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EX-32 - EX-32 - CalAmp Corp.camp-ex32_8.htm
EX-31.2 - EX-31.2 - CalAmp Corp.camp-ex312_6.htm
EX-31.1 - EX-31.1 - CalAmp Corp.camp-ex311_7.htm
EX-10.1 - EX-10.1 - CalAmp Corp.camp-ex101_54.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 30, 2019

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from          to          

COMMISSION FILE NUMBER: 0-12182

 

CALAMP CORP.

(Exact name of Registrant as specified in its Charter)

 

 

Delaware

 

95-3647070

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

15635 Alton Parkway, Suite 250

 

 

Irvine, California

 

92618

(Address of principal executive offices)

 

(Zip Code)

(949) 600-5600

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading symbol

Name of Each Exchange On Which Registered

Common stock, $0.01 per share

CAMP

Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes    No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No

The number of shares outstanding of the registrant’s common stock as of December 16, 2019 was 34,158,785.

 


 

CALAMP CORP.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED NOVEMBER 30, 2019

TABLE OF CONTENTS

 

 

 

 

 

Page

Number

 

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

Financial statements

 

3

 

 

 

 

 

 

 

Condensed consolidated balance sheets (unaudited) as of November 30, 2019 and February 28, 2019

 

3

 

 

 

 

 

 

 

Condensed consolidated statements of comprehensive income (loss) (unaudited) for the three and nine months ended November 30, 2019 and 2018

 

4

 

 

 

 

 

 

 

Condensed consolidated statements of cash flows (unaudited) for the nine months ended November 30, 2019 and 2018

 

5

 

 

 

 

 

 

 

Condensed consolidated statements of stockholders’ equity (unaudited) for the three and nine months ended November 30, 2019 and 2018

 

6

 

 

 

 

 

 

 

Notes to unaudited condensed consolidated financial statements

 

7

 

 

 

 

 

ITEM 2.

 

Management’s discussion and analysis of financial condition and results of operations

 

26

 

 

 

 

 

ITEM 3.

 

Quantitative and qualitative disclosures about market risk

 

34

 

 

 

 

 

ITEM 4.

 

Controls and procedures

 

34

 

 

 

 

 

 

 

 

 

 

PART II – OTHER INFORMATION

 

ITEM 1.

 

Legal proceedings

 

35

 

 

 

 

 

ITEM 1A.

 

Risk factors

 

35

 

 

 

 

 

ITEM 6.

 

Exhibits

 

36

 

2


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CALAMP CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)

 

 

 

November 30,

 

 

February 28,

 

Assets

 

2019

 

 

2019

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

101,634

 

 

$

256,500

 

Short-term marketable securities

 

 

1,926

 

 

 

17,512

 

Accounts receivable, net

 

 

83,462

 

 

 

78,079

 

Inventories

 

 

44,035

 

 

 

32,033

 

Prepaid expenses and other current assets

 

 

22,196

 

 

 

19,373

 

Total current assets

 

 

253,253

 

 

 

403,497

 

Property and equipment, net

 

 

57,127

 

 

 

27,023

 

Operating lease right-of-use assets

 

 

24,108

 

 

 

-

 

Deferred income tax assets

 

 

30,372

 

 

 

22,626

 

Goodwill

 

 

105,584

 

 

 

80,805

 

Other intangible assets, net

 

 

66,501

 

 

 

47,165

 

Other assets

 

 

25,466

 

 

 

22,510

 

 

 

$

562,411

 

 

$

603,626

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

32,955

 

 

$

-

 

Accounts payable

 

 

36,993

 

 

 

39,898

 

Accrued payroll and employee benefits

 

 

9,707

 

 

 

8,808

 

Deferred revenue

 

 

34,939

 

 

 

24,264

 

Other current liabilities

 

 

15,237

 

 

 

10,622

 

Total current liabilities

 

 

129,831

 

 

 

83,592

 

Long-term debt, net of current portion

 

 

176,378

 

 

 

275,905

 

Operating lease liabilities

 

 

27,090

 

 

 

-

 

Other non-current liabilities

 

 

38,459

 

 

 

38,476

 

Total liabilities

 

 

371,758

 

 

 

397,973

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, $.01 par value; 3,000 shares authorized; no shares issued or outstanding

 

 

 

 

 

 

Common stock, $.01 par value; 80,000 shares authorized; 34,153 and 33,555 shares

   issued and outstanding at November 30, 2019 and February 28, 2019, respectively

 

 

342

 

 

 

336

 

Additional paid-in capital

 

 

216,798

 

 

 

208,205

 

Accumulated deficit

 

 

(25,704

)

 

 

(2,227

)

Accumulated other comprehensive loss

 

 

(783

)

 

 

(661

)

Total stockholders' equity

 

 

190,653

 

 

 

205,653

 

 

 

$

562,411

 

 

$

603,626

 

 

See accompanying notes to condensed consolidated financial statements.

3


CALAMP CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

November 30,

 

 

November 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

63,192

 

 

$

67,571

 

 

$

188,782

 

 

$

221,461

 

Application subscriptions and related products and service

 

 

33,405

 

 

 

20,924

 

 

 

90,121

 

 

 

57,959

 

Total revenues

 

 

96,597

 

 

 

88,495

 

 

 

278,903

 

 

 

279,420

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

42,225

 

 

 

41,397

 

 

 

118,494

 

 

 

134,795

 

Application subscriptions and related products and service

 

 

17,488

 

 

 

10,717

 

 

 

50,444

 

 

 

30,332

 

Total cost of revenues

 

 

59,713

 

 

 

52,114

 

 

 

168,938

 

 

 

165,127

 

Gross profit

 

 

36,884

 

 

 

36,381

 

 

 

109,965

 

 

 

114,293

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

7,742

 

 

 

7,177

 

 

 

22,552

 

 

 

21,377

 

Selling and marketing

 

 

14,683

 

 

 

12,746

 

 

 

45,198

 

 

 

37,766

 

General and administrative

 

 

14,283

 

 

 

11,719

 

 

 

44,660

 

 

 

37,146

 

Restructuring

 

 

848

 

 

 

1,247

 

 

 

3,120

 

 

 

5,196

 

Intangible asset amortization

 

 

3,325

 

 

 

2,893

 

 

 

9,683

 

 

 

8,534

 

Total operating expenses

 

 

40,881

 

 

 

35,782

 

 

 

125,213

 

 

 

110,019

 

Operating income (loss)

 

 

(3,997

)

 

 

599

 

 

 

(15,248

)

 

 

4,274

 

Non-operating income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment income

 

 

1,108

 

 

 

1,398

 

 

 

4,445

 

 

 

3,258

 

Interest expense

 

 

(4,987

)

 

 

(5,134

)

 

 

(15,998

)

 

 

(11,566

)

Gain on legal settlement

 

 

 

 

 

2,500

 

 

 

 

 

 

15,833

 

Loss on extinguishment of debt (see Note 7)

 

 

(2,408

)

 

 

 

 

 

(2,408

)

 

 

(2,033

)

Other income (expense)

 

 

232

 

 

 

(218

)

 

 

26

 

 

 

(721

)

Total non-operating income (expense)

 

 

(6,055

)

 

 

(1,454

)

 

 

(13,935

)

 

 

4,771

 

Income (loss) before income taxes and impairment loss and equity in net loss of affiliate

 

 

(10,052

)

 

 

(855

)

 

 

(29,183

)

 

 

9,045

 

Income tax benefit (provision)

 

 

2,637

 

 

 

778

 

 

 

6,236

 

 

 

(496

)

Income (loss) before impairment loss and equity in net loss of affiliate

 

 

(7,415

)

 

 

(77

)

 

 

(22,947

)

 

 

8,549

 

Impairment loss and equity in net loss of affiliate

 

 

 

 

 

(445

)

 

 

(530

)

 

 

(1,414

)

Net income (loss)

 

$

(7,415

)

 

$

(522

)

 

$

(23,477

)

 

$

7,135

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.22

)

 

$

(0.02

)

 

$

(0.70

)

 

$

0.20

 

Diluted

 

$

(0.22

)

 

$

(0.02

)

 

$

(0.70

)

 

$

0.20

 

Shares used in computing earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

33,822

 

 

 

34,561

 

 

 

33,589

 

 

 

34,950

 

Diluted

 

 

33,822

 

 

 

34,561

 

 

 

33,589

 

 

 

35,769

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(7,415

)

 

$

(522

)

 

$

(23,477

)

 

$

7,135

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

1,165

 

 

 

(29

)

 

 

(122

)

 

 

(12

)

Total comprehensive income (loss)

 

$

(6,250

)

 

$

(551

)

 

$

(23,599

)

 

$

7,123

 

 

See accompanying notes to condensed consolidated financial statements.

4


CALAMP CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

November 30,

 

 

 

2019

 

 

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(23,477

)

 

$

7,135

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation expense

 

 

14,054

 

 

 

6,602

 

Intangible asset amortization expense

 

 

9,683

 

 

 

8,534

 

Stock-based compensation expense

 

 

9,378

 

 

 

8,088

 

Amortization of discount and debt issuance costs

 

 

11,031

 

 

 

7,999

 

Impairment of operating lease right-of-use (ROU) assets

 

 

1,210

 

 

 

 

Noncash operating lease cost

 

 

3,440

 

 

 

 

Loss on extinguishment of debt

 

 

2,408

 

 

 

2,033

 

Revenue assigned to factors

 

 

(5,016

)

 

 

 

Deferred tax assets, net

 

 

(5,701

)

 

 

(716

)

Impairment loss and equity in net loss of affiliate

 

 

530

 

 

 

1,414

 

Tax benefits on vested and exercised equity awards

 

 

 

 

 

591

 

Other

 

 

812

 

 

 

691

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,145

)

 

 

(1,005

)

Inventories

 

 

(5,747

)

 

 

4,454

 

Prepaid expenses and other assets

 

 

(1,853

)

 

 

(5,222

)

Accounts payable

 

 

(7,652

)

 

 

(3,826

)

Accrued liabilities

 

 

(1,805

)

 

 

6,716

 

Deferred revenue

 

 

3,797

 

 

 

4,605

 

Operating lease liabilities

 

 

(644

)

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

 

3,303

 

 

 

48,093

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from maturities of marketable securities

 

 

35,129

 

 

 

36,461

 

Purchases of marketable securities

 

 

(19,543

)

 

 

(43,103

)

Capital expenditures

 

 

(17,637

)

 

 

(8,884

)

Acquisitions, net of cash acquired

 

 

(60,634

)

 

 

 

Advances to affiliate

 

 

(530

)

 

 

(1,519

)

Other

 

 

901

 

 

 

(103

)

NET CASH USED IN INVESTING ACTIVITIES

 

 

(62,314

)

 

 

(17,148

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from issuance of 2025 Convertible Notes

 

 

 

 

 

230,000

 

Payment of debt issuance costs of 2025 Convertible Notes

 

 

 

 

 

(7,305

)

Purchase of capped call on 2025 Convertible Notes

 

 

 

 

 

(21,160

)

Repurchase of 2020 Convertible Notes

 

 

(94,683

)

 

 

(53,683

)

Proceeds from unwind of note hedges and warrants on 2020 Convertible Notes

 

 

 

 

 

3,122

 

Repurchases of common stock

 

 

 

 

 

(39,000

)

Taxes paid related to net share settlement of vested equity awards

 

 

(1,827

)

 

 

(3,520

)

Proceeds from exercise of stock options and contributions to employee stock purchase plan (ESPP)

 

 

1,048

 

 

 

124

 

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

 

 

(95,462

)

 

 

108,578

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

 

(393

)

 

 

(513

)

Net change in cash and cash equivalents

 

 

(154,866

)

 

 

139,010

 

Cash and cash equivalents at beginning of period

 

 

256,500

 

 

 

132,603

 

Cash and cash equivalents at end of period

 

$

101,634

 

 

$

271,613

 

 

See accompanying notes to condensed consolidated financial statements.

5


CALAMP CORP.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

November 30,

 

 

November 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Total stockholders' equity, beginning balances

$

193,296

 

 

$

209,736

 

 

$

205,653

 

 

$

198,916

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock and additional paid-in capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balances

 

213,533

 

 

 

223,329

 

 

 

208,541

 

 

 

218,574

 

Equity component of 2025 Convertible Notes, net of tax

 

 

 

 

 

 

 

 

 

 

51,902

 

Purchase of capped call on 2025 Convertible Notes, net of tax

 

 

 

 

 

 

 

 

 

 

(15,870

)

Debt issuance costs of 2025 Convertible Notes allocated to equity, net of tax

 

 

 

 

 

 

 

 

 

 

(1,649

)

Equity component of the repurchased 2020 Convertible Notes

 

 

 

 

 

 

 

 

 

 

(6,088

)

Unwind of note hedges and warrants of 2020 Convertible Notes

 

 

 

 

 

 

 

 

 

 

3,122

 

Stock-based compensation expense

 

3,652

 

 

 

2,941

 

 

 

9,378

 

 

 

8,088

 

Shares issued on net share settlement of equity awards

 

(98

)

 

 

(174

)

 

 

(1,827

)

 

 

(3,520

)

Exercise of stock options and contributions to ESPP

 

53

 

 

 

23

 

 

 

1,048

 

 

 

124

 

Repurchases of common stock

 

 

 

 

(10,436

)

 

 

 

 

 

(39,000

)

Ending balances

 

217,140

 

 

 

215,683

 

 

 

217,140

 

 

 

215,683

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated deficit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balances

 

(18,289

)

 

 

(12,963

)

 

 

(2,227

)

 

 

(19,459

)

Cumulative adjustment upon adoption of ASU 2016-01, net of tax

 

 

 

 

 

 

 

 

 

 

434

 

Cumulative adjustment upon adoption of ASC 606, net of tax

 

 

 

 

 

 

 

 

 

 

(1,595

)

Net income (loss)

 

(7,415

)

 

 

(522

)

 

 

(23,477

)

 

 

7,135

 

Ending balances

 

(25,704

)

 

 

(13,485

)

 

 

(25,704

)

 

 

(13,485

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income/(loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balances

 

(1,948

)

 

 

(630

)

 

 

(661

)

 

 

(199

)

Cumulative adjustment upon adoption of ASU 2016-01, net of tax

 

 

 

 

 

 

 

 

 

 

(434

)

Other comprehensive income (loss), net of tax

 

1,165

 

 

 

(15

)

 

 

(122

)

 

 

(12

)

Ending balances

 

(783

)

 

 

(645

)

 

 

(783

)

 

 

(645

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total stockholders' equity, ending balances

$

190,653

 

 

$

201,553

 

 

$

190,653

 

 

$

201,553

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

6


CALAMP CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED NOVEMBER 30, 2019 AND 2018

NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

CalAmp Corp. (referred to herein as “CalAmp”, “the Company”, “we”, “our”, or “us”) is a global telematics pioneer leading transformation in a mobile connected economy. We help reinvent businesses and improve lives around the globe with technology solutions that streamline complex Internet of Things (“IoT”) deployments through wireless connectivity solutions and derived data intelligence. Our software applications, scalable cloud services, and intelligent devices collect and assess business-critical data anywhere from mobile assets and their contents. We are a global organization headquartered in Irvine, California. We operate under two reportable segments: Telematics Systems and Software & Subscription Services.

On February 25, 2019, we completed our acquisition of Tracker Network (UK) Limited (“Tracker UK”), a LoJack licensee and a market leader in stolen vehicle recovery (“SVR”) telematics services across the United Kingdom, for a cash purchase price of $13.1 million. On March 19, 2019, we completed the acquisition of Car Track, S.A. de C.V. (“LoJack Mexico”), the exclusive licensee of LoJack technology for the Mexican market. We purchased the remaining 87.5% of the LoJack Mexico shares that we did not own for a cash purchase price of $14.3 million. On April 12, 2019, we acquired Synovia Solutions LLC (“Synovia”), a North American market leader in fleet safety and management for K-12 school bus and state and local government fleets for a cash purchase price of $49.8 million. Combined with the recent acquisitions of Tracker UK and LoJack Mexico, the Synovia acquisition expands our fleet management and vehicle safety services portfolio and accelerates our transformation to high-value subscription-based services. See Note 2 for a description of these acquisitions.

Certain notes and other information included in the audited financial statements in our Annual Report on Form 10-K for the fiscal year ended February 28, 2019 are condensed or omitted from the interim financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with our 2019 Annual Report on Form 10-K as filed with the U.S. Securities and Exchange Commission on May 1, 2019.

In the opinion of our management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary to present fairly our financial position at November 30, 2019 and our results of operations for the three and nine months ended November 30, 2019 and 2018. The results of operations for such periods are not necessarily indicative of results to be expected for the full fiscal year.

All intercompany transactions and accounts have been eliminated in consolidation.

Revenue Recognition and related judgments

We recognize revenue as follows:

 

Products. In accordance with ASC 606, we recognize revenue from product sales upon transfer of control of promised products to customers in an amount that reflects the transaction price, which is generally the stand-alone selling prices of the promised goods. For product shipments made on the basis of “FOB Destination” terms, revenue is recorded when the products reach the customer. Customers generally do not have a right of return except for defective products returned during the warranty period. We record estimated commitments related to customer incentive programs as reductions of revenues.

 

Professional Services. We also provide various professional services to customers. These include project management, engineering services, installation services and an on-going early warning automated notification service, which are typically distinct from other performance obligations and revenue is recognized as the related services are performed. For certain professional service contracts, we recognize revenue based on the proportion of total costs incurred to-date over the estimated cost of the contract, which is an input method.

 

Software-as-a-Service (“SaaS”). Our SaaS-based subscriptions for our fleet management, vehicle finance and certain other verticals provide our customers with the ability to wirelessly communicate with monitoring devices installed in vehicles and other mobile or remote assets through our software applications. The transaction price for a typical SaaS arrangement includes the price for the hardware, accessories, installation and application subscriptions. Generally, we defer the recognition of revenue for the customized devices that only function with our applications and are sold on an integrated basis with applicable subscriptions. Such customized devices and the application services are not sold separately. In such circumstances, the associated product costs are recorded as deferred costs on the balance sheet. The upfront fees for the devices are not distinct from the subscription service and are combined into the subscription service performance obligation. Generally, these service arrangements do not provide the customer with the right to take possession of the software supporting the subscription service at any time. Revenues from subscription services are recognized ratably on a straight-line basis over the term of the subscription. The deferred product revenue and deferred product cost amounts are amortized to application subscriptions and related products and services revenue along with the cost of revenue, respectively, on a straight-line basis over the estimated average in-service lives of these devices, which are three years in the vehicle finance and four years in the fleet management verticals. In certain fleet management contracts, we provide devices as part of the

7


subscription contracts but we retain control of such devices. Under such arrangements, the cost of the devices is capitalized as property and equipment and depreciated over the estimated useful life of three to five years. The related subscription revenues of these arrangements are recognized as services are rendered. Our deferred revenue also includes prepayments from our customers for various subscription services but does not include future subscription fees associated with customers’ unexercised contract renewal rights. The product revenues for certain customer arrangements are included within the caption Application subscriptions and related products and service revenue in our statement of comprehensive income (loss) as the products and services are customarily part of one customer contractual arrangement.

 

In certain customer arrangements, we also sell devices together with monitoring services, for which revenues for the sales of the devices are recognized upon transfer of control to the customer and monitoring services are recognized over the service period. The allocation of the transaction price is based on estimated stand-alone selling prices for the devices and the monitoring services. The revenues under these arrangements are also included within the caption Application subscriptions and related products and service revenues in our statement of comprehensive income (loss).

Sales taxes. We have elected to record revenue net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded within the caption Other current liabilities until remitted to the relevant government authority.

 

Contract Balances. Timing of revenue recognition may differ from the timing on our invoicing to customers. Contract liabilities are comprised of billings or payments received from our customers in advance of performance under the contract. We refer to these contract liabilities as “Deferred Revenues” in the accompanying condensed consolidated financial statements. During the three and nine months ended November 30, 2019, we recognized $4.7 million and $18.9 million in revenue from the beginning deferred revenue balance of $51.4 million on March 1, 2019, respectively. Certain incremental costs of obtaining a contract with a customer consist of deferred costs of hardware and sales commissions. The deferred costs of hardware are capitalized and amortized over the estimated useful life of the device on a straight-line basis. Our contract assets are primarily attributed to prepaid sales commissions, which are recognized on a straight-line basis over the life of the corresponding contracts.

 

We disaggregate revenue from contracts with customers into reportable segments, geography, type of goods and services and timing of revenue recognition. See Note 17 for our revenue by segment and geography. The disaggregation of revenue by type of goods and services and by timing of revenue recognition was as follows (in thousands):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

November 30,

 

 

November 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenue by type of goods and services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Telematics devices and accessories

$

66,281

 

 

$

68,417

 

 

$

200,340

 

 

$

228,698

 

Professional services

 

3,741

 

 

 

4,672

 

 

 

7,724

 

 

 

7,354

 

Recurring application subscriptions

 

26,575

 

 

 

15,406

 

 

 

70,839

 

 

 

43,368

 

Total

$

96,597

 

 

$

88,495

 

 

$

278,903

 

 

$

279,420

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

November 30,

 

 

November 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenue by timing of revenue recognition:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue recognized at a point in time

$

66,281

 

 

$

68,417

 

 

$

200,340

 

 

$

228,698

 

Revenue recognized over time

 

30,316

 

 

 

20,078

 

 

 

78,563

 

 

 

50,722

 

Total

$

96,597

 

 

$

88,495

 

 

$

278,903

 

 

$

279,420

 

 

Telematics devices and accessories presented in the table above are sold on a stand-alone basis and revenue is recognized at a point in time. Recurring application subscriptions revenues include the amortization for customized devices functional only with application subscriptions.

 

As of November 30, 2019, we have estimated the remaining performance obligations for contractually committed revenues of $64.0 million, of which we expect to recognize approximately 17% of those revenues through the remainder of fiscal 2020, 44% in fiscal 2021 and 22% in fiscal 2022. We have utilized the practical expedient exception and exclude contracts that have original durations of less than one year from the aforementioned remaining performance obligation disclosure.

 

8


Business Combinations

The purchase price of an acquisition is allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair value at the date of acquisition. To the extent the purchase price exceeds the fair value of the net identifiable tangible and intangible assets acquired and liabilities assumed, such excess is allocated to goodwill. We determine the estimated fair values after review and consideration of relevant information, including discounted cash flows, quoted market prices and other estimates we made. We may refine the preliminary purchase price allocation, as necessary, during the measurement period of up to one year after the acquisition closing date as we obtain more information as to facts and circumstances existing at the acquisition date impacting the asset valuations and liabilities assumed. Goodwill acquired in business combinations is assigned to the reporting unit expected to benefit from the combination as of the acquisition date. Acquisition-related costs are recognized separately from the acquisition and are expensed as incurred.

Cash and Cash Equivalents

We consider all highly liquid investments with maturities at date of purchase of three months or less to be cash equivalents.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable consists of amounts due to us from sales arrangements executed in our normal business activities and are recorded at invoiced amounts. Our payment terms generally range between 30 to 60 days and we do not offer financing options. We present the aggregate accounts receivable balance net of an allowance for doubtful accounts. Generally, collateral and other security is not obtained for outstanding accounts receivable. Credit losses, if any, are recognized based on management’s evaluation of historical collection experience, customer-specific financial conditions as well as an evaluation of current industry trends and general economic conditions. Past due balances are assessed by management on a periodic basis and balances are written off when the customer’s financial condition no longer warrants pursuit of collection. Although we expect to collect amounts due, actual collections may differ from estimated amounts. The allowance for doubtful accounts totaled $3.5 million and $1.8 million as of November 30, 2019 and February 28, 2019, respectively.

Impairment of Goodwill and Other Long-Lived Assets

We evaluate goodwill for impairment on an annual basis in the fourth quarter, or on an interim basis, if we believe indicators of impairment exist. We first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we conduct a two-step quantitative goodwill impairment test. The first step of the impairment test involves comparing the fair value of the reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds the reporting unit’s fair value, we perform the second step of the goodwill impairment test. The second step of the goodwill impairment test involves comparing the implied fair value of the reporting unit’s goodwill with the carrying value of the goodwill. The amount by which the carrying value of the goodwill exceeds its implied fair value will be recognized as an impairment loss.

Long-lived assets to be held and used, including identifiable intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. These events or changes in circumstances may include a significant deterioration of operating results, changes in business plans or changes in anticipated future cash flows. If an impairment indicator is present, we evaluate recoverability by a comparison of the carrying amount of the assets or asset group to future undiscounted net cash flows expected to be generated by the lowest level of asset group. Given the interdependencies of revenues across our segments, product and service verticals, and geographies, our asset groups are generally our two operating segments. If the assets or asset group are impaired, the impairment recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets. Fair value is generally determined by estimates of discounted cash flows. The discount rate used in any estimate of discounted cash flows would be the rate required for similar investment of like risk.

Fair Value Measurements

We apply fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in our financial statements. We define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly manner in an arm’s-length transaction between market participants at the measurement date. Fair value is estimated by using the following hierarchy:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.

9


Convertible Senior Notes and Capped Call Transactions

We account for our convertible senior notes as separate liability and equity components. We determine the carrying amount of the liability component based on the fair value of a similar debt instrument excluding the embedded conversion option at the issuance date. The carrying amount of the equity component representing the conversion option is calculated by deducting the carrying value of the liability component from the principal amount of the notes as a whole. This difference represents a debt discount that is amortized to interest expense over the term of the notes using the effective interest rate method. The equity component of the notes is included in stockholders’ equity and is not remeasured as long as it continues to meet the conditions for equity classification. We allocate transaction costs related to the issuance of the notes to the liability and equity components using the same proportions as the initial carrying value of the notes. Transaction costs attributable to the liability component are being amortized to interest expense using the effective interest method over the respective term of the notes, and transaction costs attributable to the equity components are netted with the equity component of the note in stockholders’ equity. We account for the cost of the capped calls as a reduction to additional paid-in capital.

Patent Litigation and Other Contingencies

We accrue for patent litigation and other contingencies whenever we determine that an unfavorable outcome is probable and a liability is reasonably estimable. The amount of the accrual is estimated based on a review of each claim, including the type and facts of the claim and our assessment of the merits of the claim. These accruals are reviewed at least on a quarterly basis and are adjusted to reflect the impact of recent negotiations, settlements, court rulings, advice from legal counsel and other events pertaining to the case. Such accruals, if any, are recorded as general and administrative expense in our consolidated statements of comprehensive income (loss). Although we take considerable measures to mitigate our exposure in these matters, litigation is unpredictable; however, we believe that we have valid defenses with respect to pending legal matters against us as well as adequate provisions for probable and estimable losses. All costs for legal services are expensed as incurred.

Foreign Currency Translation

We translate the assets and liabilities of our non-U.S. dollar functional currency subsidiaries into U.S. dollars using exchange rates in effect at the end of each period. Revenue and expenses for these subsidiaries are translated using rates that approximate those in effect during the period. Gains and losses from these translations are recognized in foreign currency translation included in accumulated other comprehensive income (loss) during the period. The aggregate foreign currency transaction exchange rate gain (losses) included in determining income (loss) before income taxes were immaterial for both the three and nine months ended November 30, 2019 and 2018.

 

Recently Issued Accounting Standards

 

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (“ASU 2018-15”). The amendments in ASU 2018-15 provide guidance to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by this update. The new guidance is effective for our fiscal year 2021 beginning on March 1, 2020. We do not anticipate this pronouncement will have a significant impact on our consolidated financial statements upon adoption.

 

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. This guidance eliminates Step 2 from the goodwill impairment test and instead requires that an entity measure the impairment of goodwill assigned to a reporting unit if the carrying value of assets and liabilities assigned to the reporting unit, including goodwill, exceed the reporting unit's fair value. The new guidance must be adopted for annual and interim goodwill tests by us in fiscal year 2021 beginning on March 1, 2020. After the adoption of this standard, which will be applied prospectively, we will follow a one-step model for goodwill impairment. We do not anticipate this pronouncement will have a significant impact on our consolidated financial statements upon adoption.

 

In February 2016, the FASB issued ASU 2016-02, Leases, which was further clarified by ASU 2018-10, Codification Improvements to Topic 842, Leases, and ASU 2018-11, Leases – Targeted Improvement, both issued in July 2018. ASU 2016-02 affects all entities that lease assets and establishes a right-of-use (“ROU”) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases. Leases will be classified as either finance or operating, with the classification affecting the pattern of expense recognition in the income statement. ASU 2018-10 clarifies or corrects unintended application of guidance related to ASU 2016-02. The amendments affect narrow aspects of ASU 2016-02 related to the implicit rate in the lease, impairment of the net investment in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase options, variable payments that depend on an index or rate and certain transition adjustments. ASU 2018-11 adds a transition option for all entities and a practical expedient only for lessors. The transition option allows entities to not apply the new leases standard in the comparative periods, which they present in their financial statements in the year of adoption. Under the transition option, entities can opt to continue to apply the legacy guidance in ASC 840, “Leases”, including its disclosure requirements, in the comparative periods presented in the year they adopt the new leases standard. Entities that elect this transition option will still be required to adopt the new leases standard using the modified retrospective transition method required by the standard, but they will recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented. For leases existing at, or entered into after the beginning of the earliest comparative period presented in the financial statements, lessees and lessors must apply a modified retrospective transition approach.

 

10


We applied the transition requirements on the adoption date of March 1, 2019, rather than at the beginning of the earliest comparative period presented. This approach allows for a cumulative effect adjustment in the period of adoption, and prior periods will not be restated. In addition, we elected the package of practical expedients permitted under the transition guidance, which does not require reassessment of prior conclusions related to contracts containing a lease, lease classification and initial direct lease costs. As an accounting policy election, we excluded short-term leases (term of 12 months or less) from the balance sheet presentation and accounted for non-lease and lease components in a contract as a single lease component for certain asset classes. Subsequent to the filing of our Form 10-Q for the period ended August 31, 2019, we identified certain immaterial adjustments related to amounts recorded for the adoption of ASC 842. The revised amounts for ROU assets and lease liabilities as of March 1, 2019 are $25.6 million and $29.1 million, respectively. The effect on our condensed statements of comprehensive income (loss) for the fiscal 2020 periods was immaterial. See Note 9, Leases, for additional details.

 

NOTE 2 – ACQUISITIONS

 

In addition to the Tracker UK acquisition in February 2019, we completed two additional acquisitions, LoJack Mexico and Synovia, during the first quarter of fiscal 2020.

 

Pursuant to our business combinations accounting policy, we estimated the preliminary fair values of net tangible and intangible assets acquired, and the excess of the consideration transferred over the aggregate of such fair values was recorded as goodwill. The preliminary fair values of net tangible assets and intangible assets acquired were based upon preliminary valuations. Our estimates and assumptions reflected in such preliminary valuations are subject to change within the measurement period (up to one year from the acquisition date). The primary areas that remain preliminary relate to the fair values of intangible assets acquired, certain tangible assets and liabilities acquired, certain legal matters, deferred income taxes and goodwill. We expect to continue to obtain information to assist in determining the fair values of the net assets acquired during the measurement period. The following are the preliminary purchase price allocations as of November 30, 2019 for the three acquisitions (in thousands):

 

 

 

Tracker UK

 

 

LoJack Mexico

 

 

Synovia

 

Purchase price

 

 

 

 

 

$

13,097

 

 

 

 

 

 

$

14,306

 

 

 

 

 

 

$

29,500

 

Add debt paid at closing

 

 

 

 

 

 

-

 

 

 

 

 

 

 

-

 

 

 

 

 

 

 

20,296

 

Less cash acquired

 

 

 

 

 

 

(66

)

 

 

 

 

 

 

(1,586

)

 

 

 

 

 

 

(905

)

Net cash paid

 

 

 

 

 

 

13,031

 

 

 

 

 

 

 

12,720

 

 

 

 

 

 

 

48,891

 

Less amount released from escrow

 

 

 

 

 

 

(973

)

 

 

 

 

 

 

-

 

 

 

 

 

 

 

-

 

Net consideration

 

 

 

 

 

 

12,058

 

 

 

 

 

 

 

12,720

 

 

 

 

 

 

 

48,891

 

Add previously held interest

 

 

 

 

 

 

-

 

 

 

 

 

 

 

2,021

 

 

 

 

 

 

 

-

 

Fair value of net assets and liabilities assumed:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets other than cash

 

$

3,549

 

 

 

 

 

 

$

4,933

 

 

 

 

 

 

$

10,354

 

 

 

 

 

Property and equipment

 

 

1,017

 

 

 

 

 

 

 

3,228

 

 

 

 

 

 

 

24,840

 

 

 

 

 

Customer relationships

 

 

2,354

 

 

 

 

 

 

 

7,000

 

 

 

 

 

 

 

16,700

 

 

 

 

 

Trade name

 

 

2,354

 

 

 

 

 

 

 

-

 

 

 

 

 

 

 

1,600

 

 

 

 

 

Developed technology

 

 

1,830

 

 

 

 

 

 

 

-

 

 

 

 

 

 

 

3,800

 

 

 

 

 

Deferred tax assets

 

 

-

 

 

 

 

 

 

 

-

 

 

 

 

 

 

 

2,061

 

 

 

 

 

Other non-current assets

 

 

104

 

 

 

 

 

 

 

1,301

 

 

 

 

 

 

 

-

 

 

 

 

 

Current liabilities

 

 

(3,111

)

 

 

 

 

 

 

(2,361

)

 

 

 

 

 

 

(4,468

)

 

 

 

 

Due to factors

 

 

-

 

 

 

 

 

 

 

-

 

 

 

 

 

 

 

(19,676

)

 

 

 

 

Deferred revenue

 

 

(3,162

)

 

 

 

 

 

 

(4,507

)

 

 

 

 

 

 

(4,319

)

 

 

 

 

Deferred tax liability

 

 

(824

)

 

 

 

 

 

 

(1,039

)

 

 

 

 

 

 

-

 

 

 

 

 

Other non-current liabilities

 

 

(201

)

 

 

 

 

 

 

-

 

 

 

 

 

 

 

-

 

 

 

 

 

Total fair value of net assets acquired

 

 

 

 

 

 

3,910

 

 

 

 

 

 

 

8,555

 

 

 

 

 

 

 

30,892

 

Goodwill

 

 

 

 

 

$

8,148

 

 

 

 

 

 

$

6,186

 

 

 

 

 

 

$

17,999

 

 

Tracker UK

Effective February 25, 2019, we acquired Tracker UK, a LoJack licensee, for a total purchase price of £10.0 million, or $13.1 million, which was funded from our cash on hand. As a result of the acquisition, Tracker UK became a wholly-owned subsidiary and is consolidated with our financial statements beginning February 25, 2019 as a component of our Software & Subscription Services reportable segment.

 

We paid a premium (i.e., goodwill) over the fair value of the net tangible and identified intangible assets acquired, as we believe Tracker UK’s highly recognizable brand and extensive law enforcement relationships across the United Kingdom will help us to drive our European expansion by leveraging our complete portfolio of telematics devices, cloud and software services to develop advanced connected car solutions targeting auto dealers, OEMs, insurance providers and other enterprise customers. This acquisition enables us to integrate our European operations around advanced SVR and telematics solutions to support key enterprise customer opportunities on a pan-European basis.

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The goodwill arising from the acquisition of Tracker UK is not deductible for income tax purposes.

 

LoJack Mexico

 

On March 19, 2019, we acquired LoJack Mexico, the exclusive licensee of LoJack technology for the Mexican market. LoJack Mexico will leverage our telematics and software-as-a-service solutions to expand product offering to its substantial subscriber base as well as serve auto dealers and OEMs, insurance providers and leasing companies throughout Mexico. We purchased the remaining 87.5% of the LoJack Mexico shares that we did not own for a cash purchase price of $14.3 million. Our previously held 12.5% equity interest in LoJack Mexico was determined to have a fair value of $2.0 million at acquisition date which resulted in a gain of $0.3 million, which was recorded as investment income in our condensed consolidated statements of comprehensive income (loss) for the nine months ended November 30, 2019. LoJack Mexico is consolidated with our financial statements effective March 19, 2019 as a component of our Software & Subscription Services reportable segment.

 

Synovia

 

On April 12, 2019, we acquired Synovia, a North American market leader in fleet safety and management for K-12 school bus and state and local government fleets, for a total cash purchase price of $49.8 million. Combined with the recent acquisitions of Tracker UK and LoJack Mexico, the Synovia acquisition expands our fleet management and vehicle safety services portfolio. This acquisition also accelerates our transformation to high-value subscription-based services. Synovia is consolidated with our financial statements effective April 12, 2019 as a component of our Software & Subscription Services reportable segment.

 

In conjunction with the acquisition of Synovia, we assumed the rights and obligations under certain revenue assignment arrangements with several financial institutions (the “Factors”). Pursuant to the terms of the arrangements, Synovia sold to the Factors rights to all future revenues of certain subscription contracts on a non-recourse basis for credit approved accounts. Under ASC 805, Business Combination, we recorded the amounts due to the Factors as a debt obligation at the fair value as of the acquisition date and the outstanding amount is presented as part of our long-term debt in our condensed consolidated balance sheet (see Note 7). The fair value of this debt of $19.7 million was determined using a pre-tax cost of debt of 4.7% at the time of our acquisition of Synovia.

 

We paid a premium (i.e., goodwill) over the fair value of the net tangible and identified intangible assets acquired, as we believe we will expand our fleet management and vehicle safety services portfolio and will increase our customer reach by gaining access to a base of high-value and low-churn subscribers.

 

The goodwill arising from the acquisition of Synovia is deductible for income tax purposes.

 

We incurred approximately $1.1 million for the acquisition of Synovia and LoJack Mexico the nine months ended November 30, 2019 and $0.9 million in fiscal 2019. The acquisition-related costs were primarily legal expenses, which were recorded as part of our general and administrative expenses.

 

Pro forma financial information for the three and nine months ended November 30, 2018 for acquired companies is not disclosed as the results are not material to our condensed consolidated financial statements.

 

12


NOTE 3 – CASH, CASH EQUIVALENTS AND INVESTMENTS

The following tables summarize our financial instrument assets (in thousands):

 

 

 

As of November 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Classification

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of Fair Value

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

Cash and

 

 

Short-Term

 

 

 

 

 

 

 

Adjusted

 

 

Gains

 

 

Fair

 

 

Cash

 

 

Marketable

 

 

Other

 

 

 

Cost

 

 

(Losses)

 

 

Value

 

 

Equivalents

 

 

Securities

 

 

Assets

 

Cash

 

$

28,396

 

 

$

 

 

$

28,396

 

 

$

28,396

 

 

$

 

 

$

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

 

16,202

 

 

 

 

 

 

16,202

 

 

 

16,202

 

 

 

 

 

 

 

Mutual funds (1)

 

 

4,367

 

 

 

444

 

 

 

4,811

 

 

 

 

 

 

 

 

 

4,811

 

International equities

 

 

296

 

 

 

1

 

 

 

297

 

 

 

 

 

 

 

 

 

297

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase agreements

 

 

54,000

 

 

 

 

 

 

54,000

 

 

 

54,000

 

 

 

 

 

 

 

Corporate bonds

 

 

4,962

 

 

 

 

 

 

4,962

 

 

 

3,036

 

 

 

1,926

 

 

 

 

Total

 

$

108,223

 

 

$

445

 

 

$

108,668

 

 

$

101,634

 

 

$

1,926

 

 

$

5,108

 

 

 

 

As of February 28, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Classification

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of Fair Value

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

Cash and

 

 

Short-Term

 

 

 

 

 

 

 

Adjusted

 

 

Gains

 

 

Fair

 

 

Cash

 

 

Marketable

 

 

Other

 

 

 

Cost

 

 

(Losses)

 

 

Value

 

 

Equivalents

 

 

Securities

 

 

Assets

 

Cash

 

$

26,084

 

 

$

 

 

$

26,084

 

 

$

26,084

 

 

$

 

 

$

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

 

154,428

 

 

 

 

 

 

154,428

 

 

 

154,428

 

 

 

 

 

 

 

Mutual funds (1)

 

 

6,023

 

 

 

390

 

 

 

6,413

 

 

 

 

 

 

 

 

 

6,413

 

International equities

 

 

296

 

 

 

(73

)

 

 

223

 

 

 

 

 

 

 

 

 

223

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase agreements

 

 

72,000

 

 

 

 

 

 

72,000

 

 

 

72,000

 

 

 

 

 

 

 

Corporate bonds

 

 

21,502

 

 

 

(2

)

 

 

21,500

 

 

 

3,988

 

 

 

17,512

 

 

 

 

Total

 

$

280,333

 

 

$

315

 

 

$

280,648

 

 

$

256,500

 

 

$

17,512

 

 

$

6,636

 

 

(1)

Amounts represent various equities, bond and money market mutual funds that are held in a “Rabbi Trust” and are restricted for payment obligations to non-qualified deferred compensation plan participants. In addition to the mutual funds above, our “Rabbi Trust” also included Corporate-Owned Life Insurance (COLI) starting in fiscal 2020. As of November 30, 2019, the cash surrender value of COLI was $2.2 million. 

NOTE 4 - INVENTORIES

Inventories consist of the following (in thousands):

 

 

November 30,

 

 

February 28,

 

 

2019

 

 

2019

 

Raw materials

$

22,734

 

 

$

14,141

 

Work in process

 

18

 

 

 

72

 

Finished goods

 

21,283

 

 

 

17,820

 

 

$

44,035

 

 

$

32,033

 

 

13


NOTE 5 – GOODWILL AND OTHER INTANGIBLE ASSETS

Other intangible assets consist of the following (in thousands):

 

 

 

 

 

Gross

 

 

Accumulated Amortization

 

 

Effect of Foreign Currency Translation

 

 

Net

 

 

 

Useful Life

 

Feb. 28,

2019

 

 

Addi-

tions

 

 

Nov. 30,

2019

 

 

Feb. 28,

2019

 

 

Expense

 

 

Nov. 30,

2019

 

 

Nov. 30,

2019

 

 

Feb. 28, 2019

 

 

Nov. 30,

2019

 

 

Feb. 28,

2019

 

Developed technology

 

2-7 years

 

$

23,603

 

 

 

3,800

 

 

$

27,403

 

 

$

18,253

 

 

$

2,385

 

 

$

20,638

 

 

 

(28

)

 

 

 

 

$

6,737

 

 

$

5,350

 

Tradenames

 

10 years

 

 

40,091

 

 

 

1,600

 

 

 

41,691

 

 

 

12,644

 

 

 

2,947

 

 

 

15,591

 

 

 

(42

)

 

 

 

 

 

26,058

 

 

 

27,447

 

Customer lists

 

4-7 years

 

 

25,304

 

 

 

 

 

 

25,304

 

 

 

21,307

 

 

 

1,258

 

 

 

22,565

 

 

 

 

 

 

 

 

 

2,739

 

 

 

3,997

 

Dealer and customer relationships

 

7-12 years

 

 

16,850

 

 

 

23,700

 

 

 

40,550

 

 

 

6,908

 

 

 

3,065

 

 

 

9,973

 

 

 

(11

)

 

 

 

 

 

30,566

 

 

 

9,942

 

Patents

 

5 years

 

 

589

 

 

 

 

 

 

589

 

 

 

160

 

 

 

28

 

 

 

188

 

 

 

 

 

 

 

 

 

401

 

 

 

429

 

 

 

 

 

$

106,437

 

 

$

29,100

 

 

$

135,537

 

 

$

59,272

 

 

$

9,683

 

 

$

68,955

 

 

$

(81

)

 

$

-

 

 

$

66,501

 

 

$

47,165

 

 

Intangible assets with finite lives are amortized on a straight-line basis over the expected period to be benefited by future cash flows. We monitor and assess these assets for impairment on a periodic basis. Our assessment includes various new product lines and services, which leverage the existing intangible assets as well as consideration of historical and projected revenues and cash flows. As of November 30, 2019, we determined that there was no impairment of intangible assets.

 

Estimated future amortization expense as of November 30, 2019 is as follows (in thousands):

 

2020 (remainder)

 

$

4,144

 

2021

 

 

11,497

 

2022

 

 

9,863

 

2023

 

 

9,643

 

2024

 

 

6,583

 

Thereafter

 

 

24,771

 

 

 

$

66,501

 

 

Changes in goodwill are as follows (in thousands):

 

 

Telematics Systems

 

 

Software & Subscription Services

 

 

Total

 

Balance as of February 28, 2019

$

51,203

 

 

$

29,602

 

 

$

80,805

 

Acquisition of Synovia and LoJack Mexico (Note 2)

 

 

 

 

24,185

 

 

 

24,185

 

Effect of exchange rate change on goodwill

 

 

 

 

(33

)

 

 

(33

)

Other (1)

 

 

 

 

627

 

 

 

627

 

Balance as of November 31, 2019

$

51,203

 

 

$

54,381

 

 

$

105,584

 

 

 

(1)

Amount represents adjustment to the preliminary Goodwill from the Tracker UK acquisition.  

 

NOTE 6 – OTHER ASSETS

Other assets consist of the following (in thousands):

 

 

 

November 30,

 

 

February 28,

 

 

 

2019

 

 

2019

 

Deferred cost

 

$

8,396

 

 

$

10,094

 

Deferred compensation plan assets

 

 

6,983

 

 

 

6,413

 

Lease receivables, non-current

 

 

2,648

 

 

 

-

 

Prepaid commissions

 

 

1,979

 

 

 

-

 

Other

 

 

5,460

 

 

 

6,003

 

 

 

$

25,466

 

 

$

22,510

 

 

14


We have a non-qualified deferred compensation plan in which certain members of management and all non-employee directors are eligible to participate. Participants may defer a portion of their compensation until retirement or another date specified by them in accordance with the plan. We are funding the plan obligations through cash deposits to a Rabbi Trust that are invested in various equities, bond, money market mutual funds and COLI in generally the same proportion as investment elections made by the participants. The deferred compensation plan liability is included in other non-current liabilities in the accompanying consolidated balance sheets.

NOTE 7 – FINANCING ARRANGEMENTS

 

The following table provides a summary of our debt as of November 30, 2019 and February 28, 2019 (in thousands):

 

 

 

 

Maturity

 

Effective

 

 

November 30,

 

 

February 28,

 

 

 

Date

 

Interest Rate

 

 

2019

 

 

2019

 

2020 Convertible Notes, 1.625% fixed rate

 

May 15, 2020

 

 

6.20

%

 

$

27,599

 

 

$

122,527

 

2025 Convertible Notes, 2.00% fixed rate

 

August 1, 2025

 

 

7.56

%

 

 

230,000

 

 

 

230,000

 

Due to factors

 

2020 - 2024

 

 

4.70

%

 

 

15,167

 

 

 

 

Total term debt

 

 

 

 

 

 

 

 

272,766

 

 

 

352,527

 

Unamortized discount and issuance costs

 

 

 

 

 

 

 

 

(63,433

)

 

 

(76,622

)

Less: Current portion of long-term term debt

 

 

 

 

 

 

 

 

(32,955

)

 

 

 

Long-term debt, net of current portion

 

 

 

 

 

 

 

$

176,378

 

 

$

275,905

 

 

The effective interest rates for the convertible notes include the interest on the notes and amortization of the discount. As of November 30, 2019 and February 28, 2019, the fair value of the convertible notes, based on Level 2 inputs, was $217 million and $303 million, respectively.

2020 Convertible Notes

In May 2015, we issued $172.5 million principal amount of 1.625% convertible senior unsecured notes due in 2020 (“2020 Convertible Notes”). These notes require semi-annual interest payments at a rate of 1.625% until maturity, conversion or purchase, which will be no later than in May 15, 2020.

The notes will be convertible into cash, shares of our common stock or a combination of cash and shares of common stock, at our election based on initial conversion price of $32.5256. In July 2018, we repurchased $50 million in aggregate principal amount of these notes for $53.8 million, resulting in a loss on extinguishment of $2.0 million and $6.1 million charged to additional paid-in capital. We also received $3.1 million from the unwinding of certain hedging instruments related to these notes.

In October and November 2019, we entered into separate, privately negotiated purchase agreements to repurchase approximately $94.9 million in aggregate principal amount of these notes for $94.7 million. The repurchase is accounted for as an extinguishment of debt, not a modification of debt. The fair value of the liability was determined using a discounted cash flow analysis at a market interest rate for nonconvertible debt based on the remaining maturity of the 2020 Convertible Notes, which represented a Level 3 fair value measurement. The carrying value of the repurchased notes was $92.3 million, resulting in a loss on extinguishment of debt of $2.4 million. Our intent is to settle the $27.6 million remaining principal amount of the 2020 Convertible Notes in cash upon maturity.

2025 Convertible Notes

 

In July 2018, we issued debt of $230.0 million aggregate principal amount of convertible senior unsecured notes due in 2025 (“2025 Convertible Notes”). These notes will require semi-annual interest payments at a rate of 2.00% until maturity, conversion, redemption or repurchase, which will be no later than August 1, 2025. We may redeem the notes at our option at any time on or after August 6, 2022 at a cash redemption price equal to the principal amount plus accrued interest, but only if the last reported sale price per share of our stock exceeds 130% of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date we send the related redemption notice; and (ii) the trading day immediately before the date we send such notice. The 2025 Convertible Notes are convertible into cash, shares of our common stock or a combination of both, at our election, based on an initial conversion price of $30.7450. Holders may convert their 2025 Convertible Notes at their option upon the occurrence of certain events, as defined in the 2025 Indenture. Approximately $51.9 million, net of tax, was allocated to additional paid-in capital upon issuance of these notes.

 

      

In July 2018, in connection with the 2025 Convertible Notes, we entered into capped call transactions with certain option counterparties who were initial purchasers of the 2025 Convertible Notes. The capped call transactions are expected to reduce the potential dilution of earnings per share upon conversion of the 2025 Convertible Notes. Under the capped call transactions, we purchased options relating to 7.48 million shares of common stock underlying the notes, with a strike price equal to the conversion price of the notes and with a cap price equal to $41.3875. We paid $21.2 million for the note hedges and as a result, approximately $15.9 million, net of tax, was recorded as a reduction to additional paid-in capital within stockholders’ equity.

 

15


Synovia Revenue Assignments

 

In conjunction with the acquisition of Synovia on April 12, 2019 (see Note 2), we assumed the rights and obligations under certain revenue assignment arrangements with several financial institutions (the “Factors”). Pursuant to the terms of the arrangements, Synovia sold to the Factors rights to all future revenues of certain subscription contracts on a non-recourse basis for credit approved accounts. The sales price paid represents a percentage of the total contract value (generally 80%) due to Synovia at the beginning of the contract, with the total customer contract balance to be paid by the customers to the Factors over the contract period. The cost of the transaction was recorded as a contra-liability, and was recognized as interest expense over the term of the subscription contract using the effective interest method, while the assigned customer obligation is amortized to subscription revenues using the straight-line method.

 

These arrangements with the Factors met the criteria in ASC 470-10-25, Sales of Future Revenues or Various Other Measures of Income (“ASC 470”), which relates to cash received from an investor in exchange for a specified percentage or amount of revenue or other measure of income of a particular product line, business segment, trademark, patent, or contractual right for a defined period. Under this guidance, the arrangement qualified as a debt instrument for accounting purposes due to Synovia’s significant continuing involvement in the generation of cash flows due to the Factors. Further, under ASC 805, Business Combination, we recorded the amounts due to the Factors as a debt obligation at fair value in the opening balance sheet and the outstanding amount is presented as part of our long-term debt in our condensed consolidated balance sheet. The fair value of this debt of $19.7 million was determined using a pre-tax cost of debt of 4.7% at the time of our acquisition of Synovia. The discount of $1.5 million will be amortized under the interest method. During the three and nine months ended November 30, 2019, we recognized $0.2 million and $0.5 million of interest expense related to this debt, respectively. The revenues recognized from this arrangement of $5.0 million were considered a non-cash activity in our condensed consolidated statements of cash flows for the nine months ended November 30, 2019.

Revolving Credit Facility

On March 30, 2018, we entered into a revolving credit facility with J.P. Morgan Chase Bank, dated as of March 30, 2018 (the “Credit Agreement”) that provides for borrowings up to $50.0 million. This revolving credit facility expires on March 30, 2020. At our election, the borrowings under this revolving credit facility bear interest at either a LIBOR-based variable rate plus an applicable margin, or at the greater of the Prime Rate, the NYFRB Rate plus an applicable margin rate and one-month LIBOR-based variable rate plus an applicable margin rate (each as defined in the Credit Agreement) determined based on our senior leverage ratio from time to time. The net proceeds available under the revolving credit facility can be used for working capital and general corporate purposes. There were no borrowings outstanding under this revolving credit facility at November 30, 2019.

 

The revolving credit facility contains certain negative and affirmative covenants including financial covenants that require us to maintain a minimum level of earnings before interest, income taxes, depreciation, amortization and other non-cash charges (Adjusted EBITDA) to interest ratio, a minimum senior indebtedness ratio and a total indebtedness coverage ratio, all measured on a quarterly basis. As of November 30, 2019, we were in compliance with our covenants under the revolving credit facility. 

 

 

NOTE 8 – RESTRUCTURING CHARGES

Beginning in the first quarter of fiscal 2019, we commenced a plan to capture certain synergies and cost savings related to streamlining our global operations and sales organization, as well as rationalize certain leased properties that are not fully occupied. Our plan is aligned with our strategy to integrate the global sales organization and further outsource manufacturing functions in order to drive operational efficiency, increase supplier geographic diversity, and reduce operating expenses. To date, total restructuring charges were $11.1 million, comprised of $6.2 million in severance and employee related costs, and $5.0 million for vacant office and manufacturing facility space. Restructuring charges related to vacant office and manufacturing facility space was due primarily to the vacancy in Canton, Massachusetts of $4.5 million. Substantially all charges related to severance and employee costs were under the Telematics Systems reportable segment. As a result of the adoption of ASC 842, effective March 1, 2019, the balance of the restructuring liability related to certain facility leases have been reclassified as a reduction of the Operating lease right-of-use assets in our condensed consolidated balance sheet.

For the three months ended November 30, 2019, total restructuring charges were $0.8 million, all of which were related to severance and employee costs. For the nine months ended November 30, 2019, total restructuring charges were $3.1 million, which was comprised of $1.9 million in severance and employee related costs, and $1.2 million for vacant office space. Substantially all charges were recorded under the Telematics Systems reportable segment. The impairment of $1.2 million for the vacant office space was recorded as a reduction of Operating lease right-of-use assets in our condensed consolidated balance sheet as of November 30, 2019. The restructuring liabilities related to personnel were included in Accrued payroll and employee benefits in our condensed consolidated balance sheets as of November 30, 2019 and February 28, 2019.

16


The anticipated rent payments for the vacant portion of leased facilities will be made through December 2025. There is no guarantee that the termination and cease use charges will not exceed the estimates or that the impact of any future potential sub-lease rentals will be realized. The following table summarizes the activity resulting from the implementation of the restructuring plan within other current and non-current liabilities (in thousands):

 

 

 

 

Personnel

 

 

Facilities

 

 

Total

 

Restructuring liabilities as of February 28, 2019

 

$

2,779

 

 

$

2,977

 

 

$

5,756

 

Cease-use liability reclassified as reduction of Operating lease right-of-use assets

 

 

-

 

 

 

(2,977

)

 

 

(2,977

)

Charges

 

 

1,924

 

 

 

-

 

 

 

1,924

 

Payments

 

 

(1,975

)

 

 

-

 

 

 

(1,975

)

Restructuring liabilities as of November 30, 2019

 

$

2,728

 

 

$

-

 

 

$

2,728

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOTE 9 – LEASES

We have various non-cancelable operating leases for our offices in California, Texas, Massachusetts, Indiana, Minnesota and Virginia in the United States, and Italy, Mexico and the United Kingdom. We also have various non-cancelable operating leases for towers and vehicles throughout the United States, Italy and Mexico. These leases expire at various times through 2028. Certain lease agreements contain renewal options, rent abatement, and escalation clauses that are factored into our determination of lease payments when appropriate.

The table below presents lease-related assets and liabilities recorded on the condensed consolidated balance sheet (in thousands):

 

 

 

Classification

 

November 30, 2019

 

Assets

 

 

 

 

 

 

Operating lease right-of-use assets

 

Operating lease right-of-use assets

 

$

24,108

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Operating lease liabilities (current)

 

Other current liabilities

 

$

4,877

 

Operating lease liabilities (noncurrent)

 

Operating lease liabilities

 

 

27,090

 

Total lease liabilities

 

 

 

$

31,967

 

 

 

 

 

 

 

 

 

Lease Costs

The following lease costs were included in our condensed consolidated statements of comprehensive income (loss) as follows (in thousands):

 

 

 

Three Months Ended

November 30, 2019

 

 

 

 

Nine Months Ended

November 30, 2019

 

Operating lease cost

 

$

663

 

 

 

 

$

4,636

 

Short-term lease cost

 

 

112

 

 

 

 

 

676

 

Variable lease cost

 

 

116

 

 

 

 

 

189

 

Total lease cost

 

$

891

 

 

 

 

$

5,501

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental Information

The table below presents supplemental information related to operating leases during the nine months ended November 30, 2019 (in thousands, except weighted-average information):

 

Cash paid for amounts included in the measurement of operating lease liabilities

 

 

 

$

4,581

 

Right-of-use assets obtained in exchange for new operating lease liabilities

 

 

 

$

4,342

 

Weighted average remaining lease term

 

 

 

7.8 years

 

Weighted average discount rate

 

 

 

 

5.45

%

 

17


Undiscounted Cash Flows

The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the operating lease liabilities recorded on the condensed consolidated balance sheet as of November 30, 2019 (in thousands):

 

Remainder of 2020

 

$

2,099

 

2021

 

 

6,246

 

2022

 

 

5,650

 

2023

 

 

5,510

 

2024

 

 

5,266

 

Thereafter

 

 

15,356

 

Total minimum lease payments

 

 

40,127

 

Less imputed interest

 

 

(8,160

)

Present value of future minimum lease payments

 

 

31,967

 

Less current obligations under leases

 

 

(4,877

)

Long-term lease obligations

 

$

27,090

 

 

Disclosures Related to Periods Prior to Adoption of New Lease Standard

Minimum lease payments under operating leases with non-cancelable terms in excess of one year as of February 28, 2019, were as follows (in thousands):

 

2020

 

$

7,565

 

2021

 

 

6,386

 

2022

 

 

6,242

 

2023

 

 

6,199

 

2024

 

 

6,126

 

Thereafter

 

 

7,659

 

Total minimum lease payments

 

$

40,177

 

 

NOTE 10 - INCOME TAXES

We use the assets and liabilities method when accounting for income taxes. Under this method, deferred income tax asset and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to the taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Under U.S. GAAP we are allowed to make an accounting policy choice to either: (1) treat taxes due on future GILTI inclusions in U.S. taxable income as a current-period expense when incurred (the “period cost method”); or (2) factor in such amounts into our measurement of our deferred taxes (the “deferred method”). We have elected to account for GILTI as a period cost in the year the tax is incurred. Accordingly, no GILTI-related deferred amounts were recorded.

 

Deferred tax assets are to be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Significant management judgment is required in assessing the realizability of our deferred tax assets.  We consider all available evidence, both positive and negative, in assessing the extent to which a valuation allowance should be applied against our deferred tax assets.  If, based on our assessment, we determine that it is more likely than not (intended to mean a likelihood that it is more than 50%) that some portion or all of the deferred tax assets will not be realized, a valuation allowance is established.

 

Since we were profitable for the last two fiscal years and began to incur losses this current fiscal year, the assessment as to the need for a valuation allowance is difficult since there is both positive and negative evidence present. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income in each tax jurisdiction during the periods in which the temporary differences become deductible.  We have considered the scheduled reversal of deferred liabilities, projected future taxable income and tax planning strategies, and have determined, based on our assessment of both objective and subjective evidence that it is more likely than not that we will realize our net deferred tax assets at this time. However, we will continue to reassess these facts and circumstances in future quarters and we can provide no assurance as to whether a valuation allowance will be required in the future.  

18


We file income tax returns in the U.S. federal and states jurisdictions as well as Puerto Rico, Mexico, Canada, Ireland, Italy, United Kingdom, the Netherlands, Brazil and New Zealand. Certain income tax returns for the years 2014 through present remain open to examination by U.S. federal and state tax authorities. Our tax returns in the foreign jurisdictions remain open for examination for varying years from 2013 to the present. We believe that we have adequate reserves for any uncertain tax positions. It is reasonably possible the amount of unrecognized tax benefits that could be realized within the next 12 months is $0.6 million.

Our net deferred tax assets increased during the nine months ending November 30, 2019 as a result of recording a deferred tax asset for additional net operating loss carryforwards for the period, reversal of valuation allowance against foreign tax credits and recording a preliminary net deferred tax asset relating to our acquisitions through the quarter ended November 30, 2019 (see Note 2).

NOTE 11 - EARNINGS PER SHARE

Basic earnings (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income for the period by the weighted average number of common shares outstanding during the period plus the dilutive effect of outstanding stock options and restricted stock-based awards using the treasury stock method.

The calculation of the basic and diluted income (loss) per share of common stock is as follows (in thousands, except per share value):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

November 30,

 

 

November 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net income (loss)

 

$

(7,415

)

 

$

(522

)

 

$

(23,477

)

 

$

7,135

 

Basic weighted average number of common shares outstanding

 

 

33,822

 

 

 

34,561

 

 

 

33,589

 

 

 

34,950

 

Effect of stock options and restricted stock units computed on treasury stock method

 

 

 

 

 

 

 

 

 

 

 

819

 

Diluted weighted average number of common shares outstanding

 

 

33,822

 

 

 

34,561

 

 

 

33,589

 

 

 

35,769

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.22

)

 

$

(0.02

)

 

$

(0.70

)

 

$

0.20

 

Diluted

 

$

(0.22

)

 

$

(0.02

)

 

$

(0.70

)

 

$

0.20

 

 

All outstanding options and restricted stock units for the three and nine months ended November 30, 2019 and for the three months ended November 30, 2018 were excluded from the computation of diluted earnings per share because we reported a net loss for each of these periods and the effect of inclusion would be antidilutive.

We have the option to pay cash, issue shares of common stock or any combination thereof for the aggregate amount due upon conversion of the convertible senior notes. It is our intent to settle the principal amount of these notes with cash, and therefore, we use the treasury stock method for calculating any potential dilutive effect of the conversion option on diluted earnings (loss) per share. From the time of the issuance of the notes, the average market price of our common stock has been less than the initial conversion price of the notes, and consequently no shares have been included in diluted earnings per share for the conversion value of the notes.

NOTE 12 – STOCKHOLDERS’ EQUITY

Employee Stock Purchase Plan

 

On June 7, 2018, our Board of Directors adopted the CalAmp Corp. 2018 Employee Stock Purchase Plan (the “ESPP”), which was approved by our stockholders on July 25, 2018. The ESPP provides for the issuance of 1,750,000 shares of our common stock. The first enrollment under the ESPP Plan commenced in February 2019. There are two enrollment periods each year that commence on February 1st and August 1st and lasts for six months. Stock-based compensation expense related to the ESPP for the three and nine months ended November 30, 2019 was $0.2 million and $0.4 million, respectively.

 

19


Equity Awards

Stock-based compensation expense is included in the following captions of the condensed consolidated statements of comprehensive income (loss) (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

November 30,

 

 

November 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Cost of revenues

 

$

221

 

 

$

251

 

 

$

558

 

 

$

640

 

Research and development

 

 

723

 

 

 

538

 

 

 

1,769

 

 

 

1,323

 

Selling and marketing

 

 

1,058

 

 

 

808

 

 

 

2,709

 

 

 

2,059

 

General and administrative

 

 

1,650

 

 

 

1,344

 

 

 

4,342

 

 

 

4,066

 

 

 

$

3,652

 

 

$

2,941

 

 

$

9,378

 

 

$

8,088

 

 

Changes in our outstanding stock options during the nine months ended November 30, 2019 were as follows (options in thousands):

 

 

 

Number of

Options

 

 

Weighted

Average

Exercise Price

 

 

Weighted average remaining contractual life (years)

 

 

Aggregate intrinsic value

 

Outstanding at February 28, 2019

 

 

1,054

 

 

$

13.44

 

 

 

5.8

 

 

 

 

 

Granted

 

 

171

 

 

 

11.11

 

 

 

 

 

 

 

 

 

Exercised

 

 

(106

)

 

 

2.35

 

 

 

 

 

 

 

 

 

Forfeited or expired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at November 30, 2019

 

 

1,119

 

 

$

14.14

 

 

 

6.2

 

 

$

1,380

 

Exercisable at November 30, 2019

 

 

681

 

 

$

12.46

 

 

 

4.7

 

 

$

1,380

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in our outstanding restricted stock shares, performance stock units (“PSUs”) and restricted stock units (“RSUs”) during the nine months ended November 30, 2019 were as follows (restricted shares, PSUs and RSUs in thousands):

 

 

 

Number of Restricted

Shares, PSUs

and RSUs

 

 

Weighted

Average Grant

Date Fair Value

 

 

Shares Retained to Cover Statutory Minimum Withholding Taxes

 

Outstanding at February 28, 2019

 

 

1,507

 

 

$

19.77

 

 

 

 

 

Granted

 

 

1,561

 

 

 

11.30

 

 

 

 

 

Vested

 

 

(467

)

 

 

18.91

 

 

 

159

 

Forfeited

 

 

(229

)

 

 

17.30

 

 

 

 

 

Outstanding at November 30, 2019

 

 

2,372

 

 

$

14.58

 

 

 

 

 

 

As of November 30, 2019, there was $31.0 million of total unrecognized stock-based compensation cost related to outstanding nonvested equity awards that is expected to be recognized as an expense over a weighted-average remaining vesting period of 3.4 years.

NOTE 13 – COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) consists of two components, net income (loss) and Other Comprehensive Income (Loss) (“OCI”). OCI refers to revenue, expenses, and gains and losses that under GAAP are recorded as an element of stockholders’ equity but are excluded from net income. Our OCI consists of currency translation adjustments from our foreign subsidiaries that do not use the U.S. dollar as their functional currency.

20


The following table shows the changes in Accumulated Other Comprehensive Income (Loss) for the nine months ended November 30, 2019 (in thousands):

 

 

 

Cumulative

Foreign Currency Translation

 

Balances at February 28, 2019

 

$

(661

)

Other comprehensive loss, net of tax

 

 

(122

)

Balances at November 30, 2019

 

$

(783

)

 

NOTE 14 - CONCENTRATION OF RISK

Significant Customers

We sell telematics products and services to large global enterprises in the industrial equipment, transportation and automotive market verticals. One of our customers accounted for more than 10% of our total revenue and accounts receivable as follows (rounded):

 

 

Three Months Ended

November 30,

 

 

Nine Months Ended

November 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer A

 

14

%

 

 

18

%

 

 

13

%

 

 

15

%

 

 

November 30,

 

 

February 28,

 

 

2019

 

 

2019

 

Accounts receivable:

 

 

 

 

 

 

 

Customer A

 

16

%

 

 

14

%

 

 

 

 

 

 

 

 

 

Significant Suppliers

We purchase a significant amount of our product inventory from certain manufacturers or suppliers including components, assemblies and electronic manufacturing parts. These suppliers are located in Asia. The inventory is purchased under standard supply agreements that outline the terms of the product delivery. The title and risk of loss of the product passes to us upon shipment from the manufacturers’ plant or warehouse. As identified below, some of these manufacturers accounted for more than 10% of our purchases and accounts payable as follows (rounded):

 

 

Three Months Ended

November 30,

 

 

Nine Months Ended

November 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Inventory purchases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplier A

 

23

%

 

 

32

%

 

 

28

%

 

 

30

%

Supplier B

 

8

%

 

 

20

%

 

 

11

%

 

 

21

%

Supplier C

 

13

%

 

 

0

%

 

 

7

%

 

 

0

%

 

 

November 30,

 

 

February 28,

 

 

2019

 

 

2019

 

Accounts payable:

 

 

 

 

 

 

 

Supplier A

 

19

%

 

 

30

%

Supplier B

 

9

%

 

 

18

%

 

 

 

 

 

 

 

 

 

We are currently reliant upon these suppliers for products. Although we believe that we can obtain products from other sources, the loss of a significant supplier could have a material impact on our financial condition and results of operations as the products that are being purchased may not be available on similar terms from another supplier.

21


NOTE 15 - PRODUCT WARRANTIES

All products have a one- or two-year limited warranty against manufacturing defects and workmanship. We estimate the future costs relating to product returns subject to our warranty and record a reserve upon shipment of our products. We periodically adjust our estimate for actual warranty claims and historical claims experience as well as the impact of known product operational issues. The warranty reserve is included in Other Current Liabilities in the condensed consolidated balance sheets. Activity in the accrued warranty costs liability is as follows (in thousands):

 

 

 

Nine Months Ended

 

 

 

November 30,

 

 

 

2019

 

 

2018

 

Balance at beginning of period

 

$

1,399

 

 

$

5,734

 

Charged to costs and expenses

 

 

657

 

 

 

856

 

Deductions

 

 

(703

)

 

 

(5,117

)

Balance at end of period

 

$

1,353

 

 

$

1,473

 

 

NOTE 16 – OTHER FINANCIAL INFORMATION

Supplemental Balance Sheet Information

Other current liabilities consist of the following (in thousands):

 

 

 

November 30,

 

 

February 28,

 

 

 

2019

 

 

2019

 

Operating lease liabilities (see Note 9)

 

$

4,877

 

 

$

 

Litigation reserve

 

 

1,500

 

 

 

1,500

 

Warranty reserves

 

 

1,353

 

 

 

1,398

 

Accrued restructuring costs (see Note 8)

 

 

 

 

 

752

 

Other

 

 

7,507

 

 

 

6,972

 

 

 

$

15,237

 

 

$

10,622

 

 

Other non-current liabilities consist of the following (in thousands):

 

 

 

November 30,

 

 

February 28,

 

 

 

2019

 

 

2019

 

Deferred revenue

 

$

29,046

 

 

$

27,106

 

Deferred compensation plan liability

 

 

6,943

 

 

 

6,409

 

Accrued restructuring costs (see Note 8)

 

 

-

 

 

 

2,175

 

Deferred tax liability

 

 

974

 

 

 

963

 

Deferred rent

 

 

-

 

 

 

365

 

Other

 

 

1,496

 

 

 

1,458

 

 

 

$

38,459

 

 

$

38,476

 

 

22


Supplemental Statement of Comprehensive Income (Loss) Information

Interest expense consists of the following (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

November 30,

 

 

November 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Interest expense on 2020 Convertible Notes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stated interest at 1.625% per annum

 

$

356

 

 

$

498

 

 

$

1,352

 

 

$

1,810

 

Amortization of discount and issue costs

 

 

1,038

 

 

 

1,412

 

 

 

3,989

 

 

 

5,034

 

 

 

 

1,394

 

 

 

1,910

 

 

 

5,341

 

 

 

6,844

 

Interest expense on 2025 Convertible Notes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stated interest at 2.00% per annum

 

 

1,150

 

 

 

1,150

 

 

 

3,476

 

 

 

1,661

 

Amortization of discount and issue costs

 

 

2,203

 

 

 

2,044

 

 

 

6,531

 

 

 

2,945

 

 

 

 

3,353

 

 

 

3,194

 

 

 

10,007

 

 

 

4,606

 

Other interest expense

 

 

240

 

 

 

30

 

 

 

650

 

 

 

116

 

Total interest expense

 

$

4,987

 

 

$

5,134

 

 

$

15,998

 

 

$

11,566

 

 

Supplemental Cash Flow Information

“Net cash provided by operating activities” includes cash payments for interest expense and income taxes as follows (in thousands):

 

 

 

Nine Months Ended

 

 

 

November 30,

 

 

 

2019

 

 

2018

 

Interest expense paid

 

$

4,368

 

 

$

2,550

 

Income tax paid

 

$

749

 

 

$

768

 

 

NOTE 17 - SEGMENT INFORMATION AND GEOGRAPHIC DATA

Our business activities are organized into two reportable segments – Telematics Systems and Software & Subscription Services. Our organizational structure is based on a number of factors that our CEO, the Chief Operating Decision Maker (“CODM”), uses to evaluate and operate the business, which include, but are not limited to, customer base, homogeneity of products and technology.

Our Telematics Systems segment offers a portfolio of wireless data communications products, which includes asset tracking units, mobile telematics devices, fixed and mobile wireless gateways and routers. These wireless networking devices underpin a wide range of our own, as well as third-party software and service solutions worldwide and are critical for applications demanding secure, reliable and business-critical communications. Telematics Systems segment revenues consist primarily of stand-alone product sales.

Our Software & Subscription Services segment offers cloud-based, application enablement and telematics service platforms that facilitate integration of our own applications, as well as those of third parties, through open Applications Programing Interfaces (“APIs”) to deliver full-featured IoT solutions to a wide range of customers and markets. Our scalable proprietary SaaS offerings enable rapid and cost-effective deployment of high-value solutions for customers all around the globe. Software & Subscription Services segment revenues include SaaS, professional services, devices sold with monitoring services, accessories, and amortization of deferred revenue for customized devices functional only with application subscriptions that are not sold separately.

Segment information for the three and nine months ended November 30, 2019 and 2018 is as follows (in thousands):

 

 

 

Three Months Ended November 30, 2019

 

 

Three Months Ended November 30, 2018

 

 

 

Operating Segments

 

 

 

 

 

 

 

 

 

 

Operating Segments

 

 

 

 

 

 

 

 

 

 

 

Telematics Systems

 

 

Software & Subscription Services

 

 

Corporate Expenses

 

 

Total

 

 

Telematics Systems

 

 

Software & Subscription Services

 

 

Corporate Expenses

 

 

Total

 

Revenues

 

$

63,192

 

 

$

33,405

 

 

 

 

 

 

$

96,597

 

 

$

68,552

 

 

$

19,943

 

 

 

 

 

 

$

88,495

 

Gross profit

 

$

20,956

 

 

$

15,928

 

 

 

 

 

 

$

36,884

 

 

$

26,284

 

 

$

10,097

 

 

 

 

 

 

$

36,381

 

Gross margin

 

 

33

%

 

 

48

%

 

 

 

 

 

 

38

%

 

 

38

%

 

 

51

%

 

 

 

 

 

 

41

%

Adjusted EBITDA

 

$

4,518

 

 

$

7,254

 

 

$

(867

)

 

$

10,905

 

 

$

9,276

 

 

$

3,612

 

 

$

(1,465

)

 

$

11,423

 

 

23


 

 

 

Nine Months Ended November 30, 2019

 

 

Nine Months Ended November 30, 2018

 

 

 

Operating Segments

 

 

 

 

 

 

 

 

 

 

Operating Segments

 

 

 

 

 

 

 

 

 

 

 

Telematics Systems

 

 

Software & Subscription Services

 

 

Corporate Expenses

 

 

Total

 

 

Telematics Systems

 

 

Software & Subscription Services

 

 

Corporate Expenses

 

 

Total

 

Revenues

 

$

188,782

 

 

$

90,121

 

 

 

 

 

 

$

278,903

 

 

$

222,004

 

 

$

57,416

 

 

 

 

 

 

$

279,420

 

Gross profit

 

$

70,277

 

 

$

39,688

 

 

 

 

 

 

$

109,965

 

 

$

86,189

 

 

$

28,104

 

 

 

 

 

 

$

114,293

 

Gross margin

 

 

37

%

 

 

44

%

 

 

 

 

 

 

39

%

 

 

39

%

 

 

49

%

 

 

 

 

 

 

41

%

Adjusted EBITDA

 

$

19,025

 

 

$

13,575

 

 

$

(3,479

)

 

$

29,121

 

 

$

31,772

 

 

$

9,907

 

 

$

(4,390

)

 

$

37,289

 

 

The amount shown for each period in the “Corporate Expenses” column above consists of expenses that are not allocated to the business segments. These non-allocated corporate expenses include salaries and benefits of certain corporate staff and expenses such as audit fees, investor relations, stock listing fees, director and officer liability insurance, and director fees and expenses.

Our CODM evaluates each segment based on earnings before interest, taxes, depreciation, amortization and certain other charges (“Adjusted EBITDA”) and we therefore consider Adjusted EBITDA to be a primary measure of operating performance of our operating segments. The adjustments to our net income (losses) prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) to calculate Adjusted EBITDA are itemized below (in thousands):

 

 

Three Months Ended

November 30,

 

 

Nine Months Ended

November 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net income (loss)

$

(7,415

)

 

$

(522

)

 

$

(23,477

)

 

$

7,135

 

Investment income

 

(1,108

)

 

 

(1,398

)

 

 

(4,445

)

 

 

(3,258

)

Interest expense

 

4,987

 

 

 

5,134

 

 

 

15,998

 

 

 

11,566

 

Income tax provision

 

(2,637

)

 

 

(778

)

 

 

(6,236

)

 

 

496

 

Depreciation

 

5,018

 

 

 

2,261

 

 

 

14,054

 

 

 

6,602

 

Amortization of intangible assets

 

3,325

 

 

 

2,893

 

 

 

9,683

 

 

 

8,534

 

Stock-based compensation

 

3,652

 

 

 

2,941

 

 

 

9,378

 

 

 

8,088

 

Loss on extinguishment of debt

 

2,408

 

 

 

 

 

 

2,408

 

 

 

2,033

 

Impairment loss and equity in net loss of affiliate

 

 

 

 

445

 

 

 

530

 

 

 

1,414

 

Restructuring charges

 

848

 

 

 

1,247

 

 

 

3,120

 

 

 

5,196

 

Non-recurring legal expenses

 

957

 

 

 

2,116

 

 

 

5,541

 

 

 

5,253

 

Acquisition and integration related expenses

 

382

 

 

 

 

 

 

1,572

 

 

 

 

Gain on LoJack battery performance legal Settlement

 

 

 

 

(2,500

)

 

 

-

 

 

 

(15,833

)

Other

 

488

 

 

 

(416

)

 

 

995

 

 

 

63

 

Adjusted EBITDA

$

10,905

 

 

$

11,423

 

 

$

29,121

 

 

$

37,289

 

 

We do not have significant long-lived assets outside the United States.

Revenues by geographic area are as follows (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

November 30,

 

 

November 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

United States

 

$

69,961

 

 

$

67,088

 

 

$

201,678

 

 

$

208,152

 

Europe, Middle East and Africa

 

 

14,818

 

 

 

10,328

 

 

 

41,625

 

 

 

37,460

 

Latin America

 

 

1,044

 

 

 

832

 

 

 

4,307

 

 

 

4,961

 

Canada

 

 

2,236

 

 

 

3,249

 

 

 

7,553

 

 

 

6,951

 

Asia and Pacific Rim

 

 

3,044

 

 

 

3,465

 

 

 

7,394

 

 

 

10,704

 

All other

 

 

5,494

 

 

 

3,533

 

 

 

16,346

 

 

 

11,192

 

 

 

$

96,597

 

 

$

88,495

 

 

$

278,903

 

 

$

279,420

 

 

Revenues by geographic area are based upon the country of billing. The geographic location of distributors and OEM customers may be different from the geographic location of the ultimate end users of the products and services provided by us. No single non-U.S. country accounted for more than 10% of our revenue in the three and nine months ended November 30, 2019 and 2018.

24


NOTE 18 – LEGAL PROCEEDINGS

 

Omega patent infringement claim

 

As previously disclosed in our Form 10-Q for the fiscal quarter ended May 31, 2019 that was filed with the U.S. Securities and Exchange Commission on June 28, 2019, we filed motions with the court seeking judgment as a matter of law and for a new trial in response to the patent infringement law suit filed by Omega Patents, LLC (“Omega”) that was decided against us in 2016. The court denied our motions on November 14, 2017. We then appealed to the Court of Appeals for the Federal Circuit (the “Federal Circuit”). The appeal was fully briefed, and the court heard oral argument on January 9, 2019. On April 8, 2019, the Federal Circuit vacated the compensatory and enhanced damages and attorney’s fees awarded by the trial court to Omega. The Federal Circuit also set aside the jury’s verdict that our alleged infringement was willful, and remanded the case for a new trial. As a result, substantially all of the previously reserved legal provisions of $19.1 million as of November 30, 2018 were reversed as of February 28, 2019. The reversal was recorded as a reduction of general and administrative expenses in our consolidated statement of comprehensive income for the fiscal year ended February 28, 2019. The new trial began on September 23, 2019 in the U.S. District Court for the Middle District of Florida, and on September 30, 2019, the jury determined that the Company infringed two of the four patents; however, the jury found that there was no willful infringement. On the first patent (U.S. Pat. No. 7,671,727), the jury found only one unit infringed, and assessed $1 in damages. On the second patent (U.S. Pat. No. 8,032,278), the jury found direct infringement and awarded damages at a rate of $5 per unit, for total damages of approximately $4.6 million. On November 26, 2019 the U.S. District Court for the Middle District of Florida entered judgment, awarding Omega damages of $4.6 million, together with pre-judgment interest in the amount of $0.8 million through September 30, 2019. We plan to file motions with the court seeking judgment as a matter of law in our favor and, alternatively, a new trial. If, following resolution of those motions, the judgment against the Company remains intact, we intend to again pursue an appeal at the Federal Circuit.

 

In connection with this claim, we have accrued our best estimate of the probable liability based on reasonable royalty rates for similar technologies. It is reasonably possible that the judgement and amounts described above could be upheld.

 

We also initiated ex parte reexamination proceedings filed in the U.S. Patent and Trademark Office seeking to invalidate a number of Omega’s patents involved in the litigation. Those proceedings currently remain pending. We continue to believe that our products do not infringe on any of Omega’s patents. While it is not feasible to predict with certainty the outcome of this litigation, we believe that its ultimate resolution would not have a material adverse effect on our consolidated results of operations, financial condition and cash flows.

In addition to the foregoing matters, from time to time as a normal consequence of doing business, various claims and litigation may be asserted or commenced against us. In particular, in the ordinary course of business, we may receive claims concerning personnel matters, contract performance, or claims that our products or services infringe the intellectual property of third parties. In connection with these matters, we may be required to enter into license agreements or other settlement arrangements that require us to make significant payments in the future. While the outcome of any such claims or litigation cannot be predicted with certainty, we do not believe that the outcome of any such matters existing at the present time would have a material adverse effect on our consolidated results of operations, financial condition and cash flows.

25


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues, costs and expenses during the reporting periods. Actual results could differ materially from these estimates. The critical accounting policies listed below involve our more significant accounting judgments and estimates that are used in the preparation of the consolidated financial statements. These policies are described in greater detail in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) under Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended February 28, 2019, as filed with the U.S. Securities and Exchange Commission on May 1, 2019, and include the following areas:

 

Revenue recognition;

 

Allowance for doubtful accounts;

 

Inventory write-downs;

 

Patent litigation and other contingencies; and

 

Deferred income tax assets and uncertain tax positions.

RESULTS OF OPERATIONS

OUR COMPANY

We are a telematics pioneer leading transformation in a mobile connected economy. We help reinvent businesses and improve lives around the globe with technology solutions that streamline complex Internet of Things (“IoT”) developments through wireless connectivity solutions and derived data intelligence. Our software applications, scalable cloud services, and intelligent devices collect and assess business-critical data from mobile assets and their contents. Our business is organized into two reportable segments: Telematics Systems and Software & Subscription Services. Our organizational structure is based on a number of factors that our CEO, the Chief Operating Decision Maker (“CODM”), uses to evaluate and operate the business, which include, but are not limited to, customer base, homogeneity of products, and technology within these two segments. A description of the reportable business segments is provided below.

On February 25, 2019, we completed our acquisition of Tracker Network (UK) Limited (“Tracker UK”), a LoJack licensee and a market leader in stolen vehicle recovery (“SVR”) telematics services across the United Kingdom, for a cash purchase price of $13.1 million. On March 19, 2019, we completed the acquisition of Car Track, S.A. de C.V. (“LoJack Mexico”), the exclusive licensee of LoJack technology for the Mexican market. We purchased the remaining 87.5% of the LoJack Mexico shares that we did not own for a cash purchase price of $14.3 million. On April 12, 2019, we acquired Synovia Solutions LLC (“Synovia”), a North American market leader in fleet safety and management for K-12 school bus and state and local government fleets for a cash purchase price of $49.8 million. Combined with the recent acquisitions of Tracker UK and LoJack Mexico, the Synovia acquisition expands our fleet management and vehicle safety services portfolio and accelerates our transformation to high-value subscription-based services. See Note 2 for a description of these acquisitions.

TELEMATICS SYSTEMS

 

Our Telematics Systems segment offers a series of advanced telematics and SVR products for the broader connected vehicle marketplace, which enable customers to optimize their operations by collecting, monitoring and effectively reporting business-critical information and desired intelligence from high-value remote and mobile assets. Our telematics products include asset tracking units, mobile telematics devices, mobile gateways, and routers. These wireless networking devices underpin a wide range of solutions, and are ideal for applications demanding secure, reliable and business-critical communications.

SOFTWARE & SUBSCRIPTION SERVICES

Our Software & Subscription Services segment offers cloud-based application enablement and telematics service platforms that facilitate integration of our own applications, as well as those of third parties, through open Application Programming Interfaces (“APIs”) to deliver full-featured mobile IoT solutions to a wide range of customers and markets. Our scalable proprietary applications and other subscription services enable rapid and cost-effective development of high-value solutions for customers all around the globe. Effective as of the respective transaction dates, our recently acquired businesses, Tracker UK, LoJack Mexico and Synovia, became components of this segment (see Note 2).

 

26


Adjusted EBITDA

 

In addition to our U.S. GAAP results, we present Adjusted EBITDA as a supplemental non-GAAP measure of our performance. A non-GAAP financial measure is defined as a numerical measure of a company’s financial performance that excludes or includes amounts to be different than the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles in the statements of comprehensive income (loss), balance sheets or statements of cash flows. We define Adjusted EBITDA as Earnings Before Investment Income, Interest Expenses, Taxes, Depreciation, Amortization, stock-based compensation, acquisition and integration expenses, non-cash costs and expenses arising from purchase accounting adjustments, litigation provision, gain from legal settlement and certain other adjustments. Our CEO, the CODM, uses Adjusted EBITDA to evaluate and monitor segment performance. We believe this non-GAAP financial information provides additional insight into our ongoing performance and have therefore chosen to provide this information to investors for a more consistent basis of comparison to help investors evaluate our results of ongoing operations and enable more meaningful period-to-period comparisons. Pursuant to the rule and regulations of the U.S. Securities and Exchange Commission regarding the use of non-GAAP financial measures, we have provided a reconciliation of non-GAAP financial measures to the most directly comparable financial measure. See Note 17 to the accompanying condensed consolidated financial statements for additional information related to Adjusted EBITDA by reportable segments and reconciliation to net income (loss).

OPERATING RESULTS

Three months ended November 30, 2019 compared to three months ended November 30, 2018:

Revenue by Segment

 

 

 

Three Months Ended November 30,

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

(In thousands)

 

$

 

 

% of Revenue

 

 

$

 

 

% of Revenue

 

 

$ Change

 

 

% Change

 

Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Telematics Systems

 

$

63,192

 

 

 

65.4

%

 

$

68,552

 

 

 

77.5

%

 

$

(5,360

)

 

 

(7.8

%)

Software & Subscription Services

 

 

33,405

 

 

 

34.6

%

 

 

19,943

 

 

 

22.5

%

 

 

13,462

 

 

 

67.5

%

Total

 

$

96,597

 

 

 

100.0

%

 

$

88,495

 

 

 

100.0

%

 

$

8,102

 

 

 

9.2

%

 

Telematics Systems revenue decreased by $5.4 million or 7.8% for the three months ended November 30, 2019 compared to the same period last year. The decrease was attributable to reduced sale volume in three product categories including MRM telematics, OEM/network products and legacy LoJack SVR products. The decrease in MRM telematics products sales was primarily due to a reduction in sales volume to a few larger customers. The decrease in OEM/network products was attributable to a reduction in sales to our largest OEM/network products customer which is in the middle of a product line transition and also commencing the rollout of the initial phase of a 3G-to-4G LTE retrofit program. We expect this decline to be temporary and to be offset by demands from our customers as the 3G network sunset becomes more imminent. Legacy LoJack US SVR revenue continues to decline due to a technology transition from proprietary radio frequency technology to GPS-based telematics solutions. We expect this decline to continue but be offset to a degree over time by revenues from our recent acquisitions and future growth in our telematics solutions, such as SureDrive and LotSmart within our Software & Subscription Services segment.

Software & Subscription Services revenue increased by $13.5 million or 67.5% for the three months ended November 30, 2019 compared to the same period last year. The increase was primarily due to the three recent acquisitions of Tracker UK, LoJack Mexico and Synovia, coupled with growth in LoJack Italy.

Gross Profit by Segment

 

 

 

Three Months Ended November 30,

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

(In thousands)

 

$

 

 

% of Revenue

 

 

$

 

 

% of Revenue

 

 

$ Change

 

 

% Change

 

Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Telematics Systems

 

$

20,956

 

 

 

33.2

%

 

$

26,284

 

 

 

38.3

%

 

$

(5,328

)

 

 

(20.3

%)

Software & Subscription Services

 

 

15,928

 

 

 

47.7

%

 

 

10,097

 

 

 

50.6

%

 

 

5,831

 

 

 

57.7

%

Gross profit

 

$

36,884

 

 

 

38.2

%

 

$

36,381

 

 

 

41.1

%

 

$

503

 

 

 

1.4

%

 

Consolidated gross profit increased by $0.5 million or 1.4% for the three months ended November 30, 2019 compared to the same period last year. The increase in absolute dollar terms was due to continued growth in Software & Subscription Services partially offset by lower revenue and gross profits in the Telematics Systems business as described above.

 

27


Consolidated gross margin decreased by 290 basis for the three months ended November 30, 2019 compared to the same period last year. Gross margin for Telematics Systems decreased to 33.2% for the three months ended November 30, 2019 from 38.3% for the three months ended November 30, 2018. Gross margin was impacted principally by product mix coupled with incremental charges for excess and obsolete inventory and unfavorable manufacturing variances as we proceed with the closure of our manufacturing facility in Oxnard, California within the next 90 days. Gross margin for Software & Subscription Services was 47.7% for the three months ended November 30, 2019 compared to 50.6% for the same period last year. The decrease was primarily driven by the recently acquired businesses as the gross profit was impacted by purchase price adjustments to deferred revenue.

 

Cost of revenues above excludes the restructuring related costs, which is shown separately in the operating expenses in our condensed consolidation statement of comprehensive income (loss).

Operating Expenses

 

 

 

Three Months Ended November 30,

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

(In thousands)

 

$

 

 

% of Revenue

 

 

$

 

 

% of Revenue

 

 

$ Change

 

 

% Change

 

Research and development

 

$

7,742

 

 

 

8.0

%

 

$

7,177

 

 

 

8.1

%

 

$

565

 

 

 

7.9

%

Selling and marketing

 

 

14,683

 

 

 

15.2

%

 

 

12,746

 

 

 

14.4

%

 

 

1,937

 

 

 

15.2

%

General and administrative

 

 

14,283

 

 

 

14.8

%

 

 

11,719

 

 

 

13.2

%

 

 

2,564

 

 

 

21.9

%

Restructuring

 

 

848

 

 

 

0.9

%

 

 

1,247

 

 

 

1.4

%

 

 

(399

)

 

 

(32.0

%)

Intangible asset amortization

 

 

3,325

 

 

 

3.4

%

 

 

2,893

 

 

 

3.3

%

 

 

432

 

 

 

14.9

%

Total

 

$

40,881

 

 

 

42.3

%

 

$

35,782

 

 

 

40.4

%

 

$

5,099

 

 

 

14.3

%

 

Consolidated research and development expense increased by $0.6 million or 7.9% for the three months ended November 30, 2019 compared to the same period last year. We will continue to invest in research and development of new products and technologies to be sold through the U.S. and international sales channels.

Consolidated selling and marketing expense increased by $1.9 million or 15.2% for the three months ended November 30, 2019 compared to the same period last year. The increase was primarily driven by additional compensation expenses related to an increase in headcount due to the acquired businesses.

Consolidated general and administrative expenses increased by $2.6 million or 21.9% for the three months ended November 30, 2019 compared to the same period last year. The increase was primarily driven by additional compensation expenses related to an increase in headcount due to acquired businesses and partially offset by decreases in professional fees related to certain non-recurring legal matters. We began partial operations on our new Enterprise Resource Planning (“ERP”) system in June 2019, which also resulted in increased general and administrative expenses. Certain implementation costs on our new ERP system were capitalized as Property and Equipment in our condensed consolidated balance sheets.

As described in Note 8 to the accompanying condensed consolidated financial statements, during the three months ended May 31, 2018, we commenced a plan to capture certain synergies and cost savings related to streamlining our global operations and sales organization as well as rationalize certain leased properties that are partially vacant. We incurred additional charges for this initiative during the three months ended November 30, 2019. Total restructuring costs decreased $0.4 million or 32% for the three months ended November 30, 2019 compared to the same period last year. The decrease was attributable to lower restructuring costs related to personnel charges. Restructuring costs are shown separately in the operating expenses in our condensed consolidated statement of comprehensive income (loss).

Amortization of intangibles increased by $0.4 million or 14.9% for the three months ended November 30, 2019 compared to the same period last year due to the addition of intangible assets resulting from recent business acquisitions.

Non-operating Income (Expense), Net

Investment income decreased by $0.3 million to $1.1 million for the three months ended November 30, 2019 from $1.4 million for the three months ended November 30, 2018. The decrease was primarily due to a decrease in investment income on Rabbi Trust assets that serve to informally fund our non-qualified deferred compensation plan during the period.

Interest expense decreased by $0.1 million to $5.0 million for the three months ended November 30, 2019 from $5.1 million for the three months ended November 30, 2018 primarily due to lower stated interest expense, amortization of debt discount and issue costs that resulted from the repurchase of the 2020 Convertible Notes. The decrease was partially offset by the amortization of discount of Due to Factors.

During the three months ended November 30, 2018, we recognized a $2.5 million gain from the legal settlement with a former supplier of LoJack. The final payment on the legal settlement was received in February 2019.

28


During the three months ended November 30, 2019, we recognized a loss of $2.4 million on extinguishment of debt on the repurchase of $94.9 million of our 2020 Convertible Notes in October and November 2019.

Other non-operating income for the three months ended November 30, 2019 was $0.2 million, as compared to a loss of $0.2 million for the comparable period of the prior year due to a favorable shift in foreign currency exchange rates.

Overall Profitability Measures

Net Income (Loss):

GAAP-basis net loss in the three months ended November 30, 2019 was $7.4 million as compared to a net loss of $0.5 million in the three months ended November 30, 2018. The $6.9 million increase in the net loss is due to the operating loss resulting from an increase in operating expenses during the quarter due to recent acquisitions as described above and a $2.4 million loss on extinguishment of debt.

Adjusted EBITDA:

 

 

 

Three Months Ended November 30,

 

 

 

 

 

 

 

 

 

(In thousands)

 

2019

 

 

2018

 

 

$ Change

 

 

% Change

 

Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Telematics Systems

 

$

4,518

 

 

$

9,276

 

 

$

(4,758

)

 

 

(51.3

%)

Software & Subscription Services

 

 

7,254

 

 

 

3,612

 

 

 

3,642

 

 

 

100.8

%

Corporate Expenses

 

 

(867

)

 

 

(1,465

)

 

 

598

 

 

 

(40.8

%)

Total Adjusted EBITDA

 

$

10,905

 

 

$

11,423

 

 

$

(518

)

 

 

(4.5

%)

 

Adjusted EBITDA for Telematics Systems in the three months ended November 30, 2019 decreased by $4.8 million compared to the same period last year primarily due to a decline in revenue resulting from decreased sales volume and acquisition of Synovia Solutions as described above. Adjusted EBITDA for Software & Subscription Services increased by $3.6 million compared to the same period last year primarily due to higher gross profit and partially offset by higher operating expenses as a result of the recently acquired businesses described above. Adjusted EBITDA for Corporate Expenses decreased due to lower legal expenses.

 

See Note 17 for information related to Adjusted EBITDA by reportable segments and a reconciliation to GAAP-basis net income (loss).

 

Nine months ended November 30, 2019 compared to nine months ended November 30, 2018:

Revenue by Segment

 

 

 

Nine Months Ended November 30,

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

(In thousands)

 

$

 

 

% of Revenue

 

 

$

 

 

% of Revenue

 

 

$ Change

 

 

% Change

 

Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Telematics Systems

 

$

188,782

 

 

 

67.7

%

 

$

222,004

 

 

 

79.5

%

 

$

(33,222

)

 

 

(15.0

%)

Software & Subscription Services

 

 

90,121

 

 

 

32.3

%

 

 

57,416

 

 

 

20.5

%

 

 

32,705

 

 

 

57.0

%

Total

 

$

278,903

 

 

 

100.0

%

 

$

279,420

 

 

 

100.0

%

 

$

(517

)

 

 

(0.2

%)

 

Telematics Systems revenue decreased by $33.2 million or 15.0% for the nine months ended November 30, 2019 compared to the same period last year. The decrease was attributable to reduced sale volume in three product categories including MRM telematics, OEM/network products and legacy LoJack SVR products. The decrease in MRM telematics products sales was primarily due to a reduction in sales volume to a few larger customers including Synovia Solutions, which we acquired in in April 2019, and is now contributing to our Software & Subscription Services segment. The decrease in OEM/network products was attributable to a reduction in sales to our largest OEM/network products customer which is in the middle of a product line transition and also commencing the rollout of the initial phase of a 3G-to-4G LTE retrofit program. We expect this decline to be temporary and to be offset by demands from our customers as the 3G network sunset becomes more imminent. Legacy LoJack SVR revenue continued its secular decline due to a technology transition from proprietary radio frequency technology to GPS-based telematics solutions. We expect this decline to continue but be offset to a degree over time by revenues from our recent acquisitions and future growth in our telematics solutions, such as SureDrive and LotSmart within our Software & Subscription Services segment.

Software & Subscription Services revenue increased by $32.7 million or 57.0% for the nine months ended November 30, 2019 compared to the same period last year. The increase was due primarily to the three recent acquisitions of Tracker UK, LoJack Mexico and Synovia, coupled with growth in LoJack Italy.

29


Gross Profit by Segment

 

 

 

Nine Months Ended November 30,

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

(In thousands)

 

$

 

 

% of Revenue

 

 

$

 

 

% of Revenue

 

 

$ Change

 

 

% Change

 

Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Telematics Systems

 

$

70,277

 

 

 

37.2

%

 

$

86,189

 

 

 

38.8

%

 

$

(15,912

)

 

 

(18.5

%)

Software & Subscription Services

 

 

39,688

 

 

 

44.0

%

 

 

28,104

 

 

 

48.9

%

 

 

11,584

 

 

 

41.2

%

Gross profit

 

$

109,965

 

 

 

39.4

%

 

$

114,293

 

 

 

40.9

%

 

$

(4,328

)

 

 

(3.8

%)

 

Consolidated gross profit decreased by $4.3 million or 3.8% for the nine months ended November 30, 2019 compared to the same period last year. The decrease in absolute dollar terms was due to lower revenue in the Telematics Systems business partially offset by continued growth in Software & Subscription Services as described above.

 

Consolidated gross margin decreased by 150 basis points for the nine months ended November 30, 2019 from 40.9% for the same period last year, which was primarily attributable to a decrease in gross margin from the Telematics Systems business. Our gross margin performance was impacted principally by product mix coupled with incremental charges for excess and obsolete inventory and unfavorable manufacturing variances as we proceed with the closure of our manufacturing facility in Oxnard, California within the next 90 days. Gross margin for Software & Subscription Services decreased to 44.0% for the nine months ended November 30, 2019 from 48.9% for the same period last year. The decrease was primarily driven by the recently acquired businesses, as gross profit is impacted by purchase price adjustments to deferred revenue.

 

Cost of revenues above excludes the restructuring related costs, which is shown separately in the operating expenses in our condensed consolidation statement of comprehensive income (loss).

Operating Expenses

 

 

 

Nine Months Ended November 30,

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

(In thousands)

 

$

 

 

% of Revenue

 

 

$

 

 

% of Revenue

 

 

$ Change

 

 

% Change

 

Research and development

 

$

22,552

 

 

 

8.1

%

 

$

21,377

 

 

 

7.7

%

 

$

1,175

 

 

 

5.5

%

Selling and marketing

 

 

45,198

 

 

 

16.2

%

 

 

37,766

 

 

 

13.5

%

 

 

7,432

 

 

 

19.7

%

General and administrative

 

 

44,660

 

 

 

16.0

%

 

 

37,146

 

 

 

13.3

%

 

 

7,514

 

 

 

20.2

%

Restructuring

 

 

3,120

 

 

 

1.1

%

 

 

5,196

 

 

 

1.9

%

 

 

(2,076

)

 

 

(40.0

%)

Intangible asset amortization

 

 

9,683

 

 

 

3.5

%

 

 

8,534

 

 

 

3.1

%

 

 

1,149

 

 

 

13.5

%

Total

 

$

125,213

 

 

 

44.9

%

 

$

110,019

 

 

 

39.5

%

 

$

15,194

 

 

 

13.8

%

 

Consolidated research and development expense increased by $1.2 million or 5.5% for the nine months ended November 30, 2019 compared to the same period last year. The increase was primarily driven by additional compensation expenses related to an increase in headcount due to acquired businesses. We will continue to invest in research and development of new products and technologies to be sold through the U.S. and international sales channels.

Consolidated selling and marketing expense increased by $7.4 million or 19.7% for the nine months ended November 30, 2019 compared to the same period last year. The increase was primarily driven by additional compensation expenses related to an increase in headcount due to the acquired businesses.

Consolidated general and administrative expense increased by $7.5 million or 20.2% for the nine months ended November 30, 2019 compared to the same period last year. The increase was primarily driven by additional compensation expenses related to an increase in headcount due to acquired businesses and increases in legal and professional fees related to the acquisitions and certain non-recurring legal matters. We began partial operations on the new ERP system in June 2019, which resulted in increased general and administrative expense. Certain implementation costs on our new ERP system were capitalized as Property and Equipment in our condensed consolidated balance sheets.

As described in Note 8 to the accompanying condensed consolidated financial statements, during the nine months ended November 30, 2019, we incurred an additional $3.1 million in restructuring costs related to the cost savings plan that commenced in May 2018. Total restructuring costs decreased $2.1 million or 40% for the nine months ended November 30, 2019 compared to the same period last year. The decrease was attributable to lower restructuring costs related to vacant office and manufacturing plant facilities. For the nine months ended November 30, 2018, we partially vacated these facilities and recorded a cost of $2.7 million. During the nine months ended November 30, 2019, we fully vacated certain offices, which resulted in a cost of $1.2 million. Restructuring costs are shown separately in the operating expenses in our condensed consolidated statement of comprehensive income (loss).

30


Amortization of intangibles increased by $1.1 million or 13.5% for the nine months ended November 30, 2019 compared to the same period last year due to the addition of intangible assets resulting from recent business acquisitions.

Non-operating Income (Expense), Net

Investment income increased by $1.1 million to $4.4 million for the nine months ended November 30, 2019 from $3.3 million for the nine months ended November 30, 2018. The increase was due to dividend income we received from LoJack Mexico and a gain as further discussed in Note 2 from the fair value adjustment of our previously held interest in LoJack Mexico.

Interest expense increased to $16.0 million for the nine months ended November 30, 2019 from $11.6 million for the nine months ended November 30, 2018 primarily due to additional interest and amortization of debt discount and issue costs related to the 2025 Convertible Notes issued in July 2018 and amortization of discount of Due to Factors.

During the nine months ended November 30, 2018, we recognized a $15.8 million gain from the legal settlement with a former supplier of LoJack. The final payment on the legal settlement was received in February 2019.

During the nine months ended November 30, 2019, we recognized a loss of $2.4 million on extinguishment of debt on the repurchase of $94.9 million of our 2020 Convertible Notes in October and November 2019.

During the nine months ended November 30, 2018, we recognized a loss of $2.0 million on extinguishment of debt on the repurchase of $53.8 million of our 2020 Convertible Notes in July 2018.

Other non-operating income for the nine months ended November 30, 2019 was $26 thousand and increased from an expense of $0.7 million for the comparable period of the prior year due to an favorable shift in foreign currency exchange rates.

Overall Profitability Measures

Net Income (Loss):

GAAP-basis net loss in the nine months ended November 30, 2019 was $23.5 million as compared to a net income of $7.1 million in the nine months ended November 30, 2018. The $30.6 million decrease in income is due to the operating loss resulting from an increase in operating expenses during the year due to recent acquisitions as described above coupled with a $15.8 million decrease in non-operating gain from a legal settlement that was fully recognized in fiscal 2019.

Adjusted EBITDA:

 

 

 

Nine Months Ended November 30,

 

 

 

 

 

 

 

 

 

(In thousands)

 

2019

 

 

2018

 

 

$ Change

 

 

% Change

 

Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Telematics Systems

 

$

19,025

 

 

$

31,772

 

 

$

(12,747

)

 

 

(40.1

%)

Software & Subscription Services

 

 

13,575

 

 

 

9,907

 

 

 

3,668

 

 

 

37.0

%

Corporate Expenses

 

 

(3,479

)

 

 

(4,390

)

 

 

911

 

 

 

(20.8

%)

Total Adjusted EBITDA

 

$

29,121

 

 

$

37,289

 

 

$

(8,168

)

 

 

(21.9

%)

 

Adjusted EBITDA for Telematics Systems in the nine months ended November 30, 2019 decreased by $12.7 million or 40.1% compared to the same period last year primarily due to a decline in revenue resulting from decreased sales volume and acquisition of a customer as described above. Adjusted EBITDA for Software & Subscription Services increased by $3.7 million or 37.0% compared to the same period last year primarily due to recently acquired businesses.

 

See Note 17 for information related to Adjusted EBITDA by reportable segments and a reconciliation to GAAP-basis net income (loss).

Income Tax Provision

 

We evaluate our estimated annual effective tax rate (“ETR”) on a quarterly basis based on current and forecasted operating results. The relationship between our income tax provision or benefit and our pretax book income or loss can vary significantly from period to period considering, among other factors, the overall level of pretax book income or loss and changes in the blend of jurisdictional income or loss that is taxed at different rates. Consequently, our ETR may fluctuate significantly period to period and may make quarterly comparisons less than meaningful.

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An income tax benefit of $6.2 million was recorded for the nine months ended November 30, 2019, compared to an income tax provision of $0.5 million in the same period last year. The change was primarily driven by a pre-tax loss in the current year and a reversal of a valuation allowance against foreign tax credits, partially offset by a one-time discrete tax charge related to net equity based compensation “shortfalls” and a restructuring of foreign operations during the nine months ended November 30, 2019. Our effective tax rate was 21.4% and 5.5% for the nine months ended November 30, 2019 and 2018, respectively.

As of November 30, 2019, we had approximately $25.8 million in U.S. net deferred income tax assets. The net deferred income tax assets include approximately $7.8 million and $2.4 million of federal and state net operating loss carryforwards and approximately $11.3 million and $7.4 million federal and state tax credits, respectively. These deferred income tax assets can be used to reduce our taxable income and income taxes payable in future periods. Many of these net operating loss carryforwards and tax credits will expire if they are not used within certain periods. Based on our historical three-year cumulative income and certain tax planning strategies we continue to believe that our net deferred income tax assets will more likely than not be utilized before their expiration. We continue to closely monitor all available evidence in considering the amount of valuation allowance that is required on our U.S. net deferred tax assets.

LIQUIDITY AND CAPITAL RESOURCES

Consistent with fiscal 2019, our primary recurring cash needs have been for working capital purposes and capital expenditures. We have historically funded our principal business activities through cash flows generated from operations. As we continue to grow our customer base and increase our revenues, there will be a need for working capital in the future. Our immediate sources of liquidity are cash, cash equivalents, marketable securities and our revolving credit facility. As of November 30, 2019, we have $103.6 million of cash, cash equivalents and marketable securities and $50 million available under our revolving credit facility. During the third quarter of fiscal 2020, we repurchased $95 million of our 2020 Convertible Notes. We expect to settle the $27.6 million remaining 2020 Convertible Notes due May 2020 with cash. Additionally, we expect to continue to finance our operations with cash on hand and cash generated from operations.

On March 30, 2018, we entered into a revolving credit facility with J.P. Morgan Chase Bank, N.A. that provides for borrowings of up to $50.0 million. This revolving credit facility expires on March 30, 2020 and we are currently in discussion with J.P. Morgan to extend the term for at least 12 months. At our election, the Borrowings under this revolving credit facility bear interest at either a LIBOR-based variable rate plus an applicable margin, or at the greater of the Prime Rate, the NYFRB Rate plus an applicable margin rate and a one-month LIBOR-based variable rate plus an applicable margin rate (each as defined in the Credit Agreement), in each case determined based on our senior leverage ratio from time to time. This revolving credit facility contains financial covenants that require us to maintain a minimum level of earnings before interest, income taxes, depreciation, amortization and other noncash charges (EBITDA) and minimum debt coverage ratios. There were no borrowings outstanding on this revolving credit facility at November 30, 2019.

As described in Note 2 to the accompanying consolidated financial statements, in February 2019, we acquired Tracker UK for $13.1 million. In March 2019, we completed the acquisition of 87.5% LoJack Mexico shares for $14.3 million. In April 2019, we acquired Synovia for $49.8 million. We funded these acquisitions from cash on hand. As part of the Synovia acquisition, we assumed the rights and obligations from the Synovia revenue assignments as described in Note 7. The revenues recognized from this arrangement of $5.0 million were considered a non-cash financing activity for the nine months ended November 30, 2019.

We are a defendant in various legal proceedings, including the Omega patent infringement claim, involving intellectual property claims and contract disputes in which the final resolutions have not been determined at this time. In connection with these matters, we may be required to enter into license agreements or other settlement arrangements that require us to make significant payments in the future. While it is not feasible to predict with certainty the outcome of these legal proceedings, based on currently available information, we believe that the ultimate resolution of these matters would not have a material adverse effect on our consolidated results of operations, financial condition and cash flows.

See Note 18, Legal Proceedings, of the Notes to Unaudited Condensed Consolidated Financial Statements for additional information on legal proceedings.

Cash flows from operating activities

 

Cash flows from operating activities consist of net income (loss) adjusted for certain non-cash items, including depreciation, intangible asset amortization, stock-based compensation expense, amortization of discount and debt issue costs, deferred income taxes, impairment loss and equity in net loss of affiliate, and the effect of changes in components of working capital.

 

Our cash flow from operating activities are attributable to our net income (loss) as well as how well we manage our working capital, which is dictated by the volume of products we purchase from our manufacturers or suppliers and then sell to our customers along with the payment and collection terms that we negotiate with them.

 

We purchase a majority of our products from significant suppliers located in Asia, that generally provide us 60-day payment terms for products purchased. We are currently reliant upon these suppliers for products. Although we believe that we can obtain products from other sources, the loss of a significant supplier could have a material impact on our financial condition and results of operations as the products that are being purchased may not be available on similar terms from another supplier.

 

Our significant customers are located in the United States and certain foreign countries. We believe that our relationships with our key customers are very good and that these customers are in good financial condition. We generally grant credit to our customers based on their financial viability and our historical collection experience with them. We typically require payment from them within 30 to 45 days of our invoice date with a few exceptions that extend the credit terms upto 90 days.

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For the nine months ended November 30, 2019, net cash provided by operating activities was $3.3 million and net loss was $23.5 million. Our non-cash expenses, comprised principally of depreciation, intangible asset amortization, stock-based compensation expense, amortization of debt discount and issue costs, and deferred income taxes totaled $44.4 million. These non-cash expenses are partially offset by non-cash revenues of $5.0 million related to the Synovia revenue assignment arrangements and $2.4 million losses incurred from repurchase of the 2020 Convertible Notes. Changes in operating assets and liabilities, net of the effects of our acquisitions, resulted in a $15.0 million cash outflow, primarily driven by changes in working capital including an increase in accounts receivable and inventory, and decrease in accounts payable.  

 

For the nine months ended November 30, 2018, net cash provided by operating activities was $48.1 million. Net income was $7.1 million, which was primarily attributable to $15.8 million cash received from the settlement with a former supplier of LoJack that was realized as non-operating income during the period. We received the remaining $2.5 million in installments in the fourth quarter ending February 28, 2019. Our non-cash items, comprised principally of depreciation, intangible assets amortization, stock-based compensation expense, amortization of convertible debt issue costs and discount, loss on extinguishment of debt, deferred income taxes and equity in net loss of our affiliate and non-cash assigned revenues totaled $34.0 million. Changes in operating assets and liabilities created a $5.6 million source of cash, primarily driven by changes in working capital including an increase in deferred revenue and decrease in inventory but partially offset by an increase in prepaid expense and decrease in accounts payable. The increases in our working capital accounts were attributable to an increase in sales volume in the most recent quarter.

Cash flow from investing activities

 

For the nine months ended November 30, 2019 and 2018, our net cash used in investing activities was $62.3 million and $17.1 million, respectively. In each of these periods, our primary investing activities consisted of the purchase and sale of marketable securities in accordance with our corporate investment policy as well as capital expenditures. During the nine months ended November 30, 2019, we also acquired Synovia and LoJack Mexico for $48.9 million and $12.7 million, net of cash acquired, respectively.

 

We expect that we will make additional capital expenditures in the future, including the further build-out of our corporate offices and IT infrastructure, and the devices that we lease to customers on the Synovia subscription agreements. All of these will be done to support the future growth of our business.

Cash flow from financing activities

 

For the nine months ended November 30, 2019 and 2018, our net cash (used in) or provided by financing activities was $(95.5) million and $108.6 million, respectively. In each of these periods, we have payments for taxes related to the net share settlement of vested equity awards and the proceeds from the exercise of stock options and contributions to ESPP. During the nine months ended November 30, 2019, we entered into separate, privately negotiated purchase agreements to repurchase approximately $94.9 million in aggregate principal amount of these notes for $94.7 million.

 

During the nine months ended November 30, 2018, we had a net cash inflow of $201.5 million from the issuance of the 2025 Convertible Notes, partially offset by net cash outflow of $50.6 million for the repurchase of the 2020 Convertible Notes and $28.6 million repurchase of our common stock.     

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of the U.S. Securities and Exchange Commission Regulation S-K.

  

Contractual Cash Obligations

During the third quarter of fiscal 2020, there were no significant changes to our estimates of future payments under our fixed contractual obligations and commitments as presented in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for our fiscal year ended February 28, 2019 as filed with the Securities and Exchange Commission on May 1, 2019.

 

FORWARD LOOKING STATEMENTS

Forward looking statements in this Form 10-Q which include, without limitation, statements relating to our plans, strategies, objectives, expectations, intentions, projections and other information regarding future performance, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words “may”, “will”, “could”, “plans”, “intends”, “seeks”, “believes”, “anticipates”, “expects”, “estimates”, “judgment”, “goal”, and variations of these words and similar expressions, are intended to identify forward-looking statements. These forward-looking statements reflect our current views with respect to future events and financial performance and are subject to certain risks and uncertainties that are difficult to predict, including, without limitation, product demand, competitive pressures and pricing declines in our markets, the timing of customer approvals of new product designs, intellectual property infringement claims, interruption or failure of our Internet-based systems used to wirelessly configure and communicate with the tracking and monitoring devices that we sell, the phased implementation of our ERP system, the effect of tariffs on exports from China, and other countries, and other risks and uncertainties that are set forth in Part I, Item 1A of the Annual Report on Form 10-K for the fiscal year ended February 28, 2019 as filed with the U.S. Securities and Exchange Commission on May 1, 2019. Such risks and uncertainties could cause actual results to differ materially from historical or anticipated results. Although we believe the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be attained. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Risk

We have international operations, giving rise to exposure to market risks from changes in currency exchange rates. A cumulative foreign currency translation loss of $0.8 million related to our foreign subsidiaries is included in “Accumulated other comprehensive loss” in the Stockholders' Equity section of the condensed consolidated balance sheet at November 30, 2019. The aggregate foreign currency transaction exchange rate loss included in determining loss before income taxes and impairment loss and equity in net loss of affiliate were de minimus n both the nine months ended November 30, 2019 and 2018.

As our international operations grow, our risks associated with fluctuation in foreign currency rates will become greater, and we will continue to reassess our approach to managing this risk. In addition, currency fluctuations or a weakening U.S. dollar could increase the costs of our international expansion and operation.

Interest Rate Risk

Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. The primary objective of our investment activities is to preserve principal and liquidity while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we maintain our investment portfolio in a variety of available-for-sale fixed debt securities, including both government and corporate obligations and money market funds. Investments in fixed rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in prevailing interest rates. Due in part to these factors, we may suffer losses in principal if we need the funds prior to maturity and we choose to sell securities that have declined in market value due to changes in interest rates or perceived credit risk related to the securities’ issuers.

As the majority of our investment portfolio has a short-term nature, we do not believe an immediate increase or decrease in interest rate would have a material effect on the fair market value of our portfolio, and therefore, we do not expect our operating results or cash flows to be materially affected by a sudden change in market interest rates.

We do not believe our cash equivalents and short-term marketable securities have significant risk of default or illiquidity. However, we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in market value. In addition, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in excess of federally insured limits. We cannot be assured that we will not experience losses on these deposits.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our principal executive officer and principal financial officer have concluded, based on their evaluation of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report, that our disclosure controls and procedures are effective to ensure that the information required to be disclosed in reports that are filed or submitted under the Exchange Act is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and that such information is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission.

Changes in Internal Control Over Financial Reporting

In connection with our initiative to integrate and enhance our global information technology systems and business processes, we initiated the phased implementation of a new ERP system. The ERP system is being implemented in phases throughout fiscal 2020 and continuing into fiscal 2021. The first phase was completed during the second quarter of fiscal 2020. As a result of this implementation, we modified certain existing internal controls over financial reporting as well as implemented new controls and procedures related to the new ERP system. Other than the continued implementation of our ERP system, there were no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d 15(f) under the Exchange Act) that occurred during the third quarter of fiscal 2020 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 18, Legal Proceedings, of the Notes to Unaudited Condensed Consolidated Financial Statements above for information regarding the legal proceedings in which we are involved.

ITEM 1A. RISK FACTORS

 

The reader is referred to Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended February 28, 2019, as filed with the U.S. Securities and Exchange Commission on May 1, 2019, for a discussion of factors that could materially affect our business, financial condition, results of operations, or future results in addition to the risk factors below:

 

Ongoing changes to U.S. tax, tariff and import/export regulations may have a negative effect on global economic conditions, financial markets and our business.

 

We import certain products and components from suppliers in China. In 2018, the Office of the U.S. Trade Representative (the “USTR”) enacted tariffs on imports into the U.S. from China. In September 2018, the USTR enacted another tariff on the import of certain Chinese products with an additional combined import value of approximately $250 billion. On August 28, 2019, the USTR issued a notice increasing the rate of additional duty from 10% to 15% on the $300 billion worth of certain articles, and the first tranche of those duties went into effect at the 15% rate on September 1, 2019. The second tranche of those duties had been scheduled to go into effect on December 15, 2019. On December 13, 2019, the United States and China each confirmed that the two countries had reached a “Phase One” deal in the ongoing trade war, resulting in suspension of that second tranche. Although some of the products and components we import are affected by the tariffs, at this time, we do not expect these tariffs to have a material impact on our business, financial condition or results of operations. However, it is possible that further tariffs may be imposed on imports of our products, or that our business will be impacted by retaliatory trade measures taken by China or other countries in response to existing or future tariffs, causing us to raise prices or make changes to our operations, any of which could have a negative impact on our revenue or operating results.

 

Additionally, the announcement of the Referendum of the U.K.’s Membership of the European Union (referred to as Brexit), advising for the exit of the U.K. from the European Union, could cause disruptions to and create uncertainty surrounding our business, particularly given our recent efforts to expand our business throughout Europe through our acquisition of Tracker UK. Brexit could affect our relationships with our existing and future customers, suppliers and employees, which could in turn have an adverse effect on our business, financial results and operations.

 

We may experience significant disruptions in our operations resulting from our enterprise resource planning system initiatives.

 

We depend on our information technology systems for the efficient functioning of our global business, including accounting, billing, data storage, purchasing and inventory management. In order to integrate and enhance our global operations, we initiated the phased implementation of an ERP system across our global operating locations to support our operations. The implementation of this ERP system required, and will continue to require, the investment of human and financial resources. We have incurred and expect to incur additional expenses as we continue to implement, enhance and develop our ERP system. As a result of our ERP initiatives, we may encounter difficulties in operating our business, which could disrupt our operations, including our ability to timely ship and track customer orders, determine inventory requirements, manage our supply chain, manage customer billing and adequately service our customers. If we experience significant disruptions resulting from our ERP initiatives, our business and operations could be disrupted, including our ability to report accurate and timely financial results. Accordingly, such events may disrupt or reduce the efficiency of our global operations and have a material adverse effect on our operating results and cash flows.

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ITEM 6. EXHIBITS

 

Exhibit 10.1

 

Amendment No. 2 to Employment Agreement between the Company and Kurtis Binder dated October 23, 2019

 

 

 

Exhibit 31.1

 

Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

Exhibit 31.2

 

Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

Exhibit 32

 

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101 .INS

 

XBRL Instance Document

 

 

 

101 .SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101 .CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101 .LAB

 

XBRLTaxonomy Extension Label Linkbase Document

 

 

 

101 .PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

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SIGNATURE

Pursuant to the requirements 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.

 

 

 

CALAMP CORP.

 

 

 

December 19, 2019

 

/s/ Kurtis Binder

Date

 

EVP & Chief Financial Officer

 

 

(Principal Financial Officer and

Chief Accounting Officer)

 

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