
  income taxes
 
(9,730
)
 
 
 
(1,087
)
 
 
 
 
 
(8,643
)
Benefit from income taxes
 
(395
)
 
 
 

(5) 
 
 
 
 
(395
)
Net loss
 
$
(9,335
)
 
$
(9,335
)
 
$
(1,087
)
 
 
 
 
 
$
(8,248
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation expense
 
 
 
2,541

 
199

 
 
 
 
 
2,342

Depreciation and
  amortization expense
 
 
 
637

 
52

 
 
 
 
 
585

Other income (expense), net
 
 
 
(296
)
 

(4) 
 
 
 
 
(296
)
Benefit from income taxes
 
 
 
(395
)
 

(5) 
 
 
 
 
(395
)
Adjusted EBITDA
 
 
 
$
(6,848
)
 
$
(836
)
 
 
 
 
 
$
(6,012
)
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Automotive and mobile navigation segments share many of the same technologies and resources. Accordingly, we are unable to allocate the operating expenses, other income (expense), net and provision (benefit) for income taxes to one segment versus the other.
 
 
 
 
 
 
 
 
 
 
 
 
 
 For purposes of calculating the Non-GAAP net loss attributable to the advertising segment:
(2) These expenses represent research and development and sales and marketing costs directly attributable to the advertising segment.
(3) These expenses represent actual general and administrative costs directly attributable to the advertising segment as well as an allocation of certain shared corporate costs that directly benefit the advertising segment such as accounting and human resource services.
(4) Expenses or income cannot be directly allocated to the advertising segment.
(5) Benefit from income taxes relates primarily to the automotive and mobile navigation segments.

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Telenav, Inc.
Unaudited Reconciliation of Non-GAAP Adjustments
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP metrics for the Advertising segment and the combined Automotive and Mobile Navigation segments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2015
 
 
GAAP
Consolidated
 
Non-GAAP Consolidated
 
Non-GAAP Advertising
 
Automotive (1)
 
Mobile Navigation (1)
 
Total
Non-GAAP Automotive and Mobile Navigation (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
44,061

 
 
 
$
4,851

 
$
31,743

 
$
7,467

 
$
39,210

Cost of revenue
 
23,387

 
 
 
2,995

 
18,521

 
1,871

 
20,392

Gross profit
 
20,674

 
 
 
1,856

 
$
13,222

 
$
5,596

 
18,818

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
 
17,987

 
 
 
1,479

(2)