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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
 
(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2018

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) (Zip Code)
(408) 245-3800
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of each class
 
Name of each exchange on which registered
 
Common Stock, $0.001 Par Value per Share
The NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act:
None
 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933, as amended.    Yes  ☐  No  ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended.    Yes  ☐ No  ý

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☐

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  ☒

The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of December 29, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $148 million (based on a closing sale price of $5.50 per share as reported for the NASDAQ Global Market) on December 29, 2017. For purposes of this calculation, shares of common stock held by officers and directors and shares of common stock held by persons who hold more than 10% of the outstanding common stock of the registrant have been excluded from this calculation because such persons may be deemed to be affiliates. This determination of executive officer or affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares of the registrant’s Common Stock, $0.001 par value per share, outstanding as of June 30, 2018 was 44,870,602.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement relating to its 2018 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K where indicated. Such Proxy Statement will be filed with the United States Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates.



Table of Contents

TELENAV, INC.
FORM 10-K
TABLE OF CONTENTS
 
 
 
 
 
 
Page
PART I
 
 
 
 
 
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
 
 
 
PART II
 
 
 
 
 
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
 
 
 
PART III
 
 
 
 
 
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
 
 
 
PART IV
 
 
 
 
 
ITEM 15.
ITEM 16.


Table of Contents

Special Note Regarding Forward-looking Statements and Industry Data
This Annual Report on Form 10-K, or this Form 10-K, 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,” “Management's discussion and analysis of financial condition and results of operations,” and “Business.” Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, regulatory environment 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-K. 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-K.
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-K completely and with the understanding that our actual future results may be materially different from what we expect.
Corporate information
Our predecessor company, TeleNav, Inc., incorporated in the State of Delaware in 1999 and we incorporated in the State of Delaware in 2009 as TNAV Holdings, Inc. Pursuant to stockholder approvals received in December 2009, our predecessor company merged with and into us on April 15, 2010. As the entity surviving the merger, upon completion of the merger, we changed our name to TeleNav, Inc. In November 2012, we changed our name to Telenav, Inc. Our executive offices are located at 4655 Great America Parkway, Suite 300, Santa Clara, California 95054, and our telephone number is (408) 245-3800. Our website address is www.telenav.com. The information on, or that can be accessed through, our website is not part of this Form 10-K.
We file or furnish periodic reports, including our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K, our proxy statements and other information with the Securities and Exchange Commission, or the SEC. Such reports, proxy statements and other information may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, D.C. 20549, by calling the SEC at 1-800-SEC-0330 or by sending an electronic message to the SEC at publicinfo@sec.gov. In addition, the SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically. Our reports, proxy statements and other information are also made available, free of charge, on our investor relations website at http://investor.telenav.com/financials.cfm as soon as reasonably practicable after we electronically file such information with the SEC. The information posted on our website is not incorporated into this Form 10-K.
In this Form 10-K, "Telenav," “we,” “us” and “our” refer to Telenav, Inc. and its subsidiaries.
The names Chatbaka™, Geobehavioral™, Geocookie®, Geolink™, HopOver™, LivingMap™, Location Index ™, Location Score ™, ONMYWAY®, OpenTerra™, RealReach™, RoadSense™, Scout®, Scout GPS Link™, Sipity®, skobbler®, Situational Targeting™, Telenav®, Telenav GPS Navigator™, Telenav Navigator™, Telenav Scout™, Thinknear®, Thinknear GeoVideo™, ThinkPolitical™TrueDelta™, and TurnStream™, as well as the Telenav, Scout, skobbler and Thinknear logos are our trademarks. All other trademarks and trade names appearing in this Form 10-K are the property of their respective owners.



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PART I.


ITEM 1.
BUSINESS
Overview
Telenav is a leading provider of location-based products and services for connected cars and advertising. We utilize our connected car platform and our advertising platform to deliver these products and services. Our connected car platform allows us to deliver enhanced location-based navigation services to automobile manufacturers and tier one suppliers, or tier ones. Our advertising platform, which we provide through our Thinknear subsidiary, leverages our location expertise and delivers highly targeted advertising services to advertisers and advertising agencies. We report results in three business segments: automotive, advertising and mobile navigation. Our fiscal year ends June 30. In this Form 10-K, we refer to the fiscal years ended June 30, 2016, 2017 and 2018 and ending June 30, 2019 as fiscal 2016, fiscal 2017, fiscal 2018 and fiscal 2019, respectively. Our total revenue was $183.3 million in fiscal 2016, $169.6 million in fiscal 2017 and $106.2 million in fiscal 2018. Our net loss was $35.3 million in fiscal 2016, $47.3 million in fiscal 2017 and $89.1 million in fiscal 2018.
We derive revenue primarily from automobile manufacturers and tier ones, advertisers and advertising agencies. We receive revenue from automobile manufacturers and tier ones whose vehicles or systems incorporate our proprietary personalized navigation software and services. These manufacturers and tier ones generally do not provide us with any volume or revenue guarantees. In addition, we have a strategic 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.
Our legacy mobile navigation business has declined steadily since fiscal 2013, and we expect it to continue to decline and represent less than 10% of our consolidated revenue commencing in the first quarter of fiscal 2019. We began offering our 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 $13.4 million, or 12% of our revenue, in fiscal 2018, 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 we may ultimately elect to terminate our legacy wireless carrier mobile navigation business to the extent allowable under our contractual arrangements.
For our automotive manufacturer and tier one customers, we offer our connected car products and services for distribution with their vehicles and systems. We believe our history as a supplier of cloud-based navigation services combined with our proven track record of delivering navigation solutions to three of the top five global automobile manufacturers provides a unique advantage in the automotive navigation marketplace over our competitors.
We offer four variations of our connected car products and services to our automobile manufacturer and tier one customers. First, we offer on-board navigation systems that are built into vehicles with all key elements of the system residing in the vehicle as a self-contained application along with the related software and content. Our on-board navigation products do not require access to the Internet or wireless networks to function. Second, we offer advanced navigation solutions that contain on-board functionality and also add cloud functionality such as cloud search, cloud routing, map updates and “live” data. We refer to these solutions as hybrid navigation. Third, we offer mobile phone-based navigation solutions that run on the phone and provide an interactive map and navigation instructions to the vehicle's video screen and audio system, which we refer to as brought-in navigation. Finally, we offer a Navigation Software Development Kit, or SDK, that enables our customers to add mapping and location capabilities to their cloud, mobile and on-board automotive applications.
We provide our connected car products and services directly to automobile manufacturers such as Ford Motor Company and affiliated entities, or Ford, which represented 55% of our revenue in fiscal 2018, General Motors Holdings and its affiliates, or GM, and Toyota Motor Corporation, or Toyota. We also provide our products and services indirectly through tier ones such as XEVO, Inc., or XEVO, for certain Toyota solutions; LG Electronics, Inc., or LG, for certain Opel solutions; and Panasonic Automotive Systems Company of America, or Panasonic, for certain Fiat Chrysler Automobiles, or FCA, solutions.

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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 also believe that we are experts in location-based advertising and offer differentiated value to brick-and-mortar and brand advertisers through our location based ad targeting capabilities. Our technology focuses on leveraging 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.

Automotive Navigation
Industry background
The automotive industry is going through a significant transformation due to the convergence of connectivity, autonomy, shared mobility and electrification, or CASE. In addition, due to high consumer expectations set by mobile phones, consumers are demanding user friendly products that are well integrated, always up-to-date and easy to use. Our market research has shown that in-vehicle infotainment is one of the features that drivers value most when purchasing a new car.
We believe, and market studies by Strategy Analytics indicate, navigation has been and will continue to be one of the highest demanded features within in-vehicle infotainment systems. With the current CASE trends, navigation and the navigation platform will become increasingly important because the services used for in-vehicle infotainment either stem from or must work with the navigation system. Therefore, navigation will become integral to providing a seamless infotainment experience. For example, driver safety continues to be a key priority for government regulators and automobile manufacturers globally and the European New Car Assessment Program (NCAP) gives safety incentive points to vehicles with the Speed Assist Systems (SAS) features, some of which require mapping and navigation software. Due to these pressures, automobile manufacturers are adding navigation as a standard feature on more vehicles.
Navigation is an essential aspect of autonomous vehicles as mapping and navigation are required to localize the vehicle and guide it to its destination. For shared mobility, finding the nearest vehicle to a rider and routing the vehicle requires mapping and navigation. For electric vehicles, range planning, optimization of energy use and finding charging stations along the route are enabled by mapping and navigation. For these reasons navigation is becoming increasingly important and a key element of future vehicle infotainment and safety systems.
Industry challenges
The automotive industry is experiencing increasing pressures from new entrants such as Tesla and other industries, such as the mobile handset industry, that have fast innovation and execution, which enable them to capitalize on current trends. As a result, traditional automobile manufacturers are striving to keep up with consumer demands for new and updated content on the infotainment system, which previously was not capable of being updated without inconveniencing the consumer. According to Strategy Analytics, a leading automotive market research firm, customers consider on-board access to connected applications an important factor in determining their purchase decision. Consumers are strongly indicating their desire to access connected apps through their vehicle’s controls and displays. Automobile manufacturers that enhance the in-vehicle experience with cloud connectivity and improved infotainment capabilities can find greater acceptance from consumers, but the delivery of these capabilities is technically challenging and not a traditional part of the automobile manufacturer's capabilities or supply chain. This challenge is driving automobile manufacturers to seek new partners to create differentiated in-car experiences. Automobile manufacturers are also under pressure because of the recent introduction of brought-in platforms and products such as Apple's CarPlay and Google's Android Auto along with other initiatives, including Open Automotive Alliance, which take control of the products and platforms away from the automobile manufacturers or tier one and could diminish brand loyalty to the automobile manufacturer. To counter this, automobile manufacturers are investing heavily in their infotainment solutions and leveraging their ability to provide better integration of the various automobile systems resulting in hybrid navigation services that are seamlessly integrated with in-vehicle displays (center screen, cluster, heads up display, rear-seat), speakers, voice recognition and vehicle sensors and therefore extremely easy to use. This integration of the infotainment also improves the safety of the driving experience by allowing drivers to "keep their hands on the wheel and eyes on the road."
Our competitive strengths
Automobile manufacturers procure the various elements of each car that they manufacture from third party suppliers directly and through tier ones. We work directly with automobile manufacturers such as Ford, GM and Toyota, as well as through tier ones. Our strong track record as a provider of connected and personalized navigation services to mobile phones and our history of working with large wireless carriers has helped us develop skills and technology that are well suited to meet the

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demands faced by today's automobile manufacturers and tier ones. The sales cycle for automotive navigation systems is long, consultative and requires direct and continuous engagement with the automobile manufacturer and tier ones to succeed in securing business. Often the automobile manufacturer uses the sales process to help it define the ultimate product that it delivers to its end users in a way that not only enhances customer experience but also allows the automobile manufacturer to differentiate itself from the competition. We believe that our success with on-board, brought-in and hybrid navigation solutions at Ford, GM and Toyota, and the continuing shift in emphasis to connected services has demonstrated the strength of our offerings to other automobile manufacturers and tier ones. Through our ongoing collaboration with automobile manufacturers, we remain aligned with their goals and offer solutions that allow them to differentiate against other competitors, providing their users with a superior experience and, as a result, creating brand loyalty among their customers.
Our automotive products and services
We entered the automotive navigation services business in fiscal 2008, initially with Ford, and our first on-board navigation product was launched in Ford's model year 2010 vehicles. Since that time, we have been working with Ford and other automobile manufacturers and tier ones to deploy our various navigation products and services worldwide through on-board, brought-in and hybrid systems.
Our primary automotive customer to date, Ford, currently distributes our on-board product as a standard or optional feature in certain of its models and locations. More recently, this solution has been enhanced with a phone-based connectivity feature providing key search capabilities. Our navigation products are now included in Ford models principally manufactured and sold in North America, South America, Europe and China, as well as distributed in models sold in Australia and New Zealand. In each geography where we provide navigation products to it, Ford also provides a map update program under which Ford owners in North America, South America, China and Europe with SYNC® 3 and in Australia and New Zealand with SYNC® 2 or SYNC 3 are eligible to receive annual map updates at no additional cost through the contractual period with the respective entity.
In December 2017, we announced that Ford had chosen Telenav to provide its next generation navigation solution in North America, subject to certain conditions and execution of an agreement regarding those solutions. We were not awarded the contracts for Europe, South America and Australia and New Zealand.
We have agreements with GM to provide our on-board and hybrid navigation solutions in its vehicles. Our navigation SDK powers GM's OnStar RemoteLink, and associated branded mobile applications, MyBuick, MyCadillac, MyChevrolet and MyGMC. GM also offers a localized version of our on-board, hybrid and mobile solutions for the Opel and Vauxhall brands in Europe. GM sold its Opel and Vauxhall brands to PSA Group in August 2017, and we continue to engage in development of similar solutions for Opel and Vauxhall.
We were selected to provide entry level on-board navigation through LG, a tier one supplier for GM's select line of vehicles, for the European market. This solution launched in Opel's Adam, Corsa, Karl and Zafira model vehicles in 2017. These products are expected to be made available in select vehicles for model years 2019 to 2022.
In February 2017, GM launched its first model featuring integration of our hybrid navigation solution in North America, the 2017 Cadillac CTS and CTS-V. Our solution is now available on the 2018 Cadillac CTS, CTS-V, ATS and XTS models, as well as select 2018 GM Terrain vehicles. GM also recently launched our hybrid navigation solution on model year 2019 truck and SUV/CUV models, including Chevy Silverado, GMC Sierra and Chevrolet Equinox. GM has launched vehicles with our hybrid navigation solution in China and the Middle East. Our hybrid navigation solution is scheduled to become available in additional regions and GM models for model years 2019 to model year 2025.
We have a partnership with Toyota for brought-in navigation services where our Scout GPS Link mobile application is enabled to connect with select Entune® Audio equipped Toyota vehicles and in select Lexus Enform® equipped Lexus models in the United States and Canada. Toyota and Lexus vehicles enabled to connect with our Scout GPS Link began shipping in August 2015 and September 2016, respectively.
In January 2017, we and Xevo announced that Scout GPS Link and XevoTM Engine Link were chosen to provide brought-in navigation services, including a fully interactive moving map, for select Toyota vehicles equipped with Entune 3.0 Audio, as well as select Lexus vehicles equipped with Lexus Enform. Our fully interactive solution is available on select model year 2018 Toyota Camry and Sienna and Lexus NX and RC models, and was recently expanded to select model year 2019 Toyota Corolla hatchback, Avalon and CHR models. On these same Toyota and Lexus models, a premium embedded connected navigation option is also available that provides cloud-based search, powered by our navigation SDK. While we have seen expansion of our latest version of Scout GPS Link solution across more Toyota and Lexus models in fiscal 2019, we expect that Toyota may limit the number of future models or vehicles on which Scout GPS Link is offered by Toyota and Lexus due in part

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to the offering of alternative brought-in solutions such as Apple’s CarPlay, which Toyota recently announced it is offering across certain Toyota models, and the expanded offering of Google’s Android Auto solution across more automobile manufacturers.
In August 2017, Daimler AG, or Mercedes, selected Telenav’s enhanced OpenStreetMap, or OSM, platform and navigation SDK to power its Mercedes-Benz COMAND TOUCH® Rear Seat Entertainment system throughout the world. Our solution will provide mapping for rear seat entertainment.
In January 2018, we announced that our on-board navigation solution will be offered in select Jeep and Chrysler vehicles in the China market through Panasonic, a tier one supplier for FCA, in the FCA Uconnect system. Our embedded navigation is included in the 2018 Jeep Grand Cherokee and Grand Commander and is expected to be included in Jeep Cherokee and Compass when those models debut in China later in the year.
Going forward, we anticipate more automobile manufacturers and tier ones will offer our hybrid navigation solutions with up-to-date data such as traffic, fuel prices, maps and points of interest, or POIs, to deliver an enhanced user experience. In addition, as the market transitions to cars that are “always connected,” we expect our product and service offerings to become more personalized, safer and seamlessly integrated with other functions in the infotainment system, resulting in a better overall user experience.
Platform and architecture
Our automotive navigation product architecture is designed with flexibility in mind such that we may deliver custom solutions efficiently, to meet the unique requirements of automobile manufacturers and tier ones. We have created and continue to enhance our automotive reference product, or ARP, which will serve as the foundation for our custom solutions and also allow us to show automobile manufacturers our latest on-board, brought-in and hybrid navigation capabilities. In addition, we provide our cloud services via a standard application programming interface, or API, via our navigation SDK for those manufacturers seeking cloud services only, such as GM's mobile companion app.
We have developed proprietary technologies to provide location-based on-board, brought-in and hybrid mapping and navigation services. Our on-board navigation products include a broad set of services including local search for addresses and business, converting addresses to latitude and longitude coordinates known as geocoding, routing, map rendering, traffic decoding and processing, multi-level map matching, map updates, navigation and guidance. We have also developed customized technology to improve the quality of speech recognition for address and POI searches.
Our cloud location-based services platform includes our engines for routing, mapping, local search, voice recognition, geo data aggregation, traffic, personalization, sensor processing, and a digital location-based advertising platform. We leverage our existing back-end cloud technologies for deployment to automobile manufacturer and tier one applications.
Our proprietary location-based services platform provides fast route and map generation while optimizing the route based on real-time traffic conditions. It also includes a local search technology so users can find addresses and POIs easily, to which users can then be routed. Because our proprietary platform uses computing resources efficiently, we are able to scale our servers economically for our automotive solutions.
Our back-end cloud services allow us to deliver up-to-date location based data and services to support our on-board navigation technologies. Our platform is designed to be content agnostic and offers the flexibility to use various data providers for maps, POIs, traffic and other location-based content services. This enables the automobile manufacturer or tier one to offer best of breed content, by region, to delight their drivers. It also allows more competitive content pricing by offering the automotive manufacturer or tier one the option of seeking bids from more than one content provider. We have expanded our navigation offering to add Advanced Driver Assistance Systems, or ADAS, capabilities. Our initial ADAS feature, called e-horizon, predicts the path of the user and extracts relevant map attributes to tell the vehicle about upcoming road characteristics such as curvature and elevation. This information may be used by the vehicle to alert the driver of unsafe conditions, actuate the car and also improve fuel economy.
In January 2014, we acquired skobbler GmbH, or skobbler, a leading provider of technologies that enhance the collection and use of OSM mapping data. By combining skobbler's technologies with other proprietary Telenav technologies, we have developed a range of OSM capabilities that allow us to use crowd sourced maps for more advanced services such as navigation. We deployed OSM as part of our Toyota Entune Audio Plus and Lexus Display Audio multimedia products. We believe that focusing our efforts on OSM will provide us with a competitive advantage and expand the nature and extent of our product offerings.

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Advertising Platform
Industry background
Mobile advertising provides advertisers with many benefits over traditional advertising media and PC-based online advertising, such as anytime, anywhere access, personalization, location targeting and relevance. The development of the mobile advertising ecosystem has mirrored the development for online PC-based advertising. Advertising delivered to mobile devices has the potential to increase the impact and relevance of an ad to the user, because of the ability to identify the current location of the user and remember the user's prior locations. Location is a powerful indicator of an individual's interests and likely actions because it provides context about the user that is not available in traditional advertising. For example, an ad can be targeted to a consumer who is in close proximity to a retail store, or to a consumer who may live in an area that advertisers wish to target based on demographics or other characteristics. Given the benefits of mobile advertising as compared to traditional offline advertising and PC-based online advertising, we expect that marketers will continue to shift their advertising budgets to mobile as this market continues to grow.
Industry challenges
The mobile advertising marketplace is a dynamic, fast growing industry with many new participants. Advertisers are transitioning significant portions of their marketing budgets to the mobile market where many of the traditional approaches to engaging customers are not effective. These advertisers need to be able to conduct ad campaigns that achieve favorable return on investment, or ROI. To measure ROI, advertisers typically include elements related to message reach, audience targeting capabilities and campaign effectiveness measurements.  Advertisers are particularly focused on measures of effectiveness for mobile ad campaigns, but the elements by which ROI of mobile ad campaigns are measured are evolving and not as well understood as traditional advertising campaigns. The mobile advertising market is comprised of application developers, advertising networks, advertising agencies, advertising exchanges and demand-side platforms, among others.  The various market participants tend to focus on specific elements of the market and each tries to deliver unique technology offerings to assist advertisers. Some focus on targeting, others on audience data and still others on the location information that makes the mobile marketplace distinct from all other advertising opportunities. Thinknear uses location data to build consumer insights, develop targeting tools, and create unique audiences that enable brands to connect with mobile consumers. While we are optimistic about the potential for in-vehicle advertising, we expect that it will take two to three years or longer before we start seeing any significant revenue from this channel.
Our competitive strengths
Our location-based advertising solution combines large scale access to programmatic inventory, our ability to focus on particular audiences, and dynamic user content that is customizable based on location.
We have developed a number of techniques that allow us to differentiate between the effectiveness of ad impressions that include highly-accurate location data and those that do not. Our proprietary Location Score™ technology measures the accuracy of location information within advertising impressions in order to build audience segments that can be targeted for our customers. Our ability to effectively filter out inaccurate data is a key competitive advantage in the rapidly shifting mobile advertising space.
Because of our ability to identify real-time and historical location data, as well as our ability to ingest contextual targeting data, we can target our ads on specified demographics and advertiser-defined customer segments. For example, an ad delivered in a geographic area where it happens to be raining can provide a rain-related message. An ad for sunblock can be limited to areas with a high level of sunlight and ultraviolet radiation. In addition, it is our ability to do this at significant scale due to number of users and volume of data that allows advertisers to reach their target audience. We continue to believe that our location-based advertising business is a strategic component of our connected car roadmap, especially as it relates to potential new revenue streams from in-car ads.
Our services
Our advertising services are built around the ability to provide sophisticated location-based advertising in a manner that allows advertisers to connect with consumers on mobile devices. For example:
Creative - We run a wide range of creative ad units, including static, dynamic, mobile video and rich media content. Our creative allows national advertisers to easily “localize” their content without having to create thousands of individual campaigns. Our creative focuses on leveraging location data to incorporate local context such as distance to a store location, information on where to purchase a product or nearby events that could impact the potential consumer.

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Targeting - We offer a variety of targeting tools to our advertising clients to improve the performance of the campaigns. Our targeting tools include both audience-focused tools centered on reaching specific customer segments and proximity-based tools focused on driving foot traffic to retail locations and other direct-response-related metrics.
Reports and metrics - We offer clients a broad range of reporting tools that allow them to monitor their advertising campaigns. The rich set of analytics and insights provided by our platform enable advertisers to understand in real time what is happening with respect to any of the campaigns being run by us.
Platform and architecture
Our mobile advertising platform is hosted in the cloud, primarily by Amazon Web Services, or AWS. We leverage the flexibility and scalability of cloud service providers to meet our scale requirements.
We have developed proprietary technologies that enable us to deliver location-based advertising across all types of mobile devices at scale. Our platform integrates location-enabled mobile advertising inventory with a number of contextual and location-based triggers to allow us to target mobile users. Our platform permits us to analyze, bid and deliver ad impressions through advertising exchanges in less than 30 milliseconds and to do so on billions of potential impressions every day. In addition, we are able to target our mobile campaigns based on a variety of criteria beyond location. Our platform was built to provide scalability through the use of machine-based decision processes, which allows us to execute thousands of campaigns, each with complex targeting criteria across multiple inventory sources.
 
Infrastructure and operations
Automotive Navigation
Our end users rely on our services primarily while on the road. As a result, we strive to ensure the continuous availability of our services through our high quality hosting platform and operational excellence.
Data center facilities. We developed our infrastructure with the goal of maximizing the availability of our applications, which are hosted on a highly scalable and available network located in AWS facilities in California, Oregon, Virginia, Germany, Ireland and South Korea.
We entered into hosted service agreements with AWS for primary resource capacity and disaster recovery capacity. Pursuant to the service agreements, AWS provides leased facility space, power, cooling and Internet connectivity for a term of one year, and such agreements are subject to renewal.
We have similar arrangements with Alibaba Group Holding Limited’s cloud computing business unit, Alibaba Cloud, to provide hosting services for our location services in China.

Advertising platform
We developed our advertising platform infrastructure with the goal of maximizing the performance of our platform. Our platform is hosted on a highly scalable and available network provided by AWS. Our advertising platform has been designed to place significant focus on the location of any particular unit of display advertising made available for purchase on real time bidding ad exchanges. This focus on location provides us with the speed and capability to more rapidly bid on the inventory that we believe is best suited for our customers' advertising needs. Our use of AWS provides significant flexibility with respect to service capability to meet any peaks in demand from our advertisers.

Research and development
Our research and development organization is responsible for the design, development and testing of our services and products. Our engineering team has deep expertise and experience in in-car embedded software, mobile software, location technologies and cloud services and we have a number of personnel with longstanding experience with location services applications and scaling hosted service models. In addition, through our acquisition of Thinknear and our own internal efforts, we have developed expertise in real time bidding and targeted advertising capabilities.

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Our current research and development efforts are focused on:
timely execution and delivery of contracted customer solutions;
enhancing our unified platform that enables more efficient deployment of our solutions across multiple customers and programs;
improving and expanding features, functionality and performance of our existing services;
creating new applications, services and functionality for vehicles and mobile phones;
developing key technology and content to reduce third party costs;
developing innovative and engaging advertising products that allow for highly effective targeting of end users and provide for accurate measurement of behavior; and
building features and functionality that allow OSM to be enhanced.
Our development strategy is to identify features, services and products that are, or are expected to be, needed or desired by end users and provide our customers with a means to differentiate themselves against their competitors.
As of June 30, 2018, our research and development team consisted of 644 people, 182 of whom are located in Santa Clara and Culver City, California and 462 of whom are located in Cluj, Romania; Shanghai and Xi'an, China; Berlin, Germany; and Incheon, South Korea. Our U.S., China and Romanian research and development operations function together to provide service and product development for our automotive customers. Our Romanian development efforts also focus on our OSM products. Our research and development expenses were $68.9 million, $73.1 million and $87.5 million for fiscal 2016, 2017 and 2018, respectively.
Marketing and sales
Automotive Navigation
In connection with sales efforts directed at automobile manufacturers and tier ones, we employ a sales team that focuses on targeted customers and responds to requests for proposals and related sales opportunities.
The development and sales cycle for automotive navigation products and services is substantially longer than those associated with our advertising network services. The automotive sales cycle is consultative and requires direct and continuous engagement with the customer to succeed in securing a design win. A typical sales cycle is 12 to 18 months long. Often the automobile manufacturer uses the sales process to help it to define the ultimate product that it chooses to deliver to its end users. Generally, design wins for vehicles are awarded 24 to 36 months prior to the anticipated model year launch of the vehicle, as it takes this much time to develop and integrate the software and cloud services. Once we launch services with an automobile manufacturer, our application and services are typically bundled with vehicles for multiple years.
Advertising Platform
Marketing. We market our advertising services based upon our location and data expertise. We are building brand recognition and customer relationships based upon a consultative relationship with key advertising buyers, primarily advertising agencies and large brand marketers.
Sales. We are engaged in direct sales efforts to expand the reach of our mobile advertising solutions. We strive to improve the efficiency and productivity of our sales force to help us grow the business to sustainable profitability.
Customers
We derive revenue primarily from automobile manufacturers and tier ones, and advertisers and advertising agencies. More specifically, we derive our revenue primarily from automobile manufacturers and tier ones whose vehicles contain our proprietary software and are able to access our navigation services. In addition, we have a strategic business in mobile advertising where our customers are primarily advertising agencies that represent national and regional brands, and channel partners that work closely with local and small business advertisers. To a lesser extent, we have legacy relationships with wireless carrier customers to provide mobile navigation services to their subscribers through mobile phones.

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We generate revenue from automobile manufacturers and tier ones for delivery of customized software and royalties from the distribution of this customized software for on-board and hybrid automotive navigation solutions. In addition, we earn royalties from brought-in navigation services for vehicle applications powered by our location-based services platform. We typically enter into long term supply arrangements with our auto customers to provide our solutions across multiple car models in multiple regions around the world.
We also generate revenue from advertisers and advertising agencies for the delivery of advertising impressions based on the specific terms of the advertising contract.
Our revenue from customers located in the United States comprised 97%, 88% and 94% of our total revenue for fiscal 2016, 2017 and 2018, respectively.
Ford
We are substantially dependent on Ford for our billings and revenue. In fiscal 2016, 2017 and 2018, Ford represented 71%, 69% and 55% of our revenue, respectively, and 68%, 68% and 66% of billings, respectively. We expect Ford to represent a significant portion of our billings and revenue for the foreseeable future, with Ford's percentage of our revenue anticipated to increase with our adoption of ASC 606, Revenue from Contracts with Customers, on July 1, 2018.
We provide on-board navigation solutions to Ford pursuant to an agreement dated October 12, 2009. Our automotive products are now included in Ford models manufactured and sold in North America, Europe and China, as well as distributed in models sold in South America, Australia and New Zealand. On December 14, 2017, Ford awarded to Telenav a further extension of the agreement 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 agreement. The subsequent amendment was executed in March 2018. On December 14, 2017, Ford also selected us to provide its next generation navigation solution in North America, subject to certain conditions and execution of an agreement regarding those solutions. We were not awarded the contracts for Europe, South America and Australia and New Zealand.
We are the preferred provider for on-board navigation integrated with Ford's SYNC 2 and SYNC 3 platforms during the term of the agreement.
We have also entered into amendments with Ford such that Ford Europe and Ford Australia and New Zealand also provide a map update program under which Ford owners with SYNC 2, with respect to Australia and New Zealand only, or SYNC 3 in all geographies where we provide SYNC 3 products are eligible to receive annual map updates at no additional cost through the contractual period.
In fiscal 2017, we also entered into amendments of our agreement with Ford pursuant to which Ford’s joint venture in China, Changan Ford Automobile Co., Ltd, became the primary contracting party for our relationship with Ford in that region.
Our agreement with Ford relating to navigation solutions integrated with Ford's SYNC 2 and SYNC 3 platforms allows for renewals for successive 12-month periods if either party provides notice of renewal at least 45 days prior to the expiration of the applicable term, and the other party agrees to such renewal. Our agreement with Ford also allows either party to terminate the agreement if the other party is insolvent or materially breaches its obligations and fails to cure such breach.
GM and LG
We have an agreement with GM to provide our navigation services for GM's vehicles globally, which expires on December 31, 2025. Additionally, we have an agreement with LG to provide our on-board navigation solution to LG for select Opel vehicles for the European market. Such agreement expires June 30, 2022. Our agreements with GM, as well as our agreement with LG, allow either party to terminate the agreement if the other party is insolvent or breaches its obligations and fails to cure such breach, and permit GM, or LG as applicable, to terminate at its convenience.
Our hybrid navigation solutions are available on select model year 2018 GM vehicles in markets including North America, Australia and New Zealand, and in China with Shanghai-GM, or SGM. Our on-board navigation solutions are available on select model year 2018 Opel vehicles. We have also started offering our hybrid and on-board navigation solutions in select model year 2019 GM vehicles. Under our agreements with GM, we are obligated to provide our navigation products and services for additional models and regions through model year 2025.
Indemnification under automotive customer agreements

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Under our agreements with Ford and GM, we have obligations to indemnify each of them against, among other things, losses arising out of or in connection with any claim that our technology or services infringe third party proprietary or intellectual property rights. Our agreements with each of Ford and GM may be terminated in the event an infringement claim is made against us and it is reasonably determined that there is a possibility our technology or service infringed upon a third party's rights.
Safeguards against unauthorized data usage
We employ administrative, physical and technical safeguards as part of our efforts to prevent unauthorized collection, access, use and disclosure of our end users' private data and to comply with applicable federal, state and local laws, rules and regulations. We do not use any end user data for direct marketing or promotions without the consent of the user and do not store any user location information that personally identifies the end user except to deliver and support our services. We are also required to comply with our customers' privacy and data securities policies.
Intellectual property
We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish and protect our proprietary rights. These laws, procedures and restrictions provide only limited protection and the legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain and still evolving. Furthermore, effective patent, trademark, copyright and trade secret protection may not be available in every country in which our services and products are available.
We seek to patent key concepts, components, protocols, processes and other inventions. As of June 30, 2018, we held 148 U.S. patents and 133 foreign patents expiring between April 11, 2020 and April 27, 2036, and have 61 U.S. and 34 foreign patent applications pending. Of the pending 61 U.S. patent applications, 60 are nonprovisional utility patent applications. These patents and patent applications may relate to features and functions of our services and the technology platforms we use to provide them. We have filed, and will continue to file, patent applications in the United States and other countries where there exists a strategic technological or business reason to do so. Any future patents issued to us may be challenged, invalidated or circumvented. Any patents that may issue in the future with respect to pending or future patent applications may not provide sufficiently broad protection or may not prove to be enforceable in actions against alleged infringers.
As of June 30, 2018, we owned the U.S. Patent and Trademark Office registered trademarks for Geocookie®, ONMYWAY®, Scout®, Sipity®, skobbler®, Telenav®, and Thinknear®, as well as the logos for Telenav, Scout and skobbler. We also own the Telenav registered trademark in Canada, China, the European Union, Mexico and the United Kingdom. We have several unregistered trademarks, including the marks Chatbaka™, Geobehavioral™, Geolink™, HopOver™, LivingMap™, Location Index ™, Location Score ™, MapStream™, OpenTerra™, RealReach™, RoadSense™, Scout GPS Link™, Situational Targeting™, Telenav GPS Navigator™, Telenav Navigator™, Telenav Scout™, Thinknear GeoVideo™, ThinkPolitical™, TrueDelta™, and TurnStream ™, as well as the Thinknear logo.
We endeavor to enter into agreements with our employees and contractors and with parties with which we do business in order to limit access to and disclosure of our proprietary information. We cannot be certain that the steps we have taken will prevent unauthorized use or reverse engineering of our technology. Moreover, others may independently develop technologies that are competitive with ours or that infringe our intellectual property. The enforcement of our intellectual property rights also depends on the success of our legal actions against these infringers, but these actions may not be successful, even when our rights have been infringed.
We also enter into various types of licensing agreements to obtain access to technology or data that we utilize in connection with our navigation services. Our contracts with certain licensors include minimum guaranteed royalty payments, which are payable regardless of the ultimate volume of revenue derived from the number of paying end users. Our most important agreements are with the providers of maps pursuant to which we generally pay a monthly fee per end user or copy or a per transaction fee. We obtain map data from HERE North America, LLC, or HERE, pursuant to a master data license agreement dated December 1, 2002. HERE is principally owned by a consortium consisting of Audi AG, or Audi, BMW AG, or BMW, and Mercedes. Our agreement with HERE was automatically renewed under its existing terms through January 31, 2019, and automatically renews for successive one year periods unless either party provides notice of non-renewal at least 180 days prior to the expiration of the applicable term. In addition, we have entered into separate territory license agreements with HERE under which we are licensed to use certain map data for particular programs with certain of our current automotive customers to fulfill their requirements. The term of these territory licenses with HERE vary based on the customer and program, and can be extended for additional periods. Our agreement with HERE also allows a party to terminate the agreement if the other party materially breaches its obligations and fails to cure such breach.

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In addition, we obtain other data such as map, weather updates, gas prices, POI and traffic information from additional providers.
Competition
The markets for development, distribution and sale of location services and advertising services are highly competitive. Many of our competitors have greater name recognition, larger customer bases and significantly greater financial, technical, marketing, public relations, sales, distribution and other resources than we do.
We compete in the automotive navigation market with established automobile manufacturers and tier ones and providers of on-board navigation services such as AISIN AW CO., Ltd, or AISIN, AutoNavi Software Co., Ltd., or AutoNavi, Robert Bosch GmbH, or Bosch, Elektrobit Corporation, or Elektrobit, Garmin Ltd., or Garmin, HERE, Navinfo Co., Ltd., or Navinfo, NNG LLC, or NNG, Shenyang MXNavi Co., Ltd., or MXNavi, and TomTom North America, Inc., or TomTom, as well as other competitors such as Apple and Google.
We compete in the advertising services business with mobile platform providers, including Google, Facebook, Inc., or Facebook, Oath, Inc., or Oath, GroundTruth, Inc., or GroundTruth, Verve Wireless, Inc., or Verve Wireless, PlaceIQ, Inc., or PlaceIQ, and NinthDecimal, Inc., or NinthDecimal, among others.
Competition in our markets is based primarily on pricing and performance including features, functions, reliability, flexibility, scalability and interoperability; automobile manufacturer, tier one and advertising agency relationships; technological expertise, capabilities and innovation; price of services and products and total cost of ownership; brand recognition; and size and financial stability of operations. We believe we compete favorably with respect to these factors based upon the performance, reliability and breadth of our services and products and our technical experience.
Some of our competitors and potential competitors enjoy advantages over us, either globally or in particular geographic markets, including with respect to the following:
significantly greater revenue and financial resources;
ownership of mapping and other content allowing them to offer a more vertically integrated solution;
stronger brand and consumer recognition in a particular market segment, geographic region or worldwide;
the capacity to leverage their marketing expenditures across a broader portfolio of products;
access to core technology and intellectual property, including more extensive patent portfolios;
access to custom or proprietary content;
quicker pace of innovation;
stronger automobile manufacturer, tier one, advertising agency and advertiser relationships;
more financial flexibility and experience to make acquisitions;
lower labor and development costs; and
broader global distribution and presence.
Our competitors’ and potential competitors’ advantages over us could make it more difficult for us to sell our navigation services and advertising services, and could result in increased pricing pressures, reduced profit margins, increased sales and marketing expenses and failure to increase, or even the loss of, market share or expected market share, any of which would likely cause harm to our business, operating results and financial condition.
Employees
As of June 30, 2018, we employed 784 people, including 644 in research and development, 56 in sales and marketing, 27 in customer support, data center operations, and advertising operations, and 57 in a general and administrative capacity. As of that date, we had 271 employees in the United States, 256 in China, 236 in Romania, 13 in Germany, 6 in Korea and 2 in Japan. We also engage a number of temporary employees and consultants. None of our employees is represented by a labor union or is a party to a collective bargaining agreement.

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Executive Officers of the Registrant
The following table sets forth the names, ages (as of June 30, 2018) and positions of our executive officers:
Name
 
Age
 
Position
Dr. HP Jin
 
54
 
President, Chief Executive Officer and Chairman of the Board of Directors
Michael Strambi
 
56
 
Chief Financial Officer and Treasurer
Salman Dhanani
 
45
 
Co-President, Automotive Business Unit
Philipp Kandal
 
35
 
Senior Vice President, Engineering
Lily Toy
 
38
 
General Counsel and Secretary
Hassan Wahla
 
46
 
Co-President, Automotive Business Unit
Dr. HP Jin is a cofounder of our company and has served as our president and a member of our board of directors since October 1999. Dr. Jin has also served as our chief executive officer and chairman of our board of directors from October 1999 to May 2001 and since December 2001. Prior to Telenav, Dr. Jin served as a senior strategy consultant at the McKenna Group, a strategy consulting firm. Prior to that time, Dr. Jin was a business strategy and management consultant at McKinsey & Company, a management consulting firm. Dr. Jin was also previously a technical director at Loral Integrated Navigation Communication Satellite Systems, or LINCSS, a division of Loral Space & Communications, Inc., a GPS service and engineering company. Dr. Jin holds a B.S. and M.S. in Mechanical Engineering from Harbin Institute of Technology in China and a Ph.D. in Guidance, Navigation and Control, with a Ph.D. minor in Electrical Engineering, from Stanford University.
Michael Strambi has served as our chief financial officer and treasurer since June 2012. From November 2009 to June 2012, Mr. Strambi served as our vice president of finance. From December 2008 to August 2009, Mr. Strambi served as vice president and chief accounting officer of Silver Spring Networks, Inc., a provider of smart grid services. From February 2008 to December 2008, Mr. Strambi served as chief financial officer of Metacafe, Inc., a provider of online video services. From February 2006 to February 2008, Mr. Strambi served as vice president of finance of MobiTV, Inc., a provider of mobile media solutions. From 2002 to 2006, Mr. Strambi served in various positions, the most recent of which was vice president, controller and treasurer, with Macromedia, Inc., a provider of web publishing products and solutions that was acquired by Adobe Systems Incorporated. Mr. Strambi holds a B.S. in Business Administration with a concentration in Accounting from California State University, Sacramento and an M.B.A. in Finance from the University of Southern California.
Salman Dhanani is a cofounder of our company and has served as co-president of our automotive business unit since January 2014. Mr. Dhanani served as our vice president, growth strategy and partnerships from July 2012 to January 2014, as our vice president, products from August 2010 to July 2012 and as our vice president, products and marketing from August 2009 to August 2010. Mr. Dhanani served as our executive director of marketing from March 2009 to July 2009 and as our senior director of marketing from November 1999 to February 2009. From January 1999 to November 1999, Mr. Dhanani served as a consultant at the McKenna Group, a strategy consulting firm. From July 1996 to December 1998, Mr. Dhanani served as an application engineer at Schlumberger Ltd., a technology consulting services company. Mr. Dhanani holds a B.S. in Electrical Engineering from the University of Washington.
Philipp Kandal has served as our senior vice president, engineering since January 2017. From October 2016 to January 2017, Mr. Kandal served as our vice president, engineering for automotive and OSM. From January 2014 to October 2016, Mr. Kandal served as our general manager, EU and head of OSM. From September 2008 to January 2014, Mr. Kandal served as co-founder and CTO of skobbler, prior to our acquisition of skobbler. Mr. Kandal holds an M.B.A. from the University of Cologne.
Lily Toy has served as General Counsel and Secretary since August 2017. Prior to that time, Ms. Toy served as our Acting General Counsel and Secretary from January 2017 to July 2017, Assistant General Counsel from September 2016 to January 2017 and Senior Counsel from December 2010 to September 2016. Ms. Toy was previously an associate at K&L Gates LLP, Fenwick & West LLP and Shearman & Sterling LLP. Ms. Toy holds a J.D. from Cornell Law School and a B.A. in Economics and Legal Studies from the University of California at Berkeley.
Hassan Wahla has served as co-president of our automotive business unit since January 2014. Mr. Wahla served as our vice president, business development and carrier sales from August 2009 to January 2014 and served as our executive director of business development from May 2005 to August 2009. From April 2003 to May 2005, Mr. Wahla served as a senior product manager at Nextel Communications, a wireless communications company that merged with Sprint Corporation, or Sprint. From February 2002 to April 2003, Mr. Wahla served as vice president of business development of Wireless Multimedia Solutions, a privately held wireless software platform company. From September 1999 to February 2002, Mr. Wahla served as director of

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business development at MicroStrategy, Inc., a business intelligence software company. Prior to that time, Mr. Wahla served as a senior consultant at Maritime Power, a maritime equipment company. Mr. Wahla holds a B.S. in Industrial Engineering from Virginia Tech, an M.S. in Management from Stevens Institute of Technology and a Masters of International Affairs from Columbia University.

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ITEM 1A.
RISK FACTORS
We operate in a rapidly changing environment that involves numerous uncertainties and risks. The following risks and uncertainties may have a material and adverse effect on our business, financial condition or results of operations. You should consider these risks and uncertainties carefully, together with all of the other information included or incorporated by reference in this Form 10-K. If any of the risks or uncertainties we face were to occur, the trading price of our securities could decline, and you may lose all or part of your investment.
Risk related to our business
We incurred losses in each period since fiscal 2015. We expect that we will incur losses during fiscal 2019 and we do not know when, or if, we will return to profitability, as we make further expenditures to enhance and expand our operations in order to support growth and diversification of our business.
As a percentage of revenue, our net loss was 84%, 28% and 19% in fiscal 2018, 2017 and 2016, respectively. Our revenue from paid wireless carrier mobile navigation has substantially declined and we expect it to continue to do so and we may be unable to generate sufficient revenue from our automobile navigation and advertising businesses to return Telenav to profitability in the short-term, if at all. In January 2018, the terms of our contract with Ford changed to include expanded services, a longer term and future milestone deliveries. These changes resulted in a significant deferral of revenue, reduction of revenue recognized and an increase in losses incurred in fiscal 2018.
We anticipate that we will continue to incur net operating losses during fiscal 2019. These expected losses are also due to the expected continued decline in our higher margin mobile navigation revenue and the costs we expect to incur prior to generating revenue in connection with new automotive navigation products and services that will not be integrated into production vehicles for several years, if at all. The time required to develop, test and deploy products between the time we secure the award of a new contract with any automobile manufacturer or tier one, and the timing of revenue thereunder, as well as a substantial required upfront investment in research and development resources prior to entering into contracts with automobile manufacturers and tier ones contribute to these expected losses. We also expect to continue to experience pressure on pricing in our negotiations with automobile manufacturers and tier ones as we enter into negotiations for contract renewals or new products where we are competing with larger suppliers that are competing on price, rather than features, or for vehicles where customers are price sensitive regarding navigation solutions or where the automobile manufacturer is considering brought-in solutions such as Apple CarPlay or Google's Android Auto.
Although we are working to replace the continued decline in wireless carrier revenue, our efforts to develop new services and products and attract new customers require investments in anticipation of longer term revenue. For example, the design cycle for automotive navigation products and services is typically 18 to 24 months and in order to win designs and achieve revenue from this growth area, we typically have to make investments two to four years before we anticipate receiving revenue, if any. This is the case for our relationship with GM. In addition, the revenue commencement at initial launch may not be significant depending on the automobile manufacturer's or tier one's launch timing schedule across vehicle models and regions. For example, although our hybrid product with GM launched in February 2017, it has only launched in select vehicle models and we do not have any control over when and whether it launches in other GM models.
Once we are able to recognize revenue from new automotive products, we may be required to recognize that revenue over time if there are contractual service periods or other obligations to fulfill, such as specified contractual deliverables. Certain contractual service periods or other obligations currently extend up to ten years. We intend to make additional investments in systems and continue to expand our operations to support diversification of our business, but it is likely that these efforts at diversification will not replace our declining wireless carrier revenue in the short-term, if at all. As a result of these factors, we believe we will incur a net operating loss and we will incur net losses during fiscal 2019, and we cannot predict when, or if, we will return to profitability. Our investments and expenditures may not result in the growth that we anticipate.
Our quarterly revenue and operating results have fluctuated in the past and may fluctuate in the future due to a number of factors. As a result, we may fail to meet or exceed the expectations of securities analysts or investors, which could cause our stock price to decline.
Our quarterly revenue and operating results may vary significantly in the future. Therefore, you should not rely on the results achieved in any one quarter as an indication of future performance. Period to period comparisons of our revenue and operating results may not be meaningful. Our quarterly results of operations may fluctuate as a result of a variety of factors, including, but not limited to, those listed below, many of which are outside of our control:
the ability of automobile manufacturers to sell automobiles equipped with our products;

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competitive in-car platforms and products, such as Apple's CarPlay and Google's auto initiatives;
the recent decision by Toyota to expand Apple's CarPlay compatibility to certain of its 2019 model year and beyond Toyota and Lexus vehicles;
the recent announcement by Ford of its intentions to modify its North America, and potentially European, passenger car portfolio;
the seasonality and unpredictability of new vehicle production, including tooling and assembly changes and plant shutdowns, such as the potential impact to production of certain Ford pickup truck models in U.S. factories due to a May 2018 fire at a supplier plant;
changes made to existing contractual obligations with a customer that may affect the nature and timing of revenue recognition, such as the transition by Ford to its SYNC 3 platform, for which we have different revenue recognition criteria, or the adoption of our map update solution for Ford's customers in multiple geographies and its impact on the timing of our revenue recognition;
competitive pressures on automotive navigation pricing from low cost suppliers and for vehicles where consumers are extremely price sensitive;
the recent demonstration by Google of in-car integration of Android Auto with Google Maps which did not require a mobile handset;
investments made by HERE and TomTom in high definition maps that may be leveraged to displace our products and services in new vehicle models;
the seasonality of new vehicle model introductions and consumer buying patterns, as well as the effects of economic uncertainty on vehicle purchases, particularly outside of the United States;
the impact on vehicle sales resulting from tariffs on imported vehicles and parts and disruption to automobile manufacturer supply chains resulting therefrom;
the effectiveness of our entry into new business areas;
the loss of our relationship, a change in our revenue model, or a change in pricing with any particular customer;
poor reviews of automotive service offerings into which our navigation solutions are integrated resulting in limited uptake of navigation options by car buyers;
warranty claims based on the performance of our products and the potential impact on our reputation with navigation users, automobile manufacturers and tier ones;
the sale of vehicle brands by automobile manufacturers to an automobile manufacturer with which we do not have an existing relationship;
the timing and quality of information we receive from our customers and the impact of customer audits of their reporting to us;
the inability of our automobile manufacturer customers to attract new vehicle buyers and new subscribers for connected services;
the amount and timing of operating costs and capital expenditures related to the expansion of our operations and infrastructure through acquisitions or organic growth;
the timing of expenses related to the development or acquisition of technologies, products or businesses;
the cost and potential outcomes of existing and future litigation;
the timing and success of new product or service introductions by us or our competitors and customer reviews of those products or services;
the timing and success of marketing expenditures for our products and services;
the extent of any interruption in our services;

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potential foreign currency exchange gains and losses associated with expenses and sales denominated in currencies other than the U.S. dollar;
general economic, industry and market conditions that impact expenditures for new vehicles, smartphones and mobile location services in the United States and other countries where we sell our services and products;
changes in interest rates and our mix of investments, which would impact our return on our investments in cash and marketable securities;
changes in our effective tax rates; and
the impact of new accounting pronouncements such as ASC 606.
Fluctuations in our quarterly operating results might lead analysts and investors to change their models for valuing our common stock. As a result, our stock price could decline rapidly and we could face costly securities class action lawsuits or other unanticipated issues.
We are dependent on Ford for a substantial portion of our billings and revenue, and our business, financial condition and results of operations will be harmed if our billings and revenue from Ford do not continue to grow or decline.
Ford represented approximately 55%, 69% and 71% of our revenue in fiscal 2018, 2017 and 2016, respectively. In fact, during the six months ended June 30, 2018, we experienced a decline in revenue due primarily to a change in revenue recognition discussed below, and a decline in billings due primarily to a reduction in certain content costs that are passed through to Ford. We expect that Ford, other automobile manufacturers and tier ones will account for an increasing portion of our revenue and billings, as our revenue and billings from paid wireless carrier provided navigation continues to decline. However, our revenue and billings could potentially decline if Ford increases the cost to consumers of our navigation product, reduces the number of vehicles or the geographies in which vehicles with our product as an option are sold, or its sales of vehicles fall below forecast due to competition or global macro-economic conditions. Ford previously announced that it would open its SYNC 3 product to Apple’s CarPlay and Google’s Android Auto and recently announced that Waze will be available on its vehicles equipped with the SYNC 3 platform, which may reduce the number of vehicle purchasers who purchase built-in navigation services. We may not successfully increase our revenue and billings from Ford if our products are replaced within vehicles by Ford with our competitors’ products or from price competition from third parties. Moreover, Ford has announced its intention to modify its North American passenger car portfolio strategy and recently indicated that it is also considering changes in its European portfolio strategy. This could lead to a significant reduction in the sales of vehicles with our products as an option. We may not be able to mitigate the effect of any lost billings and revenue and our business, financial condition, results of operations and prospects could be materially adversely affected, our stock price could be volatile, and it may be difficult for us to achieve and maintain profitability.
Our contract with Ford covers a broad range of products and services that we provide to Ford. On December 14, 2017, Ford awarded to Telenav a further extension of the Ford Agreement, 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. The subsequent amendment was executed in March 2018. On December 14, 2017, Ford also selected us to provide its next generation navigation solution in North America, subject to certain conditions and execution of an agreement regarding those solutions. Although we have been awarded these programs, in the course of negotiating definitive agreements for the programs, the terms and conditions of the programs, including the pricing, the length of the programs and geographic scope of the programs, may change. We were not awarded the contracts for Europe, South America and Australia and New Zealand.
In addition, a substantial portion of our revenue and billings and, to a lesser extent, gross profit from Ford is impacted by the underlying licensed content cost negotiated through HERE and other content providers. We cannot predict the impact on our revenue, billings, and gross profit of any changes between the automobile manufacturers and the map or other content providers.
We have limited experience managing, supporting and retaining automobile manufacturers and tier ones as customers and if we are not able to maintain Ford as a customer our revenue will decline.
Our automotive revenue and earnings could fluctuate due to the complexities of revenue recognition and capitalization of expenses related to customized products.
Due to the complexities of revenue recognition in accordance with U.S. generally accepted accounting principles, or GAAP, when and if we generate revenue we may be required to recognize certain revenue over extended periods. For example, GAAP requires us to defer revenue and recognize that revenue over the term of the connected services or contractual obligation

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for our contractual arrangements with GM for its OnStar RemoteLink and associated MyBrand applications, Ford for vehicles produced in the jurisdictions where we provide SYNC 3 services for their respective map update programs (and with respect to SYNC 2, Australia and New Zealand), and Toyota for its Entune Audio and Lexus Enform equipped vehicles.
Because we entered into an agreement with Ford to provide our map update solution in conjunction with our on-board navigation product for Europe in the second half of fiscal 2017, certain revenue related to the on-board navigation product in this region, which we had been recognizing upon delivery, is now recognized over time along with the new map updates. Offering map updates in this jurisdiction resulted in a substantial decline in our revenue and a substantial increase in our deferred revenue and deferred cost balances. Revenue recognition was further impacted by a recent amendment of our agreement with Ford. The scope of our solution with Ford has expanded to include future milestone deliveries throughout calendar 2018 and beyond. As a result, under current GAAP, all prospective royalties related to Ford since January 1, 2018 have been recorded as deferred revenue until such milestone deliveries occur and are accepted by Ford.
We anticipate that these changes in revenue recognition will be mitigated to an extent when we adopt ASC 606 on July 1, 2018. Although we anticipate that the adoption of ASC 606 will result in recognition of revenue and associated content costs more closely aligned with the economic reality of our business, we will not be able to recognize a significant portion of the deferred revenue (or deferred costs) on our balance sheet as of June 30, 2018 in future periods. Rather, under ASC 606 these amounts will be restated and reflected as revenue in prior periods, with the net impact recorded to retained earnings as of July 1, 2018.
Revenue recognition could also be impacted by future amendments to tier one agreements, such as providing our map update solution in other regions, changes in procurement patterns, shipping terms and title transfer. For on-board automotive navigation, we recognize revenue as the related customized software is delivered to and accepted by our customers. As our solutions encompass greater value-added services, there is potential for changes in the timing of revenue recognition. Investors and securities analysts may not understand the subtleties of these revenue recognition requirements and the trading prices of our common stock may be negatively affected.
In addition, our revenue recognition is becoming increasingly more complex with the evolution of our value-added products and services, such as our hybrid navigation solutions. The agreements for these solutions can extend over several years and require multiple deliverables. Given the length of our contractual obligations, which often extend beyond the manufacture and sale of the vehicle when the royalty is determined and paid, we may have significant post-production obligations to provide on-board navigation services or map updates over an extended period of time. These extended obligations can result in a delay in recognition of revenue, or the need to defer and recognize revenue over the period that we are required to provide these post-production obligations or other services.
In conjunction with the adoption of ASC606, we have not concluded on the application of ASC 340-40 with respect to the accounting treatment regarding the timing of capitalization and recognition of development costs that are incurred to fulfill obligations under certain actual or anticipated contracts for on-board automotive solutions. In the event we conclude that we are required to capitalize these costs that we expect to recover, we will recognize them as we transfer control of the related performance obligation. Development costs subject to ASC 340-40 incurred to fulfill future obligations under certain actual or anticipated contracts for brought-in automotive solutions are expected to be capitalized and then amortized over the period the services obligation is expected to be fulfilled.
Should we determine that we are required to capitalize certain development costs for on-board automotive solutions as deferred development costs under ASC 340-40 rather than expense them, our cost of revenue, research and development expenses and operating results could fluctuate significantly on a quarterly basis.
We may also incur significant expense to develop products for automobile manufacturers, such as under our worldwide connected navigation services agreement with GM, prior to receiving any significant revenue related to the sale of vehicles with our navigation services. As our offerings in automotive navigation expand to brought-in, as well as on-board navigation, we may not correctly anticipate the financial accounting treatment for the various products. We could be required to amortize revenue from products over time although we previously recognized revenue for similar products when the applicable vehicle was sold.
We may not be successful at adapting our business model for the Chinese automotive navigation market, which may reduce our revenue per vehicle.
Expanding our initial automotive entry in the Chinese market is a key component of our global growth strategy. The automotive software market in China is highly competitive. This competition comes from large international automotive software providers as well as domestic providers. The Chinese navigation software market is seeing transition towards new business models by third party navigation product vendors, such as substantially lower per unit license fees that are intended to

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be offset by opportunities to monetize navigation usage in additional ways that may include, but not be limited to, advertising, usage based insurance and utilizing data to create high definition maps. We may need to change or modify our license fee model in China in order to compete effectively. Our inability to do so may have a material impact on our ability to expand into the Chinese market. Even if we adopt new license fee models for China-based automobile manufacturers, we may not recognize revenue from those new models sufficient to compensate us for the costs of supporting those automobile manufacturers in the short-term, if at all. In addition, many of the same business model, pricing and licensing changes could also impact us in additional markets including, but not limited to, North America and Europe.
We may not be successful in generating material revenue from automobile manufacturers and tier ones other than Ford. As a result, our business, financial condition and results of operations will be harmed if we are unable to diversify our automotive revenue.
Although we have attempted to mitigate our dependence on Ford by establishing relationships with other automobile manufacturers and tier ones, these relationships may not produce significant revenue if the products are launched in limited models or face competition from third parties. Even if we are able to diversify our automotive navigation business through new arrangements, such as our more recently established relationships with GM and Toyota, customers may not elect to purchase automobile manufacturer and tier one navigation offerings that include our software and/or services for reasons unrelated to performance of our software or services. Even if we win new awards, once those programs go into production, consumers may not widely adopt our navigation offerings or may criticize the performance or quality of the navigation software and our reputation may be harmed. If customer purchase rates are less than anticipated, we may be unable to effectively diversify our automotive navigation revenue and our business, financial condition and results of operations may be harmed.
We may be unable to enter into agreements to provide automotive navigation products if we do not offer navigation products that serve geographies throughout the world or automobile manufacturers and tier ones are uncomfortable with our ability to support markets outside of the United States. Our automobile manufacturer and tier one customers may choose to partner with providers of location services with extensive international operations. We may be at a disadvantage in attracting such customers due to our business being concentrated in the United States, and we may not be successful in other geographies if customers are uncomfortable with the look and feel of our solutions. If we are unable to attract or retain such automobile manufacturer and tier one customers, our revenue and operating results will be negatively affected.
We may incur substantial costs when engaging with a new automotive navigation customer and may not realize substantial revenue from that new customer in the short-term, if at all.
The design and sales cycle for on-board or brought-in automotive navigation services and products is substantially longer than those associated with our mobile navigation services to customers of wireless carriers or our advertising platform services. As a result, we may not be able to achieve significant revenue growth with new customers from the automotive navigation business in a short period of time, or at all. In addition, these lengthy cycles make it difficult to predict if and when we will generate revenue from new customers. For example, design wins for vehicles may be awarded 12 to 36 months prior to the anticipated commercial launch of the vehicle. We also entered into a contract with GM in 2014 to provide worldwide hybrid navigation solutions beginning in model year 2017 and continuing through model year 2025. Although our hybrid product launched in its first GM models, the Cadillac CTS and CTS-V, in February 2017 we did not recognize any revenue from the launch of the product in fiscal 2017 or 2018 due to specified future obligations. We expect that we will begin to recognize this revenue upon the adoption of ASC 606 on July 1, 2018. We cannot assure you that our products will be in a wide variety of geographic markets in which GM sells vehicles in or across a variety of models and brands. GM has not provided us with any volume or revenue guarantees and we cannot assure you that we will ever receive material revenue from these products and services.
We have a partnership with Toyota for Toyota and Lexus vehicles and a separate partnership with Xevo for another navigation solution for Toyota and Lexus vehicles. While we have seen expansion of our latest version of Scout GPS Link solution across more Toyota and Lexus models in fiscal 2019, we expect that Toyota may limit the number of future models or vehicles on which Scout GPS Link is offered by Toyota and Lexus due in part to the offering of alternative brought-in solutions such as Apple’s CarPlay, which Toyota recently announced it is offering across certain Toyota models, and the expanded offering of Google’s Android Auto solution across more automobile manufacturers. We cannot assure you that we will receive significant revenue from the solutions for Toyota in the long-term. While we continue to invest in our existing and new relationships with automobile manufacturers, if our products do not meet the consumer’s expectations, auto manufacturer customers may not continue to offer our solutions.
We also may not price our solutions in such a way that is profitable for us and enables us to recoup the development expenses we incurred to provide such solutions in the time we expect or at all. Development schedules for automotive navigation products are difficult to predict, and there can be no assurance that we will achieve timely delivery of these products

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to our customers. To the extent that we charge service fees beyond an initial fee at the time the vehicle is purchased, we may not be successful in gaining traction with customers to provide services and charge ongoing monthly or annual fees outside of the traditional on-board navigation service model.
Our map, POI and other content costs for our automotive navigation solutions are higher than those we have historically paid for our mobile phone-based navigation services and to date we have not been able to use OSM offerings for automotive navigation, other than our Scout GPS Link mobile application for Toyota. Our ability to build demand for our automotive navigation products and services is also dependent upon our ability to provide the products and services in a cost effective manner, which may require us to renegotiate map and POI content relationships to address the specific demands of our automotive navigation products and services. If we are unable to improve our margins, we may not be able to operate our automotive navigation business profitably. If we fail to achieve revenue growth in any of our automotive navigation solutions (whether on-board, brought-in or other), we may be unable to achieve the benefits of revenue diversification. In addition, our map and content suppliers, HERE and TomTom, are also becoming competitors through the offering of their own automotive navigation services.
The success of our automotive navigation products may be affected by the number of vehicle models offered with our navigation solutions, as well as overall demand for new vehicles.
Our ability to succeed long term in the automotive industry depends on our ability to expand the number of models offered with our navigation solutions by our current automobile manufacturer customers. We are also dependent upon our ability to attract new automobile manufacturers and tier ones. For automobile manufacturers with whom we have established relationships, such as Ford, our success depends on continued production and sale of new vehicles offered with, and adoption by, end users of our products when our product is not a standard feature. Our on-board and hybrid solutions may not satisfy automobile manufacturers' or end customers' expectations for those solutions. If automobile manufacturers and tier ones do not believe that our services meet their customers’ needs, our products and services may not be designed into future model year vehicles. As we move forward, our existing automobile manufacturers and tier ones may not include our solutions in future year vehicles or territories, which would negatively affect our revenue from these products. Production and sale of new vehicles are subject to delay due to forces outside of our control, such as natural disasters, parts shortages and work stoppages, as well as general economic conditions. For example, in May 2018, Ford ceased production of certain of its pickup trucks for several weeks due to a fire at a third party supplier.
We rely on our customers for timely and accurate vehicle and subscriber sales information. A failure or disruption in the provisioning of this data to us would materially and adversely affect our ability to manage our business effectively.
We rely on our automobile manufacturers and tier one customers to provide us with reports on the number of vehicles they sell with our on-board, brought-in and hybrid navigation products and services included, depending on the nature of our contractual relationship, and to remit royalties for those sales to us. We also rely on our wireless carrier customers to bill subscribers and collect monthly fees for our mobile navigation services, either directly or through third party service providers. The risk of inaccurate reports may increase as our customers expand internationally and increase the number of manufacturing locations. For example, in the three months ended March 31, 2017 and September 30, 2017, Ford determined that it had misreported the production of vehicles to us in certain factories. If our customers or their third party service providers provide us with inaccurate data or experience errors or outages in their own billing and provisioning systems when performing these services, our revenue may be less than anticipated or may be subject to adjustment with the customer. In the past, we have experienced errors in reporting from automobile manufacturers and wireless carriers. If we are unable to identify and resolve discrepancies in a timely manner, our revenue may vary more than anticipated from period to period, which could harm our business, operating results and financial condition.
Our business practices with respect to data could give rise to liabilities or reputational harm as a result of governmental regulation, legal requirements or industry standards relating to consumer privacy and data protection.
Our advertising services depend on our ability to collect, store and use information related to mobile devices and the ads we place, including a device's geographic location for the purpose of targeting ads to the user of the device. Our automotive navigation services also depend on our ability to collect, store and use such information as we deliver personalized navigation. Federal, state and international laws and regulations govern the collection, use, retention, sharing and security of data that we collect across our mobile advertising and navigation platforms. We strive to comply with all applicable laws, regulations, policies and legal obligations relating to privacy and data protection. However, it is possible that these requirements may be interpreted and applied in a manner that is inconsistent with our practices. Any failure, or perceived failure, by us to comply with such laws could result in proceedings or actions against us by governmental entities, consumers or others. Such proceedings or actions could hurt our reputation, force us to spend significant amounts to defend ourselves, distract our management, increase our costs of doing business, require us to change our advertising services or disclosures, adversely affect

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the demand for our services and ultimately result in the imposition of monetary liability. We may also be contractually liable to indemnify and hold harmless our users from the costs or consequences of inadvertent or unauthorized disclosure of data that we store or handle as part of providing our services.
The regulatory framework for privacy issues worldwide is still evolving. For example, the European Union’s (“EU”) General Data Protection Regulation (“GDPR”) took effect in May 2018. The GDPR replaces Directive 95/46/EC of 1995 and will be directly applicable in EU member states. Among other things, the GDPR regulates data controllers and processors outside of the EU whose processing activities relate to the offering of goods or services to, or monitoring the behavior within the EU of, EU data subjects. Complying with the GDPR may cause us to incur substantial operational costs or require us to change our business practices. Despite our efforts to bring practices into compliance before the effective date of the GDPR, we cannot assure you that we are fully compliant. The GDPR imposes significant penalties of up to the greater of 4% of worldwide turnover and €20 million for breaches of data protection rules. As a result, we may be subject to fines and penalties, litigation, reputational harm and our business may be seriously harmed if we fail to protect the privacy of third party data or to comply with the GDPR or other applicable regimes. In addition, various government and consumer agencies and public advocacy groups have called for new regulation and changes in industry practices, including some directed at the mobile and advertising industries in particular. It is possible that new laws, regulations, standards, recommendations, best practices or requirements will be adopted that would affect our business, particularly with regard to location-based services, collection or use of data to target ads and communication with consumers via mobile devices. To the extent that we or our clients are subject to new laws or recommendations or choose to adopt new standards, recommendations, or other requirements, we may have greater compliance burdens. If we are perceived as not operating in accordance with industry best practices or any such guidelines or codes with regard to privacy, our reputation may suffer and we could lose relationships with advertiser or developer partners.
The advertising business is subject to seasonality, and we may not successfully grow our advertising revenue if we are unable to attract and retain advertisers.
We believe the advertising business is subject to varying buying patterns and seasonality which can impact our ability to grow our revenue. For example, in the three months ended December 31, 2017, 2016 and 2015, we experienced higher advertising revenue as the second quarter is traditionally stronger due to seasonality; however, advertising revenue subsequently declined sequentially in the three months ended March 31, 2018, 2017 and 2016. In fact, our advertising revenue in the three months ended March 31, 2018 was the lowest it had been for any quarter in the last three years.
In order to grow our advertising business, we need to identify and attract a significant number of advertisers through our Thinknear platform. The mobile advertising market is highly competitive, and advertisers have many options through which to purchase mobile advertising. Our business will require us to attract and retain a large number of advertisers and will also require us to maintain the ability to purchase a large volume of inventory at competitively attractive rates.  Increased competition from other mobile advertising companies and technology developers could impair our ability to secure advertiser revenue.  Increased competition could also limit our ability to purchase inventory for advertising placements at an economically attractive rate.  We do not have substantial experience in selling advertising and supporting advertisers and may not be able to develop these capabilities successfully. We may not be successful in retaining experienced sales personnel or recruiting the number of sales personnel we need to scale or effectively train them to sell mobile advertising. Sales personnel may also be slow to ramp up their sales pipelines, negatively impacting our ability to grow. We may not succeed in attracting and retaining a critical mass of advertisers and ad placements and may not be successful in demonstrating the value of mobile advertising. If we are unable to improve the margins of our advertising business, it may not become profitable and may impair our ability to invest in new opportunities or become profitable as a whole.
Mobile connected device users may choose not to allow tracking of their location information and therefore local advertising may not be feasible on their devices.
The growth of our advertising revenue will depend on our ability to deliver location targeted, highly relevant ads to consumers on their mobile connected devices. Our targeted advertising is highly dependent on the consumers allowing applications to have access to their location data. Users may elect not to allow location data sharing for a number of reasons, including personal privacy concerns. Mobile operating systems vendors and application developers are also promoting features that allow device users to disable device functionality that consumers may elect to invoke. In addition, companies may develop products that enable users to prevent ads from appearing on their mobile device screens. If any of these developments were to become widely used by consumers, our ability to deliver effective advertising campaigns on behalf of our advertiser clients would suffer, which could hurt our ability to generate advertising revenue.

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Our legacy wireless carrier mobile navigation business is declining and may be eliminated altogether in the future. As it continues to decline, our revenue and net income or loss will continue to be adversely affected.
Although we historically received a majority of our revenue from wireless carriers whose subscribers received our services through bundles or by purchasing our navigation services, consistent with industry trends, our wireless carrier revenue has declined significantly. In the last three fiscal years, wireless carrier subscribers have materially decreased their subscriptions for, and usage of, our paid navigation services and our revenue from our relationship with wireless carriers has declined accordingly. We anticipate that wireless carrier subscribers will continue to decrease their subscriptions for paid navigation services in favor of free or freemium offerings and that revenue from our relationship with wireless carriers will continue to decline and may be eliminated altogether in the future. In the event that our mobile navigation business ceases to be profitable or we determine that it diverts resources from growing areas of our business, we may ultimately elect to terminate our legacy wireless carrier mobile navigation business. In addition, our wireless carrier customers may determine that the cost of offering our service to their subscribers outweighs the benefits and may decide to terminate our business relationship. Our other sources of revenue from our location-based platforms, including automotive navigation and location-based advertising, have substantially lower margins than wireless carrier mobile navigation revenue and, as a result, we would have to generate substantially more revenue from those services to replace the declining wireless carrier revenue.
Our customer requirements and content management obligations are complex. If we inadvertently include content for which we have liability to the vendor but may not be entitled to payment from our customer, our financial condition and results of operation could be harmed.
The nature and extent of content that is delivered as part of our navigation solutions is complex to manage. Matching the requirements of our customers with the content offered by our vendors may result in our inclusion of content which we believe is necessary to meet our customers’ requirements for which the customer may not have agreed to make payment to us. In addition, our customers speak directly to our vendors and often those conversations influence the expected content for our end products; however, customers may not be fully informed as to the license costs associated with the various components. Therefore, there is some risk that we may include content for which we have liability to the vendor but may not be entitled to payment from our customer. If these situations were to occur, our business, financial condition and results of operations could be adversely affected.
We face intense competition in our market, especially from competitors that offer their mobile location services for free, which could make it difficult for us to acquire and retain customers and end users.
The market for development, distribution and sale of location services is highly competitive. Many of our competitors have greater name recognition, larger customer bases and significantly greater financial, technical, marketing, public relations, sales, distribution and other resources than we do. Competitors may offer mobile location services that have at least equivalent functionality to ours for free. For example, Google offers free voice-guided turn by turn navigation as part of its Google Maps and Waze products for mobile devices, including those based on the Android and iOS operating system platforms, and Apple offers proprietary maps and voice-guided turn by turn directions. Microsoft Corporation also provides a free voice-guided turn by turn navigation solution on its Windows Mobile and Windows Phone operating systems. Competition from these free offerings may reduce our revenue, result in our incurring additional costs to compete and harm our business. If our wireless carrier customers can offer these mobile location services to their subscribers for free, they may elect to cease their relationships with us, similar to Sprint, alter or reduce the manner or extent to which they market or offer our services or require us to substantially reduce our fees or pursue other business strategies that may not prove successful. In addition, new car buyers may not value navigation solutions built in to their vehicles if they believe that free (brought-in) offerings, such as Apple CarPlay or Google's auto initiatives, are adequate and may not purchase our solutions with their new cars. Ford previously announced that it would open its SYNC 3 product to Apple’s CarPlay and Google’s Android Auto and announced that Waze will be available on its vehicles equipped with the SYNC 3 platform, which may reduce the number of vehicle purchasers who purchase on-board navigation solutions. While we have seen expansion of our latest version of Scout GPS Link solution across more Toyota and Lexus models in fiscal 2019, we expect that Toyota may limit the number of future models or vehicles on which Scout GPS Link is offered by Toyota and Lexus due in part to the offering of alternative brought-in solutions such as Apple’s CarPlay, which Toyota recently announced it is offering across certain Toyota models, and the expanded offering of Google’s Android Auto solution across more automobile manufacturers. We may not successfully increase our revenue from Ford or Toyota, and our revenue could decrease, if our products are replaced within vehicles by Ford or Toyota with our competitors’ products or due to price competition from third parties.
We compete in the automotive navigation market with established automobile manufacturers and tier ones and providers of on-board navigation services such as AISIN, AutoNavi, Bosch, Elektrobit, Garmin, HERE, Navinfo, NNG, MXNavi and TomTom, as well as other competitors such as Apple and Google. We compete in the advertising network services business with mobile platform providers, including Google, Facebook, Oath, GroundTruth, Verve Wireless, PlaceIQ and NinthDecimal,

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among others. Some of our competitors’ and our potential competitors’ advantages over us, either globally or in particular geographic markets, include the following:
significantly greater revenue and financial resources;
ownership of mapping and other content allowing them to offer a more vertically integrated solution;
stronger brand and consumer recognition in a particular market segment, geographic region or worldwide;
the capacity to leverage their marketing expenditures across a broader portfolio of products;
access to core technology and intellectual property, including more extensive patent portfolios;
access to custom or proprietary content;
quicker pace of innovation;
stronger automobile manufacturer, tier one, advertising agency and advertiser relationships;
more financial flexibility and experience to make acquisitions;
ability or demonstrated ability to partner with others to create stronger or new competitors;
stronger international presence, which could make our larger competitors more attractive partners to automobile manufacturers and tier ones;
lower labor and development costs; and
broader global distribution and presence.
Our competitors’ and potential competitors’ advantages over us could make it more difficult for us to sell our navigation services, and could result in increased pricing pressures, reduced profit margins, increased sales and marketing expenses and failure to increase, or the loss of, market share or expected market share, any of which would likely cause harm to our business, operating results and financial condition.
If we are unable to integrate future acquisitions successfully, our operating results and prospects could be harmed.
In the future, we may make acquisitions to improve our navigation services offerings or expand into new markets. Our future acquisition strategy will depend on our ability to identify, negotiate, complete and integrate acquisitions and, if necessary, to obtain satisfactory debt or equity financing to fund those acquisitions. Mergers and acquisitions are inherently risky, and any mergers and acquisitions we complete may not be successful. Future mergers and acquisitions we may pursue would involve, numerous risks, including the following:
difficulties in integrating and managing the operations, technologies and products of the companies we acquire, that are geographically remote from our existing operations;
diversion of our management’s attention from normal daily operation of our business;
our inability to maintain the key business relationships and the reputations of the businesses we acquire;
our inability to retain key personnel of the companies we acquire;
uncertainty of entry into markets in which we have limited or no prior experience and in which competitors have stronger market positions;
our dependence on unfamiliar affiliates and customers of the companies we acquire;
insufficient revenue to offset our increased expenses associated with acquisitions;
our responsibility for the liabilities of the businesses we acquire, including those which we may not anticipate; and
our inability to maintain internal standards, controls, procedures and policies.
We may be unable to secure the equity or debt funding necessary to finance future acquisitions on terms that are acceptable to us. If we finance acquisitions by issuing equity or convertible debt securities, our existing stockholders will likely

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experience dilution, and if we finance future acquisitions with debt funding, we will incur interest expense and may have to comply with financial covenants and secure that debt obligation with our assets.
We may be required to recognize a significant charge to earnings if our goodwill or other intangible assets become impaired.
We have recorded goodwill related to our prior acquisitions, and may do so in connection with any potential future acquisitions. Goodwill and other intangible assets with indefinite lives are not amortized, but are reviewed for impairment annually or on an interim basis whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable.  Factors that may indicate that the carrying value of our goodwill or other intangible assets may not be recoverable include a persistent decline in our stock price and market capitalization, reduced future cash flow estimates and slower growth rates in our industry.  We may be required to record a significant charge in our financial statements during the period in which any impairment of our goodwill or other intangible assets is determined, which would adversely impact our results of operations. We report results in three business segments, which requires the allocation of goodwill and intangibles to each of these segments. As a result, we conduct our impairment review each year or on an interim basis by segment, which can result in a different outcome than if assessed on an overall consolidated basis. During the three months ended March 31, 2018, certain mobile navigation customer contracts were amended and certain other customers indicated their intent with respect to terminating services in the near term. Based upon a qualitative assessment indicating that it was more likely than not that the fair value of the mobile navigation reporting unit was less than its carrying value, we performed an interim goodwill impairment test for our mobile navigation segment during the three months ended March 31, 2018. Based on the results of our test, the carrying value of our mobile navigation business exceeded its estimated fair value. Accordingly, during the three months ended March 31, 2018, we recognized a $2.7 million impairment of all of the goodwill associated with our mobile navigation segment. We may make similar determinations regarding the impairment of goodwill in the future, which could have a material and adverse effect on our profitability.
Warranty claims, product liability claims and product recalls could subject us to significant costs and adversely affect our financial results.
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. If our navigation services or products contain defects, there are errors in the maps supplied by third party map providers or if our end users do not heed our warnings about the proper use of these products, collisions or accidents could occur resulting in property damage, personal injury or death. If any of these events occurs, we could be subject to significant liability for personal injury and property damage and under certain circumstances could be subject to a judgment for punitive damages. In addition, if any of our designed products are defective or are alleged to be defective, we may be required to participate in a recall campaign. These recall and warranty costs could be exacerbated to the extent they relate to global platforms or we are unable to deliver software updates over the air. Furthermore, recall actions could adversely affect our reputation or market acceptance of our products, particularly if those recall actions cause consumers to question the safety or reliability of our products. Warranty claims, a successful product liability claim or a requirement that we participate in a product recall campaign may adversely affect our results of operations and financial condition.
We accrue costs related to warranty claims when they are probable of being incurred and reasonably estimable. Our warranty costs have historically not been material. From time to time, we experience incidents where it may be necessary for us to expend resources to investigate and remedy a potential warranty claim.
We maintain limited insurance against accident related risks involving our products. However, we cannot assure you that this insurance would be sufficient to cover the cost of damages to others or will continue to be available at commercially reasonable rates. In addition, we may be named as a defendant in litigation by consumers individually or on behalf of a class if their handsets or automobiles suffer problems from software downloads from our customers. If we are unable to obtain indemnification from our customer for any damages or legal fees we may incur in connection with such complaints, our financial position may be adversely impacted. In addition, insurance coverage generally will not cover awards of punitive damages and may not cover the cost of associated legal fees and defense costs. If we are unable to maintain sufficient insurance to cover product liability costs or if our insurance coverage does not cover an award, our business, financial condition and results of operations could be adversely affected.
Indemnity provisions in various agreements potentially expose us to substantial liability for intellectual property infringement, damages caused by defective software and other losses.
Our agreements with our customers include indemnification provisions. We agree to indemnify them for losses suffered or incurred in connection with our navigation services or products, including as a result of intellectual property infringement, damages caused by defects and damages caused by viruses, worms and other malicious software. The term of these indemnity provisions is generally perpetual after execution of the corresponding agreement, and the maximum potential amount of future

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payments we could be required to make under these indemnification provisions is generally substantial and may be unlimited. In addition, some of these agreements permit our indemnitees to terminate their agreements with us if they determine that the use of our navigation services or products infringes third party intellectual property rights.
We have received, and expect to receive in the future, demands for indemnification under these agreements. These demands can be very expensive to settle or defend, and we have in the past incurred substantial legal fees and settlement costs in connection with certain of these indemnity demands. Furthermore, we have been notified by several customers that they have been named as defendants in certain patent infringement cases for which they may seek indemnification from us. Large future indemnity payments and associated legal fees and expenses, including potential indemnity payments and legal fees and expenses relating to the current or future notifications, could materially harm our business, operating results and financial condition.
We may in the future agree to defend and indemnify our customers in connection with the pending notifications or future demands, irrespective of whether we believe that we have an obligation to indemnify them or whether we believe that our services and products infringe the asserted intellectual property rights. Alternatively, we may reject certain of our customers’ indemnity demands, which may lead to disputes with our customers and may negatively impact our relationships with them or result in litigation against us. Our customers may also claim that any rejection of their indemnity demands constitutes a material breach of our agreements with them, allowing them to terminate such agreements. Our agreements with certain customers may be terminated in the event an infringement claim is made against us and it is reasonably determined that there is a possibility our technology or services infringed upon a third party’s rights. If, as a result of indemnity demands, we make substantial payments, our relationships with our customers are negatively impacted or if any of our customer agreements is terminated, our business, operating results and financial condition could be materially adversely affected.
Our investment portfolio may become impaired by deterioration of the financial markets.
Our cash equivalent and short-term investment portfolio as of June 30, 2018 consisted of corporate bonds, asset-backed securities, municipal securities, U.S. agency securities, commercial paper and money market mutual funds. We follow an established investment policy and set of guidelines to monitor and help mitigate our exposure to interest rate and credit risk. The policy sets forth credit quality standards and limits our exposure to any one issuer, as well as our maximum exposure to various asset classes.
Should financial market conditions worsen in the future, investments in some financial instruments may pose risks arising from market liquidity and credit concerns. In addition, any deterioration of the capital markets could cause our other income and expense to vary from expectations. As of June 30, 2018, we had no material impairment charges associated with our short-term investment portfolio. Although we believe our current investment portfolio has little risk of material impairment, we cannot predict future market conditions or market liquidity, or credit availability, and can provide no assurance that our investment portfolio will remain materially unimpaired.
Our effective tax rate may fluctuate, which could reduce our anticipated income tax benefit in the future.
Our effective tax rate could be adversely affected by several factors, many of which are outside of our control. Our effective tax rate may be affected by the proportion of our revenues and income (loss) before taxes in the various domestic and international jurisdictions in which we operate. Our revenue and operating results are difficult to predict and may fluctuate substantially from quarter to quarter. We are also subject to changing tax laws, regulations and interpretations in multiple jurisdictions in which we operate, as well as the requirements of certain tax and other accounting body rulings. Since we must estimate our annual effective tax rate each quarter based on a combination of actual results and forecasted results of subsequent quarters, any significant change in our actual quarterly or forecasted annual results may adversely impact the effective tax rate for the period. Our estimated annual effective tax rate may fluctuate for a variety of reasons, including:
changes in forecasted annual operating income or loss by jurisdiction and forecasted withholding taxes;
changes in relative proportions of revenue and income or loss before taxes in the various jurisdictions in which we operate;
requests by customers to bill their foreign subsidiaries and related entities, which may subject us to income tax withholding requirements on sales made in such jurisdictions;
changes to the valuation allowance on net deferred tax assets;

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changes to actual or forecasted permanent differences between book and tax reporting, including the tax effects of purchase accounting for acquisitions and non-recurring charges which may cause fluctuations between reporting periods;
impact from any future tax settlements with state, federal or foreign tax authorities;
impact from increases or decreases in tax reserves due to new assessments of risk, the expiration of the statute of limitations or the completion of government audits;
impact from changes in tax laws, regulations and interpretations in the jurisdictions in which we operate, as well as the expiration and retroactive reinstatement of tax holidays;
impact from withholding tax requirements in various non-U.S. jurisdictions and our ability to recoup those withholdings, which may depend on how much revenue we have in a particular jurisdiction to offset the related expenses;
changes in customer arrangements where the customer's domicile may impose withholding tax on our revenue that we previously were not subject to;
impact from acquisitions and related integration activities; or
impact from new Financial Accounting Standards Board, or FASB, requirements.
Although we believe our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in future periods. In fiscal 2014, we recorded a valuation allowance on the majority of our deferred tax assets, net of liabilities since the assets are not more likely than not to be realized based upon our assessment of all positive and negative evidence. Realization of deferred tax assets is dependent upon future taxable earnings, the timing of which is uncertain. Due to losses in previous years and expected losses in fiscal 2019 and potentially future years in the United States, we maintained a full valuation allowance on deferred tax assets in the United States. Due to operating losses in previous years and expected losses in future years, we continued to maintain a full valuation allowance for our foreign deferred tax assets in the United Kingdom. In the event deferred tax assets in Germany cannot be realized based upon the ability to generate future income in Germany, our effective tax rate would be negatively impacted.
Changes in accounting principles, or interpretations thereof, could have a significant impact on our financial position and results of operations.
We prepare our consolidated financial statements in accordance with GAAP. These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles. A change in these principles can have a significant effect on our reported results and may even retroactively affect previously reported transactions. Additionally, the adoption of new or revised accounting principles, such as ASC 606 and ASC 842, Leases, may require that we make significant changes to our systems, processes and controls.
It is not clear if or when other potential changes in accounting principles may become effective, whether we have the proper systems and controls in place to accommodate such changes and the impact that any such changes may have on our financial position and results of operations.
We rely on a proprietary provisioning and reporting system for our navigation products and services to track end user activation, deactivation and usage data and any material failures in this system could harm our revenue, affect our costs and impair our ability to manage our business effectively.
Our provisioning and reporting system that authenticates end users and tracks the number of end users and their use of our services is a proprietary and customized system that we developed internally. Although we believe that the flexibility of this service to integrate tightly with automobile manufacturers' reporting and provisioning systems gives us a competitive advantage, we might lose revenue and the ability to manage our business effectively if the system were to experience material failures or be unable to scale as our business grows. In addition, we may not be able to report our financial results on a timely basis if our customers question the accuracy of our records or we experience significant discrepancies between the data generated by our provisioning and reporting systems and data generated by their systems, or if our systems fail or we are unable to report timely and accurate information to our third party data providers. The inability to timely report our financial results would impair the quality of our financial reporting and could result in the delisting of our common stock.

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We rely on third party data and content to provide our services and if we were unable to obtain content at reasonable prices, or at all, our gross margins and our ability to provide our services would be harmed.
We rely on third party data and content to provide our services, including map data, POI, traffic information, gas prices and weather information. If our suppliers of this data or content were to enter into exclusive relationships with other providers of location services or were to discontinue providing such information and we were unable to replace them cost effectively, or at all, our ability to provide our services would be harmed. Our gross margins may also be affected if the cost of third party data and content increases substantially. Although we have integrated OSM data into our products, we may experience difficulty with customer acceptance if the quality of the consumer generated data within OSM is lower than that of paid maps. We introduced mobile phone-based navigation with OSM and launched our first brought-in automotive navigation service with OSM in 2015. As a result, we may not have sufficient data for automobile manufacturers and tier ones to feel comfortable electing to use OSM in the products and services we provide them.
We obtain map data from TomTom and HERE, which are companies owned by our current and potential competitors. Accordingly, these third party data and content providers may act in a manner that is not in our best interest. For example, they may cease to offer their map and POI data to us. Our agreement with TomTom to license TomTom map data for voice-guided turn by turn GPS navigation service for our existing mobile navigation products was automatically renewed under its existing terms through December 31, 2018. Our license to map data from TomTom will not automatically renew after December 31, 2018, but the license to other data from TomTom under the same agreement will continue for the period set forth in the agreement. Our master data license agreement with HERE was automatically renewed under its existing terms through January 31, 2019, and automatically renews for successive one year periods unless either party provides notice of non-renewal at least 180 days prior to the expiration of the applicable term. However, individual territory licenses with distinct term, termination and renewal provisions further govern the license of map data to support individual programs and products for our automobile manufacturers and tier ones.
We may identify other requisite content and content-related technologies, including certain geocoding data necessary for our OSM products, that we may be unable to license or develop internally.  If we are unsuccessful in these endeavors, we may be unable to successfully launch our OSM-based products globally and across all desired product offerings.
We may not be able to upgrade our navigation services platform to support certain advanced features and functionality without obtaining technology licenses from third parties. Obtaining these licenses may be costly and may delay the introduction of such features and functionality, and these licenses may not be available on commercially favorable terms, or at all. The inability to offer advanced features or functionality, or a delay in our ability to upgrade our navigation services platform, may adversely affect consumer demand for our navigation services and, consequently, harm our business.
We may be subject to our automobile manufacturer or tier one’s selection of map and other content providers, and our ability to negotiate and enter into a license with such provider(s) may be dependent on the timing of such automobile manufacturer or tier one’s official nomination for such content providers. Accordingly, we may have contractual obligations to provide certain products and services for certain model years or periods to our automobile manufacturer or tier one partners, prior to our ability to enter into agreements with our map and other content providers to support such products and services. We may be unable to obtain data licenses with the necessary content providers to support these products and services, or we may not be able to secure such data licenses without additional, unplanned costs or delays.
We also use our proprietary provisioning and reporting system to record and report royalties we owe to third party providers of content used by end users in connection with our services. Certain of the third party content providers have the right to audit our use of their services and, if we are found to have under or incorrectly reported usage, we may be required to pay the third party content providers for the actual usage, as well as interest and the cost of the audit. Any significant error in our recording and payment of royalties to our third party content providers could have a material and adverse effect on our financial results. We may also incur losses as a result of any significant error.

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Network failures, disruptions or capacity constraints in our third party hosted data center facilities could affect the performance of our navigation services and harm our reputation and our revenue.
We use hosted services provided by AWS and wireless carrier networks to deliver our navigation and advertising platform services. Our operations rely to a significant degree on the efficient and uninterrupted operation of the third party data centers we use. In the event that AWS or wireless carrier networks experience a disruption in services or a natural disaster, our ability to continue providing our services would be compromised. Depending on the growth rate in the number of our end users and their usage of our services, if we do not timely complete the negotiation for and scale of additional hosting services, we may experience capacity issues, which could lead to service failures and disruptions. In addition, if we are unable to secure third party hosting services with appropriate power, cooling and bandwidth capacity, we may be unable to efficiently and effectively scale our business to manage the addition of new automobile manufacturers and tier ones, increases in the number of our end users or increases in data traffic.
AWS hosting services are potentially vulnerable to damage or interruption from a variety of sources, including fire, flood, earthquake, power loss, telecommunications or computer systems failure, human error, terrorist acts or other events. We have not yet completed a comprehensive business continuity plan and there can be no assurance that the measures implemented by us to date, or measures implemented by us in the future, to manage risks related to network failures or disruptions in our data centers will be adequate, or that the redundancies built into our servers will work as planned in the event of network failures or other disruptions. In particular, if we were to experience damage or interruptions to AWS hosting services our ability to provide efficient and uninterrupted operation of our services would be significantly impaired.
We could also experience failures of our data centers or interruptions of our services, or other problems in connection with our operations, as a result of:
damage to or failure of our computer software or hardware or our connections and outsourced service arrangements with third parties;
errors in the processing of data;
computer viruses or software defects;
physical or electronic break-ins, sabotage, intentional acts of vandalism and similar events; or
errors by our employees or third party service providers.
Poor performance in or disruptions of our services could harm our reputation, delay market acceptance of our services and subject us to liabilities. Our automobile manufacturer and tier one agreements for on-board and hybrid navigation solutions require us to meet at least 99.9% operational uptime requirements, excluding scheduled maintenance periods, or be subjected to penalties. Any outage in a network or system, or other unanticipated problem that leads to an interruption or disruption of our navigation services, could have a material adverse effect on our operating results and financial condition.
We may not be able to enhance our location services to keep pace with technological and market developments, or develop new location services in a timely manner or at competitive prices.
The market for location services is characterized by rapid technological change, evolving industry standards, frequent new product introductions and short product life cycles. To keep pace with technological developments, satisfy increasing customer requirements and achieve product acceptance, our future success depends upon our ability to enhance our current navigation services platform and advertising services platform and to continue to develop and introduce new navigation services, advertising services and other location-based product offerings and enhanced performance features and functionality on a timely basis at competitive prices. Our inability, for technological or other reasons, to enhance, develop, introduce or deliver compelling services and products in a timely manner, or at all, in response to changing market conditions, technologies or consumer expectations could have a material adverse effect on our operating results or could result in our services becoming obsolete. Our ability to compete successfully will depend in large measure on our ability to maintain a technically skilled development and engineering team and to adapt to technological changes and advances in the industry, including providing for the continued compatibility of our services platform with evolving industry standards and protocols and competitive network operating environments.

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A large percentage of our research and development operations are conducted in China and Romania, and our ability to introduce new services and support our existing services cost effectively depends on our ability to manage those remote development sites successfully.
Our success depends on our ability to enhance our current services and develop new services and products rapidly and cost effectively. A majority of our research and development personnel are in China and Romania. Although we have sought to retain certain key personnel, we may be unable to retain them over the long-term. In addition, we have been experiencing significant increases in compensation costs in China and Romania due to competitive market conditions for qualified staff, as well as higher risk of employee turnover in those markets.
We also expect that we may continue to consolidate certain of our operations or reduce our workforce if we are unable to continue to replace wireless carrier revenue with other sources of high gross margin revenue. These reorganizations or reductions in force could result in unexpected costs or delays in product development that could impair our ability to meet market windows or cause us to forego certain new product opportunities.
Because our long term success depends on our ability to increase the number of end users located outside of the United States, our business will be susceptible to risks associated with international operations.
As of June 30, 2018, we had international operations in China, Romania, Germany, Japan and South Korea. Our experience with wireless carriers, automobile manufacturers and tier ones, and advertisers outside the United States is limited. Our revenue from customers in the United States comprised 94% and 88% of our total revenue in fiscal 2018 and 2017, respectively. However, our product is distributed globally in many different regions outside the United States, including South America, Europe, Australia, China and New Zealand. Our limited experience in operating our business outside the United States increases the risk that our current and future international expansion efforts may not be successful. In particular, our business model may not be successful in certain countries or regions outside the United States for reasons that we currently do not anticipate. In addition, conducting international operations subjects us to risks that we have not generally faced in the United States. These include:
fluctuations in currency exchange rates;
unexpected changes in foreign regulatory requirements;
difficulties in managing the staffing of remote operations;
potentially adverse tax consequences, including the complexities of foreign value added tax systems, foreign tax withholding, restrictions on the repatriation of earnings and changes in tax rates;
difficulties in collecting accounts receivable balances in a timely manner;
dependence on foreign wireless carriers with different pricing models;
roaming charges to end users;
availability of reliable mobile networks in those countries;
requirements that we comply with local telecommunication regulations and automobile hands free laws in those countries;
requirements that we comply with local privacy regulations;
the burdens of complying with a wide variety of foreign laws and different legal standards;
increased financial accounting and reporting burdens and complexities;
political, social and economic instability in some jurisdictions;
terrorist attacks and security concerns in general; and
reduced or varied protection for intellectual property rights in some countries.
The occurrence of any one of these risks could negatively affect our international business and, consequently, our operating results. Additionally, operating in international markets requires significant management attention and financial

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resources. We cannot be certain that the investment and additional resources required to establish, acquire or integrate operations in other countries will produce desired levels of revenue or profitability and we may incur larger losses as a result.
We rely on our management team and need specialized personnel to grow our business, and the loss of one or more key employees or our inability to attract and retain qualified personnel could harm our business.
Our success and future growth depend on the skills, working relationships and continued services of our management team. Our future performance will depend on our ability to continue to retain our senior management, particularly in the growth areas of our business, such as automotive and advertising.
Our future success also depends on our ability to attract, retain and motivate highly skilled personnel in the United States and internationally. All of our U.S. employees work for us on an at will basis. Competition for highly skilled personnel is intense, particularly in the software industry and for persons with experience with GPS and location services. The high degree of competition for personnel we experience has resulted in and may also continue to result in the incurrence of significantly higher compensation costs to attract, hire and retain employees. We have from time to time experienced, and we expect to continue to experience, difficulty in attracting, hiring and retaining highly skilled employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than we have. If we hire employees from competitors, their former employers may attempt to assert that these employees or we have breached the former employees' legal obligations to the former employer, resulting in a diversion of our time and resources. In addition, existing employees often consider the value of the stock awards they receive in connection with their employment. If our stock price performs poorly, it may adversely affect our ability to retain highly skilled employees. Our inability to attract and retain the necessary personnel could adversely affect our business and future growth prospects.
We rely on network infrastructures provided by our wireless carriers, mobile phones and in-car wireless connections for the delivery of our navigation services to end users.
We generally provide our navigation services from third party hosted servers, which require close integration with the wireless carriers’ networks. We may be unable to provide high quality services if the wireless carriers’ networks perform poorly or experience delayed response times. Our future success will depend on the availability and quality of our wireless carrier customers’ networks in the United States and abroad to run our mobile navigation services. This includes deployment and maintenance of reliable networks with the speed, data capacity and security necessary to provide reliable wireless communications services. We do not establish or maintain these wireless networks and have no control over interruptions or failures in the deployment and maintenance by wireless carrier customers of their network infrastructure. In addition, these wireless network infrastructures may be unable to support the demands placed on them if the number of subscribers increases, or if existing or future subscribers increase their use of limited bandwidth. Market acceptance of our mobile navigation services will depend in part on the quality of these wireless networks and the ability of our customers to effectively manage their subscribers’ expectations.
In addition, certain automotive navigation applications rely on wireless connections between the vehicle and our network. We have no influence or control over the vehicle’s wireless equipment and if it does not operate in a satisfactory manner, our ability to provide those services would be impaired and our reputation would be harmed.
Wireless communications have experienced a variety of outages and other delays as a result of infrastructure and equipment failures and could face outages and delays in the future. These outages and delays could affect our ability to provide our navigation services successfully. In addition, changes by a wireless carrier to its network infrastructure may interfere with the integration of our servers with their network and delivery of our navigation services and may cause end users to lose functionality for services they have already purchased. Any of the foregoing could harm our business, operating results and financial condition.
We cannot control the quality standards of our wireless carriers, their mobile phone providers, automobile manufacturers and other technology infrastructure providers. We cannot guarantee that the mobile phones or in-car wireless equipment are free from errors or defects. If errors or defects occur in mobile phones or services offered by our wireless carrier customers, it could result in consumers terminating our services, damage to our reputation, increased customer service and support costs, warranty claims, lost revenue and diverted development resources, any of which could adversely affect our business, results of operations and financial condition.
Mergers, consolidations or other strategic transactions in the mapping data industry could weaken our competitive position, reduce the number of our map providers and adversely affect our business.
The mapping data industry continues to experience consolidation. Should one of our map providers consolidate or enter into an alliance with another navigation provider, this could have a material adverse impact on our business. Currently, two of

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our map suppliers are owned by competitors in the navigation space. Such a consolidation may cause us to lose a map supplier or require us to increase the royalties we pay to map vendors as a result of enhanced supplier leverage, which would have a negative effect on our business. In the event that we lose a map supplier, we may be unable to replace our map suppliers and the remaining map suppliers may increase license fees. In addition, as we continue to use more OSM-based maps and no longer purchase maps from those suppliers, we may be unable to purchase other data that is integral to our navigation products from our existing map suppliers.
Changes in business direction and market conditions could lead to charges related to structural reorganization and discontinuation of certain products or services, which may adversely affect our financial results.
In response to changing market conditions and the desire to focus on new and more potentially attractive opportunities, we may be required to strategically realign our resources and consider restructuring, eliminating, or otherwise exiting certain business activities. Any decision to reduce investment in, dispose of, or otherwise exit business activities may result in the recording of special charges, such as workforce reduction and excessive facility space costs.
Risks related to our intellectual property and regulation
We operate in an industry with extensive intellectual property litigation. Claims of infringement against us, our customers, or other business partners may cause our business, operating results and financial condition to suffer.
Our commercial success depends in part upon us, our partners and our customers not infringing intellectual property rights owned by others and being able to resolve claims of intellectual property infringement without major financial expenditures and/or need to alter our technologies or cease certain activities. We operate in an industry with extensive intellectual property litigation and it is not uncommon for our automobile manufacturers and tier ones and competitors to be involved in infringement lawsuits by or against third parties. Many industry participants that own, or claim to own, intellectual property aggressively assert their rights, and our customers and other business partners, who we agree in certain circumstances to indemnify for intellectual property infringement claims related to our services, are often targets of such assertions. We cannot determine with certainty whether any existing or future third party intellectual property rights would require us to alter our technologies, obtain licenses or cease certain activities.
We have received, and may in the future receive, claims from third parties alleging infringement and other related claims. As of the date of this Annual Report on Form 10-K, we were named as a defendant in certain cases alleging that our services infringe other parties' patents, as well as other matters. See Part I, Item 3, “Legal Proceedings,” for a description of these matters. These cases and future litigation may make it necessary to defend ourselves and our customers and other business partners by determining the scope, enforceability and validity of third party proprietary rights or to establish our proprietary rights. Some of our competitors may have substantially greater resources than we do and may be able to sustain the costs of complex intellectual property litigation to a greater degree and for longer periods of time than we could. In addition, patent holding companies that focus solely on extracting royalties and settlements by enforcing patent rights may target us, our wireless carrier customers or our other business partners. These companies typically have little or no product revenue and therefore our patents may provide little or no deterrence against such companies filing patent infringement lawsuits against us. Regardless of whether claims that we are infringing patents or other intellectual property rights have any merit, these claims are time consuming and costly to evaluate and defend and could:
adversely affect our relationships with our current or future customers and other business partners;
cause delays or stoppages in the shipment of Telenav enabled or preloaded mobile phones or vehicles, or cause us to modify or suspend the provision of our navigation services;
cause us to incur significant expenses in defending claims brought against our customers, other business partners or us;
divert management's attention and resources;
subject us to significant damages or settlements;
require us to enter into settlements, royalty or licensing agreements on unfavorable terms; or
require us or our business partners to cease certain activities and/or modify our products or services.
In addition to liability for monetary damages against us or, in certain circumstances, our customers, we may be prohibited from developing, commercializing or continuing to provide certain of our navigation services unless we obtain licenses from the holders of the patents or other intellectual property rights. We cannot assure you that we will be able to obtain any such

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licenses on commercially reasonable terms, or at all. If we do not obtain such licenses, our business, operating results and financial condition could be materially adversely affected and we could, for example, be required to cease offering our navigation services or be required to materially alter our navigation services, which could involve substantial costs and time to develop.
Unauthorized control or manipulation of our systems in vehicles may cause them to operate improperly or not at all, or compromise their safety and data security, which could result in loss of confidence in us and our products, cancellation of contracts with certain of our automobile manufacturer or tier one customers and harm our business.
There have been reports of vehicles of certain automobile manufacturers being “hacked” to grant access and operation of the vehicles to unauthorized persons and would-be thieves. Modern vehicles are technologically advanced machines requiring the interoperation of numerous complex and evolving hardware and software systems, including the navigation system, and with respect to vehicles with autonomous driving features, control of the vehicle. We have agreed with some of our automobile manufacturer and tier one customers to adopt certain security procedures and we may be subject to claims or our contracts with those automobile manufacturers and tier ones may be terminated if we do not comply with our covenants or if our products are the source of access to the systems in their vehicles by intruders.
Although we have designed, implemented and tested security measures to prevent unauthorized access to our products when installed in vehicles, our information technology networks and communications with vehicles in which our products are installed may be vulnerable to interception, manipulation, damage, disruptions or shutdowns due to attacks by hackers or breaches due to errors by personnel who have access to our networks and systems. Any such attacks or breaches could result in unexpected control of or changes to the vehicles’ functionality and our products’ user interface and performance characteristics. Hackers may also use similar means to gain access to data stored in or generated by the vehicle, such as its current geographical position, previous and stored destination address history and web browser “favorites.” Any such unauthorized control of vehicles or access to or loss of information could result in legal claims or proceedings and negative publicity, which would negatively affect our brand and harm our business, prospects, financial condition and operating results.
Our business is subject to online security risks, including security and privacy breaches.
Our business involves the collection, storage, processing and transmission of users’ personal data including information about location, routes mapped and taken. Additionally, our apps transmit information to users’ personal devices, which creates opportunities for hackers to exploit vulnerabilities, if any, in our apps. An increasing number of organizations, including large online and offline merchants and businesses, other large Internet companies, financial institutions, and government institutions, have disclosed breaches of their security, some of which have involved sophisticated and highly targeted attacks, including on portions of their websites or infrastructure. While we are investing significant resources to evaluate and improve our security, we have been subject to such attacks in the past, although they have not, to our knowledge, resulted in the disclosure of user information or been maliciously exploited. A breach of security or privacy could have negative consequences to our reputation, which could result in users discontinuing or reducing their use of our products and our automotive and advertising customers terminating their agreements with us, and could have significant out-of-pocket financial impact, which could harm our business. Similarly, a breach of security or privacy in vehicles in which our navigation products are installed could result in a reduction in adoption of our navigation products.
The techniques used to obtain unauthorized, improper or illegal access, disable or degrade service, or sabotage our systems or access our data change frequently, may be difficult to detect quickly, and often are not recognized until launched against a target. Certain efforts may be state-sponsored and supported by significant financial and technological resources and may therefore be even more difficult to detect. As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures. Unauthorized parties also may attempt to gain access to our systems or facilities through various means, including hacking into our systems or facilities, fraud, trickery or other means of deceiving our employees, contractors and temporary staff. A party that is able to circumvent our security measures could misappropriate our, our customers’ or our employees’ personal or proprietary information, cause interruption in our operations and damage our computers and systems or those of our customers. In addition, our customers have been and likely will continue to be targeted by parties using fraudulent “spoof” and “phishing” emails to misappropriate user names, passwords, payment card numbers, GPS data or other personal information or to introduce viruses or other malware, including through “trojan horse” programs, to our users' phones and vehicles. Also, our information technology and infrastructure may be vulnerable to cyberattacks or security incidents, and third parties may be able to access our customers’ personal or proprietary information and payment card data that are stored on or accessible through our systems. Any security or privacy breach at a company providing services to us or our tier one customers, or integrated with our products and services, could have similar effects. We may also need to expend significant additional resources to protect against security or privacy breaches or to redress problems caused by breaches. These issues are likely to become more difficult and costly as we expand the number of markets where we operate. Additionally, our insurance policies carry low coverage limits, which may not

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be adequate to reimburse us for losses caused by security breaches, and we may not be able to collect fully, if at all, under these insurance policies.
Vulnerabilities in our products and services have been publicly disclosed before, and if we are unable to adequately detect and address vulnerabilities in our products and services, it may result in harm to our business.
As with any application, our products may contain known and unknown vulnerabilities, coding errors, design flaws, or other issues that could allow an attacker to maliciously exploit our software. Vulnerabilities in our software and applications have been publicly exposed in the past, although they have not, to our knowledge, resulted in the disclosure of user information or been maliciously exploited. While we are investing significantly to evaluate and improve our security on the vulnerabilities we have identified, addressing vulnerabilities in our software is an ongoing process. Malicious exploitation of our products could result in the introduction of malicious software onto our users’ devices, the theft of confidential or private information, damage to users' devices, and harm to our reputation, among other issues. Successful exploitation of a vulnerability in our software may subject us to numerous lawsuits or regulatory inquiries. Additionally, the disclosure of any vulnerability may result in a loss of confidence in us or our products, the cancellation of contracts with certain of our automotive tier one customers, discontinued use of our products, and harm to our business and reputation. These events could have significant out-of-pocket financial impact.
Changes in government regulation of the wireless communications, the automobile and mobile advertising industries may adversely affect our business.
It is possible that a number of laws and regulations may be adopted in the United States and elsewhere that could restrict the wireless communications industry, further regulate the automobile industry or impair the mobile advertising industry, including laws and regulations regarding lawful interception of personal data, hands free use of mobile phones or navigation services within autos, autonomous driving or the control of such use, privacy, taxation, content suitability, copyright and antitrust. Furthermore, the growth and development of electronic storage of personal information may prompt calls for more stringent consumer protection laws that may impose additional burdens on companies such as ours that store personal information. We anticipate that regulation of the industries in which our products and services are used will increase and that we will be required to devote legal and other resources to address this regulation. In addition, governments have recently begun to consider and adopt laws regarding vehicles using ADAS and semi-autonomous driving capabilities and those laws may curtail or preclude using the services our products provide. Changes in current laws or regulations or the imposition of new laws and regulations in the United States or elsewhere regarding the wireless communications or automobile industries may make operation more costly, and may materially reduce our ability to increase or maintain sales of our products and services.
Government regulation designed to protect end user privacy may make it difficult for us to provide our services or adopt advertising based revenue models.
We transmit and store a large volume of personal information in the course of providing our products and services. This information is increasingly subject to legislation and regulations in numerous jurisdictions around the world. This government action is typically intended to protect the privacy and security of personal or sensitive information that is collected, stored and transmitted in or from the governing jurisdiction.
Legislation may also be adopted in various jurisdictions that prohibits use of personal information and search histories to target end users with tailored advertising, or provide advertising at all. Although our advertising revenue to date is not significant, we anticipate we will continue to grow advertising revenue in the future to improve average revenue per user in certain markets.
We could be adversely affected if domestic or international legislation or regulations are expanded to require changes in our business practices or if governing jurisdictions interpret or implement their legislation or regulations in ways that negatively affect our business. For example, the USA PATRIOT Act provides certain rights to U.S. law enforcement authorities to obtain personal information in the control of U.S. persons and entities without notifying the affected individuals. If we are required to allocate significant resources to modify the delivery of our services to enable enhanced legal interception of the personal information that we transmit and store, our results of operations and financial condition may be adversely affected.
In addition, because various foreign jurisdictions have different laws and regulations concerning the storage and transmission of personal or sensitive information, we may face unknown requirements that pose compliance challenges in new international markets that we seek to enter. Such variation could subject us to costs, delayed service launches, liabilities or negative publicity that could impair our ability to expand our operations into some countries and therefore limit our future growth.

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As privacy and data protection have become more sensitive issues, we may also become exposed to potential liabilities as a result of differing views on the privacy of personal or sensitive information. These and other privacy concerns could adversely impact our business, results of operations and financial condition.
If we are unable to obtain the required government licenses or approvals to comply with government regulation relating to map data and location based services, we may not be able to provide our products and services and our business could be adversely impacted.
A number of countries and local jurisdictions require certain licenses and/or government approvals in order to comply with regulations governing the creation or distribution map data and/or the provision of location based services, including the collection of location information. If we are unable to obtain the necessary licenses or approvals or fail to comply with the regulations in each jurisdiction where we or our partners offer location based products and services, we may be unable to offer to our partners or customers the full scope of planned products and services. In addition, should any map or location based services related regulations change, we may incur additional expense in modifying our existing products and product roadmaps to comply with the requirements of individual jurisdictions. Such laws or regulations or the imposition of new laws and regulations regarding the provision of map data or location based services may make operation more costly, and may materially reduce our ability to increase or maintain sales of our products and services.
If we are unable to protect our intellectual property and proprietary rights, our competitive position and our business could be harmed.
We rely primarily on a combination of patent laws, trademark laws, copyright laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary technology. However, our issued patents and any future patents that may be issued may not survive a legal challenge to their scope, validity or enforceability, or provide significant protection for us. The failure of our patents to adequately protect our technology might make it easier for our competitors to offer similar products or technologies. In addition, patents may not be issued from any of our current or future applications.
Monitoring unauthorized use of our intellectual property is difficult and costly. The steps we have taken to protect our proprietary rights may not be adequate to prevent misappropriation of our intellectual property. We may not be able to detect unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. Our competitors may also independently develop similar technology. In addition, the laws of many countries do not protect our proprietary rights to as great an extent as do the laws of the United States. Any failure by us to meaningfully protect our intellectual property could result in competitors offering products that incorporate our most technologically advanced features, which could seriously reduce demand for our navigation services. In addition, we may in the future need to initiate infringement claims or litigation. Litigation, whether we are a plaintiff or a defendant, can be expensive, time consuming and may divert the efforts of our technical staff and managerial personnel, which could harm our business, whether or not such litigation results in a determination favorable to us.
Confidentiality agreements with employees and others may not adequately prevent disclosure of our trade secrets and other proprietary information.
We have devoted substantial resources to the development of our proprietary technology, including the proprietary software components of our navigation services and related processes. In order to protect our proprietary technology and processes, we rely in part on confidentiality agreements with our employees, licensees, independent contractors and other advisors. These agreements may not effectively prevent disclosure of our confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of our confidential information. In addition, others may independently discover trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such parties. Costly and time consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
Our use of open source software could negatively affect our ability to sell our service and subject us to possible litigation.
We use open source software in our navigation services platform and client applications and may use more open source software in the future. Use of open source software may subject our navigation services platform and client applications to general release or require us to re-engineer our navigation services platform and client applications, which may cause harm to our business. From time to time, there have been claims challenging the ownership of open source software against companies that incorporate open source software into their products. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software. Some open source licenses contain requirements that we make available source code for modifications or derivative works we create based upon the open source software and that we license such modifications or derivative works under the terms of a particular open source license or other license granting third parties certain rights of further use. If we combine our proprietary software products with open source software in a certain manner, we

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could, under certain of the open source licenses, be required to release our proprietary source code. In addition to risks related to license requirements, usage of open source software can lead to greater risks than use of third party commercial software, as open source licensors generally do not provide warranties or controls on origin of the software. Open source license terms may be ambiguous and many of the risks associated with usage of open source cannot be eliminated, and could, if not properly addressed, negatively affect our business. If we were found to have inappropriately used open source software, we may be required to release our proprietary source code, re-engineer our navigation services platform and client applications, discontinue the sale of our service in the event re-engineering cannot be accomplished on a timely basis or take other remedial action that may divert resources away from our development efforts, any of which could adversely affect our business, operating results and financial condition.
Risks related to being a publicly traded company and holding our common stock
As a public company, we are obligated to develop and maintain effective internal control over financial reporting. We may not always complete our assessment of the effectiveness of our internal control over financial reporting in a timely manner, or such internal control may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.
The Sarbanes-Oxley Act requires that we test our internal control over financial reporting and disclosure controls and procedures annually. For example, as of June 30, 2018, we performed system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our compliance with Section 404 requires that we incur substantial expense and expend significant management time on compliance-related issues. Moreover, if we are not able to comply with the requirements of Section 404 in the future, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock may decline and we could be subject to sanctions or investigations by the NASDAQ Global Market, the SEC or other regulatory authorities, which would require significant additional financial and management resources.
We will continue to incur high costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which could harm our operating results.
As a public company, we incur significant legal, accounting, investor relations and other expenses, including costs associated with public company reporting requirements. We also have incurred and will continue to incur costs associated with current corporate governance requirements, including requirements under Section 404 and other provisions of the Sarbanes-Oxley Act, as well as rules implemented by the SEC and the stock exchange on which our common stock is traded. We are generally not eligible to report under reduced disclosure requirements or benefit from longer phase in periods for “emerging growth companies” as such term is defined in the Jumpstart Our Business Act of 2012. The expenses incurred by public companies for reporting and corporate governance purposes have increased dramatically over the past several years. We expect these rules and regulations to continue to impact our legal and financial compliance costs substantially and to make some activities more time consuming and costly. We are unable currently to estimate these costs with any degree of certainty. We also expect that, over time, it may be more expensive for us to obtain director and officer liability insurance. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as our executive officers if we cannot provide a level of insurance coverage that they believe is adequate.
Regulations relating to investments in offshore companies by Chinese residents may subject our Chinese-resident beneficial owners or our Chinese subsidiaries to liability or penalties, limit our ability to inject capital into our Chinese subsidiaries, limit our Chinese subsidiaries’ ability to increase their registered capital or limit their ability to distribute profits to us.
On July 4, 2014, the State Administration of Foreign Exchange of the People’s Republic of China, or SAFE, promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents' Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or Circular 37, which replaced the former Circular on Issues Relating to the Administration of Foreign Exchange in Fund-Raising and Round Trip Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Vehicles (commonly known as "SAFE Circular 75") promulgated by SAFE on October 21, 2005. Circular 37 requires Chinese residents to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such Chinese residents' legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in Circular 37 as a "special purpose vehicle." Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by Chinese individuals, share transfer or exchange, merger, division or other material event. In the event that a Chinese shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the Chinese subsidiaries of that special

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purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out all subsequent cross-border foreign exchange activities in worst scenario, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its Chinese subsidiary. Furthermore, failure to comply with the various SAFE registration requirements described above could result in liability under Chinese law for evasion of foreign exchange controls. On February 13, 2015, SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or Circular 13, which became effective on June 1, 2015.  Pursuant to Circular 13, entities and individuals are required to apply for foreign exchange registration of overseas direct investment, including those required under Circular 37, with qualified banks, instead of SAFE. The qualified banks, under the supervision of SAFE, will directly review the applications and conduct the registration.
We attempt to comply, and attempt to ensure that our stockholders who are subject to Circular 37 and other related rules, comply with the relevant requirements under Circular 37. However, we cannot provide any assurances that all of our stockholders who are Chinese residents have complied or will comply with our request to make or obtain any applicable registrations or comply with other requirements required by Circular 37 or other related rules. Any failure or inability of any of our stockholders who is a Chinese resident to comply with relevant requirements under Circular 37 could subject such stockholders or our Chinese subsidiaries to fines and legal sanctions imposed by the Chinese government and may also limit our ability to contribute additional capital into our Chinese subsidiaries or receive dividends or other distributions from our Chinese subsidiaries. As a result, these risks may have a material adverse effect on our business, financial condition and results of operations.
If securities analysts do not publish research or reports about our business or if they publish negative evaluations of our stock, the price of our stock could decline.
We expect that the trading price for our common stock will be affected by any research or reports that industry or financial analysts publish about us or our business. As of June 30, 2018, only four research analysts published reports regarding our company. If one or more of these analysts cease coverage of our company, our stock may lose visibility in the market, which in turn could cause its price to decline. In addition, if any analysts who may elect to cover us downgrade their evaluations of our stock, the price of our stock could decline. For example, in late July 2011, following our earnings release for the three months and fiscal year ended June 30, 2011, several financial analysts published research reports lowering their price targets of our stock. After our announcement and the publication of these reports, our stock price fell more than 40%. If one or more of these analysts cease coverage of our company, our stock may lose visibility in the market, which in turn could cause its price to decline. If our stock was to trade at prices below $5.00 per share in the future for an extended period of time, financial analysts may terminate coverage of our company due to internal policies within their investment banks, which could result in further stock price declines.
Our stock price has fluctuated significantly and may continue to fluctuate in the future.
Our common stock was sold in our IPO at $8.00 per share. Although our common stock has traded at prices as high as $22.07 per share, it has also traded at prices as low as $4.47 and has tended to have significant downward and upward price movements in a relatively short time period. Future fluctuations or declines in the trading price of our common stock may result from a number of events or factors, including those discussed in the preceding risk factors relating to our operations, as well as:
actual or anticipated fluctuations in our operating results;
changes in the financial projections we may provide to the public or our failure to meet these projections;
announcements by us or our competitors of significant technical innovations, relationship changes with key customers, acquisitions, strategic partnerships, joint ventures, capital raising activities or capital commitments;
the public’s response to our press releases or other public announcements, including our filings with the SEC;
lawsuits threatened or filed against us; and
large distributions of our common stock by significant stockholders to limited partners or others who immediately resell the shares.
General market conditions and domestic or international macroeconomic factors unrelated to our performance, such as the continuing unprecedented volatility in the financial markets, may also affect our stock price. For these reasons, investors should not rely on recent trends to predict future stock prices or financial results. Investors in our common stock may not be able to dispose of the shares they purchased at prices above the IPO price, or, depending on market conditions, at all.

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In addition, if the market price of our common stock falls below $5.00 per share for an extended period of time, under stock exchange rules, our stockholders will not be able to use such shares as collateral for borrowing in margin accounts. Further, certain institutional investors are restricted from investing in shares priced below $5.00 per share. This inability to use shares of our common stock as collateral and the inability of certain institutional investors to invest in our shares may depress demand and lead to sales of such shares creating downward pressure on and increased volatility in the market price of our common stock.
In the past, the market price for our common stock has traded only slightly above the cash value of our common stock. If investors do not value our company as an ongoing business and only value it for the cash on our balance sheet, our stock price may decline if we continue to incur net losses and use our cash to fund operations. We may also attract investors who are looking for short-term gains in our shares rather than being interested in our long-term outlook. As a result, the price of our common stock may be volatile.
The concentration of ownership of our capital stock limits your ability to influence corporate matters.
Our executive officers, directors, current 5% or greater stockholders and entities affiliated with them beneficially owned (as determined in accordance with the rules of the SEC) approximately 42.6% of our common stock outstanding as of June 30, 2018. This significant concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. Also, these stockholders, acting together, may be able to control our management and affairs and matters requiring stockholder approval, including the election of directors and the approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. Consequently, this concentration of ownership may have the effect of delaying or preventing a change of control, including a merger, consolidation or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if that change of control would benefit our other stockholders.

ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.

ITEM 2.
PROPERTIES
Facilities
Our corporate headquarters are located at 4655 Great America Parkway, Suite 300, Santa Clara, California in an office consisting of approximately 55,000 square feet pursuant to a lease that expires in September 2023. This headquarters facility houses the majority of our U.S. research and development, support, marketing and general and administrative personnel. We lease approximately 30,000 square feet of space in Shanghai, China for our research and development, sales and support operations pursuant to a lease expiring in November 2020, approximately 14,000 square feet in Xi’an, China, for research and development operations pursuant to a lease expiring in September 2020, and approximately 34,000 square feet in Cluj, Romania, for research and development operations pursuant to leases that expire in September 2022. We lease approximately 12,000 square feet in Culver City, California for research and development and sales and marketing operations pursuant to a lease expiring in February 2019. We also lease office space of less than 5,000 square feet each in Southfield, Michigan; Chicago, Illinois; New York, New York; Berlin, Germany, Tokyo, Japan and Incheon, South Korea for our sales, marketing and business development personnel located in those areas. We believe our current facilities will be adequate or that additional space will be available on commercially reasonable terms for the foreseeable future.

ITEM 3.
LEGAL PROCEEDINGS

From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. We have received, and may in the future continue to receive, claims from third parties asserting infringement of their intellectual property rights. Future litigation may be necessary to defend ourselves and our customers by determining the scope, enforceability and validity of third party proprietary rights or to establish our proprietary rights. From time to time we also may be subject to claims from our third party content providers that we owe them additional royalties and interest, which claims may result in litigation if we and the third party content provider are unable to resolve the matter. There can be no assurance

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with respect to the outcome of any current or future litigation brought against us or pursuant to which we have indemnification obligations and the outcome could have a material adverse impact on our business, operating results and financial condition.
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 plaintiff filed a motion for preliminary approval of class action settlement on March 5, 2018. The court granted preliminary approval of the class action settlement on April 30, 2018. The court scheduled the final approval hearing for September 6, 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 fiscal 2018, 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. 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 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 US Patents. Telenav agreed to indemnify and defend AT&T and Sprint in connection with these matters. 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. We incurred $250,000 related to these matters in fiscal 2018, and recorded this amount as legal settlement and contingencies expense in our consolidated statement of operations.
In November 2017, Traxcell Technologies, LLC filed patent infringement lawsuits against AT&T and Sprint in the U.S. District Court for the Eastern District of Texas. On November 9, 2017, AT&T tendered control of the defense of one of the patents alleged to be infringed upon in the case and sought indemnification for the entire amount of litigation expenses related to the patent and Telenav products, including discovery, defensive intellectual property rights and any judgment rendered in, or settlement of, the lawsuit. Although Telenav has agreed to indemnify AT&T to the extent that the claims relate to the ordinary use of Telenav products, we have not yet determined the extent of our indemnification obligations to AT&T. On January 29, 2018, AT&T filed an answer and counterclaims, stating among other things, that the asserted patents are not infringed and invalid. On April 12, 2018, Traxcell served its infringement contentions, identifying Telenav products as being at issue in the AT&T litigation. On June 15, 2018, Telenav filed a complaint seeking a declaratory judgment of non-infringement against the plaintiff. Traxcell's response to complaint is due on August 31, 2018. On August 14, 2018, Telenav filed a motion to intervene and stay or sever the claims against AT&T related to AT&T Navigator. 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.
While we presently believe that the ultimate outcome of these proceedings, individually and in the aggregate, will not materially harm our financial position, cash flows or overall trends in results of operations, legal proceedings are subject to inherent uncertainties and unfavorable rulings could occur. Nevertheless, were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact on our business, financial position, cash flows or overall trends in results of operations.
Large future indemnity payments and associated legal fees and expenses, including potential indemnity payments and legal fees and expenses relating to our wireless carrier and other customers’ indemnity demands with respect to pending litigation, could materially harm our business, operating results and financial condition. 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. Although to date we have not agreed to defend or indemnify our customers for outstanding and unresolved indemnity demands where we do not believe we have an obligation to do so or that our solution infringes on asserted

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intellectual property rights, we may in the future agree to defend and indemnify our customers in connection with demands for indemnification, irrespective of whether we believe that we have an obligation to indemnify them or whether we believe our solution infringes the asserted intellectual property rights. Alternatively, we may reject certain of our customers’ indemnity demands, including the outstanding demands, which may lead to disputes with our customers, negatively impact our relationships with them or result in litigation against us. Our wireless carrier or other customers may also claim that any rejection of their indemnity demands constitutes a material breach of our agreements with them, allowing them to terminate such agreements. If we make substantial payments as a result of indemnity demands, our relationships with our customers are negatively impacted, or any of our customer agreements is terminated, our business, operating results and financial condition could be materially harmed.

ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.


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PART II.

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock began trading on the NASDAQ Global Market under the symbol “TNAV” on May 13, 2010. The following table sets forth the range of high and low closing sales prices of our common stock for the periods indicated:
 
Year ended June 30, 2018
 
High
 
Low
First Quarter
 
$
8.45

 
$
6.10

Second Quarter
 
$
6.70

 
$
4.60

Third Quarter
 
$
6.20

 
$
5.05

Fourth Quarter
 
$
6.50

 
$
5.10

Year ended June 30, 2017
 
High
 
Low
First Quarter
 
$
6.10

 
$
4.64

Second Quarter
 
$
7.45

 
$
4.80

Third Quarter
 
$
10.15

 
$
6.80

Fourth Quarter
 
$
9.25

 
$
7.50

We had approximately 36 stockholders of record as of June 30, 2018. A substantially greater number of holders of our common stock are “street name” or beneficial holders, whose shares are held by banks, brokers and other financial institutions. We have never declared or paid dividends on our common stock and do not expect to pay dividends on our common stock for the foreseeable future. Instead, we anticipate that all of our earnings in the foreseeable future will be used for the operation and growth of our business.
Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable.  



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STOCK PERFORMANCE GRAPH
This performance graph shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Telenav, Inc. under the Securities Act or the Exchange Act.
The following graph shows a comparison from July 1, 2013 through June 30, 2018 of cumulative total return for our common stock, the NASDAQ Composite Index and the Russell 3000 Index. Such returns are based on historical results and are not intended to suggest future performance. Data for the NASDAQ Composite Index and the Russell 3000 Index assume reinvestment of dividends.
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12452555&doc=16


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ITEM 6.
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the consolidated financial statements and related notes thereto appearing elsewhere in this Form 10-K. We have derived the statement of operations data for fiscal years ended June 30, 2018, 2017 and 2016 and the balance sheet data as of June 30, 2018 and 2017 from the audited consolidated financial statements included elsewhere in this Form 10-K. The statement of operations data for the fiscal years ended June 30, 2015 and 2014 and the balance sheet data as of June 30, 2016, 2015 and 2014 were derived from the audited consolidated financial statements that are not included in this Form 10-K. The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The results of operations of our enterprise business, which were previously presented as a component of our consolidated operating results, have been classified as discontinued operations in our statement of operations for all periods presented. We have not declared or distributed any cash dividends on our common stock. Historical results are not necessarily indicative of results to be expected for future periods.
 
Consolidated Statements of Operations Data:
(in thousands, except per share data)
 
Fiscal Year Ended June 30,
2018
 
2017
 
2016
 
2015
 
2014
Revenue
 
$
106,180

 
$
169,584

 
$
183,346

 
$
160,239

 
$
150,313

Cost of revenue
 
62,230

 
92,335

 
100,797

 
78,784

 
60,841

Gross profit
 
43,950

 
77,249

 
82,549

 
81,455

 
89,472

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Research and development
 
87,488

 
73,102

 
68,911

 
68,060

 
60,573

Sales and marketing
 
20,748

 
21,995

 
25,587

 
26,975

 
33,138

General and administrative
 
21,562

 
23,041

 
23,059

 
23,606

 
26,176

Goodwill impairment
 
2,666

 

 

 

 

Legal settlement and contingencies
 
425

 
6,424

 
935

 

 

Restructuring
 

 

 
(1,362
)
 
1,150

 
4,412

Total operating expenses
 
132,889

 
124,562

 
117,130

 
119,791

 
124,299

Operating loss
 
(88,939
)
 
(47,313
)
 
(34,581
)
 
(38,336
)
 
(34,827
)
Other income (expense), net
 
833

 
892

 
(229
)
 
2,267

 
1,288

Loss from operations
 
(88,106
)
 
(46,421
)
 
(34,810
)
 
(36,069
)
 
(33,539
)
Provision (benefit) for income taxes
 
1,012

 
841

 
511

 
(13,006
)
 
(4,015
)
Net loss
 
$
(89,118
)
 
$
(47,262
)
 
$
(35,321
)
 
$
(23,063
)
 
$
(29,524
)
Net loss per share, basic and diluted
 
$
(2.00
)
 
$
(1.09
)
 
$
(0.85
)
 
$
(0.58
)
 
$
(0.76
)
Weighted average shares used in computing net loss per share, basic and diluted
 
44,498

 
43,343

 
41,567

 
39,991

 
38,796

 
Consolidated Balance Sheets Data:
(in thousands)
 
June 30,
2018
 
2017
 
2016
 
2015
 
2014
Cash, cash equivalents and short-term investments
 
$
84,946

 
$
98,355

 
$
109,626

 
$
119,916

 
$
136,849

Working capital
 
64,968

 
97,094

 
118,182

 
138,415

 
153,238

Total assets
 
320,412

 
259,560

 
218,247

 
223,922

 
239,841

Common stock and additional paid-in capital
 
167,940

 
159,710

 
149,818

 
140,447

 
129,318

Total stockholders’ equity
 
31,046

 
112,148

 
149,685

 
176,183

 
192,405




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ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read together with our consolidated financial statements and the notes to those statements included elsewhere in this Form 10-K. This discussion contains forward-looking statements based on our current expectations, assumptions, estimates and projections about Telenav and our industry. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those indicated in these forward-looking statements as a result of certain factors, as more fully described in “Risk factors” in Item 1A of this Form 10-K, Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Form 10-K. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.
Overview
Telenav is a leading provider of location-based products and services for connected cars and advertising. We utilize our connected car platform and our advertising platform to deliver these products and services. Our connected car platform allows us to deliver enhanced location-based navigation services to automobile manufacturers, as well as tier ones. Our advertising platform, which we provide through our Thinknear subsidiary, leverages our location expertise and delivers highly targeted advertising services to advertisers and advertising agencies. We report results in three business segments: automotive, advertising and mobile navigation. Our fiscal year ends June 30. Our total revenue was $183.3 million in fiscal 2016, $169.6 million in fiscal 2017 and $106.2 million in fiscal 2018. Our net loss was $35.3 million in fiscal 2016, $47.3 million in fiscal 2017 and $89.1 million in fiscal 2018.
We derive revenue primarily from automobile manufacturers and tier ones, advertisers and advertising agencies. We receive revenue from automobile manufacturers and tier ones whose vehicles or systems incorporate our proprietary personalized navigation software and services. These manufacturers and tier ones generally do not provide us with any volume or revenue guarantees. In addition, we have a strategic 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.
Our legacy mobile navigation business has declined steadily since fiscal 2013, and we expect it to continue to decline and represent less than 10% of our consolidated revenue commencing in the first quarter of fiscal 2019. We began offering our 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 $13.4 million, or 12% of our revenue, in fiscal 2018, 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 we may ultimately elect to terminate our legacy wireless carrier mobile navigation business to the extent allowable under our contractual arrangements.
For our automotive manufacturer and tier one customers, we offer our connected car products and services for distribution with their vehicles and systems. We believe our history as a supplier of cloud-based navigation services combined with our proven track record of delivering navigation solutions to three of the top five global automobile manufacturers provides a unique advantage in the automotive navigation marketplace over our competitors.
We offer four variations of our connected car products and services to our automobile manufacturer and tier one customers. First, we offer on-board navigation systems that are built into vehicles with all key elements of the system residing in the vehicle as a self-contained application along with the related software and content. Our on-board navigation products do not require access to the Internet or wireless networks to function. Second, we offer advanced hybrid navigation solutions that contain on-board functionality and also add cloud functionality such as cloud search, cloud routing, map updates and “live” data. Third, we offer mobile phone-based navigation solutions that run on the phone and provide an interactive map and navigation instructions to the vehicle's video screen and audio system, which we refer to as brought-in navigation. Finally, we offer a navigation SDK that enables our customers to add mapping and location capabilities to their cloud, mobile and on-board automotive applications.

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We provide our connected car products and services directly to automobile manufacturers such as Ford, which represented 55% of our revenue in fiscal 2018, GM and Toyota. We also provide our products and services indirectly through tier ones such as XEVO for certain Toyota solutions, LG for certain Opel solutions and Panasonic for certain FCA solutions.
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 also believe that we are experts in location-based advertising and offer differentiated value compared to brick-and-mortar and brand advertisers through our location based ad targeting capabilities. Our technology focuses on leveraging 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 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 hybrid 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 hybrid navigation solutions in fiscal 2017 or 2018, although we did experience increases in deferred revenue. We expect that we will begin to recognize this revenue upon the adoption of ASC 606 on July 1, 2018.
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. This revenue continues to decline and in fiscal 2018 we recognized a $2.7 million impairment of all of the goodwill associated with our mobile navigation segment.
Recent Developments
Ford amendment and impact on revenue recognition
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"), which extended the term of our agreement with Ford until December 31, 2018. 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. The subsequent amendment was executed in March 2018.
On December 14, 2017, Ford also selected Telenav to provide its next generation navigation solution in North America, subject to certain conditions and execution of an agreement regarding those solutions. We were not awarded the contracts for Europe, South America and Australia and New Zealand.
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 and beyond. As a result, under current GAAP, all prospective royalties

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related to Ford beginning January 1, 2018 have been deferred and recorded as billings until such milestone deliveries occur and are accepted by Ford. Accordingly, automotive billings increased 13.5% to $213.6 million in fiscal 2018 from $188.1 million in fiscal 2017; however, automotive revenue decreased 47% to $65.6 million in fiscal 2018 from $123.8 million in fiscal 2017. This accounting treatment will further change on July 1, 2018 when we adopt the new revenue recognition rules under ASC 606.
Adoption of ASC 606
We will use the full retrospective transition method, and although our assessment of the impact of this standard is not complete, we anticipate this standard will have a material impact on our consolidated financial statements. We do not expect any significant impact on our advertising and mobile navigation business segments. However, we believe there will be a significant impact on the recognition of revenue and associated third party content costs for certain of our on-board and brought-in automotive navigation solutions.
With respect to on-board automotive solutions, historically we recognized revenue and associated content costs over the life of our contractual obligations when map updates were included, and we deferred substantially all revenue and associated content costs pending the delivery of future specified upgrades. Instead, as of July 1, 2018, we expect to recognize revenue related to royalties for distinct software and content that has been accepted as reproduction of the software takes place during the manufacturing process, with an allocation of the selling price based on the relative standalone selling price of map updates, specified upgrades, and other services as applicable, which we expect to recognize with the associated content costs at a point in time or over time as we transfer control of the related performance obligation. For example, with respect to Ford for SYNC 3 that is provided with annual map updates, we anticipate recognizing a portion as revenue and associated content costs upon delivery of the software, and the remainder of revenue and associated content costs over time as the annual map updates are provided.
Regarding brought-in automotive solutions, historically we recognized revenue for each royalty over the expected remaining term of the service obligation. Effective July 1, 2018, since these contracts contain variable consideration we will estimate the total transaction price each reporting period using a probability assessment, and then expect to recognize revenue ratably over the period the services obligation is expected to be fulfilled.
In conjunction with the new revenue recognition guidance under ASC 606, 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.
We have not concluded our analysis of the impact on our financial statements of the application of ASC 340-40 with respect to the timing of capitalization and recognition of development costs that are incurred to fulfill obligations under certain actual or anticipated contracts for on-board automotive solutions. In the event we conclude that we are required to capitalize these costs that we expect to recover, we will recognize them as we transfer control of the related performance obligation. Development costs subject to ASC 340-40 incurred to fulfill future obligations under certain actual or anticipated contracts for brought-in automotive solutions are expected to be capitalized and then amortized over the period the services obligation is expected to be fulfilled.
Should we determine that we are required to capitalize certain development costs for on-board automotive solutions as deferred development costs under ASC 340-40 rather than expense them, our cost of revenue, research and development expenses and operating results could fluctuate significantly on a quarterly basis.
We anticipate that when we adopt ASC 606, significant amounts currently set forth in deferred revenue and deferred costs at June 30, 2018 will be restated as revenue and expenses in our prior period statements of operations and as accumulated deficit on our July 1, 2018 balance sheet.
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, direct contribution from billings, direct contribution margin from 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.

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Our key operating and financial performance metrics are as follows (in thousands, except percentages and per share amounts):

 
 
Fiscal Year Ended June 30,
 
 
2018
 
2017
 
2016
 
 
(in thousands, except percentages and per share amounts)
Revenue
 
$
106,180

 
$
169,584

 
$
183,346

Revenue from Ford as a percentage of total revenue
 
55
%
 
69
%
 
71
%
Billings (Non-GAAP)
 
$
253,886

 
$
233,616

 
$
199,887

Billings to Ford as a percentage of total billings (non-GAAP)
 
66
%
 
68
%
 
68
%
Increase in deferred revenue
 
$
147,706

 
$
64,032

 
$
16,541

Increase in deferred costs
 
$
87,065

 
$
42,016

 
$
8,935

Gross profit
 
$
43,950

 
$
77,249

 
$
82,549

Gross margin
 
41
%
 
46
%
 
45
%
Direct contribution from billings (Non-GAAP)
 
$
104,591

 
$
99,265

 
$
90,155

Direct contribution margin from billings (Non-GAAP)
 
41
%
 
42
%
 
45
%
Net loss
 
$
(89,118
)
 
$
(47,262
)
 
$
(35,321
)
Diluted net loss per share
 
$
(2.00
)
 
$
(1.09
)
 
$
(0.85
)
Adjusted EBITDA (Non-GAAP)
 
$
(73,483
)
 
$
(28,080
)
 
$
(21,522
)
Adjusted EBITDA on billings (Non-GAAP)
 
$
(12,842
)
 
$
(6,064
)
 
$
(13,916
)
Free cash flow (Non-GAAP)
 
$
(11,644
)
 
$
(10,677
)
 
$
(7,102
)

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. However, automotive revenue decreased as a percentage of our total revenue during the three months ended March 31, 2018 and June 30, 2018 due to the deferral of all prospective Ford royalties beginning January 1, 2018 pending completion of milestone deliveries. We anticipate this accounting treatment will change when we adopt the new revenue recognition rules under ASC 606 on July 1, 2018.
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-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 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.

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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 goodwill impairment, 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. Goodwill impairment represents the impairment of all of the goodwill associated with our mobile navigation segment. Legal settlements and contingencies represent settlements and offers made to settle patent litigation cases in which we are 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 from 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;
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):


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Reconciliation of Revenue to Billings
 
 
Fiscal Year Ended June 30,
 
 
2018
 
2017
 
2016
Automotive
 
 
 
 
 
 
Revenue
 
$
65,559

 
$
123,784

 
$
135,372

Adjustments:
 
 
 
 
 
 
Change in deferred revenue
 
148,053

 
64,364

 
16,961

Billings
 
$
213,612

 
$
188,148

 
$
152,333

Advertising
 
 
 
 
 
 
Revenue
 
$
27,229

 
$
26,841

 
$
21,744

Adjustments:
 
 
 
 
 
 
Change in deferred revenue
 

 

 

Billings
 
$
27,229

 
$
26,841

 
$
21,744

Mobile Navigation
 
 
 
 
 
 
Revenue
 
$
13,392

 
$
18,959

 
$
26,230

Adjustments:
 
 
 
 
 
 
Change in deferred revenue
 
(347
)
 
(332
)
 
(420
)
Billings
 
$
13,045

 
$
18,627

 
$
25,810

Total
 
 
 
 
 
 
Revenue
 
$
106,180

 
$
169,584

 
$
183,346

Adjustments:
 
 
 
 
 
 
Change in deferred revenue
 
147,706

 
64,032

 
16,541

Billings
 
$
253,886

 
$
233,616

 
$
199,887


Reconciliations of Deferred Revenue to Change in Deferred Revenue and Deferred Cost to Change in Deferred Cost
 
 
Automotive
 
Advertising
 
Mobile Navigation
 
Total
 
 
Fiscal Year Ended
June 30,
 
Fiscal Year Ended
June 30,
 
Fiscal Year Ended
June 30,
 
Fiscal Year Ended
June 30,
 
 
2018
 
2017
 
2016
 
2018
 
2017
 
2016
 
2018
 
2017
 
2016
 
2018
 
2017
 
2016
Deferred revenue, ending balance
 
$
234,570

 
$
86,517

 
$
22,153

 
$

 
$

 
$

 
$
537

 
$
884

 
$
1,216

 
$
235,107

 
$
87,401

 
$
23,369

Deferred revenue, beginning balance
 
86,517

 
22,153

 
5,192

 

 

 

 
884

 
1,216

 
1,636

 
87,401

 
23,369

 
6,828

Change in deferred revenue
 
$
148,053

 
$
64,364

 
$
16,961

 
$

 
$

 
$

 
$
(347
)
 
$
(332
)
 
$
(420
)
 
$
147,706

 
$
64,032

 
$
16,541

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred costs, ending balance
 
$
141,157

 
$
54,092

 
$
12,076

 
$

 
$

 
$

 
$

 
$

 
$

 
$
141,157

 
$
54,092

 
$
12,076

Deferred costs, beginning balance
 
54,092

 
12,076

 
3,141

 

 

 

 

 

 

 
54,092

 
12,076

 
3,141

Change in deferred costs
 
$
87,065

 
$
42,016

 
$
8,935

 
$

 
$

 
$

 
$

 
$

 
$

 
$
87,065

 
$
42,016

 
$
8,935



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Reconciliation of Revenue to Billings - Ford
 
 
Fiscal Year Ended June 30,
 
 
2018
 
2017
 
2016
Revenue from Ford
 
$
58,836

 
$
117,088

 
$
129,480

Adjustments:
 
 
 
 
 
 
Change in deferred revenue attributed to Ford
 
108,871

 
42,216

 
5,929

Billings to Ford
 
$
167,707

 
$
159,304

 
$
135,409

Billings to Ford as a percentage of total billings
 
66
%
 
68
%
 
68
%

Reconciliation of Gross Profit to Direct Contribution from Billings
 
 
Fiscal Year Ended June 30,
 
 
2018
 
2017
 
2016
Gross profit
 
$
43,950

 
$
77,249

 
$
82,549

Gross margin
 
41
%
 
46
%
 
45
%
Adjustments to gross profit:
 
 
 
 
 
 
Change in deferred revenue
 
$
147,706

 
$
64,032

 
$
16,541

Change in deferred costs(1)
 
(87,065
)
 
(42,016
)
 
(8,935
)
Net change
 
60,641

 
22,016

 
7,606

Direct contribution from billings(1)
 
$
104,591

 
$
99,265

 
$
90,155

Direct contribution margin from billings(1)
 
41
%
 
42
%
 
45
%
 
 
 
 
 
 
 
(1) Deferred costs primarily include costs associated with third party content and in connection with certain customized software solutions, the costs incurred to develop those solutions. We expect to incur additional costs in the future due to requirements to provide ongoing map updates and provisioning of services such as hosting, monitoring, customer support and, for certain customers, additional period content and associated technology costs. Accordingly, direct contribution from billings and direct contribution margin from billings do not include all costs associated with billings.


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Reconciliation of Net Loss to Adjusted EBITDA and Adjusted EBITDA on Billings
 
 
Fiscal Year Ended June 30,
 
 
2018
 
2017
 
2016
Net loss
 
$
(89,118
)
 
$
(47,262
)
 
$
(35,321
)
Adjustments:
 
 
 
 
 
 
Goodwill impairment
 
2,666

 

 

Legal settlement and contingencies
 
425

 
6,424

 
935

Restructuring reversal
 

 

 
(1,362
)
Deferred rent reversal due to lease termination
 
(538
)
 

 
(1,242
)
Tenant improvement allowance recognition due to lease termination
 
(582
)
 

 

Stock-based compensation expense
 
9,876

 
10,162

 
11,366

Depreciation and amortization
 
3,609

 
2,647

 
3,362

Interest and other (income) expense, net
 
(833
)
 
(892
)
 
229

Provision for income taxes
 
1,012

 
841

 
511

Adjusted EBITDA
 
$
(73,483
)
 
$
(28,080
)
 
$
(21,522
)
 
 
 
 
 
 
 
Change in deferred revenue
 
$
147,706

 
$
64,032

 
$
16,541

Change in deferred costs(1)
 
(87,065
)
 
(42,016
)
 
(8,935
)
Adjusted EBITDA on billings(1)
 
$
(12,842
)
 
$
(6,064
)
 
$
(13,916
)
 
 
 
 
 
 
 
(1) We expect to incur additional costs in the future due to requirements to provide ongoing map updates and provisioning of services such as hosting, monitoring, customer support and, for certain customers, additional period content and associated technology costs. Accordingly, adjusted EBITDA on billings does not reflect all costs associated with billings.


Reconciliation of Net Loss to Free Cash Flow
 
 
 
 
 
 
 
 
 
Fiscal Year Ended June 30,
 
 
2018
 
2017
 
2016
Net loss
 
$
(89,118
)
 
$
(47,262
)
 
$
(35,321
)
 
 
 
 
 
 
 
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
 
 
Change in deferred revenue(1)
 
147,706

 
64,032

 
16,541

Change in deferred costs(2)
 
(87,065
)
 
(42,016
)
 
(8,935
)
Changes in other operating assets and liabilities
 
6,267

 
2,407

 
7,774

Other adjustments(3)
 
15,214

 
13,387

 
16,843

Net cash used in operating activities
 
(6,996
)
 
(9,452
)
 
(3,098
)
Less: Purchases of property and equipment
 
(4,648
)
 
(1,225
)
 
(4,004
)
Free cash flow
 
$
(11,644
)
 
$
(10,677
)
 
$
(7,102
)
 
 
 
 
 
 
 
(1) Consists of product royalties, customized software development fees, service fees and subscription fees.
(2) Consists primarily of third party content costs and customized software development expenses.
(3) Consist primarily of depreciation and amortization, stock-based compensation expense and other non-cash items.



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Key components of our results of operations
Sources of revenue
We classify our revenue as either product or services revenue. Product revenue consists primarily of revenue we receive from the delivery of customized software and royalties from the distribution of this customized software in certain automotive navigation applications, map updates to the software and customized software development. Services revenue consists primarily of revenue we derive from our brought-in automotive navigation services, advertising services and mobile navigation services.
We report revenue, cost of revenue and gross profit results in three business segments: automotive, advertising and mobile navigation. Our chief executive officer, or CEO, the chief operating decision maker, reviews revenue and gross margin information for each of our reportable segments. See " - Results of operations" and Note 11 to the consolidated financial statements in this Form 10-K for more information about our business segments.
Revenue from our automotive segment represented 62%, 73% and 74% of our revenue in fiscal 2018, 2017 and 2016, respectively. Ford represented 55%, 69% and 71% of our revenue in fiscal 2018, 2017 and 2016, respectively. Our contract with Ford covers a broad range of products and services that we provide to Ford. On December 14, 2017, Ford awarded to Telenav a further extension of the Ford Agreement, 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. The subsequent amendment was executed in March 2018. On December 14, 2017, Ford also selected us to provide its next generation navigation solution in North America, subject to certain conditions and execution of an agreement regarding those solutions. Although we have been awarded these programs, in the course of negotiating definitive agreements for the programs, the terms and conditions of the programs, including the pricing, the length of the programs and geographic scope of the programs, may change. We were not awarded the contracts for Europe, South America and Australia and New Zealand. Furthermore, a substantial portion of our revenue, and, to a lesser extent, gross profit is impacted by the underlying licensed content cost negotiated through HERE and other content providers and we cannot predict the impact on our revenue and gross profit of any changes between Ford and the map or other content providers.
Our automotive product revenue is generated primarily from on-board automotive navigation solutions provided to Ford. 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 product revenue is primarily derived from Ford's SYNC 2 and SYNC 3 on-board solutions. In connection with the aforementioned amendment, the scope of our solution with Ford has expanded to include future milestone deliveries throughout calendar 2018. Through December 31, 2017, we recognized as revenue royalties earned from our Ford SYNC 2 on-board solutions as the software was reproduced onto an SD card and shipped for installation in vehicles; however, we recognized revenue from Ford SYNC 3 primarily as our software was installed in the vehicle by Ford. Accordingly, the timing of our revenue recognition changed materially in fiscal 2017 during Ford's global transition from SYNC 2 to SYNC 3. We experienced a lower level of orders and revenue in the three months ended September 30, 2016 as Ford used its existing inventory of SYNC 2 product in conjunction with its transition to SYNC 3. Ford transitioned to SYNC 3 in all major regions during the three months ended December 31, 2016. Effective January 1, 2018, all prospective royalties related to Ford have been recorded as deferred revenue until the milestone deliveries listed in the amendment occur. This accounting treatment will further change on July 1, 2018 when we adopt the new revenue recognition rules under ASC 606.
In each geography where we provide navigation products to it, Ford also provides a map update program under which Ford owners in North America, South America, China and Europe with SYNC 3 and in Australia and New Zealand with SYNC 2 or SYNC 3 are eligible to receive annual map updates at no additional cost through the contractual period with the respective entity. We earn an annual compilation fee and a per unit fee for these updates included in the pricing arrangement. As our solutions encompass greater value-added services, such as Ford’s map update program, there is potential for changes in the timing of revenue recognition. We anticipate that we will continue to depend on Ford for a material portion of our revenue for the foreseeable future.
We also have agreements with GM. In February 2017, GM launched its first model featuring integration of our hybrid navigation solution in North America, the 2017 Cadillac CTS and CTS-V. Our solution is now available on the 2018 Cadillac CTS, CTS-V, ATS and XTS models, as well as select 2018 GM Terrain vehicles. GM also recently launched our hybrid navigation solution on model year 2019 truck and SUV/CUV models, including Chevy Silverado, GMC Sierra and Chevrolet Equinox. GM has launched vehicles with our hybrid navigation solution in China and the Middle East. Due to specified future obligations in connection with the product, we did not recognize any revenue from GM hybrid navigation solutions in fiscal 2017 or 2018, although we did experience increases in deferred revenue from these solutions. We expect that we will begin to

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recognize this revenue upon the adoption of ASC 606 on July 1, 2018. Our hybrid navigation solution is scheduled to become available in additional regions and GM models for model years 2019 to 2025.
We were selected to provide entry level on-board navigation through LG, a tier one supplier for the Opel and Vauxhall line of vehicles, for the European market. This solution launched in Adam, Corsa, Karl and Zafira model vehicles equipped with NAVI 4.0 IntelliLink® beginning in July 2017. These products are expected to be made available in other select vehicles for model years 2019 to 2022. GM sold its Opel and Vauxhall business to Groupe PSA in August 2017, and we continue to engage in development of similar solutions for Opel and Vauxhall.
In connection with our agreement to offer our on-board navigation solution in select Jeep and Chrysler vehicles in the China market through Panasonic Automotive Systems Company of America, we have not met all milestones under the contract. Accordingly, under current GAAP, all billings will be recorded as deferred revenue and will be amortized over the contractual period upon completion of the milestones. Our embedded navigation is included in the 2018 Jeep Grand Cherokee, which had its China launch in August 2017, and is expected to be included in Jeep Cherokee and Compass when those models debut in China by December 31, 2018.
We derive automotive services revenue primarily from our brought-in automotive navigation solutions. Billings for these services are generally recorded as deferred revenue and amortized to revenue over the estimated service periods.
In October 2017, we amended our agreement with Ford to provide certain connected services for SYNC 3 in North America, Europe and China. Ford launched connected search across various model year 2018 SYNC 3 vehicles in North America using its FordPassTM and Lincoln WayTM mobile applications. As of June 30, 2018, the vast majority of Ford vehicles with SYNC 3 produced in North America during the three months ended June 30, 2018 were capable of providing connected services.
GM offers its OnStar RemoteLink feature including our location-based services platform, and we earn a one-time fee for each new vehicle owner who downloads the associated MyBrand mobile application, including a localized version offered in Europe for the Opel and Vauxhall brands.
We have a partnership with Toyota for brought-in navigation services where our Scout GPS Link mobile application is available in select Entune Audio equipped Toyota vehicles in the United States and in select Lexus Enform equipped Lexus models. Toyota and Lexus vehicles enabled to connect with our Scout GPS Link began shipping in August 2015 and September 2016, respectively. We earn a one-time fee for each new Toyota or Lexus sold and enabled to connect to our Scout GPS Link mobile application.
Our Scout GPS Link and Xevo's XevoTM Engine Link provide brought-in navigation services, including a fully interactive moving map, for select model year 2018 Toyota vehicles equipped with Entune 3.0 Audio, as well as select Lexus vehicles equipped with Lexus Enform. Our fully interactive solution is available on select model year 2018 Toyota Camry and Sienna and Lexus NX and RC models, and was recently expanded to select model year 2019 Toyota Corolla hatchback, Avalon and CHR models. On these same Toyota and Lexus models, a premium embedded connected navigation option is also available that provides connected search, powered by our platform. Toyota and Lexus offer both our current solution and the new fully interactive solution in model year 2018 vehicles, with the availability of each solution dependent upon the Toyota and Lexus model and trim level. While we have seen expansion of our latest version of Scout GPS Link solution across more Toyota and Lexus models in fiscal 2019, we expect that Toyota may limit the number of future models or vehicles on which Scout GPS Link is offered by Toyota and Lexus due in part to the offering of alternative brought-in solutions such as Apple’s CarPlay, which Toyota recently announced it is offering across certain Toyota models, and the expanded offering of Google’s Android Auto solution across more automobile manufacturers.
Revenue from our advertising segment, which includes the delivery of display, location-based advertising impressions represented 26%, 16% and 12% of our revenue in fiscal 2018, 2017 and 2016, respectively. Our advertising revenue is derived primarily from ad insertion orders contracted with advertising agencies, direct customers, and channel partners.
Revenue from our mobile navigation segment represented 12%, 11% and 14% of our revenue in fiscal 2018, 2017 and 2016, respectively. We offer voice-guided, real-time, turn by turn, mobile navigation services under several brand names including Telenav GPS as well as under wireless carrier (or “white label”) brands. Subscription fee revenue from our mobile navigation service has declined steadily, primarily due to a substantial decrease in the number of paying subscribers for navigation services provided through AT&T and other wireless carriers. We expect that mobile navigation revenue will continue to decline. 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.
We derive mobile navigation services revenue primarily from our wireless carrier customers for their end users' subscriptions to our mobile navigation services. Our wireless carrier customers pay us based on a revenue sharing arrangement

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or a monthly subscription fee per end user, and they are responsible for billing and collecting the fees they charge their subscribers for the right to use our navigation services. When we are paid on a revenue sharing basis with our wireless carrier customers, the amount we receive varies depending on several factors, including the revenue share rate negotiated with the wireless carrier customer, the price charged to the subscriber by the wireless carrier customer, the specific sales channel of the wireless carrier customer in which the service is offered and the features and capability of the service. As a result of these factors, the amount we receive for a subscriber may vary considerably and is subject to change over time.

In fiscal 2019, we expect automotive and advertising revenue to represent the strategic growth segments of our business, but our expectations may not be realized. We expect that services revenue from wireless carrier customers, which has a higher gross margin than automotive and advertising revenue, will continue to decline substantially in fiscal 2019 due to the continued decline in the number of monthly recurring subscribers.

We generated 94%, 88% and 97% of our revenue in the United States in fiscal 2018, 2017 and 2016, respectively. With respect to revenue we receive from automobile manufacturers and tier ones for sales of vehicles in other countries, we classify the majority of that revenue as being generated in the United States, because we provide deliverables to and receive compensation from the automobile manufacturer's or tier one's United States' entity. It is possible that this classification may change in the future, as existing and new customers may elect to contract through subsidiaries. For example, in fiscal 2017, Ford assigned certain contract rights for its production of vehicles with our SYNC 3 products to its joint ventures in China.
Cost of revenue
We classify our cost of revenue as either cost of product revenue or cost of services revenue. Cost of product revenue consists primarily of the cost of third party content we incur in providing our on-board automotive navigation solutions and recognition of deferred software development costs. Cost of services revenue consists primarily of the costs associated with third party content we incur in providing our brought-in automotive navigation solutions, third party exchange ad inventory, data center operations and outsourced hosting services, customer support, stock-based compensation and amortization of developed technology that we incur in providing our navigation and advertising network services.

We capitalize and defer recognition of certain licensed map and POI content costs from third parties in a manner similar to deferred revenue for our brought-in automotive solutions and certain of our on-board solutions, and we recognize these deferred costs generally over the period the licensor is obligated to provide the content related services. As the deferred revenue and related deferred costs are recognized as the underlying services are provided, we will also incur ongoing costs of revenue for network operations, hosting and data center, customer service support, and other related costs over time. We also capitalize and defer recognition of certain costs, primarily payroll and related compensation and benefits expense, of software we develop for customers requiring significant modification or customization, and we recognize these deferred software development costs as cost of revenue with the associated customized software development revenue.
We primarily provide navigation service customer support through a third party provider to whom we provide training and assistance with problem resolution. In addition, we use outsourced, hosting services and industry standard hardware to provide our navigation services. We generally maintain at least 99.9% uptime every month, excluding designated periods of maintenance. Our internal targets for service uptime are even higher. We have in the past, and may in the future, not achieve our targets for service availability, which could result in penalties for failure to meet contractual service availability requirements or termination of our customer agreements.
The largest component of cost of revenue as it relates to our advertising business is the cost of location-based, third party advertising inventory which we acquire from advertising exchanges. Other notable costs of our advertising business are the cost of technologies that we license to deliver customized solutions, costs of ad delivery via contracted hosted relationships and the cost of our advertising operations.
While we expect that our services revenue from wireless carrier customers will continue to decline substantially in fiscal 2019 and beyond, we do not expect to be able to reduce our cost of services revenue at the same rate, if at all, as the decline in services revenue. Although we successfully transitioned to utilizing OSM content for the majority of our mobile user base resulting in notable cost savings, we expect to continue to incur significant costs, especially related to third party content as well as for outsourced hosting services. Cost of services revenue related to our advertising business will be impacted by our ability to grow advertising revenue, as well as the cost and availability of display ad inventory sourced from third party exchanges.

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Operating expenses
We generally classify our operating expenses into three categories: research and development, sales and marketing and general and administrative. Our operating expenses consist primarily of personnel costs, which include salaries, bonuses, advertising sales commissions, payroll taxes, employee benefit costs and stock-based compensation expense. Other expenses include marketing program costs, third party contractor and temporary staffing services, facilities-related costs including rent expense, legal, audit and tax consulting and other professional service fees. We allocate stock-based compensation expense resulting from the amortization of the fair value of stock-based awards granted, based on the department in which the award holder works. We allocate overhead, such as rent and depreciation, to each expense category based on headcount. In addition, when we incur legal settlements or make offers to settle contingencies, we classify such operating expense amounts separately as legal settlement and contingencies. We anticipate continued investment of resources, including the hiring of significant additional headcount, or reallocation of employee personnel to automotive and advertising. We may also be required to pay judgments, indemnification claims or other amounts, which we are unable to predict or estimate at this time.
Research and development. Research and development expenses consist primarily of personnel costs for our development and product management employees and related costs of outside consultants and temporary staffing. We have focused our research and development efforts on improving the ease of use and functionality of our existing products and services as well as developing new products and services. In addition to our U.S. employee base, a significant number of our research and development employees are located in our development centers in China and Romania; as a result, a portion of our research and development expense is subject to changes in foreign exchange rates, notably the Chinese Renminbi, or RMB, the Romanian Leu, or RON, and the Euro.
Sales and marketing. Sales and marketing expenses consist primarily of personnel costs for our sales and marketing staff, commissions earned by our sales personnel and the cost of marketing programs, advertising and promotional activities. Historically, a majority of our revenue has been derived from wireless carriers, which bore much of the expense of marketing and promoting our services to their subscribers, as well as consumers acquired through open market application stores. More recently, automotive revenue has comprised the largest portion of our revenue and automotive and advertising revenue have represented the growing components of our revenue. Our sales and marketing activities supporting our automotive navigation solutions include the costs of our business development efforts. Our automobile manufacturer partners and tier ones also provide primary marketing for our on-board and brought-in navigation services.
General and administrative. General and administrative expenses consist primarily of personnel costs for our executive, finance, legal, human resources and administrative personnel, legal, audit and tax consulting and other professional services and corporate expenses.
Other income (expense), net. Other income (expense), net consists primarily of interest we earn on our cash and cash equivalents and short-term investments, gain or loss on investments and foreign currency gains or losses.
Provision (benefit) for income taxes. Our provision (benefit) for income taxes primarily consists of corporate income taxes related to profits earned in foreign jurisdictions, foreign withholding taxes, and changes to our tax reserves. Our effective tax rate could fluctuate significantly from period to period, particularly in those periods in which we incur losses, due to our ability to benefit from the carryback of net operating losses within the carryback period and the available amount therein, if any. Furthermore, on a quarterly basis our tax rates can fluctuate due to changes in our tax reserves resulting from the settlement of tax audits or the expiration of the statute of limitations. Our effective tax rate could also fluctuate due to a change in our earnings or loss projections, changes in the valuation of our deferred tax assets or liabilities, or changes in tax laws, regulations, or accounting principles, as well as the expiration and retroactive reinstatement of tax holidays.
Critical accounting policies and estimates
We prepare our consolidated financial statements in accordance with GAAP. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require our judgment in its application. In other cases, our judgment is required in selecting among available alternative accounting policies that allow different accounting treatment for similar transactions. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and various other assumptions that we believe are reasonable under the circumstances. In many instances, we could reasonably use different accounting estimates, and in some instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving our judgments and estimates.

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Revenue recognition. We generate revenue primarily from software licenses, service subscriptions and customized software development fees. We also generate revenue from the delivery of advertising impressions. We recognize revenue when persuasive evidence of an arrangement exists, delivery of the product or service has occurred, the fee is fixed or determinable and collectability is reasonably assured. We evaluate whether it is appropriate to recognize revenue based on the gross amount billed to our customers or the net amount earned as revenue.  When we are primarily obligated in a transaction, have latitude in establishing prices, are responsible for fulfillment of the transaction, have credit risk, or have several but not all of these indicators, we record revenue on a gross basis. While none of the factors individually are considered presumptive or determinative, in reaching conclusions on gross versus net revenue recognition, we place the most weight on the analysis of whether or not we are the primary obligor in the arrangement. We report our automotive and advertising revenue on a gross basis.
We derive product revenue from the delivery of customized software and royalties earned from the distribution of this customized software in certain automotive navigation applications, map updates to the software and customized software development. We generally recognize customized software revenue using the completed contract method of contract accounting under which revenue is recognized upon delivery to, and acceptance by, the automobile manufacturer of our on-board navigation solutions. We generally recognize royalty revenue for our automotive on-board navigation solutions as the software is reproduced for installation in vehicles or as the software is installed in vehicles, assuming all other conditions for revenue recognition have been met. For on-board navigation solutions provided with ongoing contractual obligations such as map updates, we generally recognize royalty revenue ratably over the contractual period.
We derive services revenue from our brought-in automotive navigation solutions. Billings for these services are recorded as deferred revenue and amortized to revenue over the estimated service periods.
We derive services revenue from the delivery of advertising impressions. We recognize revenue when the related advertising services are delivered based on the specific terms of the advertising contract, which are commonly based on the number of ad impressions delivered, or clicks, drives or actions by users on mobile advertisements.
We also derive 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 pay us based on a revenue sharing arrangement or a monthly subscription fee per end user.
We recognize monthly fees related to our mobile navigation services in the month we provide the services. We defer amounts received or billed in advance of the service being provided and recognize the deferred amounts when the monthly service has been provided. Our agreements do not contain general rights of refund once the service has been provided. We also establish allowances for estimated credits subsequently issued to end users by our wireless carrier customers.
We recognize as services revenue the amount our wireless carrier customers report to us as we provide our services, which are net of any revenue sharing or other fees earned and deducted by our wireless carrier customers. We are not the principal provider when selling access to our mobile navigation services through our wireless carrier customers as the subscribers directly contract with our wireless carrier customers. Our wireless carrier customers have the sole ability to set the price charged to their subscribers for our service and have direct responsibility for billing and collecting those fees from their subscribers.
In certain instances, due to the nature and timing of monthly revenue and reporting from our customers, we may be required to make estimates of the amount of revenue to recognize from a customer for the current period. For example, we may not receive accurate subscriber billing information from our wireless carrier customers or production information from our automobile manufacturer and tier one customers and may have to use provisioning, usage, activation and deactivation data, or shipment and production information to allow us to compute revenue due to us from our customers, and in such cases we make estimates of revenue and third party costs. In addition, if we fail to receive an accurate revenue report from a customer for the month, we will need to estimate the amount of revenue that should be recorded for that month. These estimates may require judgment, and we consider certain factors and information in making these estimates such as:
purchaser data supplied by our wireless carrier customers or production and sales data provided by our auto manufacturer and tier one customers;
customer specific historical subscription or unit sales trends and revenue reporting trends;
end user subscription data from our internal systems; and
data from comparable distribution channels of our other customers.
If we are unable to reasonably estimate recognizable revenue from a customer for a given period, we defer recognition of revenue to the period in which we receive and validate the customer’s revenue report and all of our revenue recognition criteria have been met. If we have recorded an estimated revenue amount, we record any difference between the estimated revenue and

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actual revenue in the period when we receive the final revenue reports from our customer, which typically occurs within the following month. To date, actual amounts have not differed materially from our estimates.
Software development costs
Software developed for internal use. We account for the costs of computer software we develop for internal use by capitalizing qualifying costs, which are incurred during the application development stage, and amortizing those costs over the application’s estimated useful life, which generally ranges from three to five years depending on the type of application. Costs incurred and capitalized during the application development stage generally include the costs of software configuration, coding, installation and testing. Such costs primarily include payroll and payroll related expenses for employees directly involved in the application development, as well as third party developer fees. We expense preliminary evaluation costs as they are incurred before the application development stage, as well as post development implementation and operation costs, such as training, maintenance and minor upgrades. We begin amortizing capitalized costs when a project is ready for its intended use, and we periodically reassess the estimated useful life of a project considering the effects of obsolescence, technology, competition and other economic factors which may result in a shorter remaining life.
We capitalized $0.8 million of software development costs during fiscal 2018. We did not capitalize or write off any software development costs during fiscal 2017 or 2016. Amortization expense related to capitalized software development costs, which was recorded in cost of revenue, totaled $0.2 million, zero and zero for fiscal 2018, 2017 and 2016, respectively.
Software developed for external customers. We account for the costs of computer software we develop for customers requiring significant modification or customization by deferring qualifying costs under the completed contract method. We begin deferring development costs upon receipt of a signed contract or purchase order for a fixed amount. All such development costs incurred are deferred until the related revenue is recognized. We deferred $3.2 million, $3.2 million and $0.6 million of software development costs during fiscal 2018, 2017 and 2016, respectively. Development costs expensed to cost of revenue totaled $0.9 million, $0.1 million and $0.7 million for fiscal 2018, 2017 and 2016, respectively.
Impairment of long-lived assets. We evaluate long-lived assets held and used for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. We continually evaluate whether events and circumstances have occurred that indicate the balance of our property and equipment and intangible assets with definite lives may not be recoverable. Our evaluation is significantly impacted by our estimates and assumptions of future revenue, costs, and expenses and other factors. If an event occurs that would cause us to revise our estimates and assumptions used in analyzing the value of our property and equipment, that revision could result in a non-cash impairment charge that could have a material impact on our financial results. When these factors and circumstances exist, we compare the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amounts. We base the impairment, if any, on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows of those assets, and record it in the period in which we make the determination.
Goodwill. Goodwill represents the excess of the aggregate purchase price paid over the fair value of the net assets acquired. Goodwill is not amortized and is tested for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. These tests are based on our operating segment and reporting unit structure. We first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. We are not required to calculate the fair value of our reporting units unless we determine, based on a qualitative assessment, that it is more likely than not that the fair value is less than our carrying amount. If we determine it is more likely than not that the fair value of the reporting unit is less than its carrying value, we perform a two-step quantitative goodwill impairment test. The first step of the impairment test involves comparing the fair value of the reporting unit to its net book value, including goodwill. If the net book value exceeds its fair value, then we would perform the second step of the goodwill impairment test to determine the amount of the impairment loss, if any. In assessing the fair value of our reporting units, we make assumptions regarding our estimated future cash flows, long-term growth rates, timing over which the cash flows will occur and, amongst other factors, the weighted average cost of capital. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units and determination of the fair value of each reporting unit.
During the three months ended March 31, 2018, certain mobile navigation customer contracts were amended and certain other customers indicated their intent with respect to terminating services in the near term. Based upon a qualitative assessment indicating that it was more likely than not that the fair value of the mobile navigation reporting unit was less than its carrying value, we performed an interim goodwill impairment test for our mobile navigation segment during the three months ended March 31, 2018. In assessing its fair value, we made assumptions regarding our estimated future cash flows, weighted average cost of capital and timing over which the cash flows will occur, amongst other factors. Based on the results of our goodwill impairment test, the carrying value of our mobile navigation business exceeded its estimated fair value and, accordingly, during the three months ended March 31, 2018, we recognized a $2.7 million impairment of all of the goodwill associated with our mobile navigation segment.

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We also performed our annual test of goodwill for impairment on April 1, 2018 at the reporting unit level using a discounted cash flow analysis based upon projected financial information. We applied our best judgment when assessing the reasonableness of the financial projections used to determine the fair value of each reporting unit. Based on the results of our annual goodwill impairment test as of April 1, 2018, the estimated fair value of each of our reporting units exceeded its carrying value.
The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions and other factors. If our estimates or related assumptions change in the future, or if our net book value were to exceed our market capitalization, we may be required to record an impairment loss related to our goodwill. Other than our $2.7 million impairment of all of the goodwill associated with our mobile navigation segment, we have not recognized any impairment of goodwill in the three year period ended June 30, 2018. As of June 30, 2018, we had goodwill of $28.7 million.
Stock-based compensation expense. We account for stock-based employee compensation arrangements under the fair value recognition method, which requires us to measure the stock-based compensation costs of share-based compensation arrangements based on the grant date fair value, and recognize the costs in the financial statements over the employees’ requisite service period. We recognize compensation expense for the fair value of these awards with time based vesting on a straight-line basis over an employee’s requisite service period of each of these awards, net of estimated forfeitures.
Our stock-based compensation expense was as follows:
 
 
Fiscal Year Ended June 30,
 
 
2018
 
2017
 
2016
 
 
(in thousands)
Cost of revenue
 
$
145

 
$
130

 
$
143

Research and development
 
5,535

 
5,543

 
6,062

Selling and marketing
 
1,671

 
2,090

 
2,844

General and administrative
 
2,525

 
2,399

 
2,317

Total stock-based compensation expense
 
$
9,876

 
$
10,162

 
$
11,366

As of June 30, 2018, there was $2.5 million of unrecognized stock-based compensation expense related to unvested stock option awards, net of estimated forfeitures, that we expect to be recognized over a weighted average period of 1.90 years. At June 30, 2018, the total unrecognized stock-based compensation cost related to restricted stock units was $11.3 million, net of estimated forfeitures, and will be amortized over a weighted average period of 2.38 years.
We generally utilize the Black-Scholes option-pricing model to determine the fair value of our stock option awards, which requires a number of estimates and assumptions. In valuing share-based awards under the fair value accounting method, significant judgment is required in determining the expected volatility of our common stock and the expected term individuals will hold their share-based awards prior to exercising. The expected volatility is based on the historical volatility of our common stock. The expected term of options granted represents the period of time that options granted are expected to be outstanding. The expected term was based on an analysis of our historical exercise and cancellation activity. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results differ from our estimates, such amounts will be recorded as an adjustment in the period estimates are revised.
For fiscal 2018, 2017 and 2016, we calculated the fair value of options granted to employees with the following weighted average assumptions:
 
 
Fiscal Year Ended June 30,
 
 
2018
 
2017
 
2016
Expected volatility
 
42
%
 
39
%
 
47
%
Expected term (in years)
 
4.75

 
4.25

 
4.53

Risk-free interest rate
 
2.00
%
 
1.32
%
 
1.35
%
Dividend yield
 

 

 


We recognize the estimated stock-based compensation expense of restricted stock units, net of estimated forfeitures, over the vesting term. The estimated stock-based compensation expense is based on the fair value of our common stock on the date of grant.
Provision (benefit) for income taxes. We use the asset and liability method of accounting for income taxes. Under this method, income tax expense (benefit) is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax effect of temporary differences between

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the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. We must make assumptions, judgments and estimates to determine our current provision for income taxes and also our deferred tax assets and liabilities and any valuation allowance to be recorded against a deferred tax asset.
Our assumptions, judgments and estimates relative to the current provision (benefit) for income taxes take into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. We have established reserves for income taxes to address potential exposures involving tax positions that could be challenged by tax authorities. In addition, we are subject to the periodic examination of our income tax returns by the Internal Revenue Service, or IRS, and other domestic and foreign tax authorities. Although we believe our assumptions, judgments and estimates are reasonable, changes in tax laws or our interpretation of tax laws and the resolution of the current and any future tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements.
Our assumptions, judgments and estimates relative to the value of a deferred tax asset take into account predictions of the amount and category of future taxable income, such as income from operations or capital gains income and predictions of the amount and category of future taxable loss that may be carried back for a tax refund. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets, on a jurisdiction by jurisdiction basis, will be realized. Actual operating results and the underlying amount and category of income in future years as well as expectations regarding the generation of operating losses could render our current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate. Any of the assumptions, judgments and estimates mentioned above could cause our actual income tax obligations or refunds to differ from our estimates, thus materially impacting our financial position and results of operations.

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Results of operations
The following tables set forth our results of operations for fiscal 2018, 2017 and 2016, as well as a percentage that each line item represents of our revenue for those periods. The period to period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods.
 
 
Fiscal Year Ended June 30,
Consolidated Statements of Operations Data
 
2018
 
2017
 
2016
Revenue:
 
 
 
(in thousands)
 
 
Product
 
$
59,143

 
$
119,785

 
$
132,454

Services
 
47,037

 
49,799

 
50,892

Total revenue
 
106,180

 
169,584

 
183,346

Cost of revenue:
 
 
 
 
 
 
Product
 
37,517

 
70,260

 
79,165

Services
 
24,713

 
22,075

 
21,632

Total cost of revenue
 
62,230

 
92,335

 
100,797

Gross profit
 
43,950

 
77,249

 
82,549

Operating expenses:
 
 
 
 
 
 
Research and development
 
87,488

 
73,102

 
68,911

Sales and marketing
 
20,748

 
21,995

 
25,587

General and administrative
 
21,562

 
23,041

 
23,059

Goodwill impairment
 
2,666

 

 

Legal settlement and contingencies
 
425

 
6,424

 
935

Restructuring
 

 

 
(1,362
)
Total operating expenses
 
132,889

 
124,562

 
117,130

Loss from operations
 
(88,939
)
 
(47,313
)
 
(34,581
)
Other income (expense), net
 
833

 
892

 
(229
)
Loss before provision for income taxes
 
(88,106
)
 
(46,421
)
 
(34,810
)
Provision for income taxes
 
1,012

 
841

 
511

Net loss
 
$
(89,118
)
 
$
(47,262
)
 
$
(35,321
)
 
 
Fiscal Year Ended June 30,
 
 
2018
 
2017
 
2016
Revenue:
 
(as a percentage of revenue)
Product
 
56
 %
 
71
 %
 
72
 %
Services
 
44
 %
 
29
 %
 
28
 %
Total revenue
 
100
 %
 
100
 %
 
100
 %
Cost of revenue:
 
 
 
 
 
 
Product
 
36
 %
 
41
 %
 
43
 %
Services
 
23
 %
 
13
 %
 
12
 %
Total cost of revenue
 
59
 %
 
54
 %
 
55
 %
Gross profit
 
41
 %
 
46
 %
 
45
 %
Operating expenses:
 
 
 
 
 
 
Research and development
 
82
 %
 
43
 %
 
38
 %