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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 quarterly period ended December 31, 2017

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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
 
¨
 
Accelerated filer
 
ý
 
 
 
 
 
 
 
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
 
 
 
 
 
 
 
Emerging growth company
 
¨
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of December 31, 2017, there were approximately 44,551,830 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)
 
 
 
December 31,
2017
 
June 30,
2017*
 
 
(unaudited)
 
 
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
13,956

 
$
20,757

Short-term investments
 
76,773

 
77,598

Accounts receivable, net of allowances of $112 and $75 at December 31, 2017 and June 30, 2017, respectively
 
52,287

 
57,834

Restricted cash
 
3,404

 
3,401

Income taxes receivable
 
32

 
34

Deferred costs
 
19,545

 
11,703

Prepaid expenses and other current assets
 
4,392

 
3,988

Total current assets
 
170,389

 
175,315

Property and equipment, net
 
7,138

 
4,658

Deferred income taxes, non-current
 
958

 
900

Goodwill and intangible assets, net
 
34,278

 
34,844

Deferred costs, non-current
 
75,362

 
42,389

Other assets
 
1,877

 
1,454

Total assets
 
$
290,002

 
$
259,560

Liabilities and stockholders’ equity
 
 
 
 
Current liabilities:
 
 
 
 
Trade accounts payable
 
$
4,676

 
$
6,151

Accrued expenses
 
51,350

 
51,528

Deferred revenue
 
31,908

 
20,345

Income taxes payable
 
138

 
197

Total current liabilities
 
88,072

 
78,221

Deferred rent, non-current
 
710

 
996

Deferred revenue, non-current
 
115,689

 
67,056

Other long-term liabilities
 
1,073

 
1,139

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; 44,552 and 43,946 shares issued and outstanding at December 31, 2017 and June 30, 2017, respectively
 
45

 
44

Additional paid-in capital
 
163,663

 
159,666

Accumulated other comprehensive loss
 
(1,576
)
 
(1,934
)
Accumulated deficit
 
(77,674
)
 
(45,628
)
Total stockholders’ equity
 
84,458

 
112,148

Total liabilities and stockholders’ equity
 
$
290,002

 
$
259,560

* Derived from audited consolidated financial statements as of and for the year ended June 30, 2017.
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
 
Six Months Ended
 
 
December 31,
 
December 31,
 
 
2017
 
2016
 
2017
 
2016
Revenue:
 
 
 
 
 


 


Product
 
$
25,307

 
$
37,804

 
$
49,271

 
$
67,227

Services
 
13,773

 
14,197

 
26,467

 
27,001

Total revenue
 
39,080

 
52,001

 
75,738

 
94,228

Cost of revenue:
 
 
 
 
 
 
 
 
Product
 
15,053

 
22,598

 
29,727

 
40,359

Services
 
7,258

 
6,129

 
13,431

 
11,844

Total cost of revenue
 
22,311

 
28,727

 
43,158

 
52,203

Gross profit
 
16,769

 
23,274

 
32,580

 
42,025

Operating expenses:
 
 
 
 
 
 
 
 
Research and development
 
21,903

 
16,301

 
42,985

 
34,319

Sales and marketing
 
5,136

 
5,277

 
10,200

 
10,545

General and administrative
 
5,514

 
6,872

 
10,725

 
12,363

Legal settlement and contingencies
 
60

 
6,424

 
310

 
6,424

Total operating expenses
 
32,613

 
34,874

 
64,220

 
63,651

Loss from operations
 
(15,844
)
 
(11,600
)
 
(31,640
)
 
(21,626
)
Other income (expense), net
 
218

 
714

 
171

 
1,010

Loss before provision for income taxes
 
(15,626
)
 
(10,886
)
 
(31,469
)
 
(20,616
)
Provision for income taxes
 
26

 
537

 
281

 
142

Net loss
 
$
(15,652
)
 
$
(11,423
)
 
$
(31,750
)
 
$
(20,758
)
 
 
 
 
 
 
 
 
 
Net loss per share:
 
 
 
 
 
 
 
 
Basic and diluted
 
$
(0.35
)
 
$
(0.26
)
 
$
(0.71
)
 
$
(0.48
)
Weighted average shares used in computing net loss per share:
 
 
 
 
 
 
 
 
Basic and diluted
 
44,476

 
43,208

 
44,495

 
42,932

 
 
 
 
 
 
 
 
 
Stock-based compensation expense included above:
 
 
 
 
 
 
 
 
Cost of revenue
 
$
38

 
$
35

 
$
73

 
$
64

Research and development
 
1,649

 
897

 
3,044

 
2,387

Sales and marketing
 
481

 
536

 
919

 
1,030

General and administrative
 
720

 
520

 
1,332

 
1,048

Total stock-based compensation expense
 
$
2,888

 
$
1,988

 
$
5,368

 
$
4,529

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
 
Six Months Ended
 
 
December 31,
 
December 31,
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Net loss
 
$
(15,652
)
 
$
(11,423
)
 
$
(31,750
)
 
$
(20,758
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of tax
 
206

 
(661
)
 
565

 
(595
)
Available-for-sale securities:
 
 
 
 
 
 
 
 
Unrealized gain (loss) on available-for-sale securities, net of tax
 
(241
)
 
(298
)
 
(213
)
 
(437
)
Reclassification adjustments for gain (loss) on available-for-sale securities recognized, net of tax
 
6

 
(5
)
 
6

 
(10
)
Net increase (decrease) from available-for-sale securities, net of tax
 
(235
)
 
(303
)
 
(207
)
 
(447
)
Other comprehensive income (loss), net of tax
 
(29
)
 
(964
)
 
358

 
(1,042
)
Comprehensive loss
 
$
(15,681
)
 
$
(12,387
)
 
$
(31,392
)
 
$
(21,800
)
 
 
 
 
 
 
 
 
 

See accompanying Notes to Condensed Consolidated Financial Statements.


3

Table of Contents

TELENAV, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 
Six Months Ended
 
 
December 31,
 
 
2017
 
2016
Operating activities
 
 
 
 
Net loss
 
$
(31,750
)
 
$
(20,758
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
Depreciation and amortization
 
1,513

 
1,260

Deferred rent reversal due to lease termination
 
(538
)
 

Tenant improvement allowance recognition due to lease termination
 
(582
)
 

Accretion of net premium on short-term investments
 
113

 
237

Stock-based compensation expense
 
5,368

 
4,529

Loss (gain) on disposal of property and equipment
 
6

 
(2
)
Bad debt expense
 
37

 
125

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
5,545

 
(5,724
)
Deferred income taxes
 
(23
)
 
226

Restricted cash
 
(3
)
 
1,015

Income taxes receivable
 
2

 
39

Deferred costs
 
(40,815
)
 
(6,704
)
Prepaid expenses and other current assets
 
(476
)
 
580

Other assets
 
(620
)
 
98

Trade accounts payable
 
(1,563
)
 
5,309

Accrued expenses and other liabilities
 
(263
)
 
3,945

Income taxes payable
 
(61
)
 
154

Deferred rent
 
767

 
44

Deferred revenue
 
60,196

 
12,728

Net cash used in operating activities
 
(3,147
)
 
(2,899
)
Investing activities
 
 
 
 
Purchases of property and equipment
 
(3,350
)
 
(531
)
Purchases of short-term investments
 
(32,817
)
 
(37,788
)
Proceeds from sales and maturities of short-term investments
 
33,322

 
39,392

Proceeds from sales of long-term investments
 

 
246

Net cash (used in) provided by investing activities
 
(2,845
)
 
1,319

Financing activities
 
 
 
 
Proceeds from exercise of stock options
 
235

 
159

Tax withholdings related to net share settlements of restricted stock units
 
(1,606
)
 
(1,638
)
Net cash used in financing activities
 
(1,371
)
 
(1,479
)
Effect of exchange rate changes on cash and cash equivalents
 
562

 
(596
)
Net decrease in cash and cash equivalents
 
(6,801
)
 
(3,655
)
Cash and cash equivalents, at beginning of period
 
20,757

 
21,349

Cash and cash equivalents, at end of period
 
$
13,956

 
$
17,694

Supplemental disclosure of cash flow information
 
 
 
 
Income taxes paid, net
 
$
640

 
$
1,410

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 leading provider of connected car and location-based platform products and services. We utilize our automotive navigation platform and our advertising delivery platform to deliver these products and services. Our automotive navigation platform allows us to deliver enhanced location-based services to automobile manufacturers, as well as original equipment manufacturers and tier one suppliers, to which we refer collectively as OEMs. Our advertising delivery platform, which we provide through our Thinknear subsidiary, delivers highly targeted advertising services leveraging our location expertise. We operate in three segments - automotive, advertising and mobile navigation. Our fiscal year ends on June 30, and in this report we refer to the fiscal year ended June 30, 2017 as “fiscal 2017” and the fiscal year ending June 30, 2018 as “fiscal 2018.”
Basis of presentation
The unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The condensed consolidated financial statements include the accounts of Telenav, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The financial statements include all adjustments (consisting only of normal recurring adjustments) that our management believes are necessary for a fair presentation of the periods presented. These interim financial results are not necessarily indicative of results expected for the full fiscal year or for any subsequent interim period.
Our condensed consolidated financial statements also include the financial results of Shanghai Jitu Software Development Ltd., or Jitu, located in China. Based on our contractual arrangements with the shareholders of Jitu, we have determined that Jitu is a variable interest entity, or VIE, for which we are the primary beneficiary and are required to consolidate in accordance with Accounting Standards Codification, or ASC, subtopic 810-10, or ASC 810-10, Consolidation: Overall. The results of Jitu did not have a material impact on our financial statements for the three and six months ended December 31, 2017 and 2016.
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 2017, included in our Annual Report on Form 10-K for fiscal 2017 filed with the U.S. Securities and Exchange Commission, or SEC, on August 25, 2017.
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 2017.
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 assessment of goodwill for impairment, the fair value of stock-based awards issued, the determination of income taxes and the recoverability of deferred tax assets. Actual results could differ from those estimates.
Concentrations of risk and significant customers
Revenue related to products and services provided through Ford Motor Company and affiliated entities, or Ford, comprised 65% and 70% of revenue for the three months ended December 31, 2017 and 2016, respectively, and 65% and 69% of revenue for the six months ended December 31, 2017 and 2016, respectively. As of December 31, 2017 and June 30, 2017, receivables due from Ford were 58% and 74% of total accounts receivable, respectively.

5

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

Restricted cash
As of December 31, 2017 and June 30, 2017, we had restricted cash of $3.4 million on our consolidated balance sheets, comprised primarily of prepayments from a customer.
Accumulated other comprehensive loss, net of tax
The components of accumulated other comprehensive loss, net of related taxes, and activity as of December 31, 2017, 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, 2017
 
$
(1,701
)
 
$
(233
)
 
$
(1,934
)
Other comprehensive income (loss) before reclassifications, net of tax
 
565

 
(213
)
 
352

Amount reclassified from accumulated other comprehensive loss, net of tax
 

 
6

 
6

Other comprehensive income, net of tax
 
565

 
(207
)
 
358

Balance, net of tax as of December 31, 2017
 
$
(1,136
)
 
$
(440
)
 
$
(1,576
)

The amount of income tax benefit allocated to each component of accumulated other comprehensive loss was not material for the three and six months ended December 31, 2017.
Long-term investments
As of December 31, 2017, 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 did not record any impairment charges for cost method investments during the six months ended December 31, 2017 and 2016.
Recent accounting pronouncements
In October 2016, the 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 standard is effective for us in our first quarter of fiscal 2019 and requires a modified retrospective method of adoption. We adopted early this standard under the modified retrospective method on July 1, 2017, and the adoption resulted in the elimination of prepaid taxes of $287,000 with a corresponding increase in accumulated deficit.
In March 2016, the 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 us in our first quarter of fiscal 2018.
We adopted this standard on July 1, 2017. As required by the standard, excess tax benefits recognized on stock-based compensation expense are reflected in our condensed consolidated statements of operations as a component of the provision for income taxes rather than paid-in capital on a prospective basis. We also elected to prospectively apply the change in presentation of excess tax benefits wherein excess tax benefits recognized on stock-based compensation expense are classified as operating activities in our condensed consolidated statements of cash flows. Since we do not recognize tax benefits on our net operating losses as well as excess tax benefits due to our full valuation allowance, this standard does not have a material impact on our condensed consolidated statements of operations or statements of cash flows. The cumulative effect to retained earnings from previously unrecognized excess tax benefits, after offset by the related valuation allowance, was not material to our condensed consolidated balance sheets.
Presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact to all periods presented as such cash flows have historically been presented as financing activities. Further, we did not elect an accounting policy change to record forfeitures as they occur and thus we continue to estimate forfeitures at each period.

6

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

With the exception of the new standards discussed above, there have been no other recent accounting pronouncements or changes in accounting pronouncements during the six months ended December 31, 2017, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for fiscal 2017, that are of significance or potential significance to us, other than the following update:
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 new guidance, ASC 606, Revenue from Contracts with Customers, or ASC 606, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. In conjunction with this new revenue guidance, a new subtopic, ASC 340-40, Other Assets and Deferred Costs - Contracts with Customers, was also issued. 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 and certain cost guidance under GAAP when it becomes effective and permits the use of either the full retrospective or cumulative effect transition method. In August 2015, the FASB deferred the effective date of this guidance by one year. The updated standard will be effective for us in the first quarter of fiscal 2019; accordingly, we will adopt ASC 606 effective July 1, 2018.
While we are in the process of selecting a transition method, we anticipate this standard will have a material impact on our consolidated financial statements. Even though our assessment of the impact of this standard is not complete, we currently believe there will not be any significant impact on our advertising and mobile navigation business segments. We do believe there will be a significant impact on the recognition of revenue for certain of our automotive value-added and combined offerings, such as on-board navigation with map updates, and on-board and connected navigation. We anticipate our revenue recognition for certain of these offerings may change with respect to software and software related elements in the following manner: a) we may no longer recognize revenue over the life of our contractual obligations, and b) we may no longer defer substantially all revenue pending the delivery of future specified upgrades. Instead, to the extent delivered software represents a distinct performance obligation for which transfer of control has taken place, such revenue would be recorded either upon delivery or as the software is used. In addition, in conjunction with the adoption of ASC 340-40, we anticipate additional capitalization of certain research and development costs that are expected to be recovered and that are incurred to fulfill obligations under certain actual or anticipated automotive contracts; under the new standard, such costs are then amortized consistent with the transfer of products and services to which the capitalized costs relate. Costs associated with software development would be recognized when transfer of the software occurs, and costs associated with connected services would be amortized over the service period. Our conclusions are subject to the completion of our assessment of the impact of the standard.
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
December 31,
 
Six Months Ended
December 31,
 
 
2017
 
2016
 
2017
 
2016
Net loss
 
$
(15,652
)
 
$
(11,423
)
 
$
(31,750
)
 
$
(20,758
)
Weighted average common shares used in computing net loss per share, basic and diluted
 
44,476

 
43,208

 
44,495

 
42,932

Net loss per share, basic and diluted
 
$
(0.35
)
 
$
(0.26
)
 
$
(0.71
)
 
$
(0.48
)


7

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

The following potential shares outstanding as of December 31, 2017 and 2016 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):

 
 
December 31,
 
 
2017
 
2016
Stock options
 
5,556

 
6,410

Restricted stock units
 
3,596

 
3,062

Total
 
9,152

 
9,472


3.
Cash, cash equivalents and short-term investments
Cash and cash equivalents consist of highly liquid fixed-income investments with original maturities of three months or less at the time of purchase, including money market funds. Short-term investments consist of readily marketable securities with a remaining maturity of more than three months from the date of purchase. Short-term investments are classified as current assets, even though maturities may extend beyond one year, because they represent investments of cash available for operations. We classify all cash equivalents and short-term investments as “available for sale,” as these investments are free of trading restrictions. These marketable securities are carried at fair value, with the unrealized gains and losses, net of tax, reported as accumulated other comprehensive income (loss) and included as a separate component of stockholders’ equity. Gains and losses are recognized when realized. When we have determined that an other-than-temporary decline in fair value has occurred, the amount of the decline that is related to a credit loss is recognized in earnings. Gains and losses are determined using the specific identification method. We had no material realized gains or losses in the six months ended December 31, 2017 and 2016.
Cash, cash equivalents and short-term investments consisted of the following as of December 31, 2017 (in thousands):
 
Description
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Cash
 
$
11,329

 
$

 
$

 
$
11,329

Cash equivalents:
 
 
 
 
 
 
 
 
Money market mutual funds
 
631

 

 

 
631

Commercial paper
 
1,996

 

 

 
1,996

Total cash equivalents
 
2,627

 

 

 
2,627

Total cash and cash equivalents
 
13,956

 

 

 
13,956

Short-term investments:
 
 
 
 
 
 
 
 
U.S. treasury securities
 
2,985

 

 
(10
)
 
2,975

U.S. agency securities
 
3,051

 

 
(25
)
 
3,026

Asset-backed securities
 
9,476

 
2

 
(43
)
 
9,435

Municipal securities
 
5,522

 
1

 
(3
)
 
5,520

Commercial paper
 
3,735

 

 
(2
)
 
3,733

Corporate bonds
 
52,307

 
2

 
(225
)
 
52,084

Total short-term investments
 
77,076

 
5

 
(308
)
 
76,773

Cash, cash equivalents and short-term investments
 
$
91,032

 
$
5

 
$
(308
)
 
$
90,729



8

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

Cash, cash equivalents and short-term investments consisted of the following as of June 30, 2017 (in thousands):
 
Description
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Cash
 
$
17,316

 
$

 
$

 
$
17,316

Cash equivalents:
 
 
 
 
 
 
 
 
Money market mutual funds
 
444

 

 

 
444

Commercial paper
 
2,997

 

 

 
2,997

Total cash equivalents
 
3,441

 

 

 
3,441

Total cash and cash equivalents
 
20,757

 

 

 
20,757

Short-term investments:
 
 
 
 
 
 
 
 
U.S. treasury securities
 
1,476

 

 
(3
)
 
1,473

U.S. agency securities
 
2,553

 

 
(16
)
 
2,537

Asset-backed securities
 
9,707

 
8

 
(10
)
 
9,705

Municipal securities
 
7,980

 
3

 
(1
)
 
7,982

Commercial paper
 
4,240

 

 
(1
)
 
4,239

Foreign government securities
 
750

 

 

 
750

Corporate bonds
 
50,987

 
24

 
(99
)
 
50,912

Total short-term investments
 
77,693

 
35

 
(130
)
 
77,598

Cash, cash equivalents and short-term investments
 
$
98,450

 
$
35

 
$
(130
)
 
$
98,355


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 December 31, 2017 (in thousands):
 
 
 
Amortized
Cost
 
Estimated
Fair Value
Due within one year
 
$
32,846

 
$
32,801

Due between one and two years
 
28,308

 
28,156

Due between two and three years
 
15,922

 
15,816

Total
 
$
77,076

 
$
76,773


Declines in fair value judged to be other-than-temporary on securities available for sale are included as a component of other income (expense), net. In order to determine whether a decline in value is other-than-temporary, we evaluate, among other factors: the duration and extent to which the fair value has been less than the carrying value and our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair market value. As of December 31, 2017, 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 utilize a hierarchy, which consists of three levels, for disclosure of the inputs used to determine the fair value of our financial instruments.
Level 1 valuations are based on quoted prices in active markets for identical assets or liabilities.
Level 2 valuations are based on inputs that are observable, either directly or indirectly, other than quoted prices included within Level 1. Such inputs used in determining fair value for Level 2 valuations include quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
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)

All of our cash equivalents and short-term investments are classified within Level 1 or Level 2. As of December 31, 2017 and June 30, 2017, we did not have any investments that require Level 3 valuations. The fair values of these financial instruments were determined using the following inputs at December 31, 2017 (in thousands):

 
 
 
Fair Value Measurements at December 31, 2017 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
 
$
631

 
$
631

 
$

 
$

Commercial paper
 
1,996

 

 
1,996

 

Total cash equivalents
 
2,627

 
631

 
1,996

 

Short-term investments:
 
 
 
 
 
 
 
 
U.S. treasury securities
 
2,975

 
2,975

 

 

U.S. agency securities
 
3,026

 

 
3,026

 

Asset-backed securities
 
9,435

 

 
9,435

 

Municipal securities
 
5,520

 

 
5,520

 

Commercial paper
 
3,733

 

 
3,733

 

Corporate bonds
 
52,084

 

 
52,084

 

Total short-term investments
 
76,773

 
2,975

 
73,798

 

Cash equivalents and short-term investments
 
$
79,400

 
$
3,606

 
$
75,794

 
$

The fair values of our financial instruments were determined using the following inputs at June 30, 2017 (in thousands):
 
 
 
Fair Value Measurements at June 30, 2017 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
 
$
444

 
$
444

 
$

 
$

Commercial paper
 
2,997

 

 
2,997

 

Total cash equivalents
 
3,441

 
444

 
2,997

 

Short-term investments:
 
 
 
 
 
 
 
 
U.S. treasury securities
 
1,473

 
1,473

 

 

U.S. agency securities
 
2,537

 

 
2,537

 

Asset-backed securities
 
9,705

 

 
9,705

 

Municipal securities
 
7,982

 

 
7,982

 

Commercial paper
 
4,239

 

 
4,239

 

Foreign government securities
 
750

 

 
750

 

Corporate bonds
 
50,912

 

 
50,912

 

Total short-term investments
 
77,598

 
1,473

 
76,125

 

Cash equivalents and short-term investments
 
$
81,039

 
$
1,917

 
$
79,122

 
$

Amortization of net premium on short-term investments totaled $113,000 and $237,000 in the six months ended December 31, 2017 and 2016, respectively.

10

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

There were no transfers between Level 1 and Level 2 financial instruments in the six months ended December 31, 2017 and 2016.
We did not have any financial liabilities measured at fair value on a recurring basis as of December 31, 2017 or June 30, 2017.
5.
Balance sheet information
Goodwill and intangible assets, net
Goodwill as of December 31, 2017 and June 30, 2017 was $31.3 million. We have not recognized any impairment of goodwill through December 31, 2017. Total goodwill for our mobile navigation segment as of December 31, 2017 was $2.7 million.
Intangible assets consisted of the following (in thousands):
 
 
December 31,
2017
 
June 30,
2017
Acquired developed technology
 
$
13,875

 
$
13,875

Less accumulated amortization
 
(10,925
)
 
(10,359
)
Intangible assets, net
 
$
2,950

 
$
3,516

Acquired developed technology is amortized on a straight-line basis over the expected useful life. Amortization expense related to intangibles was $283,000 and $258,000 for the three months ended December 31, 2017 and 2016, respectively, and $566,000 and $518,000 for the six months ended December 31, 2017 and 2016, respectively.
As of December 31, 2017, remaining amortization expense for intangible assets by fiscal year is as follows: $567,000 in fiscal 2018, $1.0 million in fiscal 2019, $872,000 in fiscal 2020 and $509,000 in fiscal 2021.
Accrued expenses
Accrued expenses consisted of the following (in thousands):
 
 
December 31,
2017
 
June 30,
2017
Accrued compensation and benefits
 
$
10,525

 
$
10,554

Accrued royalties
 
28,648

 
28,179

Customer overpayments and related reserves
 
5,711

 
5,940

Other accrued expenses
 
6,466

 
6,855

Total accrued expenses
 
$
51,350

 
$
51,528

6.
Commitments and contingencies
Operating lease and purchase obligations
In August 2017, we terminated our sublease with Avaya Inc. for our Santa Clara, California headquarters facility and signed a new direct lease agreement, effective in September 2017, for this same facility. The new lease term is six years, expiring in September 2023. We have a one-time option to extend the new facility lease for an additional three years at the prevailing market rate, as defined in the lease agreement.
In connection with the sublease termination agreement, we recorded the following amounts during the six months ended December 31, 2017: i) the reversal of $538,000 of deferred rent related to the sublease, with an offsetting credit to rent expense, as amortization of this deferred rent liability is no longer required, and ii) the recognition of $582,000 of tenant improvement allowance related to the sublease, with an offsetting credit to depreciation expense, as amortization of this allowance is no longer required.
As of December 31, 2017, we had future minimum non-cancelable financial commitments primarily related to office space under non-cancelable operating leases and license fees due to certain of our third party content providers, regardless of usage level. The aggregate future minimum commitments were comprised of the following (in thousands):
 

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

 
 
Payments Due by Period
 
 
Total
 
Fiscal 2018
 
Fiscal 2019
 
Fiscal 2020
 
Fiscal 2021
 
Fiscal 2022
 
Thereafter
Operating lease obligations
 
$
18,215

 
$
1,856

 
$
4,132

 
$
3,962

 
$
2,868

 
$
2,662

 
$
2,735

Purchase obligations
 
7,751

 
2,526

 
2,208

 
941

 
415

 
415

 
1,246

Total contractual obligations
 
$
25,966

 
$
4,382

 
$
6,340

 
$
4,903

 
$
3,283

 
$
3,077

 
$
3,981

Contingencies
From time to time, we may become involved in legal proceedings, claims and litigation arising in the ordinary course of business. When we believe a loss or a cost of indemnification is probable and can be reasonably estimated, we accrue the estimated loss or cost of indemnification in our consolidated financial statements. Where the outcome of these matters is not determinable, we do not make a provision in our financial statements until the loss or cost of indemnification, if any, is probable and can be reasonably estimated or the outcome becomes known. We expense legal fees related to these matters as they are incurred.
On July 28, 2016, Nathan Gergetz filed a putative class action complaint in the U.S. District Court for the Northern District of California, alleging that Telenav violated the Telephone Consumer Protection Act, or TCPA. The complaint purports to be filed on behalf of a class, and it 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. Telenav moved to dismiss the complaint on November 21, 2016 and a hearing was held on December 21, 2017. A settlement has been reached and the court set a deadline for March 5, 2018 for plaintiff to file a motion for preliminary approval of class action settlement. The court set that motion for hearing on April 26, 2018. The proposed settlement will be paid by our technology errors and omissions liability insurance policy, after payment of our deductible of $250,000. We accrued the $250,000 deductible payment in the three months ended December 31, 2017, and recorded this amount as general and administrative expense in our consolidated statement of operations.
In addition, we have received, and expect to continue to receive, demands for indemnification from our customers, which demands can be very expensive to settle or defend, and we have in the past offered to contribute to settlement amounts and incurred legal fees in connection with certain of these indemnity demands. A number of these indemnity demands, including demands relating to pending litigation, remain outstanding and unresolved as of the date of this Form 10-Q. Furthermore, in response to these demands we may be required to assume control of and bear all costs associated with the defense of our customers in compliance with our contractual commitments. At this time, we are not a party to the following cases; however, our customers requested that we indemnify them in connection with such cases.
In August 2017, AT&T Mobility LLC (AT&T) and Sprint Spectrum L.P. (Sprint) sent Telenav indemnification requests relating to patent infringement lawsuits brought by Location Based Services LLC, alleging patent infringement by the AT&T Navigator system and App for iOS and Android, and the Sprint Scout System and the Sprint Scout App for iOS and Android. Location Based Services LLC filed separate lawsuits against AT&T and Sprint in the U.S. District Court for the Eastern District of Texas, asserting five U.S. Patents. Telenav agreed to indemnify and defend AT&T and Sprint in connection with these matters. We accrued $250,000 related to these matters in the six months ended December 31, 2017, and recorded this amount as legal settlement and contingencies expense in our consolidated statement of operations. On November 22, 2017, Location Based Services LLC entered into a Settlement and License Agreement with Telenav for the patents in suit and 15 other patents assigned to Location Based Services LLP.
On November 2017, AT&T Mobility LLC sent Telenav indemnification requests related to a patent infringement lawsuit brought by Traxcell Technologies, LLC, alleging patent infringement by the AT&T Navigator system. Traxcell Technologies, LLC filed patent infringement lawsuits against AT&T in the U.S. District Court for the Eastern District of Texas. On November 29, 2017, AT&T filed and was granted an unopposed application for extension of time to answer complaint. On December 14, 2017, AT&T filed a second unopposed application for extension of time to answer complaint. On December 13, 2017, Telenav’s counsel sent a letter to AT&T’s counsel challenging the indemnification claim by AT&T. On January 8, 2018, Telenav’s counsel proposed an offer of $50,000 to Plaintiff’s counsel, and we recorded this amount as legal settlement and contingencies expense in our consolidated statement of operations for the three months ended December 31, 2017.

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

7.
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.
8.
Stock-based compensation
Under our 2009 Equity Incentive Plan and 2011 Stock Option and Grant Plan, eligible employees, directors and consultants are able to participate in our future performance through awards of nonqualified stock options, incentive stock options and restricted stock units as authorized by our board of directors. In addition, we have granted restricted common stock in connection with certain acquisitions.
A summary of our stock option activity is as follows (in thousands except per share and contractual life amounts):
 
 
 

Number of
Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life
(years)
 
Aggregate
Intrinsic
Value
Options outstanding as of June 30, 2017
 
5,708

 
$
6.47

 
 
 
 
Granted
 
68

 
$
5.54

 
 
 
 
Exercised
 
(51
)
 
$
4.61

 
 
 
 
Canceled or expired
 
(169
)
 
$
7.11

 
 
 
 
Options outstanding as of December 31, 2017
 
5,556

 
$
6.46

 
6.21
 
$
846

As of December 31, 2017:
 
 
 
 
 
 
 
 
Options vested and expected to vest
 
5,325

 
$
6.49

 
6.12
 
$
790

Options exercisable
 
3,652

 
$
6.71

 
5.11
 
$
433



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, 2017
 
3,005

 
 
 
 
Granted
 
1,684

 
 
 
 
Vested
 
(812
)
 
 
 
 
Canceled
 
(281
)
 
 
 
 
RSUs outstanding as of December 31, 2017
 
3,596

 
1.63
 
$
19,959

As of December 31, 2017:
 
 
 
 
 
 
RSUs expected to vest
 
2,986

 
1.50
 
$
16,572



13

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


During the six months ended December 31, 2017, 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, 2017
 
1,899

Additional shares authorized
 
1,667

Granted
 
(1,752
)
RSUs withheld for taxes in net share settlements
 
256

Canceled
 
450

Shares available for grant as of December 31, 2017
 
2,520

The following table summarizes the stock-based compensation expense recorded for stock options and RSUs issued to employees and nonemployees (in thousands):
 
 
 
Three Months Ended
December 31,
 
Six Months Ended
December 31,
 
 
2017
 
2016
 
2017
 
2016
Stock option awards
 
$
577

 
$
553

 
$
1,173

 
$
1,027

RSU awards
 
2,311

 
1,435

 
4,195

 
3,502

Total stock-based compensation expense
 
$
2,888

 
$
1,988

 
$
5,368

 
$
4,529

We use valuation pricing models to determine the fair value of stock-based awards. The determination of the fair value of stock-based payment awards on the date of grant is affected by the stock price as well as assumptions regarding a number of complex and subjective variables. These variables include expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rates and expected dividends. The weighted average assumptions used to value stock option awards granted and the resulting weighted average grant date fair value per share were as follows:
 
 
 
Three Months Ended
December 31,
 
Six Months Ended
December 31,
 
 
2017
 
2016
 
2017
 
2016
Expected volatility
 
42
%
 
39
%
 
42
%
 
39
%
Expected term (in years)
 
4.74

 
4.45

 
4.75

 
4.19

Risk-free interest rate
 
2.00
%
 
1.82
%
 
2.00
%
 
1.24
%
Dividend yield
 
%
 
%
 
%
 
%
Weighted average grant date fair value per share
 
$
2.14

 
$
1.72

 
$
2.14

 
$
1.66




14

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 provision for income taxes was $281,000 in the six months ended December 31, 2017 compared to $142,000 in the six months ended December 31, 2016. Our provision for income taxes of $281,000 for the six months ended December 31, 2017 was comprised primarily of foreign withholding taxes and income taxes in foreign jurisdictions where we have profit, partially offset by a tax benefit from a tax holiday granted in China. Our provision for income taxes of $142,000 for the six months ended December 31, 2016 was comprised primarily of foreign withholding taxes on revenue generated in China and foreign income taxes, partially offset by a $1.0 million reversal of tax reserves resulting from our July 2016 settlement of the State of New York's audit of our income tax returns for fiscal 2010 through fiscal 2012. Our effective tax rate of less than 1% and 1% for the six months ended December 31, 2017 and 2016, 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 December 31, 2017 and June 30, 2017, our cumulative unrecognized tax benefits were $3.4 million and $3.0 million, respectively. Included in the balance of unrecognized tax benefits at December 31, 2017 and June 30, 2017 was $98,000 and $124,000, respectively, that if recognized, would affect the effective tax rate.
We recognize interest and penalties related to unrecognized tax benefits as part of our provision for federal, state and foreign income taxes. We accrued $89,000 and $91,000 for the payment of interest and penalties at December 31, 2017 and June 30, 2017, respectively.
We file income tax returns with the Internal Revenue Service, or IRS, California and various states and foreign tax jurisdictions in which we have filing obligations. The statute of limitations remains open for fiscal 2016 through fiscal 2017 for federal tax purposes, fiscal 2013 through fiscal 2017 in state jurisdictions, and fiscal 2012 through fiscal 2017 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, 2017 was $50.1 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.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”), a tax reform bill which, among other items, reduces the current corporate federal income tax rate to 21% from 35%, was signed into law. The rate reduction is effective January 1, 2018.
We have concluded that the Act will cause the Company’s deferred tax assets and deferred tax liabilities to be revalued. Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through income tax expense. Due to the full valuation allowance placed against our U.S. deferred tax assets, any change in our gross deferred tax assets will have no impact to income tax expense.
Based on currently available information, we estimate the value of deferred tax assets, net of liabilities will decrease by $18.8 million due to the reduction in the federal corporate tax rate, which will have no impact to income tax expense during the three months ended December 31, 2017 due to the full valuation allowance placed on the assets. Our revaluation of gross deferred tax assets is subject to further refinement as additional information becomes available and further analysis is completed.
10.
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.


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

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

We report results in three business segments:

Automotive - Our automotive segment utilizes our automotive navigation platform to deliver enhanced location-based services to automobile manufacturers, as well as OEMs. We provide both built-in, or on-board, and mobile device-based wireless connectivity, or brought-in, navigation solutions, as well as hybrid solutions that contain elements of on-board and connected functionality. 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. These solutions are often enhanced with connected services which leverage our cloud to provide real-time traffic, online search and map updates.

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

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

Our segment results for the three and six months ended December 31, 2017 and 2016 were as follows (dollars in thousands):

 
 
Three Months Ended
December 31,
 
Six Months Ended
December 31,
 
 
2017
 
2016
 
2017
 
2016
Automotive
 
 
 
 
 
 
 
 
Revenue
 
$
26,838

 
$
38,744

 
$
52,142

 
$
69,011

Cost of revenue
 
16,416

 
23,438

 
32,301

 
41,983

Gross profit
 
$
10,422

 
$
15,306

 
$
19,841

 
$
27,028

Gross margin
 
39
%
 
40
%
 
38
%
 
39
%
Advertising
 
 
 
 
 
 
 
 
Revenue
 
$
8,742

 
$
8,208

 
$
16,357

 
$
14,753

Cost of revenue
 
4,402

 
3,919

 
7,814

 
7,445

Gross profit
 
$
4,340

 
$
4,289

 
$
8,543

 
$
7,308

Gross margin
 
50
%
 
52
%
 
52
%
 
50
%
Mobile Navigation
 
 
 
 
 
 
 
 
Revenue
 
$
3,500

 
$
5,049

 
$
7,239

 
$
10,464

Cost of revenue
 
1,493

 
1,370

 
3,043

 
2,775

Gross profit
 
$
2,007

 
$
3,679

 
$
4,196

 
$
7,689

Gross margin
 
57
%
 
73
%
 
58
%
 
73
%
Total
 
 
 
 
 
 
 
 
Revenue
 
$
39,080

 
$
52,001

 
$
75,738

 
$
94,228

Cost of revenue
 
22,311

 
28,727

 
43,158

 
52,203

Gross profit
 
$
16,769

 
$
23,274

 
$
32,580

 
$
42,025

Gross margin
 
43
%
 
45
%
 
43
%
 
45
%


16

Table of Contents

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read together with our condensed consolidated financial statements and the notes to those statements included elsewhere in this Form 10-Q. This Form 10-Q contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally in the sections entitled “Risk Factors” and this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking statements include information concerning our possible or assumed future results of operations, accounting for and future sources of revenue, expectations regarding expenses, business strategies, financing plans, competitive position, industry environment, potential growth opportunities and the effects of competition. Forward-looking statements include statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts," “projects,” “should,” “will,” “would” or similar expressions and the negatives of those terms.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail in “Risk Factors” and elsewhere in this Form 10-Q. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Form 10-Q.
Except as required by law, we assume no obligation to update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. You should read this Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect.
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, 2017 as “fiscal 2017" and the fiscal year ending June 30, 2018 as "fiscal 2018.”
Overview
Telenav is a leading provider of connected car and location-based platform products and services. We utilize our automotive navigation platform and our advertising platform to deliver these products and services. Our automotive navigation platform allows us to deliver enhanced location-based services to automobile manufacturers, as well as original equipment manufacturers and tier one suppliers, to which we refer collectively as OEMs. Our advertising platform, which we provide through our Thinknear subsidiary, delivers highly targeted advertising services leveraging our location expertise for advertisers and advertising agencies. We report operating results in three business segments: automotive, advertising and mobile navigation.
Our legacy mobile navigation business has declined steadily since fiscal 2013, and we expect it to continue to decline. Mobile navigation represented $3.5 million, or 9%, of our consolidated revenue in the second quarter of fiscal 2018. Telenav began offering its mobile navigation services in 2003. Our mobile navigation business generates revenue from our partnerships with wireless carriers who sell our navigation services to their subscribers either as a standalone service or in a bundle with other data or services. The mobile navigation business has declined both in absolute dollars and as a percentage of revenue from $116.4 million, or 61% of our revenue, in fiscal 2013 to $19.0 million, or 11% of our revenue, in fiscal 2017, as subscriptions for paid navigation services declined in favor of free or freemium navigation services offered by our competitors with greater resources and name recognition, such as Google and Apple. We have experienced and anticipate that we will continue to experience the non-renewal of our agreements for these services by our wireless carrier customers as demand from their subscribers declines. In the event our mobile navigation business ceases to be profitable or we determine that it diverts resources from strategic growth areas of our business, we may ultimately elect to terminate our legacy wireless carrier mobile navigation business. In addition, we expect the continued deterioration of this revenue base will result in an impairment of some or all of the goodwill assigned to this reporting unit during the three months ended March 31, 2018. We have not recognized any impairment of goodwill through December 31, 2017. Total goodwill for our mobile navigation segment as of December 31, 2017 was $2.7 million.
We derive revenue primarily from automobile manufacturers and OEMs, 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 and OEMs who provide larger systems in which our automotive navigation services are integrated. These manufacturers and OEMs generally do not provide 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.

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For our automotive segment customers, we offer our automotive and mobile navigation platform products and services to vehicle manufacturers and OEMs for distribution with vehicles. We believe our history as a supplier of cloud-based navigation services combined with our proven track record of working closely with these automobile manufacturers and OEMs provides a unique advantage in the automotive navigation marketplace over our competitors. We offer embedded navigation products that are integrated into the vehicle, which we refer to as on-board, connected navigation services that utilize our mobile device-based wireless connectivity, which we refer to as brought-in, and hybrid solutions that contain elements of both on-board and connected functionality. We provide our automotive navigation products and services to automobile manufacturers such as Ford Motor Company and affiliated entities, or Ford, which represented 65% of our revenue in the six months ended December 31, 2017, General Motors Holdings and its affiliates, or GM, and Toyota Motor Corporation, or Toyota.
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 differentiated 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 advertising exchanges using programmatic real-time bidding, or RTB, tools.
We generate product revenue from the delivery of customized software and royalties from the distribution of this customized software in certain automotive navigation applications, map updates to the software and customized software development. We generate services revenue from brought-in automotive navigation solutions, advertising services and mobile navigation services.
Ford utilizes our on-board automotive navigation product in its Ford SYNC® platform. Ford pays us a royalty fee on SYNC 2 on-board solutions as the software is imaged onto an SD card and shipped for installation in vehicles and pays us a royalty fee on SYNC 3 on-board solutions as our software is installed in the vehicle. We also derive product revenue from map update fees.
We generate automotive services revenue primarily from our brought-in automotive navigation solutions. We earn a fee for each new vehicle owner who downloads and activates the associated mobile application featuring GM OnStar RemoteLink®, whereby we provide enhanced search capabilities for contracted service periods. We also earn a fee for each new Toyota and Lexus vehicle sold and enabled to connect with our Scout GPS Link mobile application, similarly provided over a contracted service period.
For our on-board and connected navigation solutions, GM pays us a royalty fee as the SD card is shipped for installation in vehicles; this royalty includes a fee for the initial connected service to be provided once the vehicle is sold. GM will pay us an additional service fee for connected solution subscriptions for each end user that elects to renew their OnStar Connected Navigation or Connected Navigation subscription with GM. Due to specified future obligations, we did not recognize any revenue from GM on-board and connected navigation solutions in fiscal 2017 or the six months ended December 31, 2017, although we did experience increases in deferred revenue. We expect that we will not recognize any revenue from GM for our on-board and connected navigation solutions during fiscal 2018 due to specified future obligations.
We generate revenue from advertising network services through the delivery of advertising impressions based on the specific terms of the advertising contract.
We also generate a declining portion of our services revenue from subscriptions to access our mobile navigation services, which are generally provided through our wireless carrier customers that offer our services to their subscribers. Our wireless carrier customers typically pay us based on a revenue sharing arrangement or a monthly subscription fee per end user.
Recent Developments
On December 15, 2017, Telenav and Ford entered into Amendment No. 23 (the "Ford Amendment") to the SYNC Generation 2 On-Board Navigation Agreement dated October 12, 2009, as amended (the "Ford Agreement"). The Ford Amendment extends the term of the Ford Agreement from December 31, 2017 to December 31, 2018 for each jurisdiction in which we currently provide our products, including SYNC 2 and SYNC 3, to Ford.
On December 14, 2017, Ford awarded to Telenav a further extension of the Ford Agreement, beyond the aforementioned Ford Amendment, to December 31, 2020 for each jurisdiction in which we currently provide our products to Ford, subject to certain conditions and execution of a subsequent amendment to the Ford Agreement. On December 14, 2017, Ford also selected Telenav to provide its next generation navigation solution in North America, subject to certain conditions and

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execution of an agreement regarding those solutions. We do not expect to be awarded the opportunity to provide navigation for Ford's next generation solution in Europe.
In connection with the Ford Amendment set forth above, the scope of our solution with Ford has expanded to include future milestone deliveries throughout calendar 2018. As a result, under current GAAP, all prospective royalties related to Ford will be deferred and recorded as billings until such milestone deliveries occur. This accounting treatment will further change on July 1, 2018 when we adopt the new revenue recognition rules under ASC 606.
On January 9, 2018, we announced that our embedded navigation solution will be offered in select Jeep and Chrysler vehicles in the China market through Panasonic Automotive Systems Company of America, a Tier 1 supplier for Fiat Chrysler Automobiles (“FCA”), in the FCA Uconnect system. The launch date and projected volumes are to be determined by FCA.

Key operating and financial performance metrics
We monitor the key operating and financial performance metrics set forth in the tables below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess our operational efficiencies. Certain of these measures such as billings, changes in deferred revenue and deferred costs, adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA, adjusted EBITDA on billings and free cash flow are not measures calculated in accordance with GAAP, and should not be considered as an alternative to any measure of financial performance calculated and presented in accordance with GAAP. In addition, these non-GAAP measures may not be comparable to similarly titled measures of other companies because other companies may not calculate them in the same manner that we do.
Our key operating and financial performance metrics are as follows (in thousands, except percentages and per share amounts):

 
 
Three Months Ended
December 31,
 
Six Months Ended
December 31,
 
 
2017
 
2016
 
2017
 
2016
Revenue
 
$
39,080

 
$
52,001

 
$
75,738

 
$
94,228

Revenue from Ford as a percentage of total revenue
 
65
%
 
70
%
 
65
%
 
69
%
Billings (Non-GAAP)
 
$
70,145

 
$
59,687

 
$
135,934

 
$
106,956

Billings to Ford as a percentage of total billings (Non-GAAP)
 
65
%
 
64
%
 
67
%
 
64
%
Increase in deferred revenue
 
$
31,065

 
$
7,686

 
$
60,196

 
$
12,728

Increase in deferred costs
 
$
20,767

 
$
3,847

 
$
40,815

 
$
6,704

Gross profit
 
$
16,769

 
$
23,274

 
$
32,580

 
$
42,025

Gross margin
 
43
%
 
45
%
 
43
%
 
45
%
Direct contribution from billings (Non-GAAP)
 
$
27,067

 
$
27,113

 
$
51,961

 
$
48,049

Direct contribution margin from billings (Non-GAAP)
 
39
%
 
45
%
 
38
%
 
45
%
Net loss
 
$
(15,652
)
 
$
(11,423
)
 
$
(31,750
)
 
$
(20,758
)
Diluted net loss per share
 
$
(0.35
)
 
$
(0.26
)
 
$
(0.71
)
 
$
(0.48
)
Adjusted EBITDA (Non-GAAP)
 
$
(12,099
)
 
$
(2,565
)
 
$
(25,569
)
 
$
(9,413
)
Adjusted EBITDA on billings (Non-GAAP)
 
$
(1,801
)
 
$
1,274

 
$
(6,188
)
 
$
(3,389
)
Free cash flow (Non-GAAP)
 
$
(423
)
 
$
2,653

 
$
(6,497
)
 
$
(3,430
)

Gross margin is our gross profit, or total revenue less cost of revenue, expressed as a percentage of our total revenue. Our gross margin has been and will continue to be impacted by the increasing percentage of our revenue base derived from automotive navigation solutions and advertising network services, which generally have higher associated third party content costs and third party display ad inventory costs, respectively, than our mobile navigation offerings provided through wireless carriers.
Billings measure revenue recognized plus the change in deferred revenue from the beginning to the end of the period. Direct contribution from billings reflects GAAP gross profit plus change in deferred revenue less change in deferred costs. Direct contribution margin from billings reflects direct contribution from billings divided by billings. We have also provided a breakdown of the calculation of the change in deferred revenue by segment, which is added to revenue in calculating our non-

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GAAP metric of billings. In connection with our presentation of the change in deferred revenue, we have provided a similar presentation of the change in the related deferred costs. Such deferred costs primarily include costs associated with third party content and certain development costs associated with our customized software solutions. As deferred revenue and deferred costs become larger components of our operating results, we believe these metrics are useful in evaluating cash flow.
We consider billings, direct contribution from billings and direct contribution margin from billings to be useful metrics for management and investors because billings drive revenue and deferred revenue, which is an important indicator of the viability of our business. We believe direct contribution from billings and direct contribution margin from billings are useful metrics because they reflect the impact of the contribution over time from such billings, exclusive of the incremental costs incurred to deliver any related service obligations. There are a number of limitations related to the use of billings, direct contribution from billings and direct contribution margin from billings versus revenue, gross profit and gross margin calculated in accordance with GAAP. First, billings, direct contribution from billings and direct contribution margin from billings include amounts that have not yet been recognized as revenue or cost and may require additional services to be provided over contracted service periods. For example, billings related to certain connected solutions cannot be fully recognized as revenue in a given period due to requirements for ongoing provisioning of services such as hosting, monitoring, customer support and map updates, including certain third party technology and content license fees as applicable. Second, we may calculate billings, direct contribution from billings and direct contribution margin from billings in a manner that is different from peer companies that report similar financial measures, making comparisons between companies more difficult. When we use these measures, we attempt to compensate for these limitations by providing specific information regarding billings and how they relate to revenue, gross profit and gross margin calculated in accordance with GAAP.
Adjusted EBITDA measures our GAAP net loss excluding the impact of stock-based compensation expense, depreciation and amortization, other income (expense), provision (benefit) for income taxes, and other applicable items such as legal settlements and contingencies, and deferred rent reversal and tenant improvement allowance recognition due to sublease termination, net of tax. Stock-based compensation expense relates to equity incentive awards granted to our employees, directors, and consultants. Legal settlements and contingencies represent settlements and offers made to settle patent litigation cases in which we are a defendant and royalty disputes. Deferred rent reversal and tenant improvement allowance recognition represent the reversal of our deferred rent liability and recognition of our deferred tenant improvement allowance, as amortization of these amounts is no longer required due to the termination of our Santa Clara facility sublease and subsequent entry into a new lease agreement with our landlord for this same facility in August 2017. Adjusted EBITDA, while generally a measure of profitability, can also represent a loss.
Adjusted EBITDA and Adjusted EBITDA on billings 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 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 generally 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.
Adjusted EBITDA on billings measures adjusted EBITDA plus the effect of changes in deferred revenue and deferred costs. We believe adjusted EBITDA on billings is a useful measure, especially in light of the significant impact we expect on reported GAAP revenue for certain value-added offerings we provide our customers, including Ford map updates. Adjusted EBITDA and adjusted EBITDA on billings, while generally measures of profitability, can also represent losses.
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.
These non-GAAP measures have limitations as analytical tools and should not be considered in isolation or as substitutes for our financial results as reported under GAAP. Some of these limitations are:
We expect to incur additional costs in the future due to requirements to provide ongoing provisioning of services such as hosting, monitoring and customer support; accordingly, direct contribution from billings, direct contribution margin from billings and adjusted EBITDA on billings do not reflect all costs associated with billings;
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;

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adjusted EBITDA and adjusted EBITDA on billings do not reflect the potentially dilutive impact of equity-based compensation;
adjusted EBITDA and adjusted EBITDA on billings do not reflect the use of cash for net share settlements of RSUs;
adjusted EBITDA and adjusted EBITDA on billings do 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
adjusted EBITDA, adjusted EBITDA on billings, free cash flow or similarly titled measures may be calculated by other companies differently, which reduces their usefulness as comparative measures.
Because of these and other limitations, you should consider billings, direct contribution from billings, direct contribution margin from billings, adjusted EBITDA, adjusted EBITDA on billings and free cash flow alongside other GAAP-based financial performance measures.
We reconcile the most directly comparable GAAP financial measure to each non-GAAP financial metric used. 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 profit to direct contribution from billings, net loss to adjusted EBITDA and adjusted EBITDA on billings, and net loss to free cash flow for each of the periods indicated (dollars in thousands):
Reconciliation of Revenue to Billings
 
 
Three Months Ended
December 31,
 
Six Months Ended
December 31,
 
 
2017
 
2016
 
2017
 
2016
Automotive
 
 
 
 
 
 
 
 
Revenue
 
$
26,838

 
$
38,744

 
$
52,142

 
$
69,011

Adjustments:
 
 
 
 
 
 
 
 
Change in deferred revenue
 
31,259

 
7,694

 
60,447

 
12,807

Billings
 
$
58,097

 
$
46,438

 
$
112,589

 
$
81,818

Advertising
 
 
 
 
 
 
 
 
Revenue
 
$
8,742

 
$
8,208

 
$
16,357

 
$
14,753

Adjustments:
 
 
 
 
 
 
 
 
Change in deferred revenue
 

 

 

 

Billings
 
$
8,742

 
$
8,208

 
$
16,357

 
$
14,753

Mobile Navigation
 
 
 
 
 
 
 
 
Revenue
 
$
3,500

 
$
5,049

 
$
7,239

 
$
10,464

Adjustments:
 
 
 
 
 
 
 
 
Change in deferred revenue
 
(194
)
 
(8
)
 
(251
)
 
(79
)
Billings
 
$
3,306

 
$
5,041

 
$
6,988

 
$
10,385

Total
 
 
 
 
 
 
 
 
Revenue
 
$
39,080

 
$
52,001

 
$
75,738

 
$
94,228

Adjustments:
 
 
 
 
 
 
 
 
Change in deferred revenue
 
31,065

 
7,686

 
60,196

 
12,728

Billings
 
$
70,145

 
$
59,687

 
$
135,934

 
$
106,956


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Reconciliation of Deferred Revenue to Change in Deferred Revenue
Reconciliation of Deferred Costs to Change in Deferred Costs
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended December 31, 2017
 
 
Automotive
 
Advertising
 
Mobile Navigation
 
Total
Deferred revenue, December 31
 
$
146,964

 
$

 
$
633

 
$
147,597

Deferred revenue, September 30
 
115,705

 

 
827

 
116,532

Change in deferred revenue
 
$
31,259

 
$

 
$
(194
)
 
$
31,065

 
 
 
 
 
 
 
 
 
Deferred costs, December 31
 
$
94,907

 
$

 
$

 
$
94,907

Deferred costs, September 30
 
74,140

 

 

 
74,140

Change in deferred costs
 
$
20,767

 
$

 
$

 
$
20,767