ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
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 20,000 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 2022, which we intend to either assign to inMarket or terminate in connection with the inMarket Transaction. We also lease various office spaces of less than 5,000 square feet throughout the world 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.
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 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.
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.
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.
ITEM 4.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
PART II.
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the NASDAQ Global Market under the symbol “TNAV.”
We had approximately 29 stockholders of record as of June 30, 2019. 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.
Issuer Purchases of Equity Securities
On February 7, 2019, we announced that our board of directors had approved a stock repurchase program to facilitate our repurchase up to $20.0 million worth of our issued and outstanding common stock in the open market. The timing and amount of repurchase transactions under this program will depend on market conditions, cash flow and other considerations. The repurchase authorization will expire on August 4, 2020.
The following table summarizes stock repurchase activity during the three months ended June 30, 2019:
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, 2014 through June 30, 2019 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.
ITEM 6.
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, 2019, 2018 and 2017 and the balance sheet data as of June 30, 2019 and 2018 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, 2016 and 2015 and the balance sheet data as of June 30, 2017, 2016 and 2015 were derived from 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.
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(1) The summary consolidated financial data for the fiscal years ended and as of June 30, 2018 and 2017 have been retrospectively restated to reflect the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) and subsequent amendments to the initial guidance. In conjunction with Topic 606, a new subtopic, ASC 340-40, Other Assets and Deferred Costs - Contracts with Customers, was also issued. Collectively, we refer to Topic 606 and Subtopic 340-40 as “ASC 606.” See Note 1 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for a summary of adjustments related to ASC 606. The selected financial data for the fiscal years ended and as of June 30, 2016 and 2015 have not been updated to reflect the adoption of ASC 606.
ITEM 7.
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. We utilize our connected car 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. In addition, as discussed below, until August 2019, we utilized our advertising platform, which we refer to as our Ads Business, to deliver highly targeted advertising services to advertisers and advertising agencies by leveraging our location expertise. We reported results through June 30, 2019 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, 2017, 2018 and 2019 and ending June 30, 2020 as fiscal 2017, fiscal 2018, fiscal 2019 and fiscal 2020, respectively. Our total revenue was $209.7 million in fiscal 2017, $218.5 million in fiscal 2018 and $220.9 million in fiscal 2019. Our net loss was $29.5 million in fiscal 2017, $40.8 million in fiscal 2018 and $32.5 million in fiscal 2019.
We derive revenue primarily 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.
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 in fiscal 2020. 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 $9.8 million, or 4% of our revenue, in fiscal 2019, 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.
We offer four variations of our connected car products and services to our automobile manufacturer and tier one customers for distribution with their vehicles and systems. First, we offer on-board navigation systems that are built into vehicles with all key elements of the system residing in the vehicle as a self-contained application along with the related software and content. Our on-board navigation products do not require access to the Internet or wireless networks to function. 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 SDK that enables our customers to add mapping and location capabilities to their cloud, mobile and on-board automotive applications. 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 provide our connected car products and services directly to automobile manufacturers such as Ford, which represented 55% of our revenue in fiscal 2019, GM, which represented 18% of our revenue in fiscal 2019, 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 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's branded mobile and web-based applications, 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 its 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.
Through August 2019, we generated revenue from advertising network services through the delivery of advertising impressions based on the specific terms of the advertising contract. In fiscal 2019, we recognized a $2.6 million impairment of the goodwill associated with our advertising business segment. Subsequent to June 30, 2019, we entered into the inMarket Transaction described above.
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.
In August 2019, we sold the Ads Business to inMarket. Upon the terms and subject to the conditions of the Asset Purchase Agreement, inMarket acquired substantially all of the assets and assumed certain liabilities related to and used in the Ads Business. In exchange, inMarket issued to Telenav units of inMarket representing a 14.5% member interest in inMarket at the time of closing of the inMarket Transaction. In addition, inMarket granted to Telenav a perpetual, non-exclusive, irrevocable, royalty-free, license back to the software and other intellectual property rights being assigned to inMarket as part of the inMarket Transaction. We will report the operating results of the Ads Business as discontinued operations in our condensed consolidated financial statements for the first quarter of fiscal 2020 and for all prior comparative periods.
In August 2019, we entered into certain agreements with affiliates of Grab, including: (i) a services agreement pursuant to which we agreed that we will provide certain services to Grab through certain of our employees designated to work on our OpenTerra Platform; (ii) a license agreement pursuant to which we have granted to Grab a perpetual license to certain intellectual property associated with the OpenTerra Platform; and (iii) an asset purchase agreement pursuant to which we will sell certain intellectual property associated with the OpenTerra Platform to Grab and facilitate the making of offers for employment or consulting arrangements by Grab of certain of our OpenTerra employees. The transactions contemplated by the services agreement, license agreement and asset purchase agreement together comprise the “Grab Transaction.” The consideration for the services agreement, license agreement and asset purchase agreement is a mix of cash and Grab Holdings, Inc. ordinary shares. The asset purchase component of the Grab Transaction is subject to customary closing conditions and is expected to close before June 30, 2020.
Adoption of ASC 606
We adopted ASC 606 effective July 1, 2018, utilizing the full retrospective transition method. All prior period amounts and disclosures for the three years ended June 30, 2019 set forth in this Form 10-K have been adjusted to comply with ASC 606. See Note 1 to our consolidated financial statements for a summary of adjustments.
The effect of adopting ASC 606 on fiscal 2018 was material to our statements of operations and balance sheets as a result of its impact on the recognition of revenue and associated third-party content costs for certain of our on-board and brought-in automotive navigation solutions. The adoption of ASC 606 had no significant impact on our advertising and mobile navigation
business segments. The adoption of ASC 606 resulted in reductions to deferred costs (asset) and deferred revenue (liability) balances, and accelerated the recognition of revenues and deferred costs in the automotive segment. Such impact on our statements of operations will continue going forward.
The adjustments required to transition to ASC 606 resulted in $160.6 million of deferred revenue and $86.9 million of deferred costs of the total originally reported on our balance sheet as of June 30, 2018 being recorded instead as revenue and cost of revenue, respectively, in our adjusted prior periods. In addition, the adoption of ASC 606 required us to capitalize an additional $4.2 million, net, of deferred development costs on our adjusted June 30, 2018 balance sheet, resulting in a net decrease in deferred costs of $82.7 million. In total, our accumulated deficit decreased by $77.8 million as of June 30, 2018. All prior period amounts presented have been adjusted to comply with ASC 606. See Note 1 to our condensed consolidated financial statements.
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 recognize revenue related to royalties for distinct software and content that has been accepted as transfer of control takes place, with an allocation of the transaction price based on the relative standalone selling price, or SSP, of map updates, specified upgrades, and other services as applicable, which we will recognize with the associated content costs at a point in time or over time as we transfer control of the related performance obligation.
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 estimate the total transaction price each reporting period using a probability assessment, and then recognize revenue ratably over the period the services obligation is expected to be fulfilled.
Development costs subject to ASC 340-40 incurred to fulfill future obligations under certain actual or anticipated contracts for automotive solutions are capitalized, provided they are expected to be recovered, and then recognized as control of the related performance obligations is transferred. Historically, such costs were not capitalized until receipt of a signed contract or purchase order for a fixed amount, provided the costs were probable of being recovered. Under ASC 340-40, we are required to capitalize such costs in anticipation of a contract, provided the costs are expected to be recovered; thus, increasing the amount of costs we capitalize under ASC 340-40. For on-board automotive solutions, such capitalized costs represent the customized portion of software development, which will continue to be recognized upon acceptance of the software under ASC 340-40 since acceptance is generally required for control of the software to transfer. For brought-in automotive solutions, such costs will be amortized over the period the services obligation is expected to be fulfilled, since software development does not represent a distinct performance obligation in the case of brought-in automotive solutions. Historically, we recognized such costs for brought-in automotive solutions upon acceptance of the software.
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 cash flow from operations and free cash flow are not measures calculated in accordance with GAAP, and should not be considered as an alternative to any measure of financial performance calculated and presented in accordance with GAAP. In addition, these non-GAAP measures may not be comparable to similarly titled measures of other companies because other companies may not calculate them in the same manner that we do.
Our key operating and financial performance metrics are as follows (in thousands, except percentages and per share amounts):
Gross margin is our gross profit, or total revenue less cost of revenue, expressed as a percentage of our total revenue. Our gross margin has been and will continue to be impacted by the increasing percentage of our revenue base derived from automotive navigation solutions and advertising network services, which generally have higher associated third party content costs and third party display ad inventory costs, respectively, than our mobile navigation offerings provided through wireless carriers.
Billings equals revenue recognized plus the change in deferred revenue from the beginning to the end of the applicable period. Direct contribution from billings reflects GAAP gross profit plus change in deferred revenue less change in deferred costs from the beginning to the end of the applicable period. 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 whereby customized engineering fees are earned. As we enter into more hybrid and brought-in navigation programs, deferred revenue and deferred costs become larger components of our operating results, so we believe these metrics are useful in evaluating cash flows.
We consider billings, 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 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 for 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 brought-in solutions cannot be fully recognized as revenue in a given period due to requirements for ongoing map updates and provisioning of services such as hosting, monitoring, customer support and, for certain customers, additional period content and associated technology costs. Accordingly, direct contribution from billings and direct contribution margin from billings do not include all costs associated with billings. Second, we may calculate billings, direct contribution from billings and direct contribution margin from billings in a manner that is different from peer companies that report similar financial measures, making comparisons between companies more difficult. When we use these measures, we attempt to
compensate for these limitations by providing specific information regarding billings, direct contribution from billings and direct contribution margin from billings and how they relate to revenue, gross profit and gross margin calculated in accordance with GAAP.
Adjusted EBITDA measures our GAAP net loss excluding the impact of stock-based compensation expense, depreciation and amortization, other income (expense), net, provision (benefit) for income taxes, and other applicable items such as goodwill impairment, legal settlements and contingencies, deferred rent reversal and tenant improvement allowance recognition due to sublease termination, and merger and acquisition, or M&A, transaction expenses, net of tax. Stock-based compensation expense relates to equity incentive awards granted to our employees, directors, and consultants. Legal settlements and contingencies represent settlements, offers made to settle, or loss accruals relating to litigation or other disputes in which we are a party or the indemnitor of a party. 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 effective September 2017. M&A transaction expenses related primarily to transaction costs associated with the inMarket Transaction and the Grab Transaction. Goodwill impairment represents the impairment charge related to our mobile navigation business segment recorded in the third quarter of fiscal 2018 and the impairment charge related to our advertising business segment recorded in the fourth quarter of fiscal 2019.
Adjusted cash flow from operations measures adjusted EBITDA plus the effect of changes in deferred revenue and deferred costs. We believe adjusted cash flow from operations is a useful measure, especially in light of the impact we expect on reported revenue from certain value-added offerings we provide our customers, including map updates and the impact of future deliverables.
Adjusted EBITDA and adjusted cash flow from operations, while generally measures of profitability and the generation of cash, can also represent losses and the use of cash, respectively. Adjusted EBITDA and adjusted cash flow from operations 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 and adjusted cash flow from operations can provide a useful measure for period-to-period comparisons of our core business.
In addition, adjusted cash flow from operations 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 and other employees. Accordingly, we believe that adjusted EBITDA and adjusted cash flow from operations generally provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.
Free cash flow is a non-GAAP financial measure we define as net cash provided by (used in) operating activities less purchases of property and equipment. We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash (used in) generated by our business after purchases of property and equipment.
These non-GAAP measures have limitations as analytical tools and should not be considered in isolation or as substitutes for our financial results as reported under GAAP. Some of these limitations are:
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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 cash flow from operations do not reflect all costs associated with billings;
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assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditures;
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adjusted EBITDA and adjusted cash flow from operations do not reflect the potentially dilutive impact of equity-based compensation;
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adjusted EBITDA and adjusted cash flow from operations do not reflect the use of cash for net share settlements of RSUs;
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adjusted EBITDA and adjusted cash flow from operations 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
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adjusted EBITDA, adjusted cash flow from operations, 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, billings, direct contribution from billings, direct contribution margin from billings, adjusted EBITDA, adjusted cash flow from operations and free cash flow should be considered 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 cash flow from operations, and net loss and net cash flow used in operating activities to free cash flow for each of the periods indicated (dollars in thousands):
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 reported revenue, cost of revenue and gross profit results in three business segments through June 30, 2019: 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 85%, 81% and 78% of our revenue in fiscal 2019, 2018 and 2017, respectively. Ford represented 55%, 67% and 71% of our revenue in fiscal 2019, 2018 and 2017, respectively, and GM represented 18%, less than 10% and less than 10% of our revenue in fiscal 2019, 2018 and 2017, respectively.
Our contract with Ford covers a broad range of products and services that we provide to Ford. On March 28, 2018, we entered into an amendment with Ford that extends the term of the agreement from December 31, 2018 to December 31, 2020 for each jurisdiction in which we currently provide our products to Ford. 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. The terms of this next generation navigation solution were embodied in an amendment executed in December 2018. With respect to North America production, this amendment extended the term of the agreement to December 31, 2022, which term may be further extended at Ford’s option subject to certain conditions. 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 contract with GM includes the provision of our on-board, hybrid, and brought-in navigation solutions across a wide assortment of GM vehicles. Our mobile navigation SDK powers GM’s branded mobile and web-based applications and is covered under a services agreement that was entered into June 13, 2014 and extends to December 31, 2019. Our on-board and hybrid navigation solutions for GM are covered under a product and services agreement that became effective February 1, 2017. These solutions began shipping in a limited number of vehicles beginning with model year 2017 and are gradually expanding across additional regions and models. In May 2017, additional vehicles through model year 2025 were added to this products and services agreement, which terminates on December 31, 2026.
Product revenue. Our automotive product revenue is generated primarily from on-board and hybrid automotive navigation solutions provided to Ford and GM. Our on-board solutions consist of software, memory card, map and point of interest, or POI, data loaded in the vehicle that provides voice-guided turn by turn navigation displayed on the vehicle screen. Our hybrid navigation solutions contain on-board software functionality and also add cloud functionality such as cloud search, cloud routing, map updates and “live” data.
Royalties for on-board navigation solutions are generally earned at various points in time, depending upon the individual customer agreement. We earn each royalty upon either the re-imaging of the software on each individual memory card or the time at which each vehicle is produced.
We recognize revenue from on-board automotive navigation solutions upon transfer of control of the customized software and any associated integrated content together forming a distinct performance obligation. Transfer of control generally occurs at a point in time upon acceptance. Any royalties for the use of distinct software combined with integrated content, with an allocation of the transaction price based on the relative SSP of map updates, specified upgrades, and other services as applicable, are recognized at the later of when the royalties are earned or when transfer of control of the related performance obligation has occurred.
For hybrid automotive solutions, the transaction price allocated to the on-board component is generally recognized as product revenue as described above, and the transaction price allocated to the included cloud functionality based on SSP is generally recognized as services revenue. Since the on-board software is still the predominant item in the hybrid solution, the royalties recognition guidance applies as it does for on-board navigation solutions described above. Our brought-in automotive navigation solutions as described below are subject to variable consideration and constraint guidance.
Our product revenue from Ford is primarily derived from Ford’s SYNC 2 and SYNC 3 on-board solutions. 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 applicable contractual period. We earn an annual compilation fee and a per unit fee for these updates included in the pricing arrangement. 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 currently available in North America on select 2019 models of Cadillac, GMC, Chevrolet and Buick. GM has also launched vehicles with our hybrid navigation solution in China and the Middle East. Our on-board and connected navigation solution is scheduled to become available in additional regions and GM models for model years 2020 through 2025. We anticipate that we will continue to depend on GM for a material portion of our revenue for the foreseeable future.
We 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 Opel's Adam, Corsa, Karl and Zafira model vehicles in July 2017. These products are expected to be made available in other select vehicles for model years 2020 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.
We also have an agreement to offer our on-board navigation solution in select Jeep and Chrysler vehicles in the China market through Panasonic. Our on-board navigation was initially included in the 2018 Jeep Grand Cherokee, which had its China launch in August 2017, and is now included in Jeep Cherokee and Compass models in China.
Services revenue. We derive services revenue primarily from our brought-in automotive navigation solutions and, to a lesser extent, from the cloud functionality that is a component of our hybrid automotive navigation solutions as discussed above. Royalties for brought-in navigation solutions are earned upon vehicle sales reporting or upon initial usage by the end user.
Since these contracts typically contain a substantial amount of variable consideration that is required to be estimated and included in the transaction price, we include in the transaction price only variable consideration such that it is probable that a risk of significant revenue reversal will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Total variable consideration to be received is estimated at contract inception and updated at each reporting date. We utilize the expected value method and consider expected unit volume combined with a risk-based probability based on factors including, but not limited to: model year cycles, customer history, technology life cycles, nature of competition and other contract-specific factors. Because customers of our brought-in automotive navigation solutions simultaneously receive and consume the benefit from our performance, we recognize revenue ratably over the period the services obligation is expected to be fulfilled, generally 8 to 12 years, as this provides a faithful depiction of the transfer of control.
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. The vast majority of Ford vehicles with SYNC 3 produced in North America and Europe during the fiscal year ended June 30, 2019 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 North America 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. In addition, our Scout GPS Link and Xevo’s XevoTM Engine Link 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 first became available on select model year 2018 Toyota Camry and Sienna and Lexus NX and RC models, and was expanded to select model year 2019 Toyota Corolla hatchback, Avalon, CHR and RAV4 models, as well as Lexus UX and select model year 2020 Corolla sedans and Prius Prime. On most Toyota and Lexus models, a premium embedded connected navigation option is also available that provides connected search, powered by our platform.
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 or reduce the number of models or vehicles on which Scout GPS Link is offered by Toyota and Lexus, beginning in model year 2021, due in part to the offering of alternative brought-in solutions such as Apple’s CarPlay, which Toyota is offering across certain Toyota models, and the expanded offering of Google’s Android Auto solution across more automobile manufacturers.
During the fourth quarter of fiscal 2019, Telenav entered into an amended agreement with Xevo. The amended agreement provides that we will receive a one-time $17.0 million cash pre-payment in the first quarter of fiscal 2020 in exchange for removing a contractual minimum unit commitment that otherwise would have resulted in a payment to us in fiscal 2027. We recorded the receivable as deferred revenue in the fourth quarter of fiscal 2019, and it will be recognized as revenue over future periods. Our contract with Xevo relating to the implementation of our solutions in Toyota and Lexus vehicles is expected to remain in place through 2026, and we are exploring additional opportunities with Xevo and Toyota as well.
Revenue from our advertising segment, which includes the delivery of display, location-based advertising impressions represented 11%, 13% and 13% of our revenue in fiscal 2019, 2018 and 2017, respectively. Our advertising revenue is derived primarily from ad insertion orders contracted with advertising agencies, direct customers, and channel partners. We recognize revenue when transfer of control of the related advertising services occur based on the specific terms of each advertising contract, which are generally based on the number of ad impressions delivered. In August 2019, we sold the Ads Business to inMarket. We will report the operating results of the Ads Business as discontinued operations in our condensed consolidated financial statements for the first quarter of fiscal 2020 and for all prior comparative periods.
Revenue from our mobile navigation segment represented 4%, 6% and 9% of our revenue in fiscal 2019, 2018 and 2017, respectively. We offer voice-guided, real-time, turn by turn, mobile navigation service under several brand names including Telenav GPS as well as under wireless carrier brands (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 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. 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 obligation has been fulfilled.
In fiscal 2020, we expect automotive revenue to represent the strategic growth segment 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 2020 due to the continued decline in the number of monthly recurring subscribers.
Revenue concentrations. We generated 81%, 90% and 90% of our revenue in the United States in fiscal 2019, 2018 and 2017, 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, memory cards and recognition of deferred software development costs. Cost of services revenue consists primarily of the costs associated with third-party content we incur in providing our brought-in automotive navigation solutions, third-party ad inventory, data center operations and outsourced hosting services, software maintenance, customer support, the amortization of capitalized software, recognition of deferred customized software development costs, stock-based compensation and amortization of acquired developed technology.
We capitalize and defer recognition of certain third-party royalty-based content costs associated with the fulfillment of future automotive product and services obligations, and we recognize these deferred content costs as cost of revenue as we
transfer control of the related performance obligation. As the deferred revenue and related deferred costs are recognized as we transfer control of the related performance obligation, we will also incur ongoing costs of revenue for network operations, hosting and data center, customer service support, and other related costs over time.
We also capitalize and defer recognition of certain costs, primarily payroll and related compensation and benefits expense, of customized software we develop for customers. We begin deferring development costs when they relate directly to a contract or specific anticipated contract and such costs are incurred to satisfy performance obligations in the future, provided they are expected to be recovered. We recognize these deferred software development costs as cost of revenue upon transfer of control of the associated performance obligation.
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 agreement.
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 2020 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 mobile navigation services revenue. Although we successfully transitioned to utilizing OpenStreetMap, or 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. As the number of connected vehicles powered by Telenav continues to increase, we expect to incur additional costs and expenses associated with supporting this functionality.
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, make offers to settle contingencies or accrue losses relating to litigation or other disputes in which we are a party or the indemnitor of a party, we classify such operating expense amounts separately as legal settlements and contingencies. We anticipate continued investment of resources, including the hiring of 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. Automotive revenue has comprised the largest portion of our revenue and has represented the growing component 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.
Legal settlements and contingencies. Legal settlements and contingencies represent settlements, offers made to settle, or loss accruals relating to litigation or other disputes in which we are a party or the indemnitor of a party.
Other income (expense), net. Other income (expense), net consists primarily of interest we earn on our cash and cash equivalents and short-term investments, gain or loss on investments, unrealized gains or losses on non-marketable equity investments and foreign currency gains or losses.
Provision (benefit) for income taxes. Our provision (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.
Revenue recognition. The core principle of ASC 606 is to recognize revenue to depict the transfer of products or services to customers in an amount that reflects the consideration we expect to be entitled to in exchange for those products or services. This principle is achieved through applying the following five-step approach:
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Identification of the contract, or contracts, with a customer
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Identification of the performance obligations in the contract
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Determination of the transaction price
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Allocation of the transaction price to the performance obligations in the contract
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Recognition of revenue when, or as, the company satisfies a performance obligation
We generate revenue primarily from software licenses, service subscriptions and customized software development fees, as well as the delivery of advertising impressions. 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. Since we control the products or services prior to their transfer to the customer, we report our automotive, advertising and mobile navigation revenue on a gross basis. This assessment is based primarily on our ultimate primary responsibility for fulfilling the promises made with respect to the products and services as well as the degree of discretion we have in establishing pricing.
Royalties for on-board navigation solutions are generally earned at various points in time, depending upon the individual customer agreement. We earn each royalty upon either the re-imaging of the software on each individual memory card or the time at which each vehicle is produced. Royalties for brought-in navigation solutions are earned upon vehicle sales reporting or upon initial usage by the end user.
Product revenue
We generate product revenue from the delivery of our on-board automotive navigation solutions, specified map updates and customized software development.
We recognize revenue from on-board automotive navigation solutions upon transfer of control of the customized software and any associated integrated content together forming a distinct performance obligation. Transfer of control generally occurs at a point in time upon acceptance. Any royalties for the use of distinct software combined with integrated content, with an allocation of the transaction price based on the relative SSP of map updates, specified upgrades, and other services as applicable, are recognized at the later of when the royalties are earned or when transfer of control of the related performance obligation has occurred.
For hybrid automotive solutions, which contain on-board software and cloud functionality, the transaction price allocated to the on-board component is generally recognized as product revenue as described above, and the transaction price allocated to the included cloud functionality based on relative SSP is generally recognized as services revenue. Since the on-board software is still the predominant item in the hybrid solution, the royalties recognition guidance applies as it does for on-board navigation solutions described above. Our brought-in automotive navigation solutions as described below are subject to variable consideration and constraint guidance.
Services revenue
We derive services revenue primarily from our brought-in automotive navigation solutions and, to a lesser extent, from the cloud functionality that is a component of our hybrid automotive navigation solutions as discussed above. Since contracts for our brought-in automotive navigation solutions typically contain a substantial amount of variable consideration that does not meet the allocation objective of ASC 606 and is required to be estimated and included in the transaction price, we include in the transaction price only variable consideration such that it is probable that a risk of significant revenue reversal will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Total variable consideration to be received is estimated at contract inception and updated at each reporting date. We utilize the expected value method and consider expected unit volume combined with a risk-based probability based on factors including, but not limited to: model year cycles, customer history, technology life cycles, nature of competition and other contract-specific factors. Because customers of our brought-in automotive navigation solutions simultaneously receive and consume the benefit from our performance, we recognize revenue ratably over the period the services obligation is expected to be fulfilled, generally 8 to 12 years, as this provides a faithful depiction of the transfer of control.
We also derive services revenue from the delivery of advertising impressions. We recognize revenue when transfer of control of the related advertising services occur based on the specific terms of each advertising contract, which are generally based on the number of ad impressions delivered. Substantially all contracts for advertising services are cancellable within a short period of notice, and we assess whether pricing within such contracts create any material right which could extend the expected term of the contract beyond the cancellable term.
In addition, we derive a declining amount of 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, which is considered variable consideration. For such variable consideration related to our mobile navigation services, these fees are recognized in the month in which they are earned because the terms of the variable payments relate specifically to the outcome from transferring the distinct time increment (month) of service, which is consistent with the allocation objective when considering all of the performance obligations and payment terms in the contract.
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 obligation has been fulfilled. Our agreements do not contain general rights of refund once the service has been provided.
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. Estimates for revenue include our consideration of certain factors and information, including subscriber data, historical subscription and revenue reporting trends, end user subscription data from our internal systems, and data from comparable distribution channels of our other customers. We record any differences between estimated revenue and actual revenue in the reporting period when we determine the actual amounts. 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 any software development costs during fiscal 2019 and fiscal 2017. Amortization expense related to capitalized software development costs, which was recorded in cost of revenue, totaled $0.3 million, $0.2 million and zero for fiscal 2019, 2018 and 2017, respectively.
Deferred costs. We capitalize and defer recognition of certain third-party royalty-based content costs associated with the fulfillment of future automotive product and services obligations, and we recognize these deferred content costs as cost of revenue as we transfer control of the related performance obligation. Deferred costs are classified as current or non-current consistent with the periods over which the performance obligations are anticipated to be satisfied.
Deferred costs also include the cost of customized software we develop for customers. We begin deferring development costs when they relate directly to a contract or specific anticipated contract and such costs are incurred to satisfy performance obligations in the future, provided they are expected to be recovered. We recognize these deferred software development costs as cost of revenue upon transfer of control of the associated performance obligation. We evaluate contract cost deferrals for impairment on a quarterly basis or whenever events or changes in circumstances indicate that a project may require recognition of a contract loss. We did not record any impairment losses during fiscal 2019, 2018 and 2017.
In connection with our usage of licensed third-party content, 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. These contracts contain obligations for the licensor to provide ongoing services and, accordingly, we record any minimum guaranteed royalty payments as an asset when paid and amortize the amount to cost of revenue over the applicable period. Any additional royalties due based on actual usage are expensed monthly as incurred.
Changes in the balance of total deferred costs (current and non-current) during fiscal 2019 were as follows (in thousands):
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 calculate the fair value of our
reporting unit. 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 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.
We performed our annual goodwill impairment test as of April 1, 2019 by comparing the fair value of our three reporting units with their respective carrying amounts. Based upon a qualitative assessment indicating that it was not more likely than not that the fair value of each of our reporting units was less than its carrying value, we determined that no impairment was indicated. Subsequent to the completion of our annual assessment, in May 2019 we entered into substantive discussions with inMarket regarding the sale of certain assets and the assumption of certain liabilities associated with the Ads Business in exchange for an equity interest in inMarket. In June 2019, we considered it more likely than not that a sale would occur, and we concluded that this represented a triggering event that required an interim goodwill impairment assessment. Accordingly, in June 2019, we performed an interim goodwill impairment test for our advertising business segment. 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 this interim goodwill impairment test, the carrying value of our advertising business segment exceeded its estimated fair value and, accordingly, during fiscal 2019 we recognized a $2.6 million impairment of the goodwill associated with our advertising business segment.
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 business 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 segment exceeded its estimated fair value and, accordingly, during fiscal 2018, we recognized a $2.7 million impairment of all of the goodwill associated with our mobile navigation business segment.
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 and our $2.6 million impairment of some of the goodwill associated with our advertising business, we have not recognized any impairment of goodwill in the three year period ended June 30, 2019. As of June 30, 2019, we had goodwill of $26.1 million associated with our automotive and advertising segments.
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:
As of June 30, 2019, there was $1.3 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 1.77 years. At
June 30, 2019, the total unrecognized stock-based compensation cost related to restricted stock units was $8.5 million, net of estimated forfeitures, and will be amortized over a weighted average period of 2.26 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 2019, 2018 and 2017, we calculated the fair value of options granted to employees with the following weighted average assumptions:
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 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.
Results of operations
The following tables set forth our results of operations for fiscal 2019, 2018 and 2017, 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.
(1) Certain amounts have been adjusted to reflect the adoption of ASC 606. See Note 1 to our consolidated financial statements for a summary of adjustments.
Segments information. The information below is organized in accordance with our three reportable business segments (dollars in thousands):
Comparison of the fiscal years ended June 30, 2019 and 2018
Revenue, cost of revenue and gross profit
Consolidated overview. Product revenue increased 3% to $168.6 million in fiscal 2019 from $163.6 million in fiscal 2018. The increase was due primarily to increases in map update revenue and on-board royalty revenue. Services revenue decreased 5% to $52.3 million in fiscal 2019 from $54.9 million in fiscal 2018. The decrease in services revenue was due primarily to lower advertising revenue and mobile navigation subscription fees, partially offset by increased revenue from brought-in automotive solutions.
Our cost of product revenue decreased 5% to $97.2 million in fiscal 2019 from $102.2 million in fiscal 2018. The decrease was due primarily to a net decrease in third-party content costs resulting from a January 1, 2018 reduction in certain on-board automotive navigation content costs that are passed through to Ford. Our cost of services revenue increased 6% to $27.4 million in fiscal 2019 from $25.8 million in fiscal 2018. The increase was due primarily to included costs of software maintenance performed by engineering personnel and an increase in cost of automotive revenue associated with increased revenue from brought-in solutions, partially offset by decreases in cost of mobile navigation revenue and cost of advertising revenue.
Our gross profit increased to $96.2 million in fiscal 2019 from $90.4 million in fiscal 2018. Our gross margin increased to 44% in fiscal 2019 from 41% in fiscal 2018. The increase in gross margin was due primarily to the aforementioned reduction in certain on-board automotive navigation content costs that are passed through to Ford.
Revenue concentrations. In fiscal 2019 and 2018, revenue from Ford represented 55% and 67% of our total revenue, respectively, and revenue from GM comprised 18% and less than 10% of our total revenue, respectively.
We primarily sell our services in the United States. In fiscal 2019 and 2018, revenue derived from U.S. sources represented 81% and 90% of our total revenue, respectively.
Segments information
Automotive. Automotive revenue increased 5% to $186.8 million in fiscal 2019 from $177.8 million in fiscal 2018. The increase was due primarily to increases in map update revenue of $5.2 million, brought-in automotive navigation solutions of $3.0 million and royalty revenue of $0.6 million. The $0.6 million net increase in on-board royalty revenue was due to a net increase in navigation unit volume, partially offset by a decrease in royalty revenue resulting from a January 1, 2018 reduction in certain on-board navigation content costs that are passed through to Ford. Automotive revenue included customized software development revenue of $3.3 million and $4.1 million in fiscal 2019 and 2018, respectively. Automotive revenue represented 85% and 81% of total revenue in fiscal 2019 and 2018, respectively.
Cost of automotive revenue increased 1% to $109.8 million in fiscal 2019 from $109.0 million in fiscal 2018. The increase was due primarily to a $2.3 million increase in costs related to software maintenance services performed by engineering personnel, which maintenance costs were allocated entirely to research and development expense in prior periods, a $0.8 million increase in hosted services costs and a $0.6 million increase in payroll and related compensation and benefits expense. These increases were partially offset by a decrease of $2.7 million in deferred development costs recognized and a net decrease in third-party content costs of $0.4 million. Content costs decreased due primarily to the aforementioned January 1, 2018 reduction in certain on-board navigation content costs that are passed through to Ford, partially offset by an increase in content costs associated with increased map update revenue.
Automotive gross profit increased 12% to $77.1 million in fiscal 2019 from $68.8 million in fiscal 2018. Automotive gross margin increased to 41% in fiscal 2019 from 39% in fiscal 2018. The increase in gross margin was due primarily to the aforementioned reduction in certain on-board navigation content costs that are passed through to Ford, partially offset by increased costs related to software maintenance services and a decrease in gross margin resulting from increased map update revenue, which carries a higher relative cost and lower gross margin.
Advertising. Advertising revenue decreased 11% to $24.2 million in fiscal 2019 from $27.2 million in fiscal 2018. The decrease was due primarily to a decrease in the number of impressions delivered, partially offset by a higher effective revenue per thousand impressions, or eRPM. Advertising revenue represented 11% and 13% of total revenue in fiscal 2019 and 2018, respectively.
Cost of advertising revenue decreased 14% to $11.5 million in fiscal 2019 from $13.3 million in fiscal 2018. The decrease was due primarily to decreased third-party ad exchange inventory costs of $1.7 million due to a decrease in impressions and a slight decrease in our average cost per thousand impressions, or eCPM.
Advertising gross profit decreased 8% to $12.7 million in fiscal 2019 from $13.9 million in fiscal 2018. Advertising gross margin increased slightly to 52% in fiscal 2019 from 51% in fiscal 2018. The slight increase in gross margin was due to a higher eRPM combined with a slightly lower eCPM.
In August 2019, we sold the Ads Business to inMarket. We will report the operating results of the Ads Business as discontinued operations in our condensed consolidated financial statements for the first quarter of fiscal 2020 and for all prior comparative periods.
Mobile Navigation. Mobile navigation revenue decreased 27% to $9.8 million in fiscal 2019 from $13.4 million in fiscal 2018. The decrease was primarily due to lower subscription revenue resulting from decreases in the number of paying subscribers for mobile navigation services provided through AT&T, and a decrease in mobile navigation revenue internationally. Mobile navigation revenue represented 4% and 6% of total revenue in fiscal 2019 and 2018, respectively.
Cost of mobile navigation revenue decreased 41% to $3.4 million in fiscal 2019 from $5.7 million in fiscal 2018. The decrease was due primarily to decreases in hosted services costs of $0.9 million, payroll and related compensation and benefits expense of $0.6 million and third-party content costs of $0.3 million associated with the decline in mobile navigation revenue.
Mobile navigation gross profit decreased 16% to $6.4 million in fiscal 2019 from $7.7 million in fiscal 2018. Mobile navigation gross margin increased to 65% in fiscal 2019 from 57% in fiscal 2018. The increase in gross margin resulted primarily from decreased hosted services costs and headcount required to support the declining business.
Operating expenses
Our total operating expenses decreased 1% to $130.3 million in fiscal 2019 from $131.0 million in fiscal 2018. Operating expenses in fiscal 2019 included $2.6 million related to the impairment of goodwill associated with our advertising segment, and operating expenses in fiscal 2018 included $2.7 million related to the impairment of all of the goodwill associated with our mobile navigation segment. Excluding goodwill impairment, the decrease in operating expenses was due primarily to cost optimization, including lower compensation costs resulting from a redesigned employee incentive compensation plan that more
closely aligns compensation payouts with financial results, partially offset by higher base compensation driven by merit-based salary increases on generally flat headcount. In addition, operating expenses decreased as a result of the allocation to cost of services revenue of certain software maintenance costs previously allocated to research and development expense, as discussed above in Automotive results of operations.
Research and development. Our research and development expenses decreased 2% to $84.0 million in fiscal 2019 from $85.6 million in fiscal 2018. The decrease was due primarily to software maintenance costs of $2.3 million allocated to cost of services revenue, as discussed above, and decreases in payroll and related compensation and benefits expense of $1.4 million, stock-based compensation expense of $0.7 million, outside consulting services of $0.4 million and travel and entertainment expense of $0.4 million. These decreases were partially offset by an increase of $3.3 million as a result of lower capitalized deferred development costs in fiscal 2019. As a percentage of revenue, research and development expenses decreased slightly to 38% in fiscal 2019 from 39% in fiscal 2018. The total number of research and development personnel increased 1% to 653 at June 30, 2019 from 644 at June 30, 2018. We believe that as we deliver our contracted customer requirements for our automotive customers, establish relationships with new automobile manufacturers and tier ones and continue the development of our OSM capabilities, revenue from those investments and development efforts will lag the related research and development expenses.
Sales and marketing. Our sales and marketing expenses decreased 7% to $19.3 million in fiscal 2019 from $20.7 million in fiscal 2018. The decrease was due primarily to decreases in payroll and related compensation and benefits expense of $1.2 million and stock-based compensation expense of $0.3 million. As a percentage of revenue, sales and marketing expenses decreased to 9% in fiscal 2019 from 10% in fiscal 2018. The total number of sales and marketing personnel decreased 13% to 49 at June 30, 2019 from 56 at June 30, 2018.
General and administrative. Our general and administrative expenses increased 10% to $23.8 million in fiscal 2019 from $21.6 million in fiscal 2018. The increase was due primarily to an increase in outside services of $2.9 million, partially offset by a decrease in payroll and related compensation and benefits expense of $0.7 million. The total number of general and administrative personnel was comparable at 57 as of June 30, 2019 and 2018. As a percentage of revenue, general and administrative expenses increased to 11% in fiscal 2019 from 10% in fiscal 2018.
Goodwill impairment. Goodwill impairment in fiscal 2019 was comprised of $2.6 million related to the impairment of goodwill associated with our advertising segment. Goodwill impairment in fiscal 2018 was comprised of $2.7 million related to the impairment of all of the goodwill associated with our mobile navigation segment.
Legal settlement and contingencies. Legal settlement and contingencies expense in fiscal 2019 related to the Traxcell Technologies, LLC patent matter. Legal settlement and contingencies expense in fiscal 2018 related primarily to the settlement of the Location Based Services LLC patent matter. Refer to Note 6 of Notes to the Consolidated Financial Statements for more information.
Other income (expense), net. Our other income (expense), net was $2.9 million in fiscal 2019 and $0.8 million in fiscal 2018. Other income (expense), net in fiscal 2019 included $1.7 million of interest income, an unrealized gain of $1.1 million recorded on marketable equity investments and gains of $0.1 million on foreign exchange. Other income (expense), net in fiscal 2018 included $1.4 million of interest income partially offset by losses of $(0.6) million on foreign exchange.
Provision (benefit) for income taxes. Our provision for income taxes increased to $1.3 million in fiscal 2019 compared to $1.0 million in fiscal 2018. Our effective tax rate was 4% in fiscal 2019 compared to an effective tax rate of 3% in fiscal 2018. Our effective tax rate in fiscal 2019 and fiscal 2018 was attributable primarily to foreign withholding taxes and income taxes in certain foreign jurisdictions.
We anticipate that our foreign tax withholding obligation will continue into the future and that we will not be able to benefit from an offsetting deduction in the United States for an extended period of time given our existing net operating loss carryforwards.
The ability to carry back losses for a refund of prior taxes paid was eliminated under the Tax Cuts and Jobs Act, which impacts our losses incurred during fiscal 2019 and 2018.
The usage of our remaining U.S. federal and California state loss carryforwards at June 30, 2019 of approximately $250.2 million and $14.3 million, respectively, is subject to an annual limitation under Section 382 of the Internal Revenue Code.
As of June 30, 2019, our cumulative unrecognized tax benefit was $4.6 million, of which $4.5 million was netted against deferred tax assets. Included in the other long-term liabilities are unrecognized tax benefits at June 30, 2019 of $0.1 million that, if recognized, would affect the annual effective tax rate.
We believe it is reasonably possible that the gross unrecognized tax benefits as of June 30, 2019 will not decrease (whether by payment, release, or a combination of both) by a material amount in the next 12 months. We recognize interest and penalties related to unrecognized tax benefits as part of our provision for income taxes. We had zero and $0.1 million accrued for the payment of interest and penalties at June 30, 2019 and 2018, respectively.
All available evidence, both positive and negative, was considered to determine whether, based upon the weight of the evidence, a valuation allowance for deferred tax assets is needed.
Due to operating losses in previous years and continued earnings volatility, we maintain 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 2020 and potentially future years in the United States, we continue to maintain a valuation allowance on deferred tax assets in the United States. Due to operating losses in previous years and expected losses in future years in the United Kingdom, we continue to maintain a full valuation allowance for our foreign deferred tax assets in the United Kingdom. Our valuation allowance increased (decreased) from the prior fiscal year by approximately $(19.3) million, $13.9 million and $25.9 million in fiscal 2019, 2018 and 2017, respectively.
We file income tax returns in the U.S. with the IRS, California, various states and foreign tax jurisdictions in which we have subsidiaries. The statute of limitations remains open for fiscal 2016 through fiscal 2018 for federal tax purposes, for fiscal 2015 through fiscal 2018 in state jurisdictions, and for fiscal 2014 through fiscal 2018 in foreign jurisdictions. Fiscal years outside the normal statute of limitations remain open to audit by tax authorities due to tax attributes generated in those early years which have been carried forward and may be audited in subsequent years when utilized.
The impact of our adoption of ASC 606 was to reduce deferred revenue and deferred costs and accelerate the recognition of such revenue and costs. For tax purposes, the acceleration of income is reported in the current and future fiscal years and, accordingly, we have established a deferred tax liability. The impact of the new standard on income tax expense was not material since it resulted in the reduction of deferred tax assets and liabilities with a corresponding adjustment to our valuation allowance.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”), a tax reform bill which, among other items, reduces the current corporate federal income tax rate to 21% from 35%, was signed into law. The rate reduction is effective January 1, 2018.
The Act caused our deferred tax assets and deferred tax liabilities to be revalued. Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through income tax expense. Due to the full valuation allowance placed against our U.S. deferred tax assets, any change in our gross deferred tax assets will have no impact to income tax expense.
The value of deferred tax assets, net of liabilities decreased by $18.9 million as of January 1, 2018 due to the reduction in the federal corporate tax rate, which had no impact to income tax expense during fiscal 2018 due to the full valuation allowance placed on the assets.
Comparison of the fiscal years ended June 30, 2018 and 2017
Revenue, cost of revenue and gross profit
Consolidated overview. Product revenue increased 6% to $163.6 million in fiscal 2018 from $155.0 million in fiscal 2017. The net increase in product revenue was due primarily to an increase in royalty revenue from higher unit volume, partially offset by a decrease in royalty revenue resulting from a January 1, 2018 reduction in certain on-board navigation content costs that are passed through to Ford, and an increase in map update revenue. Services revenue was comparable at $54.9 million in fiscal 2018 and $54.7 million in fiscal 2017. Services revenue was impacted primarily by increases in automotive navigation revenue and advertising revenue, offset by lower subscription fees resulting from decreases in the number of paying subscribers for mobile navigation revenue.
Our cost of product revenue increased 4% to $102.2 million in fiscal 2018 from $98.5 million in fiscal 2017. The increase was due primarily to an increase in unit volume, partially offset by a decrease in third-party content costs resulting from the aforementioned reduction in certain on-board navigation content costs. Our cost of services revenue increased 18% to $25.8 million in fiscal 2018 from $21.9 million in fiscal 2017. The increase was due primarily to an increase in cost of automotive revenue associated with the increased revenue from brought-in solutions and, to a lesser extent, an increase in cost of advertising revenue associated with delivered impressions related to a cash basis customer, for which we do not recognize revenue until cash is received.
Our gross profit increased to $90.4 million in fiscal 2018 from $89.3 million in fiscal 2017. Our gross margin decreased to 41% in fiscal 2018 from 43% in fiscal 2017. The decrease in gross margin was primarily due to decreases in advertising and mobile navigation margins, partially offset by an increase in automotive margins.
Revenue concentrations. In fiscal 2018 and 2017, revenue from Ford represented 67% and 71% of our total revenue, respectively. GM comprised less than 10% of our total revenue in fiscal 2018 and 2017.
We primarily sell our services in the United States. In both fiscal 2018 and 2017, revenue derived from U.S. sources represented 90% of our total revenue.
Segments information
Automotive. Automotive revenue increased 8% to $177.8 million in fiscal 2018 from $163.9 million in fiscal 2017. The increase was due primarily to increases in royalty revenue of $4.4 million, brought-in automotive navigation solutions of $5.3 million and map update revenue of $2.5 million. Automotive revenue included customized software development revenue of $4.1 million and $2.5 million in fiscal 2018 and 2017, respectively. Automotive revenue represented 81% and 78% of total revenue in fiscal 2018 and 2017, respectively.
Cost of automotive revenue increased 7% to $109.0 million in fiscal 2018 from $102.0 million in fiscal 2017. The increase was due primarily to increases in third-party content costs of $3.8 million, deferred development costs recognized of $2.3 million, hosted services costs of $0.3 million and payroll and related compensation and benefits expense of $0.3 million.
Automotive gross profit increased 11% to $68.8 million in fiscal 2018 from $61.9 million in fiscal 2017. Automotive gross margin increased slightly to 39% in fiscal 2018 from 38% in fiscal 2017. The increase in gross margin was due primarily to the aforementioned reduction in certain on-board navigation content costs that are passed through to Ford.
Advertising. Advertising revenue increased 1% to $27.2 million in fiscal 2018 from $26.8 million in fiscal 2017. The increase was due primarily to an increase in the value of contracted insertion orders along with the number of impressions delivered. Advertising revenue in fiscal 2018 excludes $0.9 million of billings for delivered impressions related to a cash basis customer, for which we recognized the related costs of such impressions in cost of advertising revenue. Advertising revenue represented 13% of total revenue in both fiscal 2018 and 2017.
Cost of advertising revenue increased 5% to $13.3 million in fiscal 2018 from $12.7 million in fiscal 2017. The increase was due primarily to an increase in hosted services costs of $0.3 million and amortization of capitalized software costs of $0.2 million. Our cost of advertising revenue increased at a higher rate than our advertising revenue due primarily to the inclusion of costs in fiscal 2018 associated with $0.9 million of excluded revenue related to a cash basis customer.
Advertising gross profit decreased 2% to $13.9 million in fiscal 2018 from $14.1 million in fiscal 2017. Advertising gross margin decreased to 51% in fiscal 2018 from 53% in fiscal 2017. The decrease in gross margin resulted primarily from the inclusion of costs in fiscal 2018 associated with $0.9 million of excluded revenue related to a cash basis customer.
Mobile Navigation. Mobile navigation revenue decreased 29% to $13.4 million in fiscal 2018 from $19.0 million in fiscal 2017. The decrease was primarily due to lower subscription revenue resulting from decreases in the number of paying subscribers for mobile navigation services provided through AT&T and T-Mobile and a decrease in mobile navigation revenue internationally. Mobile navigation revenue represented 6% and 9% of total revenue in fiscal 2018 and 2017, respectively.
Cost of mobile navigation revenue was generally flat at $5.7 million in fiscal 2018 and 2017. Cost of mobile navigation revenue in fiscal 2018 reflects a decrease in third party content costs of $0.4 million, offset by an increase in hosted services costs of $0.2 million, payroll and related compensation and benefits expense of $0.1 million and telecommunications expense of $0.1 million.
Mobile navigation gross profit decreased 42% to $7.7 million in fiscal 2018 from $13.3 million in fiscal 2017. Mobile navigation gross margin decreased to 57% in fiscal 2018 from 70% in fiscal 2017. The decrease in gross margin resulted primarily from declining revenue, while cost of revenue remained generally fixed.
Operating expenses
Research and development. Our research and development expenses increased 27% to $85.6 million in fiscal 2018 from $67.4 million in fiscal 2017. The increase was due primarily to increases in payroll and related compensation and benefits expense of $12.1 million, outside consulting services of $1.5 million and business and other expenses of $0.6 million, partially offset by decreases in hardware, software and related maintenance of $0.4 million and travel and entertainment expense of $0.3 million. As a percentage of revenue, research and development expenses increased to 39% in fiscal 2018 from 32% in fiscal 2017. The total number of research and development personnel increased 7% to 644 at June 30, 2018 from 604 at June 30, 2017, with a significant portion of the increase attributable to employees in lower cost regions such as Romania and China. We believe that as we deliver our contracted customer requirements for our automotive customers, establish relationships with new automobile manufacturers and tier ones, enhance our service offerings around our OSM capabilities, and develop new products and services for advertisers, revenue from those investments and development efforts will lag the related research and development expenses.
Sales and marketing. Our sales and marketing expenses decreased 6% to $20.7 million in fiscal 2018 from $22.0 million in fiscal 2017. The decrease was primarily due to decreases of $0.4 million in stock-based compensation expense, $0.3 million in travel and entertainment expense, $0.2 million in marketing expense and $0.1 million in payroll and related compensation and benefits expense. As a percentage of revenue, sales and marketing expenses decreased to 10% in fiscal 2018 from 11% in fiscal 2017. The total number of sales and marketing personnel decreased 8% to 56 at June 30, 2018 from 61 at June 30, 2017.
General and administrative. Our general and administrative expenses decreased 6% to $21.6 million in fiscal 2018 from $23.0 million in fiscal 2017. The decrease was primarily due to a decrease in legal expense of $2.0 million, partially offset by an increase in outside services of $0.5 million. The total number of general and administrative personnel was comparable at 57 as of June 30, 2018 and 2017. As a percentage of revenue, general and administrative expenses decreased to 10% in fiscal 2018 from 11% in fiscal 2017.
Goodwill impairment. Goodwill impairment in fiscal 2018 was comprised of $2.7 million related to the impairment of all of the goodwill associated with our mobile navigation segment.
Legal settlement and contingencies. Legal settlement and contingencies expense in fiscal 2018 related primarily to the settlement of the Location Based Services LLC patent matter. Legal settlement and contingencies expense in fiscal 2017 included the portion of our $8.0 million settlement with Vehicle IP in January 2017 that was not previously accrued. Of the $8.0 million total settlement expense, $0.9 million was previously accrued in fiscal 2016. Legal settlement and contingencies expense in fiscal 2017 also reflected the reversal of an accrued liability of $0.7 million previously expensed related to other ongoing indemnification matters, which were also resolved in January 2017.
Other income (expense), net. Our other income (expense), net was $0.8 million in fiscal 2018 and $0.9 million in fiscal 2017. Other income (expense), net in fiscal 2018 included $1.4 million of interest income partially offset by $(0.6) million losses on foreign exchange. Other income (expense), net in fiscal 2017 included $1.2 million of interest income partially offset by a $(0.3) million loss on foreign exchange.
Provision (benefit) for income taxes. Our provision for income taxes increased to $1.0 million in fiscal 2018 compared to $0.8 million in fiscal 2017. Our effective tax rate was 3% in fiscal 2018 and fiscal 2017. Our effective tax rate in fiscal 2018 was attributable primarily to foreign withholding taxes and income taxes in certain foreign jurisdictions. Our effective tax rate in fiscal 2017 was attributable primarily to foreign withholding taxes and income taxes in certain foreign jurisdictions, partially offset by the reversal of tax reserves related to the settlement of our New York state and IRS tax audits.
Liquidity and capital resources
The following table sets forth the major sources and uses of cash and cash equivalents for each of the periods set forth below:
At June 30, 2019, we had cash and cash equivalents and short-term investments of $99.5 million, which primarily consisted of corporate bonds, asset-backed securities, U.S. treasury securities and money market mutual funds held by well-capitalized financial institutions.
Our accounts receivable are heavily concentrated in a small number of customers. As of June 30, 2019, our accounts receivable, net balance was $75.8 million, of which Ford, Xevo and GM represented 33%, 29% and 15%, respectively.
Our future capital requirements will depend on many factors, including our ability to continue to increase our billings and control our expenses in fiscal 2020 and beyond, whether we return to profitability, the timing and extent of expenditures to support development efforts, the management and optimization of research and development and sales and marketing activities and headcount, the introduction of our new and enhanced service and product offerings and the timing and scale of the introduction of vehicles including our navigation products relative to when we are required to develop the product. We believe our cash, cash equivalents and short-term investments will be sufficient to satisfy our financial obligations through at least the next 12 months. However, we expect to continue to use cash in operating activities in fiscal 2020 and we may experience greater than expected cash usage in operating activities if revenue is lower than we anticipate or we incur greater than expected cost of revenue or operating expenses. Our revenue and operating results could be lower than we anticipate if, among other reasons, our customers, one of which we are substantially dependent upon for a large portion of our revenue, were to limit or terminate our relationships with them; we were to fail to successfully compete in our highly competitive market; or our revenue did not grow as expected. In the future, we may acquire businesses or technologies or license technologies from third parties, and we may decide to raise additional capital through debt or equity financing to the extent we believe this is necessary to successfully complete these acquisitions or license these technologies. However, additional financing may not be available to us on favorable terms, if at all, at the time we make such determinations, which could have a material adverse effect on our business, operating results, financial condition and liquidity and cash position.
Net cash provided by (used in) operating activities. Net cash provided by (used in) operating activities was $7.5 million, $(7.4) million and $(11.2) million in fiscal 2019, 2018 and 2017, respectively. Cash provided by (used in) operating activities has historically been affected by changes in our end user base and our operating costs. In fiscal 2019, cash provided by operating activities was due primarily to a net loss of $32.5 million, which was more than offset by non-cash charges for depreciation and amortization of $4.0 million, stock-based compensation of $8.3 million, goodwill impairment of $2.6 million and a $26.4 million change in our operating assets and liabilities. In fiscal 2018, cash used in operating activities was due primarily to a net loss of $40.8 million, partially offset by non-cash charges for depreciation and amortization of $3.6 million, stock-based compensation of $9.9 million, goodwill impairment of $2.7 million and an $18.2 million change in our operating assets and liabilities. In fiscal 2017, cash used in operating activities was due primarily to a net loss of $29.5 million, partially offset by non-cash charges for depreciation and amortization of $2.6 million, stock-based compensation of $10.2 million, and a $5.0 million change in our operating assets and liabilities.
Net cash provided by (used in) investing activities. Net cash provided by (used in) investing activities was $(3.5) million, $4.5 million and $8.9 million during fiscal 2019, 2018 and 2017, respectively. In fiscal 2019, cash used in investing activities was principally the result of purchases of short-term investments, net of sales and maturities, of $2.1 million and purchases of property and equipment of $1.4 million. In fiscal 2018, cash was provided primarily by proceeds from sales and maturities of short-term investments, net of purchases, of $9.1 million, partially offset by purchases of property and equipment of $4.6 million. In fiscal 2017, cash was provided primarily by proceeds from sales and maturities of short-term investments, net of purchases, of $9.9 million, partially offset by purchases of property and equipment of $1.2 million.
Net cash provided by (used in) financing activities. During fiscal 2019, 2018 and 2017, our financing activities provided (used) $5.6 million, $(1.6) million and $(0.3) million, respectively. In fiscal 2019, these activities reflect proceeds from the
exercise of options to acquire our common stock, partially offset by tax withholdings paid related to net share settlements of restricted stock units upon vesting and repurchases of our common stock. In fiscal 2018 and 2017, these activities reflect tax withholdings paid related to net share settlements of restricted stock units upon vesting, partially offset by proceeds from the exercise of stock options.
Contractual obligations, commitments and contingencies
We generally do not enter into long term minimum purchase commitments. However, we have agreed to pay minimum annual license fees to certain of our third party content providers. Our principal commitments, in addition to those related to our third party content providers, consist of obligations under facility leases for office space in Santa Clara and Culver City, California; Southfield, Michigan; Chicago, Illinois; New York, New York; Shanghai, China; Xi’an, China; Cluj, Romania; Berlin, Germany; Tokyo, Japan; and Incheon, South Korea. In connection with the inMarket Transaction, we expect to assign our interest in the Culver City, California and Chicago, Illinois leases to inMarket or to terminate such leases.
The following table summarizes our outstanding noncancelable contractual obligations as of June 30, 2019:
(1)
Consist of contractual obligations for office space under noncancelable operating leases.
(2)
Consist of minimum noncancelable financial commitments primarily related to fees owed to certain third party content providers, regardless of usage level.
At June 30, 2019, we had no material liability for unrecognized tax benefits and no material accrual for the payment of related interest and penalties.
Warranties and indemnifications
Our agreements with our customers generally include certain provisions for indemnifying them against liabilities if our navigation services or products infringe a third party’s intellectual property rights or for other specified reasons. We have in the past received indemnification requests or notices of their intent to seek indemnification in the future from our customers with respect to litigation in which our customers have been named as defendants. See Note 7, “Commitments and contingencies” of the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. As it relates to past indemnification requests or notices, in certain situations we have agreed to defend or indemnify our customers for the indemnity demands. For those notices where we have not agreed to provide indemnity or defense to date, or future demands for indemnity, we may in the future agree to defend and indemnify our customers, irrespective of whether we believe that we have an obligation to indemnify them or whether we believe our navigation services and products infringe 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 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, as a result of indemnity demands, we make substantial payments, 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. As of June 30, 2019, any costs in connection with such indemnity demands which are probable and estimable have been recorded in our consolidated financial statements.
We have agreed to indemnify our directors, officers and certain other employees for certain events or occurrences, subject to certain limits, while such persons are or were serving at our request in such capacity. We may terminate the indemnification agreements with these persons upon the termination of their services with us, but termination will not affect claims for indemnification related to events occurring prior to the effective date of termination. The maximum amount of potential future indemnification is unlimited. We have a director and officer insurance policy that limits our potential exposure. We believe the fair value of these indemnification agreements is minimal. We have not recorded any liabilities for these agreements as of June 30, 2019.
Off-balance sheet arrangements
During fiscal 2019, 2018 and 2017, we did not have any relationships with unconsolidated entities or financial partnerships, such as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Recent accounting pronouncements
See Part IV., Item 15 (a) 1. Financial Statements, Note 1 Summary of business and significant accounting policies, "Recent accounting pronouncements."
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate sensitivity. The primary objectives of our investment activities are to preserve principal, provide liquidity and maximize income without significantly increasing risk. By policy, we do not enter into investments for trading or speculative purposes. Some of the securities we invest in are subject to market risk. This means that a change in prevailing interest rates may cause the fair value of the investment to fluctuate. To minimize this risk, we invest in a variety of securities, which primarily consist of money market funds, commercial paper, municipal securities and other debt securities of domestic corporations. Due to the nature of these investments and relatively short duration of the underlying securities, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, will reduce future interest income. A 10% appreciation or depreciation in interest rates in fiscal 2019 would not have had a material impact on our interest income or the fair value of our marketable securities.
Foreign currency risk. A substantial majority of our revenue has been generated to date from our end users in the United States and, as such, our revenue has not been substantially exposed to fluctuations in currency exchange rates. However, some of our contracts with our customers outside of the United States are denominated in currencies other than the U.S. dollar and therefore expose us to foreign currency risk. Should the revenue generated outside of the United States grow in absolute amounts and as a percentage of our revenue, we will increasingly be exposed to foreign currency exchange risks. In addition, a portion of our operating expenses are incurred outside the United States, are denominated in foreign currencies and are subject to changes in foreign currency exchange rates, particularly the RMB and the RON. Additionally, changes in foreign currency exchange rates may cause us to recognize transaction gains and losses in our statement of operations.
To date, we have not used any foreign currency forward contracts or similar instruments to attempt to mitigate our exposure to changes in foreign currency rates.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this Form 10-K. See Part IV, Item 15.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and our chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our management, with the participation of our CEO and our Chief Financial Officer, or CFO, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2019. Based on that evaluation, our CEO and CFO concluded that, as of such date, our disclosure controls and procedures were not effective due to the existence of the material weakness in internal control over financial reporting described below.
Management’s Report on Internal Control Over Financial Reporting
The SEC, as required by Section 404 of the Sarbanes-Oxley Act, adopted rules requiring every company that files reports with the SEC to include a management report on such company’s internal control over financial reporting in its annual report. In addition, our independent registered public accounting firm must attest to the effectiveness of our internal control over financial reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
During the three months ended December 31, 2018, our management identified certain errors related to our implementation of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”) due to our internal control over financial reporting relating to supervision and review of the financial models supporting our revenue and related cost of revenue recognition accounting and disclosures not operating effectively. Our management concluded that, because this deficiency created a more than remote likelihood of a material misstatement not being prevented or detected on a timely basis, this deficiency constituted a material weakness in internal control over financial reporting.
A material weakness is a control deficiency or combination of control deficiencies that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. We are committed to maintaining a strong internal control environment, and we have implemented a remediation plan that is designed to address the material weakness relating to our adoption of ASC 606. While the original remediation plan adopted shortly after the discovery of the errors relating to our adoption of ASC 606 was fully implemented during the third quarter of fiscal 2019, during the fourth quarter of fiscal 2019, we decided to implement additional remediation measures relating to the review of supporting calculations to further address that control deficiency. The material weakness will not be deemed remediated until the affected internal controls have been tested and determined to be operating effectively.
Management assessed our internal control over financial reporting as of June 30, 2019. Management based its assessment on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, management concluded that our internal control over financial reporting was not effective as of June 30, 2019 due to the existence of the material weakness in internal control over financial reporting described above.
Grant Thornton LLP, an independent registered public accounting firm, has issued a report on our internal control over financial reporting, which is included below.
Changes in Internal Control over Financial Reporting
Except for the additional remediation measures discussed above that were implemented during the fourth quarter of fiscal 2019 to address the identified control deficiency relating to our adoption of ASC 606, there were no changes in our internal control over financial reporting that occurred during the three months ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls
Control systems, no matter how well conceived and operated, are designed to provide a reasonable, but not an absolute, level of assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Because of the inherent limitations in any control system, misstatements due to error or fraud may occur and not be detected.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Telenav, Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Telenav, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of June 30, 2019, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, because of the effect of the material weakness described in the following paragraphs on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of June 30, 2019, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.
A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The Company’s control related to the review of the financial models supporting their accounting for revenue and related cost of revenue recognition and disclosures was not operating effectively. The material weakness referred to above is described in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the 2019 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended June 30, 2019. The material weakness identified above was considered in determining the nature, timing, and extent of audit tests applied in our audit of the fiscal year 2019 consolidated financial statements, and this report does not affect our report dated August 22, 2019 which expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Other information
We do not express an opinion or any other form of assurance on Management’s Plan for Remediation of Material Weakness.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
Not applicable.
PART III.
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Pursuant to General Instruction G(3) of Form 10-K, the information required by this Item 10 relating to our executive officers is included under the caption “Information about our Executive Officers” in Part I of this Form 10-K.
The other information required by this Item 10 is incorporated by reference to our Proxy Statement for the 2019 Annual Meeting of Stockholders (to be filed with the Securities and Exchange Commission within 120 days of our June 30, 2019 fiscal year end) under the headings “Proposal One - Election of Directors” and “Corporate Governance.”
The information required by this Item 11
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item 12 is incorporated by reference to our Proxy Statement for the 2019 Annual Meeting of Stockholders (to be filed with the Securities and Exchange Commission within 120 days of our June 30, 2019 fiscal year end) under the headings “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information.”
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item 13 is incorporated by reference to our Proxy Statement for the 2019 Annual Meeting of Stockholders (to be filed with the Securities and Exchange Commission within 120 days of our June 30, 2019 fiscal year end) under the headings “Corporate Governance” and “Certain Relationships and Related Party Transactions.”
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item 14 is incorporated by reference to our Proxy Statement for the 2019 Annual Meeting of Stockholders (to be filed with the Securities and Exchange Commission within 120 days of our June 30, 2019 fiscal year end) under the heading “Ratification of Appointment of Independent Registered Public Accounting Firm.”
PART IV.
ITEM 15.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements
We have filed the consolidated financial statements listed in the Index to Consolidated Financial Statements of Telenav, Inc. on page as a part of this Form 10-K.
2. Financial Statement Schedule
Schedule II-Valuation and Qualifying Accounts is set forth on page of this Form 10-K. All other schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements and the Notes thereto.
3. Exhibits
See Item 15(b) below.
(b) Exhibits
The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the U.S. Securities and Exchange Commission.
Exhibit
Number
Description
Incorporated
by Reference
From Form
Incorporated
by Reference
From Exhibit
Number
Date Filed
101.LAB*
InlineXBRL Taxonomy Label Linkbase Document
Filed herewith
101.PRE*
InlineXBRL Taxonomy Extension Presentation Linkbase Document
Filed herewith
#
Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate.
†
Portions of the exhibit have been omitted pursuant to an order granted by the Securities and Exchange Commission for confidential treatment.
+
Portions of the exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission.
++
Portions of the exhibit have been omitted by means of marking such portions with an asterisk because the identified portions are not material and would likely cause competitive harm to the Company if publicly disclosed.
~
In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-K and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filings under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
None.
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dr. HP Jin, in his capacity as Telenav, Inc.'s Chief Executive Officer, and Adeel Manzoor, in his capacity as Telenav, Inc.'s Chief Financial Officer, jointly and severally, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign this Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises hereby ratifying and confirming all that said attorneys-in-fact and agents, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated.
FINANCIAL STATEMENTS.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF TELENAV, INC.
Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Telenav, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Telenav, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of June 30, 2019 and 2018, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2019, and the related notes and schedule (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2019, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of June 30, 2019, based on criteria established in the 2013 “Internal Control-Integrated” Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated August 22, 2019 expressed an adverse opinion.
Adoption of New Accounting Standard
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for revenue in fiscal year 2019 due to the adoption of Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers” (Topic 606), and the related amendments.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
TELENAV, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(1) See Note 1 for a summary of adjustments.
See accompanying Notes to Consolidated Financial Statements.
TELENAV, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(1) See Note 1 for a summary of adjustments.
See accompanying Notes to Consolidated Financial Statements.
TELENAV, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(1) See Note 1 for a summary of adjustments.
See accompanying Notes to Consolidated Financial Statements.
TELENAV, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(1) See Note 1 for a summary of adjustments. The cumulative effect adjustment to Accumulated Deficit and Total Stockholders' Equity related to the adoption of ASU No. 2014-09 (Topic 606) as of June 30, 2016 was $11.8 million.
See accompanying Notes to Consolidated Financial Statements.
TELENAV, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(1) See Note 1 for a summary of adjustments.
See accompanying Notes to Consolidated Financial Statements.
TELENAV, INC.
Notes to Consolidated Financial Statements
1.
Summary of business and significant accounting policies
Description of business
Telenav, Inc., also referred to in this report as "Telenav," “we,” “our” or “us,” was incorporated in September 1999 in the State of Delaware. We are a leading provider of connected car and location-based products and services. We utilize our automotive navigation platform and our advertising delivery platform to deliver these products and services. Our automotive navigation platform allows us to deliver enhanced location-based services to automobile manufacturers, as well as original equipment manufacturers and tier one suppliers, to which we refer collectively as tier ones. Our automotive solutions primarily include navigation systems built into vehicles, or on-board, mobile phone based navigation systems, or brought-in, and advanced navigation solutions that offer on-board functionality combined with cloud functionality, or hybrid. Our advertising delivery platform, which we provide through our Thinknear business unit, delivers highly targeted advertising services leveraging our location expertise. We reported results in three business segments through June 30, 2019: automotive, advertising and mobile navigation. Our fiscal year ends on June 30, and in this report we refer to the fiscal years ended June 30, 2019, 2018 and 2017 as fiscal 2019, fiscal 2018 and fiscal 2017, respectively.
Basis of presentation
The consolidated financial statements and accompanying notes have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The consolidated financial statements include the accounts of Telenav, Inc. and our wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior year balances have been reclassified to conform to the current year presentation.
Our consolidated financial statements also include the financial results of Shanghai Jitu Software Development Ltd., or Jitu, located in China. Based on our contractual arrangements with the shareholders of Jitu, we have determined that Jitu is a variable interest entity, or VIE, for which we are the primary beneficiary and are required to consolidate in accordance with Accounting Standards Codification, or ASC, subtopic 810-10, or ASC 810-10, Consolidation: Overall. The results of Jitu did not have a material impact on our overall operating results for fiscal 2019, fiscal 2018 or fiscal 2017.
Use of estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant estimates and assumptions made by us include the determination of revenue recognition and deferred revenue, including estimating and allocating the transaction price of customer contracts, the recoverability of accounts receivable, the determination of acquired intangibles and assessment of goodwill for impairment, the fair value of stock-based awards issued, the determination of income taxes and the recoverability of deferred tax assets. Actual results could differ from those estimates.
Revenue recognition
The core principle of ASC 606 is to recognize revenue to depict the transfer of products or services to customers in an amount that reflects the consideration we expect to be entitled to in exchange for those products or services. This principle is achieved through applying the following five-step approach:
•
Identification of the contract, or contracts, with a customer
•
Identification of the performance obligations in the contract
•
Determination of the transaction price
•
Allocation of the transaction price to the performance obligations in the contract
•
Recognition of revenue when, or as, the company satisfies a performance obligation
We generate revenue primarily from software licenses, service subscriptions and customized software development fees, as well as the delivery of advertising impressions. 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. Since we control the products or services prior to their transfer to the customer, we report our automotive, advertising and mobile navigation revenue on a gross basis. This
TELENAV, INC.
Notes to Consolidated Financial Statements-(Continued)
assessment is based primarily on our ultimate primary responsibility for fulfilling the promises made with respect to the products and services as well as the degree of discretion we have in establishing pricing.
Royalties for on-board navigation solutions are generally earned at various points in time, depending upon the individual customer agreement. We earn each royalty upon either the re-imaging of the software on each individual memory card or the time at which each vehicle is produced. Royalties for brought-in navigation solutions are earned upon vehicle sales reporting or upon initial usage by the end user.
Product revenue
We generate product revenue from the delivery of our on-board automotive navigation solutions, specified map updates and customized software development.
We recognize revenue from on-board automotive navigation solutions upon transfer of control of the customized software and any associated integrated content together forming a distinct performance obligation. Transfer of control generally occurs at a point in time upon acceptance. Any royalties for the use of distinct software combined with integrated content, with an allocation of the transaction price based on the relative SSP of map updates, specified upgrades, and other services as applicable, are recognized at the later of when the royalties are earned or when transfer of control of the related performance obligation has occurred.
For hybrid automotive solutions, which contain on-board software and cloud functionality, the transaction price allocated to the on-board component is generally recognized as product revenue as described above, and the transaction price allocated to the included cloud functionality based on relative SSP is generally recognized as services revenue. Since the on-board software is still the predominant item in the hybrid solution, the royalties recognition guidance applies as it does for on-board navigation solutions described above. Our brought-in automotive navigation solutions as described below are subject to variable consideration and constraint guidance.
Services revenue
We derive services revenue primarily from our brought-in automotive navigation solutions and, to a lesser extent, from the cloud functionality that is a component of our hybrid automotive navigation solutions as discussed above. Since contracts for our brought-in automotive navigation solutions typically contain a substantial amount of variable consideration that does not meet the allocation objective of ASC 606 and is required to be estimated and included in the transaction price, we include in the transaction price only variable consideration such that it is probable that a risk of significant revenue reversal will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Total variable consideration to be received is estimated at contract inception and updated at each reporting date. We utilize the expected value method and consider expected unit volume combined with a risk-based probability based on factors including, but not limited to: model year cycles, customer history, technology life cycles, nature of competition and other contract-specific factors. Because customers of our brought-in automotive navigation solutions simultaneously receive and consume the benefit from our performance, we recognize revenue ratably over the period the services obligation is expected to be fulfilled, generally 8 to 12 years, as this provides a faithful depiction of the transfer of control.
We also derive services revenue from the delivery of advertising impressions. We recognize revenue when transfer of control of the related advertising services occur based on the specific terms of each advertising contract, which are generally based on the number of ad impressions delivered. Substantially all contracts for advertising services are cancellable within a short period of notice, and we assess whether pricing within such contracts create any material right which could extend the expected term of the contract beyond the cancellable term.
In addition, we derive a declining amount of 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, which is considered variable consideration. For such variable consideration related to our mobile navigation services, these fees are recognized in the month in which they are earned because the terms of the variable payments relate specifically to the outcome from transferring the distinct time increment (month) of service, which is consistent with the allocation objective when considering all of the performance obligations and payment terms in the contract.
We recognize as revenue 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 obligation has been fulfilled. Our agreements do not contain general rights of refund once the service has been provided.
TELENAV, INC.
Notes to Consolidated Financial Statements-(Continued)
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. Estimates for revenue include our consideration of certain factors and information, including subscriber data, historical subscription and revenue reporting trends, end user subscription data from our internal systems, and data from comparable distribution channels of our other customers. We record any differences between estimated revenue and actual revenue in the reporting period when we determine the actual amounts. To date, actual amounts have not differed materially from our estimates.
Disaggregation of revenue
In order to further depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors, the following table depicts the disaggregation of revenue according to revenue type and pattern of recognition, and is consistent with how we evaluate our financial performance (in thousands):
Contracts with multiple performance obligations
Some of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative SSP basis. We determine SSP based on, if available, observable prices for those related products and services when sold separately. When observable prices are not available, we determine SSP based on our overall pricing trends and objectives, taking into consideration market conditions and other factors, including the value of the contracts, the products and services sold, and stated prices for renewal. In such instances, we apply the expected cost plus margin method and the residual method in cases where we have not yet established a price and the product or service has not previously been sold on a standalone basis.
We have used the practical expedient to reflect the aggregate effect of all contract modifications that occurred before our earliest reporting period, fiscal 2017, when i) determining the satisfied and unsatisfied performance obligations, ii) determining the transaction price, and iii) allocating the transaction price to the satisfied and unsatisfied performance obligations.
TELENAV, INC.
Notes to Consolidated Financial Statements-(Continued)
Contract assets
Contract assets relate to our rights to consideration for performance obligations satisfied but not billed at the reporting date. As of June 30, 2019 and 2018, we had no contract assets.
Deferred revenue
Deferred revenue consists primarily of amounts that have been invoiced, and for which we have the right to bill, in advance of performance obligations being satisfied and revenue being recognized under our contracts with customers. Deferred revenue associated with performance obligations that are anticipated to be satisfied during the succeeding 12 months is recorded as current deferred revenue, and the remaining portion is recorded as non-current deferred revenue in our consolidated balance sheets.
In instances where the timing of revenue recognition differs from the timing of invoicing, we do not adjust consideration for the effects of a significant financing portion for periods of one year or less, for example, in the case of customized software development fees paid in advance of acceptance of the software. Substantially all brought-in automotive navigation solutions contain consideration paid significantly in advance of our provision of the services. In these cases, we have determined such contracts do not include a significant financing component, since neither we nor the applicable automobile manufacturer or tier one is substantially in control of such consideration, as revenue from these contracts is driven by future sales demand of a particular vehicle.
Cost of revenue
Our cost of revenue consists primarily of the cost of third-party royalty based content, such as map, points of interest, or POI, traffic, gas price and weather data, and voice recognition technology that we use in providing our personalized navigation services. Our cost of revenue also includes the cost of third-party exchange ad inventory as well as expenses associated with outsourced hosting services, data center operations, customer support, the amortization of capitalized software, recognition of deferred customized software development costs, stock-based compensation and amortization of acquired developed technology.
Deferred costs
We capitalize and defer recognition of certain third-party royalty-based content costs associated with the fulfillment of future automotive product and services obligations, and we recognize these deferred content costs as cost of revenue as we transfer control of the related performance obligation. Deferred costs are classified as current or non-current consistent with the periods over which the performance obligations are anticipated to be satisfied. We do not capitalize advertising commission costs, as we have applied the practical expedient under ASC 606 to allow such incremental costs of obtaining a contract to be expensed in the period incurred if the amortization period is one year or less. Incremental costs of obtaining advertising contracts with amortization periods greater than one year are immaterial.
Deferred costs also include the cost of customized software we develop for customers. We begin deferring development costs when they relate directly to a contract or specific anticipated contract and such costs are incurred to satisfy performance obligations in the future, provided they are expected to be recovered. We recognize these deferred software development costs as cost of revenue upon transfer of control of the associated performance obligation. We evaluate contract cost deferrals for impairment on a quarterly basis or whenever events or changes in circumstances indicate that a project may require recognition of a contract loss. We did not record any impairment losses during fiscal 2019, 2018 and 2017.
In connection with our usage of licensed third-party content, 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. These contracts contain obligations for the licensor to provide ongoing services and, accordingly, we record any minimum guaranteed royalty payments as an asset when paid and amortize the amount to cost of revenue over the applicable period. Any additional royalties due based on actual usage are expensed monthly as incurred.
Changes in the balance of total deferred costs (current and non-current) during fiscal 2019 and 2018 are as follows (in thousands):
TELENAV, INC.
Notes to Consolidated Financial Statements-(Continued)
Foreign currency
We translate the financial statements of certain of our foreign subsidiaries whose functional currency is their local currency. Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are recorded as part of a separate component of comprehensive income in stockholders’ equity. Foreign currency transaction gains and losses are included in our net income for each year. All assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenue and expenses are translated at the average monthly exchange rates during the year. Equity transactions are translated using historical exchange rates. Foreign currency transaction gains (losses) were $(215,000), $254,000 and $318,000 in fiscal 2019, 2018 and 2017, respectively.
Accumulated other comprehensive income (loss), net of tax
The components of accumulated other comprehensive income (loss), net of related taxes, were as follows (in thousands):
The amount reclassified from accumulated other comprehensive income (loss), net of tax, was determined using the specific identification method and the amount was included in other income, net, for fiscal 2019 and 2018, respectively.
The amount of income tax benefit allocated to each component of accumulated other comprehensive income (loss) was not material for fiscal 2019 and 2018.
Cash equivalents and short-term investments
Cash equivalents consist of highly liquid fixed-income investments with original maturities of three months or less at the time of purchase, including money market funds and commercial paper. Short-term investments consist of readily marketable debt securities with a remaining maturity of more than three months from time of purchase and marketable equity securities. Short-term investments are classified as current assets, even though maturities may extend beyond one year, because they represent investments of cash available for operations. We classify all of our cash equivalents and short-term investments as “available-for-sale,” as these investments are free of trading restrictions. We may or may not hold securities with stated maturities greater than 12 months until maturity. After consideration of our risk versus reward objectives, as well as our liquidity requirements, we may sell these securities prior to their stated maturities. As we view these securities as available to
TELENAV, INC.
Notes to Consolidated Financial Statements-(Continued)
support current operations, we classify securities with maturities beyond 12 months as current assets under the caption short-term investments in the accompanying consolidated balance sheets.
Marketable debt securities are carried at fair value, with the unrealized gains and losses, net of tax, reported as accumulated other comprehensive income and included as a separate component of stockholders’ equity. Gains and losses are recognized when realized. When we have determined that an other-than-temporary decline in fair value has occurred, the amount of the decline that is related to a credit loss is recognized in earnings. Gains and losses are determined using the specific identification method. Our net realized gains (losses) were $11,000, $(64,000) and zero in fiscal 2019, 2018 and 2017, respectively. Interest income totaled $1.7 million, $1.4 million and $1.2 million in fiscal 2019, 2018 and 2017, respectively.
As of June 30, 2019, short-term investments also included marketable equity securities, which are carried at fair value with unrealized gains and losses recognized in other income (expense), net. Our net realized gains (losses) from marketable equity securities were zero in fiscal 2019. We did not hold any marketable equity securities in fiscal 2018 and 2017.
Concentrations of risk and significant customers
Financial instruments that subject us to significant concentrations of credit risk primarily consist of cash, cash equivalents, short-term investments and accounts receivable. We maintain our cash, cash equivalents and short-term investments with well-capitalized financial institutions. At times, such deposits may be in excess of federally insured limits. Cash equivalents consist primarily of money-market accounts and commercial paper with original maturities of three months or less at the time of purchase. Our primary customers are automobile manufacturers and tier ones, and advertisers and advertising agencies, and we do not require collateral for accounts receivable. To manage the credit risk associated with accounts receivable, we evaluate the creditworthiness of our customers. We evaluate our accounts receivable on an ongoing basis to determine those amounts not collectible. To date, we are not aware of circumstances that may impair a specific customer’s ability to meet its financial obligations to us, other than those customers for which an allowance for doubtful accounts has been established.
Revenue related to products and services provided through Ford Motor Company, or Ford, comprised 55%, 67% and 71% of revenue for fiscal 2019, 2018 and 2017, respectively. Receivables due from Ford were 33% and 56% of total accounts receivable at June 30, 2019 and 2018, respectively.
Revenue related to products and services provided through General Motors Holdings and its affiliates, or GM, comprised 18% of revenue for fiscal 2019 and less than 10% of revenue for fiscal 2018 and 2017. Receivables due from GM were 15% and 10% of total accounts receivable at June 30, 2019 and 2018, respectively.
Receivables due from Xevo, Inc. were 29% of total accounts receivable at June 30, 2019. No other customer represented 10% of our revenue or 10% of our receivables for any period presented.
Our licensed map, POI and traffic data have been provided principally through HERE North America, LLC, a company owned by a consortium of German automobile manufacturers, or HERE, and TomTom North America, Inc., or TomTom, in fiscal 2019, 2018 and 2017. To date, we are not aware of circumstances that may impair either party’s intent or ability to continue providing such services to us.
Restricted cash
As of June 30, 2019 and 2018, we had restricted cash of $2.0 million and $3.0 million, respectively, on our consolidated balance sheets. As of June 30, 2019 and 2018, restricted cash is comprised primarily of prepayments from a customer.
Fair value of financial instruments
The estimated fair market value of financial instruments, including cash, accounts receivable and accounts payable, approximates the carrying values of those instruments due to their relatively short maturities.
We measure certain other financial instruments at fair value on a recurring basis. We have established a hierarchy, which consists of three levels, for disclosure of the inputs used to determine the fair value of our financial instruments.
Level 1 valuations are based on quoted prices in active markets for identical assets or liabilities.
Level 2 valuations are based on inputs that are observable, either directly or indirectly, other than quoted prices included within Level 1. Such inputs used in determining fair value for Level 2 valuations include quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other
TELENAV, INC.
Notes to Consolidated Financial Statements-(Continued)
inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 valuations are based on information that is unobservable and significant to the overall fair value measurement.
As of June 30, 2018, we did not have any Level 3 financial instruments.
Property and equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets. Computers, software and equipment have useful lives of three years and automobiles, furniture and fixtures have useful lives of five years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful lives of the assets or the term of the related lease.
Long-lived assets
We evaluate our long-lived assets, including intangible assets, for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If long-lived assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair value.
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 performed our annual goodwill impairment test as of April 1, 2019 by comparing the fair value of our three reporting units with their respective carrying amounts. Based upon a qualitative assessment indicating that it was not more likely than not that the fair value of each of our reporting units was less than its carrying value, we determined that no impairment was indicated. Subsequent to the completion of our annual assessment, in May 2019 we entered into substantive discussions with inMarket regarding the sale of certain assets and the assumption of certain liabilities associated with the Ads Business in exchange for an equity interest in inMarket. In June 2019, we considered it more likely than not that a sale would occur, and we concluded that this represented a triggering event that required an interim goodwill impairment assessment. Accordingly, in June 2019, we performed an interim goodwill impairment test for our advertising business segment. 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 this interim goodwill impairment test, the carrying value of our advertising business segment exceeded its estimated fair value and, accordingly, during fiscal 2019 we recognized a $2.6 million impairment of the goodwill associated with our advertising business segment.
Revenue from our mobile navigation business has been declining substantially over the last few years and has continued to deteriorate in fiscal 2018 and 2019. 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 business 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 segment exceeded its estimated fair value and, accordingly, during fiscal 2018, we recognized a $2.7 million impairment of all of the goodwill associated with our mobile navigation business segment.
As of June 30, 2019, we had goodwill of $26.1 million associated with our automotive and advertising segments. See Note 5.
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Notes to Consolidated Financial Statements-(Continued)
Leases
We lease our office facilities under operating lease agreements. Office facilities subject to an operating lease and the related lease payments are not recorded on our consolidated balance sheets. The terms of certain lease agreements provide for rental payments on a graduated basis; however, we recognize rent expense on a straight-line basis over the lease period. Any lease incentives or contracted sublease income are recognized as reductions of rental expense on a straight-line basis over the term of the lease. The lease term begins on the date we become legally obligated for the rent payments or when we take possession of the office space, whichever is earlier. As of June 30, 2019, and 2018, we had a total of $1.6 million and $1.3 million, respectively, in deferred rent related to tenant improvement lease incentives and graduated rent payments recorded as liabilities on our balance sheets.
Stock-based compensation
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 the employee’s requisite service period of each of these awards, net of estimated forfeitures.
Equity instruments issued to nonemployees are recorded at their fair value on the measurement date and are subject to periodic adjustment as the underlying equity instruments vest.
Income taxes
We utilize the asset and liability method of accounting for income taxes, whereby deferred tax asset or liability account balances are calculated at the balance sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are provided when necessary to reduce deferred tax assets to the amount that will more likely than not be realized.
Research and software development costs
We expense research and development costs as incurred. For costs incurred under ASC 985-20, Costs of Software to be Sold, Leased, or Marketed, we typically do not achieve technological feasibility prior to incurring such costs and, as a result, all such costs are expensed as incurred. 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. We capitalized $781,000 of internal use software development costs during fiscal 2018. We did not capitalize any software development costs during fiscal 2019 and 2017. Amortization expense related to capitalized internal use software development costs, which has been recorded in cost of revenue, totaled $260,000, $174,000 and zero for fiscal 2019, 2018 and 2017, respectively. As of June 30, 2019 and 2018, unamortized capitalized internal use software development costs, which were included in other assets, were $347,000 and $608,000, respectively.
Advertising expense
Advertising costs are expensed as incurred. Advertising expense was $334,000, $131,000 and $246,000 in fiscal 2019, 2018 and 2017, respectively.
Recently adopted accounting pronouncements
In January 2017, the Financial Accounting Standards Board, or FASB, issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (ASU 2017-04), which removes the second step of the goodwill impairment test that requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019 and will be applied prospectively. Early adoption is permitted for annual or any interim impairment tests with a measurement date on or after January 1, 2017. We early adopted this guidance as of April 1, 2019. The adoption of this standard did not have a material impact to our consolidated financial statements.
In November 2016, the FASB issued new guidance to clarify how entities should present restricted cash and restricted cash equivalents in the statement of cash flows. The new guidance requires that restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning and ending total amounts shown in the statement of
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Notes to Consolidated Financial Statements-(Continued)
cash flows. The new standard was effective for us in our first quarter of fiscal 2019 and requires a retrospective method of adoption. We adopted this standard on July 1, 2018 on a retrospective basis, resulting in immaterial changes to our previously reported consolidated statement of cash flows for fiscal 2018.
In August 2016, the FASB issued new guidance which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. The new standard was effective for us in our first quarter of fiscal 2019. We adopted this standard on July 1, 2018, and it did not have a material impact to our consolidated statements of cash flows.
In March 2016, the FASB issued new guidance to clarify the implementation guidance on principal versus agent considerations for reporting revenue gross versus net. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customer. The new standard was effective for us in our first quarter of fiscal 2019. We adopted this standard on July 1, 2018 in connection with our adoption of ASU 2014-09 discussed below, and it did not have a material impact to our consolidated financial statements.
In January 2016, the FASB issued new guidance that amends the accounting and disclosures of financial instruments, including a provision that requires equity investments (except for investments accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in current earnings. A practicality exception applies to those equity investments that do not have a readily determinable fair value. These investments may be measured at cost, adjusted for changes in observable prices minus impairment. The new standard was effective prospectively for us in our first quarter of fiscal 2019 for our equity investments that were previously accounted for under the cost-method. We adopted this standard on July 1, 2018 and it did not have a material impact to our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. Under Topic 606, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. In conjunction with Topic 606, a new subtopic, ASC 340-40, Other Assets and Deferred Costs - Contracts with Customers, was also issued. The updated standard replaces most existing revenue recognition and certain cost guidance under GAAP. Collectively, we refer to Topic 606 and Subtopic 340-40 as “ASC 606.”
We adopted ASC 606 effective July 1, 2018, utilizing the full retrospective transition method. Adoption of ASC 606 resulted in changes to our accounting policies for revenue recognition and deferred costs as detailed below. We applied ASC 606 using a practical expedient where the consideration allocated to the remaining performance obligations or an explanation of when we expect to recognize that amount as revenue for all reporting periods presented before the date of the initial application is not disclosed.
The effect of adopting ASC 606 on fiscal 2018 was material to our statements of operations and balance sheets as a result of its impact on the recognition of revenue and associated third-party content costs for certain of our on-board and brought-in automotive navigation solutions. The adoption of ASC 606 had no significant impact on our advertising and mobile navigation business segments. The adoption of ASC 606 resulted in reductions to deferred costs (asset) and deferred revenue (liability) balances, and accelerated the recognition of revenues and deferred costs in the automotive segment.
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 recognize revenue related to royalties for distinct software and content that has been accepted as transfer of control takes place, with an allocation of the transaction price based on the relative standalone selling price, or SSP, of map updates, specified upgrades, and other services as applicable, which we will recognize with the associated content costs at a point in time or over time as we transfer control of the related performance obligation.
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 that does not meet the allocation objective of ASC 606 to recognize the fees in the month in which they are earned because the terms of the variable payments do not relate specifically to the outcome from transferring the distinct time increment (month) of service, we will estimate the total transaction price each reporting period, subject to a constraint, and then recognize revenue ratably over the period the services obligation is expected to be fulfilled, as further described in the section titled “Services revenue” of this Note 1.
Development costs subject to ASC 340-40 incurred to fulfill future obligations under certain actual or anticipated contracts for automotive solutions are capitalized, provided they are expected to be recovered, and then recognized as control
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Notes to Consolidated Financial Statements-(Continued)
of the related performance obligations is transferred. Historically, such costs were not capitalized until receipt of a signed contract or purchase order for a fixed amount, provided the costs were probable of being recovered. Under ASC 340-40, we are required to capitalize such costs in anticipation of a contract, provided the costs are expected to be recovered; thus, increasing the amount of costs we capitalize under ASC 340-40. For on-board automotive solutions, such capitalized costs represent the customized portion of software development, which will continue to be recognized upon acceptance of the software under ASC 340-40 since acceptance is generally required for control of the software to transfer. For brought-in automotive solutions, such costs will be amortized over the period the services obligation is expected to be fulfilled, since software development does not represent a distinct performance obligation in the case of brought-in automotive solutions. Historically, we recognized such costs for brought-in automotive solutions upon acceptance of the software.
We adjusted our consolidated financial statements from amounts previously reported due to the adoption of ASC 606. Summarized financial information depicting the impact of ASC 606 is presented below. Our historical net cash flows provided by or used in operating, investing and financing activities are not impacted by the adoption of ASC 606. (Amounts in thousands, except per share data):
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Notes to Consolidated Financial Statements-(Continued)
Recent accounting pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) which supersedes the guidance in topic ASC 840, Leases. The new standard, including subsequent amendments, requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today.
Topic 842 is effective for us beginning July 1, 2019. We will adopt the standard on a modified retrospective basis and intend to elect the package of transition expedients and the current period adjustment transition method that allows us not to restate the comparative periods in our financial statements in the year of adoption. We are assessing the impact of Topic 842 on our internal controls over financial reporting.
While the adoption of Topic 842 remains in progress, we expect that adoption will result in the recognition of right-of-use assets and lease liabilities for operating leases that were not previously recognized, which will increase total assets and liabilities on our balance sheet. We expect that adoption will have no impact to our results of operations or cash flows.
In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, or ASU 2018-15, which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to defer and recognize as an asset. This guidance is effective for us in our first quarter of fiscal 2021. Early adoption is permitted and the guidance allows for a retrospective or prospective application. We are evaluating the impact of the adoption of this standard on our consolidated financial statements.
2.
Net income (loss) per share
Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period, including potential dilutive common shares assuming the dilutive effect of outstanding stock options and restricted stock units using the treasury-stock method.
The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share amounts):
The following outstanding shares subject to options and restricted stock units were excluded from the computation of diluted net loss per share for the periods presented because including them would have had an antidilutive effect (in thousands):
3.
Cash, cash equivalents and short-term investments
Cash, cash equivalents and short-term investments consisted of the following as of June 30, 2019 (in thousands):
(1) Consist of Chess Depository Interests held in an Australian Stock Exchange traded company. Investment was sold subsequent to June 30, 2019.
Cash, cash equivalents and short-term investments consisted of the following as of June 30, 2018 (in thousands):
The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category, that have been in an unrealized loss position for less than 12 months or a continuous unrealized loss position for 12 months or greater, as of June 30, 2019 and 2018 (in thousands):
There were 11 securities and 111 securities in an unrealized loss position for less than 12 months at June 30, 2019 and 2018, respectively, and 51 securities and 25 securities in an unrealized loss position for 12 months or greater at June 30, 2019 and 2018, respectively.
The following table summarizes the cost and estimated fair value of fixed income securities classified as short-term investments based on stated maturities as of June 30, 2019 (in thousands):
Declines in fair value judged to be other-than-temporary on securities available for sale are included as a component of other income, net. In order to determine whether a decline in value is other-than-temporary, we evaluate, among other factors: the duration and extent to which the fair value has been less than the carrying value and our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair market value. As of June 30, 2019 and 2018, we did not consider any of our short-term investments to be other-than-temporarily impaired.
4.
Fair value of financial instruments
We measure certain financial instruments at fair value on a recurring basis. We have established a hierarchy, which consists of three levels, for disclosure of the inputs used to determine the fair value of our financial instruments.
All of our cash equivalents and short-term investments are classified within Level 1 or Level 2. The fair values of these financial instruments were determined using the following inputs at June 30, 2019 (in thousands):
The fair values of our financial instruments were determined using the following inputs at June 30, 2018 (in thousands):
Accretion of premium, net of discounts, on short-term investments totaled $(30,000) and $192,000 in fiscal 2019 and 2018, respectively.
Where applicable, we use quoted prices in active markets for identical assets to determine the fair value of short-term investments. If quoted prices in active markets for identical assets are not available to determine fair value, we use quoted prices for similar assets and liabilities or inputs that are observable either directly or indirectly. If quoted prices for identical or similar assets are not available, we use third party valuations utilizing underlying assets assumptions.
There were no transfers between Level 1 and Level 2 financial instruments in fiscal 2019 and 2018, respectively.
We did not have any financial liabilities measured at fair value on a recurring basis as of June 30, 2019 or 2018.
Non-marketable equity investments
Our non-marketable equity securities are investments in privately held companies without readily determinable market values.
Prior to July 1, 2018, we accounted for our non-marketable equity investments at cost less impairment. Realized gains and losses on non-marketable equity investments sold or impaired were recognized in other income (expense), net. As of June 30, 2018, non-marketable equity investments accounted for under the cost method had a carrying value of $708,000.
On July 1, 2018, we adopted ASU 2016-01, which changed the way we account for non-marketable equity securities. The carrying value of our non-marketable equity securities is measured at cost and adjusted to fair value for observable transactions for identical or similar investments of the same issuer or impairment (referred to as the measurement alternative). All gains and losses on non-marketable equity securities, realized and unrealized, are recognized in other income (expense), net. Because we adopted ASU 2016-01 prospectively for investments without readily determinable market values, we apply the measurement alternative commencing July 1, 2018. Non-marketable equity securities that are remeasured are classified within Level 3 in the fair value hierarchy because we estimate the value based on valuation methods using the observable transaction price at the transaction date and other unobservable inputs including volatility, rights, and obligations of the securities we hold.
As of June 30, 2019, we had recorded an unrealized gain of $1.1 million upon the May 2019 initial public offering of stock of a non-marketable equity investee on the Australian Stock Exchange. We reclassified this investment to marketable equity securities as of June 30, 2019.
We did not record any impairment losses during fiscal 2019, 2018 and 2017. As of June 30, 2019, the carrying value of our non-marketable equity securities was $458,000.
5. Balance sheet information
Property and equipment, net
Property and equipment consist of the following (in thousands):
Depreciation and amortization expense related to property and equipment was $2.7 million, $2.3 million and $1.7 million for fiscal 2019, 2018 and 2017, respectively.
Goodwill and intangible assets, net
Intangible assets consist of the following (in thousands):
Acquired developed technology is amortized on a straight-line basis over the expected useful life. Amortization expense related to intangibles was $1.0 million, $1.1 million and $1.1 million for fiscal 2019, 2018 and 2017, respectively.
As of June 30, 2019, amortization expense for intangible assets by fiscal year is as follows: $872,000 in fiscal 2020 and $509,000 in fiscal 2021.
Goodwill by reportable segment as of June 30, 2019 and 2018 was as follows (in thousands):
Goodwill impairment
We reported results in three business segments through June 30, 2019. During fiscal 2019, we recognized a $2.6 million impairment of the goodwill associated with our advertising segment. During fiscal 2018, we recognized a $2.7 million impairment of all of the goodwill associated with our mobile navigation segment (see Note 1).
Accrued expenses
Accrued expenses consist of the following (in thousands):
The overpayment from customers and related reserves will either be refunded or be applied to future amounts owed to us.
6. Deferred revenue and remaining performance obligations
Deferred revenue
Deferred revenue, which is a contract liability, consists primarily of payments received in advance of revenue recognition under our contracts with customers and is recognized upon transfer of control. Changes in the balance of total deferred revenue (current and non-current) during fiscal 2019 is as follows (in thousands):
The cumulative adjustment as a result of changes in the estimate of the transaction price of customer contracts during fiscal 2019 was a net increase in revenue recognized of $1.4 million. In addition, the amount of revenue recognized in fiscal 2019 from performance obligations satisfied or partially satisfied in previous periods was $1.8 million.
Remaining performance obligations
Transaction price allocated to the remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and amounts that are expected to be invoiced and recognized as revenue in future periods. As of June 30, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations for our automotive segment was $70.3 million, which is expected to be recognized over a remaining period of approximately 5 to 8 years. This amount excludes the variable consideration that falls under the exemption for usage-based royalties promised in exchange for a license of intellectual property. We have used the practical expedient to not disclose amounts related to the comparative years under ASC 606.
The aggregate amount of transaction price allocated to the remaining performance obligations for our advertising segment and our mobile navigation segment as of June 30, 2019 was not material.
7. Commitments and contingencies
Operating leases
Our primary facilities located in Santa Clara and Culver City, California, Shanghai and Xi’an, China, and Cluj, Romania, as well as certain other facilities in various locations in the United States, Germany and Japan, are leased under noncancelable operating lease arrangements.
In August 2017, we terminated our sublease with Avaya Inc. for our Santa Clara, California headquarters facility and signed a new direct lease agreement, effective in September 2017, for this same facility. The new lease term is six years, expiring in September 2023. We have a one-time option to extend the new facility lease for an additional three years at the prevailing market rate, as defined in the lease agreement.
In connection with the sublease termination agreement, we recorded the following amounts during fiscal 2018: i) the reversal of $538,000 of deferred rent related to the sublease, with an offsetting credit to rent expense, as amortization of this deferred rent liability is no longer required, and ii) the recognition of $582,000 of tenant improvement allowance related to the sublease, with an offsetting credit to depreciation expense, as amortization of this allowance is no longer required.
As of June 30, 2019, future minimum operating lease payments by fiscal year were as follows (in thousands):
Rent expense was $4.4 million, $4.5 million and $4.1 million for fiscal 2019, 2018 and 2017, respectively.
Purchase obligations
As of June 30, 2019, in addition to our lease obligations, we had an aggregate of $10.6 million of future minimum noncancelable financial commitments primarily related to license fees due to certain of our third party content providers. The aggregate of $10.6 million of future minimum commitments is comprised of $8.1 million due in fiscal 2020, $709,000 due in fiscal 2021, $599,000 due in fiscal 2022, $415,000 due in fiscal 2023, $311,000 due in fiscal 2024 and $520,000 due thereafter. The above commitment amounts exclude amounts already recorded on the consolidated balance sheet.
Contingencies
From time to time, we may become involved in legal proceedings, claims and litigation arising in the ordinary course of business. When we believe a loss or a cost of indemnification is probable and can be reasonably estimated, we accrue the estimated loss or cost of indemnification in our consolidated financial statements. Where the outcome of these matters is not determinable, we do not make a provision in our financial statements until the loss or cost of indemnification, if any, is probable and can be reasonably estimated or the outcome becomes known. We expense legal fees related to these matters as they are incurred.
On December 31, 2009, Vehicle IP, LLC, or Vehicle IP, filed a patent infringement lawsuit against us in the U.S. District Court for the District of Delaware, seeking monetary damages, fees and expenses and other relief. Verizon Wireless, or Verizon, was named as a co-defendant in the Vehicle IP litigation based on the VZ Navigator product and has demanded that we indemnify and defend Verizon against Vehicle IP. We have not agreed to defend or indemnify Verizon. AT&T was also named as a co-defendant in the Vehicle IP litigation based on the AT&T Navigator and Telenav Track products. AT&T tendered the defense of the litigation to us and we defended the case on behalf of AT&T. During fiscal 2016, we accrued $850,000 related to this litigation. On January 12, 2017, we entered into a settlement and license agreement with Vehicle IP. In connection with the agreement, we made a one-time payment of $8.0 million and recorded $7.2 million of this amount as legal settlement and contingencies expense in our consolidated statement of operations in fiscal 2017. On January 31, 2017, Vehicle IP's claims against Telenav and AT&T were dismissed. We are not obligated to make any future payments with respect to the settlement or license. We also have no further obligation to indemnify AT&T with respect to the case.
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 purported to be filed on behalf of a class, and it alleged that Telenav caused unsolicited text messages to be sent to the plaintiff from July 6, 2016 to July 26, 2016. The plaintiff sought statutory and actual damages under the TCPA, attorneys’ fees and costs of the action, and an injunction to prevent any future violations. A settlement was subsequently 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 and final approval of the settlement on September 27, 2018. The settlement became effective on October 30, 2018 and was 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. We expect the matter to be finally concluded in or around November 2019.
In addition, we have received, and expect to continue to receive, demands for indemnification from our customers, which demands can be very expensive to settle or defend, and we have in the past offered to contribute to settlement amounts and incurred legal fees in connection with certain of these indemnity demands. A number of these indemnity demands, including demands relating to pending litigation, remain outstanding and unresolved as of the date of this Form 10-K. Furthermore, in response to these demands we may be required to assume control of and bear all costs associated with the defense of our customers in compliance with our contractual commitments. At this time, we are not a party to the following cases; however, our customers have requested that we indemnify them in connection with such cases.
In August 2017, AT&T Mobility LLC (AT&T) and Sprint Spectrum L.P. (Sprint) sent Telenav indemnification requests relating to patent infringement lawsuits brought by Location Based Services LLC, alleging patent infringement by the AT&T Navigator system and App for iOS and Android, and the Sprint Scout System and the Sprint Scout App for iOS and Android. Location Based Services LLC filed separate lawsuits against AT&T and Sprint in the U.S. District Court for the Eastern District of Texas, asserting five U.S. patents. Telenav agreed to indemnify and defend AT&T and Sprint in connection with these matters. 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, or Traxcell, 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’s products, including discovery, defensive intellectual property rights and any judgment rendered in, or settlement of, the lawsuit. Telenav did not accept tender of the defense but did agree to indemnify AT&T to the extent that the claims relate to the ordinary use of Telenav products.
On June 15, 2018, Telenav filed a complaint against Traxcell seeking a declaratory judgment of non-infringement against the plaintiff.
On December 26, 2018, Telenav and Traxcell entered into a Settlement Agreement. Traxcell granted Telenav and its customers and end users a license to the patent at issue and certain other related patents, and agreed to withdraw its claims of patent infringement against Telenav’s products. Telenav agreed to make a one-time payment to Traxcell and to dismiss without prejudice all claims pending in the declaratory judgment matter. On January 10, 2019, the court dismissed without prejudice all claims pending in the declaratory judgment matter.
Following the Traxcell settlement, AT&T sought reimbursement from Telenav of its litigation expenses incurred in connection with the Traxcell lawsuits. On July 11, 2019, Telenav and AT&T entered into a settlement agreement resolving all claims for indemnification in connection with the Traxcell lawsuits.
In fiscal 2019, Telenav expensed an aggregate of $700,000 relating to the two settlement agreements, which amount was recorded as legal settlements and contingencies expense in our consolidated statement of operations.
In connection with our resolution of certain indemnification disputes with AT&T in January 2017, we reversed a total accrued liability of $726,000 previously expensed for these and other contingencies.
Legal proceedings are subject to inherent uncertainties. 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.
8. Guarantees and indemnifications
Our agreements with our customers generally include certain provisions for indemnifying them against liabilities if our products and services infringe a third party’s intellectual property rights or for other specified matters. We have in the past received indemnification requests or notices of their intent to seek indemnification in the future from our customers with respect to specific litigation claims in which our customers have been named as defendants.
We have agreed to indemnify our directors, officers and certain other employees for certain events or occurrences, subject to certain limits, while such persons are or were serving at our request in such capacity. We may terminate the indemnification agreements with these persons upon the termination of their services with us, but termination will not affect claims for indemnification related to events occurring prior to the effective date of termination. The maximum amount of potential future indemnification is unlimited. We have a directors and officers insurance policy that limits our potential exposure. We believe that any financial exposure related to these indemnification agreements is not material.
9. Stockholders’ equity
Undesignated preferred stock
We are authorized to issue 50,000,000 shares of undesignated preferred stock, par value $0.001 per share. The undesignated preferred stock may be issued from time to time at the discretion of our board of directors. As of June 30, 2019 and 2018, no shares of undesignated preferred stock were issued or outstanding.
Common stock
We are authorized to issue 600,000,000 shares of $0.001 par value stock. The holders of each share of common stock have the right to one vote.
Stock repurchase program
In February 2019, our Board of Directors authorized a program for the repurchase of up to $20.0 million in shares of common stock through open market purchases. The term of the program is 18 months. The timing and amount of repurchase transactions under this program will depend on market conditions, cash flow and other considerations. Under this program, we utilized $1.3 million of cash to repurchase 221,333 shares of our common stock at an average purchase price of $5.89 per share during fiscal 2019.
The repurchased shares are retired and designated as authorized but unissued shares. The timing and amount of repurchase transactions under our stock repurchase programs depends on market conditions and other considerations. We use the par value method of accounting for our stock repurchases. Under the par value method, common stock is first charged with the par value of the shares involved. The excess of the cost of shares acquired over the par value is allocated to additional paid-in capital, or APIC, based on an estimated average sales price per issued share with the excess amounts charged to retained earnings. As a result of our stock repurchases during fiscal 2019, we reduced common stock and APIC by an aggregate of $714,000 and charged $589,000 to retained earnings.
Stock plans
Under our 1999 Stock Option Plan, or 1999 Plan, 2002 Executive Stock Option Plan, or 2002 Plan, 2009 Equity Incentive Plan, or 2009 Plan, and 2011 Stock Option and Grant Plan, or 2011 Plan, eligible employees, directors, and consultants are able to participate in our future performance through awards of nonqualified stock options, incentive stock options and restricted stock units, or RSUs, through the receipt of such awards as authorized by our board of directors. Incentive stock options may be granted only to employees to purchase our common stock at prices equal to or greater than the fair market value on the date of grant. Nonqualified stock options to purchase our common stock may be granted at prices not less than 85% of the fair market value on the date of grant. Options generally vest over a four-year period beginning from the date of grant and generally expire 10 years from the date of grant. RSUs generally vest annually over a four-year period beginning from the date of grant. Prior to our initial public offering, we granted options outside of our stock option plans with terms substantially similar to the terms of options granted under our plans. Our 2009 Plan expires in October of 2019 and our 2011 Plan expires in June 2021.
On the first day of each fiscal year, the number of shares available and reserved for issuance under the 2009 Plan will be annually increased by an amount equal to the lesser of 1,666,666 shares of common stock; 4% of the outstanding shares of our common stock as of the last day of our immediately preceding fiscal year; or an amount determined by our board of directors. The last annual increase occurred in fiscal 2019, as the 2009 Plan expires in October 2019 for new awards.
A summary of our stock option activity is as follows (in thousands except per share and contractual life amounts):
During fiscal 2019, 2018 and 2017, the total cash received from the exercise of stock options was $8.9 million, $681,000 and $2.7 million, respectively, and the total intrinsic value of stock options exercised was $1.1 million, $227,000 and $6.1 million, respectively.
A summary of our RSU activity is as follows (in thousands except contractual life amounts):
Performance-based RSUs
In October 2018, the Compensation Committee of our Board of Directors approved the grant under our 2009 Equity Incentive Plan of performance-based RSUs (the “PSU Award”) covering a target of 240,000 shares of common stock to Dr. HP Jin, our Chairman of the Board of Directors, President and Chief Executive Officer, or CEO.
The PSU Award is subject to (a) four performance milestones, each requiring achievement of a specified trailing average closing stock price for a 50 trading day period on or before the three-year anniversary of the PSU Award’s grant date, as well as (b) Dr. Jin’s continued service with the Company. Achieving each individual stock price performance milestone will result in one quarter of the shares subject to the PSU Award becoming eligible to vest. If a stock price performance milestone is achieved, then one half of the shares that became eligible to vest under the PSU Award upon achievement of that stock price performance milestone will vest on the later of November 1, 2019, or the date that the Compensation Committee of our Board of Directors certifies achievement of the milestone, and the remaining one half of the shares that became eligible to vest will vest on the one-year anniversary of the date the performance milestone was achieved, in each case subject to Dr. Jin’s continued service with the Company through the applicable vesting date. The maximum number of shares subject to the PSU Award that may vest is 240,000.
Since achievement of the award is dependent on a market condition, stock-based compensation expense associated with the PSU Award is recognized regardless of whether the market condition is satisfied, provided that the requisite service period has been met. We utilized the Monte Carlo valuation method to determine the fair value and derived service periods of each of the stock price performance milestones. Total stock-based compensation expense associated with the PSU Award for fiscal 2019 was not material.
In December 2016, 70,000 RSUs granted under a 2015 Performance Share Program were canceled, as the performance conditions were not met. The cancellation of these RSUs resulted in a credit to stock-based compensation expense of $546,000, which is reflected in our results of operations for fiscal 2017.
Shares available for grant
A summary of our shares available for grant activity is as follows (in thousands):
Stock-based compensation expense
The following table summarizes total stock-based compensation expense included in our consolidated statements of operations (in thousands):
The following table summarizes total stock-based compensation expense recorded for stock options, RSUs and restricted common stock issued to employees and nonemployees (in thousands):
We generally use the Black-Scholes option-pricing model to determine the fair value of stock option awards. The determination of the fair value of stock option awards on the date of grant is affected by the stock price as well as assumptions regarding a number of complex and subjective variables. These variables include expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rates and expected dividends. The weighted average assumptions used to value stock options granted and the resulting weighted average grant date fair value per share were as follows:
Expected volatility. The expected volatility used is based on the historical volatility of our common stock.
Expected term. The expected term represents the period that our stock-based awards are expected to be outstanding. The expected term was based on an analysis of our historical exercise and cancellation activity.
Risk-free interest rate. The risk-free rate is based on U.S. Treasury zero coupon issues with remaining terms similar to the expected term on the options.
Dividend yield. We have never declared or paid any cash dividends on our common stock and do not plan to pay cash dividends in the foreseeable future and, therefore, use an expected dividend yield of zero in the valuation model.
We recognize the estimated stock-based compensation expense of RSUs and restricted common stock, net of estimated forfeitures, over the vesting term. The estimated stock-based compensation cost is based on the fair value of our common stock on the date of grant.
At June 30, 2019, the total unrecognized stock-based compensation expense related to employee options was $1.3 million, net of estimated forfeitures, and will be amortized over a weighted average period of 1.77 years. The total fair value of stock options that vested during fiscal 2019, 2018 and 2017 was $3.7 million, $2.4 million and $2.2 million, respectively. At June 30, 2019, the total unrecognized stock-based compensation expense related to RSUs was $8.5 million, net of estimated forfeitures, and will be amortized over a weighted average period of 2.26 years. The total fair value of RSUs that vested during fiscal 2019, 2018 and 2017 was $6.0 million, $7.0 million and $8.2 million, respectively.
Shares reserved for future issuance
Common stock reserved for future issuance as of June 30, 2019 was as follows (in thousands):
10.
Income taxes
The domestic and foreign components of loss before provision (benefit) for income taxes were as follows (in thousands):
(1) See Note 1 for a summary of adjustments.
The provision (benefit) for income taxes consists of the following (in thousands):
(1) See Note 1 for a summary of adjustments.
The provision (benefit) for income taxes differs from the amount computed by applying the statutory federal income tax rate as follows (in thousands):
(1) See Note 1 for a summary of adjustments.
Our provision for income taxes was $1.3 million in fiscal 2019 compared to $1.0 million in fiscal 2018. Our effective tax rate was 4% in fiscal 2019 compared to an effective tax rate of 3% in fiscal 2018. Our effective tax rate in fiscal 2019 and fiscal 2018 was attributable primarily to foreign withholding taxes and income taxes in certain foreign jurisdictions. Our effective tax rate in fiscal 2017 was attributable primarily to foreign withholding taxes and income taxes in certain foreign jurisdictions, partially offset by the reversal of tax reserves related to the settlement of our New York state and IRS tax audits. Our provision for income taxes was $841,000 in fiscal 2017.
Our effective tax rate of 4% and 3% in fiscal 2019 and 2018, respectively, was lower than the tax computed at the U.S. federal statutory income tax rate due primarily to losses for which no benefit will be recognized since they are not more likely than not to be realized due to the lack of current and future income and the inability to carry back losses within the two year carryback period.
In May 2017, the Internal Revenue Service, or IRS, completed its audit of our income taxes for fiscal 2012 through fiscal 2015. The audit resulted in a $947,000 reduction of our research and development tax credit carryforwards and we recorded a tax benefit of $425,000 to reverse the related tax reserves.
The ability to carry back losses for a refund of prior taxes paid was eliminated under the Tax Cuts and Jobs Act, which impacts our losses incurred during fiscal 2019 and 2018.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our net deferred tax assets were as follows (in thousands):
(1) See Note 1 for a summary of adjustments.
All available evidence, both positive and negative, was considered to determine whether, based upon the weight of the evidence, a valuation allowance for deferred tax assets is needed. As of June 30, 2019, we recognized deferred tax assets of $939,000 from foreign jurisdictions and a deferred tax liability of $175,000 from a foreign jurisdiction, for net deferred tax assets of $764,000.
Due to operating losses in previous years and continued earnings volatility, we maintain 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 and losses, the timing of which is uncertain. Due to losses in previous years, and expected losses in fiscal 2020 and potentially
future years in the U.S., we maintained a full valuation allowance on deferred tax assets in the U.S. 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. Our valuation allowance increased (decreased) from the prior year by approximately $(19.3) million, $13.9 million, and $25.9 million in fiscal 2019, 2018 and 2017, respectively.
The impact of our adoption of ASC 606 was to reduce deferred revenue and deferred costs and accelerate the recognition of such revenue and costs. For tax purposes, the acceleration of income is reported in the current and future fiscal years and, accordingly, we have established a deferred tax liability. The impact of the new standard on income tax expense was not material since it resulted in the reduction of deferred tax assets and liabilities with a corresponding adjustment to our valuation allowance.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”), a tax reform bill which, among other items, reduces the current corporate federal income tax rate to 21% from 35%, was signed into law. The rate reduction was effective January 1, 2018.
The Act caused the Company’s deferred tax assets and deferred tax liabilities to be revalued. Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through income tax expense. Due to the full valuation allowance placed against our U.S. deferred tax assets, any change in our gross deferred tax assets will have no impact to income tax expense.
The value of deferred tax assets, net of liabilities decreased by $18.9 million as of January 1, 2018 due to the reduction in the federal corporate tax rate, which had no impact to income tax expense during fiscal 2018 due to the full valuation allowance placed on the assets.
We provide for U.S. income taxes on the earnings of foreign subsidiaries unless the subsidiaries' earnings are permanently reinvested outside the U.S. As of June 30, 2019, the cumulative amount of earnings upon which U.S. income taxes have not been provided was approximately $9.4 million. The net unrecognized deferred tax liability for these earnings was $364,000, which is primarily due to withholding taxes imposed if the dividend was distributed.
As of June 30, 2019, we had federal and California net operating loss carryforwards for income tax purposes of $250.2 million and $14.3 million, respectively. Federal loss carryforwards of $116.3 million will begin to expire in fiscal 2020, while $133.9 million of federal loss carryforwards can be carried forward indefinitely under the Act. Loss carryforwards have begun to expire for California purposes. In addition, we had federal and California research and development tax credit carryforwards of $7.0 million and $11.5 million, respectively, as of June 30, 2019. The federal research credits will begin to expire in fiscal 2023 and the California research credits can be carried forward indefinitely. The loss carryforwards and certain credits are subject to annual limitation under Internal Revenue Code Section 382.
As of June 30, 2019, we also had foreign net operating loss carryforwards of $3.5 million, which can be carried forward indefinitely. Due to uncertainty regarding our ability to utilize the foreign net operating loss carryforwards in certain jurisdictions, we have placed a valuation allowance of $0.5 million on these deferred tax assets.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits (in thousands):
At June 30, 2019, 2018 and 2017, there was $0.1 million of unrecognized tax benefits that if recognized would affect the annual effective tax rate.
We file income tax returns in the U.S. with the IRS, California, various states, and foreign tax jurisdictions in which we have subsidiaries. The statute of limitations remains open for fiscal 2016 through fiscal 2018 for federal tax purposes, for fiscal 2014 through fiscal 2018 in state jurisdictions, and for fiscal 2014 through 2018 in foreign jurisdictions. Fiscal years outside the normal statute of limitation remain open to audit by tax authorities due to tax attributes generated in those early years which have been carried forward and may be audited in subsequent years when utilized.
We believe it is reasonably possible that the gross unrecognized tax benefits as of June 30, 2019 will not decrease (whether by payment, release, or a combination of both) by a material amount in the next 12 months. We recognize interest and penalties related to unrecognized tax positions as part of our provision for federal, state and foreign income taxes. During fiscal 2019, 2018 and 2017, we recognized approximately zero, $15,000 and $17,000 in interest and penalties. We had accrued zero and $97,000 for the payment of interest and penalties at June 30, 2019 and 2018, respectively.
11. Industry segment and geographic information
We report segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of our reportable segments.
Our CEO, the chief operating decision maker, reviews revenue and gross margin information for each of our reportable segments. In addition, with the exception of goodwill and intangible assets, we do not identify or allocate our assets by the reportable segments.
We reported results in three business segments through June 30, 2019:
Automotive - Our automotive segment utilizes our connected car platform to deliver enhanced location-based navigation services to automobile manufacturers and tier ones. We primarily offer three 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. We refer to these solutions as hybrid navigation. Third, we offer mobile phone-based navigation solutions that run on the phone and provides an interactive map and navigation instructions to the vehicle's video screen and audio system, which we refer to as brought-in navigation.
Advertising - Our advertising segment provides interactive mobile advertisements on behalf of our advertising clients to consumers based specifically on the location of the user and other sophisticated targeting capabilities. Our customers include advertisers and advertising agencies.
Mobile Navigation - Our mobile navigation segment provides our map and navigation platform to end users through mobile devices. We distribute our services primarily through our wireless carrier partners.
Our segment results were as follows (dollars in thousands):
Revenue by geographic region is based on the billing address of our customers. The following table sets forth revenue and property and equipment by geographic region (in thousands):
12. Employee savings and retirement plan
We sponsor a defined contribution plan under Internal Revenue Code Section 401(k), or the 401(k) Plan. Most of our U.S. employees are eligible to participate following the start of their employment. Employees may contribute up to the lesser of 100% of their current compensation to the 401(k) Plan or an amount up to a statutorily prescribed annual limit. We pay the direct expenses of the 401(k) Plan and beginning in July 2006, we began to match employee contributions up to 4% of an employee’s salary, limited to a maximum annual contribution of $8,000 per employee. Contributions made by us are subject to certain vesting provisions. We made matching contributions and recorded expense of $1.1 million, $1.3 million and $1.3 million for fiscal 2019, 2018 and 2017, respectively.
13. Quarterly financial data (unaudited)
Summarized quarterly financial information for fiscal 2019 and 2018 is as follows, as restated for the adoption of ASC 606 (in thousands, except per share data):
14. Subsequent event (unaudited)
In August 2019, we sold our advertising delivery platform (the Ads Business) to inMarket Media, LLC, or inMarket, a provider of digital advertising services. Upon the terms and subject to the conditions of the Asset Purchase Agreement, inMarket acquired substantially all of the assets and assumed certain liabilities related to and used in the Ads Business. In exchange, inMarket issued to Telenav units of inMarket representing a 14.5% member interest in inMarket at the time of closing of the transaction. In addition, inMarket granted to Telenav a perpetual, non-exclusive, irrevocable, royalty-free, license back to the software and other intellectual property rights being assigned to inMarket as part of the inMarket Transaction.
In connection with the agreement, we expect to assign our interest in our Culver City, California and Chicago, Illinois office leases to inMarket or to terminate such leases, resulting in a decrease in future minimum operating lease payments totaling $1.4 million.
We will report the operating results of the Ads Business as discontinued operations in our condensed consolidated financial statements for the first quarter of fiscal 2020 and for all prior comparative periods. Our pro forma results of operations for fiscal 2019, assuming the sale of the Ads Business had been completed on June 30, 2019, was as follows:
Assets transferred to inMarket or written off and liabilities assumed by inMarket or written off in connection with the inMarket Transaction totaled less than 5% and less than 1% of our consolidated total assets and consolidated total liabilities, respectively, at June 30, 2019.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)